Hold Some Cash in Your Investment Portfolio - dummies

By David Stevenson

If you decide to use leveraging in your investment portfolio in the UK, make sure you understand all the risks and benefits. You have one almost failsafe way of controlling the risks involved with leverage: always try to make sure that you have a lot of cash sitting around in your portfolio!

In fact, many investors use a dual strategy involving lashings of leverage alongside a healthy cash reserve. In the following example the leverage is built within the product structure.

The idea is simple. Limit your downside risk by keeping cash, but use a small amount of leverage for a part of your portfolio. Perhaps 5 to 10 per cent of your portfolio assets is about right, committed to one main investment idea based on a market view expressed using options.

If the options-based bet using leverage goes wrong, you end up losing at most 5 or 10 per cent of your portfolio’s value, but the rest of your assets are safe in cash. If your bet’s right, and the market moves your way, your small bet on a market move can yield massive, leveraged profits!

By all means use leverage, but also remain cautious by keeping a large reserve of cash. Mix and match absolute returns strategies (plenty of cash as an absolute safety net) with leveraged strategies with the potential for geared returns.