Why I don’t hold cash in my Stocks and Shares ISA
A Stocks and Shares ISA can be a great resource for investors. And a lot of people like to keep a percentage of their portfolio in cash, to take advantage of sudden opportunities.
This, however, isn’t something I go in for. There are a couple of reasons I look to get the cash in my ISA invested in stock opportunities as soon as I can.
Timing the market
The first reason is that holding onto cash comes with a potential opportunity cost. It might be years until the next time a stock I want to buy falls below its current level.
During that time I might miss out on dividend payments that I could receive by buying the stock today. And this can be a big part of the overall return.
Equally, a better opportunity might never arise. If a stock keeps going higher for long enough, even a crash might not bring it below its current level.
The unpredictable nature of the stock market means that waiting for prices to fall isn’t necessarily a good idea. The only guarantee is the loss of dividend income in the short term.
Balancing a portfolio
Maintaining a cash position also presents investors with a dilemma when share prices fall. One option is to use the capital to take advantage and the other is to leave it as a strategic reserve.
Using the cash means it needs replacing. One way to do this is by selling something else, but someone who does this might as well have financed the investment using the sale proceeds.
The other option is to keep it and maintain the existing cash position. In that case, though, it’s not much use for taking advantage of stock market volatility.
That’s why I don’t maintain a cash position in my Stocks and Shares ISA. I prefer buying stocks when opportunities themselves and selling investments to raise cash if need be.
Buying opportunities
Instead of holding onto my cash, I’m looking for buying opportunities. And I think the latest results from JD Wetherspoon (LSE:JDW) are very encouraging.
There’s a £60m hit coming from National Insurance and Living Wage increases. And investors note there’s a risk this might not be the end of the story in terms of higher staffing costs.
The firm’s growth, though, has been very impressive, especially while other businesses have been struggling. Like-for-like sales grew 5.6% in the three months between February and April.
This highlights the company’s unusual resilience. And with investments in freeholds to help offset the higher costs, I’m looking to buy the stock while it trades at a price-to-earnings (P/E) ratio below 15.
Long-term thinking
Holding on to cash can be the right thing to do. But I think that’s more appropriate for dealing with emergencies outside investing than waiting for share prices to fall.
From a long-term perspective, I know that I much prefer shares in companies to cash. So I typically look to invest in the best opportunities I can find at any time.
Share prices could always go down. But there’s no guarantee of this and I’m more comfortable taking the risk of owning a stock than by staying in cash and hoping for a better opportunity.
The post Why I don’t hold cash in my Stocks and Shares ISA appeared first on The Motley Fool UK.
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Stephen Wright has positions in J D Wetherspoon Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
