Do you have opportunity insurance?

One afternoon near the end of December, we had given Tracer, our young dog, a new bully stick for him to chew on. In his usual spot, he was strewn out on the couch with the stick between his two front paws. He had been chewing for a few minutes when we heard a crack. Normally that’s just the sound of him breaking through a thinner part of the stick, but this time it sounded different. I tried to examine his mouth and noticed a huge fracture in one of his molars. It was split through and looked quite painful. We called the vet and they recommended surgery to get it removed. A few days later, he was missing a rear molar and we were missing $1,200.

One of the most common pieces of financial advice is to establish a “rainy day” fund. 

Something might go wrong such as a health emergency or a family crisis and you need to be financially prepared. This money is set aside in cash and is meant to be left untouched until the rain comes. This advice, while valuable, creates a narrow view of cash in your financial journey—for emergencies only. 

But what about the good times? 

Life isn’t only about planning for the downside. We all get exposed to moments of opportunity, that if we are not prepared, we cannot act. There is a quote attributed to Seneca, “Luck is what happens when opportunity meets preparation,” that captures how I think about cash in your own portfolio of savings. I prefer to have an optimistic outlook, ensure I’m prepared for life’s unexpected opportunities and upside.

Traditional investment advice surrounding cash is to hold it for emergencies. Outside of that, your asset allocation should be nearly 100% stocks & bonds, unless you’re looking to preserve the value of your assets as you approach retirement. This approach will have you fully allocated1This means all of your money is invested to maximize potential returns. Unfortunately, this focuses only on the knowable. 

Warren Buffett compares investing to baseball, waiting for the perfect pitch before investing. In the HBO documentary Becoming Warren Buffett, he says, “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.” Though a reference to investing, if you swing at every pitch, you’ll be out before the right opportunity comes by. When you’re fully allocated, you’re out of opportunities to even swing.

You never know what life will throw at you. Without expecting it, opportunities might appear in your life that seem financially interesting. 

This is where cash, your opportunity insurance, comes in. 

By keeping a portion of your assets in cash, separate from your emergency fund, you will have money available for life’s positive surprises.Maybe your a friend starting a new company. Maybe you want to be able to donate to in response to world events. Maybe the market has crashed and you want to buy in. Investors explain that the biggest returns are to be made by investing through a recession, but my guess is most people aren’t financially set up to take advantage of these opportunities. 

Cash is still about preparing for the unknown, but in a positive way this time. It’s not going to be easy to invest in these spur-of-the-moment ventures. Holding cash has a cost. You’re not investing it in slow and steady growth. But the answer is not hold everything in cash, nor is it  to be fully invested. It’s up to you to find an opportunity insurance allocation that matches your own financial goals. There will be times in your life where an opportunity will cross your path and you will regret not having this insurance. You’ll be prepared. You’ll get lucky.

I want to acknowledge that I’m lucky and privileged to be in a position where opportunity insurance is a possibility. While I haven’t personally had many opportunities cross my plate, I feel prepared for the future. This is not a priority for most people struggling with their finances. If you have the rest of your financial affairs in order, only then would I suggest pursuing this strategy.

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