 Good day fellow investors. A question that I often get is how much cash should one have now? Well first cash is the best head you can have because it gives you optionality. It gives you the option to buy, to invest when you want to invest, when you find something that's appropriate to your financial goals and then also to do nothing when there are no such opportunities. So it's very important to have some cash and on the sides and the answer how much cash depends you and your long-term financial goals, your required rates of return to get to your goals. When you put it in the long-term perspective, everything, all decision-making related to investing is much, much easier. Let me give you three examples, some food for thought and then you will have a clearer picture of how much cash should you own. Here we have the SAP 500 Red and the yield on the one-year treasury. You can see how the yield was pretty insignificant up till 2017 when it spiked to the current 1.91%. The yield of 1.91% is already something and as the yield will be going higher from there, stocks will be going lower. Until now the yield wasn't significant, now it becomes significant when compared to stocks. People prefer to invest in one-year treasuries with a 2% yield than in stocks that offer also a 2% dividend yield. So stocks as much more risky will have to deliver a higher return from a higher dividend yield, which means lower stock prices. So we are at a verge of turning point in the markets. With higher yields, those have an effect on asset values the same as gravity. Higher yields, lower asset values. That's it. Short-term movements as we have seen in the chart can be different but in the long-term yields interest rates, asset values up and down. That's it. So when you are investing, you have to see what's your long-term horizon, what is your investing goal? Start from there. In 20 years I want to have half a million. Okay, then you know how much you have to invest now, what is the required investment return on what you are investing and then you can calculate if you will get there. For example, if I have now an amount of 50 000, I add 500 per month with 7.5% interest rate after 20 years, I should be at half a million. However, the dividend on the SAP 500 is 2% and the earnings yield is 4%. So that's much lower than the 7.5% I have used. So one, you have to or find investments that will give you the 7.5% at a low risk or no risk in the long term, which is a little bit more difficult to find in this market or you simply save up cash until there is a day where stocks in general low-risk investments will lead to a 7.5% long-term return. So it's all about your required long-term returns. Just an example, the MSC Emerging Market ETF has a PE ratio of 15.9. However, I just use this as an example that there are better yields out there, but I remain an ETF skeptic and they also exclude loss-making companies from this PE ratio calculation. So just as an example that there are possibilities. Now, if there is possibilities, okay, then you can invest everything you have if you reach that target. However, if you say, okay, I invest only in American stocks, only in the SAP 500, then you can say, okay, the yield is 4%, I need 5%, I need 7%, I need 10%, I don't know. And then you say, as the yield is only 4%, I will invest only 25% of my portfolio in stocks. The rest will be cash or treasuries, which will bring to 2% one-year treasuries. And then also from the monthly contributions, you say, I will invest 25% and 75% I will keep in cash or treasuries with a small yield. And then I say, I wait until I get 7% or 10%, which is what I need to get to my goal somewhere in the long-term. For example, keeping 75% in cash at these valuations from the previous example would still lead to something. After 20 years at the 4% return, the 25% of the portfolio we have in stocks would still lead to $72,869. Now you are saving cash. As I said, the interest rate on one-year yields is close to 2%. And if we continue to reinvest that cash at 2%, after five years, we will have $65,000 in cash. And let's assume that after five years, stock prices drop to a yield of 10%, and then you start investing or you find investments that will give you such a yield and allow you to reinvest, then you invest all your cash 100% when you get to the required yield. And then even if you invest only for 15 years, you will get to the required half million. This saving method would lead you to a portfolio of 470 plus the 72 from what we have invested now, which is more than half a million, and you reach your goals. If you continue to invest in the SAP 500 and the long-term return is 4% annually, which is a very, very positive long-term return at these valuations, you get to 291,000, which is below your rate. So just some food for thought these examples, you can go to Bankrate, you can play with returns, investments, when you have to add more or so, and see how that fits your required returns and your needs, your financial goals. However, keep in mind one thing, cash is an option and is the best hedge. Whatever happens in the market, if you have cash, you have optionality. You have optionality to buy the bargains when they come. And as always in the market, they will always come. First, we have now higher interest rates that will lead to lower asset prices. Higher interest rates will also inevitably lead towards a recession somewhere in the future, which will lower earnings and which will lower again asset prices. So expect somewhere in the future SAP 500 crash of 50, 60, 70%. When that happens, you will have the cash necessary to take advantage of the opportunities. And that's the key to long-term investing. Low risk keeping your risk low, keeping the cash, as much as it is necessary for your long-term goals. So if you have a long-term investment horizon and a long-term investing attitude, you will have a lot of cash now because even if emerging markets are cheaper, when the SAP 500 drops, emerging markets will drop even more, as we have seen in the last two weeks. So opportunities there will be extreme. So keeping cash, taking the SAP 500 as a value benchmark will allow you to take advantages of what will have happened in the future. Further, if really stocks in a few years get to 10-12% returns over the long term, expected returns over the long term, then you have to also be in a position to put the cash in or find other sources to increase your investments. Perhaps you say, okay, then I'm going to save and then I'm going to put 1000, not 500 into stocks when stocks are cheap. Now that stocks are expensive, I will put just 250. So it's all about balancing what you invest per month and your portfolio in relation to your goals and risk rewards. The stock market is extremely risky now because of the high valuation. So it was risky two weeks ago, it was risky two months ago, it was risky two years ago. So don't think that it is risky just because of the turmoil now. Further, Warren Buffett has 100 billion in cash. That's more than 30% of the equity of Berkshire Hathaway. So a lot, a lot of cash, which means that he's really waiting for better opportunities. He has done the same in 2008, late 2008. He bought Burlington, Northern Santa Fe, took advantage now, nine years later, he already got back more dividends than what he paid for the company. So that was a great investment. Further he invested in convertible stocks of Bank of America, Goldman Sachs, whatever, when everything was cheap. He knows that it will happen again and he's simply waiting on 100 billion in cash, which is a huge amount and a huge chunk of his portfolio. Seth Claremont also some numbers say 30-40% of the portfolio in cash. If they have so much cash, you might also think about your cash to asset allocation. If you're young, if you have the long term in front of you, you might risk a little bit more. However, if you are about to retire and you need that money in the next few years, I would be 100% in cash or in treasuries with 2% and that's it. Don't risk your retirement on stocks, maybe going up 10-20% more in the next year or two. I will finish with a discussion about hedges, put options. Those might look interesting now that the stock market is going down. But if you take such a strategy, it has to be part of a long term strategy. So think that those who had puts now have been having them for the last 5-6-7 years because it was plausible that the stock market crashes in the whole period coming up to here. So that is extremely costly and that's something you really should know what you're doing. Betting on put options, call options, whatever, just here and there will make you some money here, lose you some money there, but over the long term the return will be negative if it's not part of a long term well sophisticated strategy, which most of retail investors 99% don't have the capacity to do, follow, know what's going on and calculate proper option pricing. So think of the best hedge to be cash. As I said in the last video, gold and defensive stocks are really not a hedge towards a stock market crash and higher interest rates. Those are more a hedge to financial turmoil that is something that might happen or might not happen, so it's always good to have portfolio diversification and rebalance accordingly. Thank you for watching. I hope I have helped a little bit with your cash allocation. I know it's hard to hold cash when you see stocks go up 57% how was the case of Tencent that we discussed yesterday, but it's all about risk reward when you invest and remember main focus is it's all about risk reward in relation to your financial goals. The start of every investment should be your financial well-being, well-creation and financial goal and the risk reward in relation to that. Anything can happen in the stock market, so really be careful with what you want and what you are doing. Don't take too much divergence there. Thank you. See you in the next video.