When To Cash In On Cash

Storing a cash pile under your bed isn’t a good idea, but having cash available for uncertain times or expensive occurrences is essential. After all, markets do crash and unexpected life events can happen.

- Simon Brown

An old saying that I certainly have used in many different articles I’ve written over the years, is that cash is king. But one scenario where it truly is king, is when we look at the correlation between cash and other assets.

I track a number of local and offshore indices and currencies and one of the things that I track is the cash rate. Cash steadily (and boringly) moves higher every day while all the others bounce around like crazy.

Correlation is a mostly ignored but important concept in investing. It’s not that we want correlated assets. In fact, we largely want uncorrelated assets.

Correlation is a relationship between two different things. As an example, we can look at the relationship between the price movement of different assets or stocks. The formula for correlation results in an answer of between -1 and +1. Zero, right in the middle, means that there is no relationship between the price moves (they move totally independently of each other). A result of +1 means they move pretty much in lockstep and -1 would mean they move inversely to one another.