Should cash be part of your ASX shares portfolio?

One expert recommends storing cash now so you can pounce on beaten-up stocks once inflation stops rising.

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Key points

  • One expert recommends storing cash now so you can pounce on beaten-up ASX shares once inflation stops rising
  • While waiting for the best buying opportunities, investors can earn a decent yield on their cash savings after a 3% increase in the official cash rate this year 
  • At the recent Sohn Hearts & Minds Conference, one expert picked cash as their best idea for ASX shares investors right now

Whether to keep some cash aside as part of your ASX shares investment strategy is a contentious issue.

In recent years, it's made less sense to do so because interest rates have been at historical lows.

During this time, some investors figured they might as well go all in on ASX shares because even if stock prices dropped, their after-tax dividend payments would exceed savings interest by a long shot.

But keeping cash as part of your ASX shares portfolio is now more appealing. This follows a 3% increase in Australia's official cash rate in 2022.

According to today, some banks are offering savings accounts at 4.5% interest.

But there's another reason to keep cash on the side.

Cash is my top ASX share pick, says expert

At the recent Sohn Hearts & Minds Investment Leaders Conference, cash was the 'best idea' brought by Hermitage Capital UK CEO Bill Browder.

Hearts & Minds conference speakers are asked to bring their best idea or top pick among ASX shares to discuss with attendees.

According to The Weekend Australian, Browder went rogue. He nominated cash as his best investment idea, for the moment at least, due to rising inflation and interest rates.

Browder said:

We're in a world with high inflation and central banks need to do something about that … they're going to raise interest rates and so the value of assets will go down.

We've seen this in the performance of ASX shares this year. The S&P/ASX 200 Index (ASX: XJO) was hit hardest in the first six months of 2022 when inflation and rates first began to rise.

The benchmark index lost 15% of its value between the first trading day of 2022 and the mid-June bottom.

Invest in cash and wait, says expert

To be clear, Browder doesn't think you should invest in cash because it's now offering a decent yield.

He recommends cash so investors will be ready to pounce on beaten-up ASX shares once this inflationary cycle turns the corner.

Browder continued:

Once we get to a point when rates are peaking and inflation starts to go down I think there's going to be a great opportunity to buy assets.

Has inflation peaked?

As we reported recently, inflation growth in Australia has softened from an annual growth rate of 7.3% over the September quarter to 6.9% in the month of October.

HSBC Australia chief economist, Paul Bloxham reckons inflation has "passed its peak".

So, the time to buy ASX shares with that cash on hand might be just around the corner.

Should cash be part of your portfolio?

Whether cash should be part of your ASX shares investment strategy is discussed by our Education Hub writer, Kate O'Brien.

As Kate reports, having some cash on hand will "enable you to top up your portfolio when suitable buying opportunities arise".

Kate writes:

Share prices are volatile, and the ASX moves with the economic cycle. Down periods in the cycle can provide abundant buying opportunities for long-term investors seeking quality shares. This will help build your portfolio over time while allowing you to take advantage of market dips. 

Kate points out that long-term investors who buy the dip have the advantage of time to accumulate returns. 

She writes:

It can take time for the market to recover from a downturn – it took the ASX 200 14 months to return to its pre-COVID levels from its March 2020 dip. 

But investors who bought the dip would have made a return of 47% over that period. For this reason, many investors like to keep some cash on hand to take advantage of unexpected buying opportunities.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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