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Why cash is King in a crisis

Regular commentator on CNBC, Dr Marc Faber, has made headlines today with The Australian Financial Review leading with: “Get ready for shares wipeout, says Swiss investor Marc Faber”.

Faber’s comments follow a thumping on Wall Street overnight where the Dow Jones fell 1.62%, the S&P 500 sunk 2.09% and the tech heavy Nasdaq plunged 3.1%. Technology and biotechnology stocks have been particularly hard hit with investors appearing to be losing confidence in the sky-high multiples many of these ‘hot’ stocks are trading on.

In the wake of last night’s sell-off, many individual stocks are being crunched today on the ASX as well, although the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has held up reasonably well with a fall of around 1%.

At times like these it is worth remembering why investment gurus such as Warren Buffett and Seth Klarman regularly counsel investors to “keep some powder dry”. Having a stash of cash or readily saleable liquid investments is essential to allow investors to maximise the opportunities a crisis can present. In other words, there is no use knowing that stocks are cheap but not having any funds available to do anything about it – you don’t want to waste a good crisis!

Two portfolio managers that are heeding this advice are Geoff Wilson and Kerr Nielson. Wilson’s listed investment company (LIC) WAM Capital Limited (ASX: WAM) currently has around 37% of its portfolio in cash, while investment guru Nielson’s Platinum Asset Management Limited (ASX: PTM) , the manager of the $9.7 billion Platinum International Fund currently has a net portfolio exposure to cash of 22%.

Foolish takeaway

While cash is an obvious benefit in a crisis, so too can be large blue-chip stocks such as Woolworths Limited (ASX: WOW). The defensive nature of the earnings base of true blue-chips (generally speaking) leads to lower volatility. Their large size also means better liquidity. These factors make them desirable portfolio holdings during a crisis as not only will they still pay income to shareholders but their stability can allow investors to sell them and raise cash if more appealing investment options present themselves.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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