The Hidden Powers of Cash: A New Definition of ‘2 and 20’.

I have been working on a model for cash I call ‘2 and 20’.  What it means is, hold 2 years of cash for your operating expenses (i.e., to live on), and then within the portfolio allocation for stocks, hold up to 20% in cash when the market has gotten overbought and therefore overvalued. 

What this ‘2 and 20’ model allows for is:

1. The 2 - Comfort and safety that your living expenses for the next two years are covered by your cash reserve.

2. The 20 - Ability to take risk and emotionally manage large drawdowns without feeling the need to sell at a loss; the 20% cash, which is in addition to the 2 year reserve, allows for the money flow index and market sentiment signals to be bought when reading oversold conditions.

In practice, I have found this model gives me a super power. The power to operate in a more contrarian manner (sell when others are greedy and buy when others are fearful) and more resilient to fight the tendency to follow the herd. With the courage born from a 2 year runway on living expense, and the discipline to sell in overbought environments, you will be build up the extra 20% cash reserve to then buy in the inevitable panic selling and despair that ensues. Down days of the market are now met with optimism and excitement as buying opportunities.  And days where the market gets a little over extended, become the days where I sell and trim.

It is hard to fight the ostensible trend, but with this ‘2 and 20’ model for cash, I have found extra strength that helps make uncomfortable decisions with more ease. It’s still not ‘easy’, but it is easier with the added safety net that cash affords.