How Much Cash To Hold With Russian Black Swan Risk Rising?

How Much Cash To Hold With Russian Black Swan Risk Rising?

sharrocks/iStock via Getty Images Introduction

I’ve written several articles at the beginning of 2022, warning investors about the bear market potential for certain stocks. My primary method of teaching people about investing is to lead by example, so these articles shared many of the stocks I had been taking profits in. I started by explaining my reasoning for taking profits in stocks like Dollar Tree ( DLTR ), US Bancorp ( USB ), and LKQ Corporation ( LKQ ). I also shared ” 6 Financial Stocks I Recently Sold, And 2 I Will Hold For The Long Term “. Additionally, I shared a strategy to capitalize on the future decline of industrial stocks like Caterpillar ( CAT ) in my article ” How To Capitalize On Caterpillar’s Future Price Decline “. And I warned about the dangers of two of the biggest tech stocks in my last article ” Apple & Alphabet Will Not Side-Step A Deep Bear Market “.

Looking at just the headlines and the broad theme here, one might think that I am one of the many fear-mongering perma-bears that have been declaring an imminent market crash since 2011. However, that is not the case. In each of these articles, I pointed out how even though I was taking profits in many of these stocks because of a variety of market and economic risks, I was still staying fully invested. Whenever I sell an individual stock, I have a position where I put the proceeds of the sale that I call my “default position”. The money then stays there until I find a new individual stock opportunity that I like, at which point I move the money from the “default position” into the new opportunity. Starting in 2022, my default position was not cash. It was instead iShares Core Growth Allocation ETF ( AOR ), and I noted that in all of my bearish articles earlier in the year. AOR is essentially a 60/40 ETF, and if you would like to read my reasoning behind using it, feel free to read any of those earlier articles. So, until about 10 trading days ago, I was fully invested and holding effectively no cash in my investment accounts. That didn’t change until Russia’s invasion of Ukraine.

Because I have been using the 60/40 proxy AOR for most of the year and writing about it in my articles, I feel a responsibility to share my reasons for now moving that position to cash, even though I would prefer not to write about Russia’s invasion, publicly. Black Swan Risk

A “Black Swan Event” can be defined as: The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight This makes writing about black swan risk particularly difficult. I could certainly use my imagination and list out a very long list of black swan events that, due to Russia’s invasion of Ukraine, and the rest of the civilized world’s reaction to it, now have a higher probability of occurring. But, in some ways, I think it’s counter-productive because I really don’t know which, if any, of those will happen, and there is a good probability I am not imaginative enough to come up with the one or more that actually end up occurring. So preparing for a specific list of black swan events isn’t likely to produce better returns than just having a simple understanding that the broad risk of one of these events has gone up.

As an example, I think one only needs to put themselves in the shoes of the average Russian citizen right now. Their stock market is closed, the value of their currency is cratering, many products from outside of Russia will soon no longer be available there, many franchises are closing or leaving the country, key exports of oil and natural gas may soon have far fewer buyers. This all happened in a matter of days. Things like this (which is really a black swan for average Russians already) can have very unpredictable knock-on effects that few or any of us can predict ahead of time. In other words, other stuff is likely to break.

Moving back to those of us who live in the rest of the world who are invested in stocks, we haven’t yet felt much of a shock in the market indices. Nothing has really broken, yet. […]

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