Every three to four years, we revisit the topic issue on the importance to keep a warchest in our portfolio. This comes always on the back of something that is brewing, like the Eurozone crisis in 2011, the oil and China crisis in 2016 and the Trade War and HK protests in 2019.

As the name itself implied, having sufficient warchest in your portfolio means you are keeping a sum of money that is ready when you are needed to go to war. 

The thing is this, we always take things granted in our lives, especially when everything are looking good and the sky is shining clear and bright.

When times are good, we don't treasure them hard enough and often it gets overlooked with something which may seem more urgent to us. However, when things go sour, or when we lose it, we wish we could have put on more efforts into building that relationship and moments.

The same theory applies to warchest. We seem to belittle them when things are positive but need them most when things are dire but are often too late to realize. 

Today, we'll talk about how we can prepare a growing warchest and how as investors we can maximise our warchest allocations without losing alternate returns that we can garner if we put them on a positive market. 

I'll also share about how I typically accumulate warchest using my style and we can discuss the pros and cons of each method.

This is probably the most common method which most people are already using one way or another at some point. 

The idea of this accumulation of warchest is basically through the leftover savings from the monthly salary (less expenses) that you get from your job. For instance, if you are earning $5k/month and have an expense of $4k/month, you are able to plough in the $1k leftover as warchest. Basically, the more you can grow your income, or reduce your expenses, everything else constant, the more you are able to accumulate your growing warchest.

At some point, as you grow and climb the office ladder over time, the more savings you will have to accumulate for your warchest. 

Recently, a reader emailed me on this question he has about dividend reinvestment and how it affects compounding. 

In theory, the impact on compounding is strongest when you have money rolled on after money on an infinite period at every intervals. What this means is if you have a dividend that is coming on the 8th Aug for instance, you should allocate those dividends almost immediately without wasting any time. This is almost similar to the DRIP method where you get to reinvest your dividends back into the company you are vested in. 

In theory, that is not what I usually do. 

When I receive an incoming dividend, it will usually go to my account and form as part of my warchest, which I would then choose to allocate depending on opportunities availability. I don't usually almost invest them back, unless we are in an attractive down market that I wanted to get in as soon as possible. 

Most people usually think of warchest as cash but this is something which I think is quite interesting to explore. 

The idea of keeping your warchest in the form of bonds or gold is something which is quite interesting to explore because of their inverse relationship nature to equities, which means they are likely to outperform when equities go south and vice versa. Even if they don't fully have that correlation in nature, they still are a good hedging to the portfolio.

These assets may or may not make up for the "lost" returns cash does when you are holding them for longer period.

Accumulation Through Defensive Equities

This method is one which I used it most often especially during the build up towards more dividend investing in the early stage.

Through defensive nature of stocks such as Vicom, NetLink Trust, Keppel DC, Plife Reit for instance, you are essentially buying yourself a predictable earning and cash flow that you know you will be getting quarters after quarters.

As the economy goes weaker, these defensive stocks are the last to fall and can act as warchest balancing depending on when you want to cash them out.

The idea of holding onto them as an alternate warchest instead of equity is that you get your dividend and capital gain during a bull market, something which cash cannot give you.

Using my case for instance, I've began unloading my position for Vicom slowly this week to switch to a higher risk reward company such as HK Land for instance. This will continue until I feel the risk reward tilts to the other side. 

Everyone is looking for that perfect formula on the optimal allocation of how much warchest they should be keeping in their portfolio. 

These people look and google around for answers through some random blogs like this and hope to find a straight answer that tells them 70/30 or 80/20 is the most optimal allocation. 

The truth is that many are asking the wrong questions in the first place. 

Keeping a warchest is a function of how much initial returns you are willing to sacrifice in order to recoup it back at a later stage. 

Keeping a warchest is a function of how confident you are in today's market macro environment and how good you are as a capital allocator. 

Keeping a warchest is a function of how well prepared and how much knowledge you have on yourself. 

And these are the things that no one can tell you except yourself, just because you are supposed to know yourself better than anybody else. 

Some folks thrive on having 50% warchest at all times. Some thrive on having just minimally 20% and they use them when they see opportunities. Some thrive on having no warchest at all times in the market. 

There are so many different school of thoughts to the topics on warchest that you can never get an universal answer.

To a large extent, most people would agree that keeping a sum of warchest is necessary in order to take advantage of the situation but the optimal allocation would have to depend if you are a good allocator yourself.

In this regard, it is better that we know our style from a holistic approach prior to knowing how much warchest that we need.