Asset Allocation with a twist or why you should keep 25% of your assets in cash

A lot of professional money managers will quote some nobel prize winning economist theory about strategic asset allocation.[For the record, Harry Markowitz won the nobel prize in 1952 by showing that in the long run, investors make more money by investing in assets whose prices don’t have a lot of fluctuation]. They make you di”worse”ify your portofolio by buying a bunch of stock in totally different sectors, on the assumption that some of the sectors are non-related and thus you’ll get an average performance in the long. However if you’ve read When Genius Failed – The Rise and Fall of Long Term Capital Management you’d know that sometimes even non-related sectors can go down all at the same time.

Since most of my investments are in Real Estate my asset allocation is slightly different from the stock market. I have at any given time nearly 25% of my net worth in CASH or cash equivalents like CDs or gold.[not that I have any gold, but I’m looking into it]. Of the remaining 75%, 95% is currently in real estate related investments. Of that 10% is in trust deeds and 90% in actual real estate which is spread across a 3 different states and 4 different cities [as of writing this entry].

Actually a large chunck of this money is in the form of deposits on homes that haven’t been built yet. Since I like to get 100% financed loans[at least while interest rates are so low] the equity buildup is without risk[risk to my money that is. the bank is still risking its money and I’m risking my credit]. If the economy tanks and I end up losing money on several deals at the same time, I’d much rather walk away and lose my credit than my money. You don’t miss credit so much if you have a pile of cash lying around!!! 😉
Jokes aside, its imperative to keep a lot of liquid cash lying around as you accumulate more houses. If you have 7 homes vacant at the same time for 3 months thats $30k you’ll need in mortgage payments!!!! Thats why you should have 25% of your net worth in CASH.

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