Hi Toofuzzy,
I agree that, as markets drop, positions become more correlated. But, rebalancing a diversified basket of stocks and/or ETFs will still not need as much cash as one position.
For example, in the AMZN example from my book, I had to add about $1800 to an original $2000 position.
In my real life portfolio, in 2008 I ran out of cash and had to add a lot of cash. I couldn't add enough to rebalance all positions. I ended up having to sell off 2 or 3 positions to make sure all the rest were rebalanced.
But, I didn't have 30% cash. In my book I said that, if I was adding a lump sum, I would keep 30% in cash, but with my regular contributions, I was just putting in the $2000.
Now, after 2008, I am contributing $2900 when I want to add a $2000 position, so I have that 30% cushion.
But, my point is that, with 30% cash, I would have been ok in 2008, while that wasn't enough for Amazon.
Even in a crash like 2008, a multi-position portfolio does offer some protection.
For example, one of my stocks is CRI (baby clothing company Carters). It finished slightly up in 2008.
(on an unrelated note, this is a sign of strength when a stock goes up despite a strong downtrend. The stock doubled since Dec 2008).
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