Sunday, June 28, 2015

Cash: The Blessing and Curse

The best thing about being a dividend growth investor is the increasing amount of cash that trickles into my investment accounts each month. The dividends add up quickly and along with my monthly contributions, allow me the opportunity to buy more shares of great companies. These great companies increase their distributions over time, and the virtuous cycle continues.

At the same time, for me, the downside to being an income focused investor is the constant need to make decisions relating to the allocation of cash. Simply put, I hate sitting on cash. Even though cash provides me with ammunition to take advantage of market over-reactions, the opportunity cost of not investing in income producing securities weighs heavily on my mind.  Looking back over the past couple of years, some of my worst investment decisions came at times when I felt obligated to put cash to work.

Due to some recent sales designed to rebalance my portfolio and my regularly monthly contributions, my cash balance presently accounts for 7% of my total holdings.  Even though this percentage might seem reasonable enough, my mind tends to multiply the cash balance by my average portfolio yield (~4%). The resulting amount is almost enough to meet my forward dividend growth goal for 2015…six months ahead of schedule. 

Before I make a series of rash trades that decrease my cash balance, I have to keep reminding myself that financial independence, goal achievement, and investing in general, aren’t races. Plus, given about two thirds of my current cash will remain in my taxable account, any investment decisions I make will be for the long-term and aimed at minimizing the amount of taxes I pay.

Here's hoping that instead of rushing into trades simply to boost my forward expected dividends, I can be patient and make good decisions to allocate the cash in my investment accounts.

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