Today, I am going to speak about this thing called “warchest” and why it is important in investing.
What is a warchest?
“A warchest is essentially a sum of reserved funds that is kept for leveraging purposes.”
Why is it important?
Well, as the name itself suggests, a warchest is very effective to triumph in a combat context where the situation is dangerous and erratic. Just like in a stock market, stocks can experience a sudden crash as a result of spontaneous factors that cannot reasonably be predicted. Hence, it would be prudent to create a warchest in preparation for such situations.
How to use the warchest?
The first way to use a warchest is to feel the financial stability it offers to you. When you have disposable cash apart from your emergency funds, you will feel less affected when the stocks you hold suffer from a crash. This will reduce the likelihood of you panic selling when stocks are undervalued.
The second way a warchest is helpful is that when stocks crash, the funds in a warchest can be used to purchase those stocks at a discounted price. Usually, when stocks are trading at below the intrinsic value, chances are quite high that the purchase will be profitable in the long run.
Will SG Finance Guy have a warchest?
Of course, that goes without saying! It is always important to allocate a percentage of your portfolio as cash for the purpose of curating a warchest.
For myself personally, I am intending to place maybe 40% of my warchest in SSB. The 1-2 months lag period of withdrawal can force me to dollar cost average into the bearish market. (Click here to see why I advocate this).
“This method of DCA works as the dip of the bear market do not always show itself right at the start.”
However, as I also have a portion of emergency funds in SSB, I must be cautious not to mix both funds up. Same same but very different.
Deciding where to put your warchest is not as important as deciding whether to have a warchest in the first place. Winning a war may not require you to have a warchest, but having one definitely increases your odds.