I was reminded recently of a great investment saying: “Cash is most valuable when nobody has it”. As sharemarket risks escalate in 2019, cash will more valuable than ever.
Ultimately, cash separates great investors from the rest. Savvy fund managers take profits on overvalued stocks when markets are rising and rotate those funds into cash. A high cash weighting protects their portfolio and is used to buy oversold stocks. The more cash they have, the greater the opportunity to buy stocks during panic selling.
Inexperienced investors do the opposite. Fuelled by greed, they keep buying stocks when markets rise and hold less cash, or none. They become fully invested in Australian equities, horribly under-diversified and easy prey for a bear-market stampede. 
When the market tanks, they have no cash to buy bargain stocks. Worse, the only way to free up cash is to sell falling stocks, a quick way to destroy wealth. If they borrowed to buy shares and face a margin call to restore the lending ratio, they have no cash to do so.
I have seen this cycle many times, having covered the sharemarket and written on investing for three decades. Greed is a dangerous emotion; when stocks are racing higher, fewer investors want to hold cash in a portfolio and earn a puny return.
Cash should have a permanent role in portfolios. Every investor is different, but a conservative portfolio (for an investor in retirement) should have at least 20 per cent of assets in cash; a moderate portfolio (close to retirement) should have at least 10 per cent; and a balanced portfolio (five years to retirement) should have 5 per cent. Even a growth or high-growth portfolio (significant years to retirement) should have a cash allocation of up to 5 per cent. 
I emphasise that this a rough benchmark; seek financial advice or do your own research to tailor the right cash holding for you.
Also, these benchmarks are flexible. In times of high market volatility and uncertainty, an investor might hold a much higher cash weighting. It is not unusual for asset managers hold 30 to 40 per cent of their portfolio in cash near the market peak, to have some “dry powder” for a market pullback.
Most people prefer to talk about stocks
Investors do not hear nearly as much about cash as they should. Cash is a boring topic for newspapers in rising markets; who wants to read about an investment that returns 1 to 2 per cent? Brokers don’t write research reports on cash and fund managers usually prefer to talk about stocks rather than their cash holding (why pay a manager fees to hold lots of cash?)
Expect to hear more about cash’s virtues in the next 12 months. The sharemarket sell-off and higher volatility in the fourth quarter of 2018 is a taste of what is ahead. The global economy is slowing, market uncertainty is increasing and the odds of another financial crisis are falling.
Locally, the Australian property market’s downturn is escalating. A “hard landing” (where prices in Sydney and Melbourne drop by more than 20 per cent, peak to trough) cannot be ruled out, although it not my expectation. Should a hard landing occur, it would weigh on consumer spending, which is worth about 56 per cent of Australia’s gross domestic product.
I don’t mean to finish the year for The Bull with doomsday scenarios. My hunch is that 2019 will be a transition year with higher volatility and sharper market pullbacks and rallies – as some big questions about the pace of US interest rate rises, China’s growth outlook and the Australian property market are answered. 
2019 will be no time to be fully invested in equities.
Selling stocks into market rallies in 2019, possibly in the New Year, and increasing cash in portfolios, makes sense. I’m not suggesting aggressive selling or dumping core portfolio holdings; rather, some profit-taking on overvalued equities to lift the cash weighting.
As to cash investments, the obvious place is online savings accounts and bank term deposits. The problem is lack of liquidity: a one-year bank term deposit usually takes time and money to break before the term expires – a problem if you need funds quickly
The BetaShares Australian High Interest Cash ETF (ASX Code: AAA) is a useful tool to overcome this liquidity challenge. This exchange-traded fund provides exposure to Australian cash and income that exceeds the 30-day Bank Bill Swap Rate. 
The ETF’s assets are invested in deposits with selected Australian banks. Investors buy and sell the ETF on ASX like they would a share, meaning they can quickly increase or decrease cash holdings without the paperwork of opening or closing a bank term deposit. 
AAA’s annual management fee is 18 basis points and it returned 2.04 per cent over one year to November 2018 (after fees), BetaShares data shows. That return will not excite the bears, but will look exceptional if global sharemarkets have double-digit falls in 2019.

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• Author’s note: This is my last column for The Bull for 2018. Thank you to the readers who commented on the column during the year and continue to support it. I wish all readers and their families a happy and safe festive season. The column will return in early January.

The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article, consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at December 17, 2018.