Hi,

Does anyone use a strategy of keeping cash and using options? I know in volatile times they are more expensive, but it locks in a low price and allows you to buy in cash if it is to go lower?

In light of the current market volatility and ongoing discussions around timing the market, I thought this would be a good time to share my approach to cash. My strategy is simple: I focus on minimising risk and managing my emotions, rather than chasing maximum returns.

I generally use dollar cost averaging between my portfolio and cash. I don’t actively try to time the market, but in rare instances—such as during market panics with low liquidity when sellers struggle to find buyers—I step in as a buyer of last resort. In these scenarios, I may temporarily reduce my cash position. While this might appear to be market timing, I see it more as portfolio rebalancing in response to a liquidity event, driven by circumstances rather than valuations. This allows me to take a position in small-cap stocks or expand existing ones, often avoiding premiums and even securing discounts.

This approach is less about science and more about psychology. Instead of joining the panic, I shift into buy mode and focus on well-researched businesses.

How do I determine when the market is panicking? There’s no definitive answer, but I lean on the "taxi driver" or "shoe shine boy" analogy—when people who don’t normally discuss markets suddenly can’t stop talking about them. I also look for major record-breaking events, such as the largest X-day drop in Y years. If the drop sets an all-time record (e.g., NDQ’s highest one-day drop ever), I classify it as a market panic. Following extended months of market sell-offs, my cash position often naturally increases as a percentage of my portfolio, making it easier to rebalance during a subsequent panic.

Can I end up buying too early? Absolutely. But I’m not trying to pick the bottom. During the GFC, I rebalanced multiple times and never quite nailed the bottom—but that’s okay.

As a general rule, I maintain a cash position of around 5% for a few reasons:

• To buy stocks from my watchlist during market panics.
• To serve as an additional emergency fund.
• To buffer cash flow for portfolio rebalancing.
• To dampen the volatility of a portfolio heavily skewed toward small-cap stocks.

Conversly, when the market is rising I will occassionally take a profit to rebalance into cash. But the trigger for this is more relaxed but may revolve around annual rebalance, EOFY, RBA decison etc. I also take a similar approach to cash with gold ETFs to add diversification, particularly as a hedge against AUD fluctuations.

I’m curious—how do others manage their cash strategies?