“Cash is king” is a popular phrase used to stress the importance of liquid assets in investing. With the plethora of knowledge on stocks, bonds, money market funds, retirement accounts, and all other forms of investment, it is easy to forget about the importance cash can play in investing strategy. When cash is king, investors with liquid assets may find themselves in the position to make incredible deals.
The cash referred to in the phrase “cash is king” does not only mean the literal bills carried in wallets or stashed in piggy banks. It can also mean any asset that is not tied up in investments, and thus can be turned into actual cash without penalty or limits. Money in checking or basic savings accounts is considered cash, as is the change under the driver's seat.
The reason primary reason why cash is king is because it is so liquid and accessible. A household that pays for rent and groceries out of returns on investments is in danger of being caught broke if investment account suddenly nose dives. Even if the household has $100,000 US Dollars (USD) in a retirement account, this money may not be able to save the family since it is illiquid and takes time to withdraw, at the expense of huge penalties. If, however, this household has a reserve of easily accessed cash, they can continue to meet payments and avoid problems such as foreclosure while waiting to liberate other assets for more long-term help.
For businesses, cash can be the difference between bankruptcy and living to fight another day. Since most companies use cash accounts to manage payroll, a sudden loss of liquid assets can lead to serious problems within the workforce and the external market. Some experts cite the massive drops in share prices during the 2008 financial crisis as partly the result of insufficient liquid assets, which forced companies to sell off shares fast, at a reduced rate, merely to generate additional cash.
In addition to liquidity, cash is king because it gives investors opportunities in markets that are bad for those without cash reserves. When market prices drop due to a panic, investors with cash have the opportunity to sweep up normally expensive shares at bargain rates, since their money is not tied up in investments being affected by the crisis. Once the market trends go back up, investors that believe that cash is king may find themselves with an extremely valuable portfolio.
