Cash. For the last five years or so, a lot of financial advice has been about investing your money into product- whether it be a mutual fund, stock, GIC, ETF etc. Now that the market is going sideways, it may be time to assess your cash position. First and foremost, cash gives most investors an emotional comfort zone to work with- no matter how bad a return on an investment, you still have the comfort of knowing you have some cash on hand. Cash also allows you to pursue buying opportunities for fundamentally sound stocks and/or real estate when a correction occurs. Finally, cash allows you to weather an emergency without having to liquidate assets which you may have to sell for a loss or pay taxes if you sell for a gain. Cash, as they say, is king.
My cash strategy is quite straight-forward. In my non-registered accounts, I try to keep at least 3 months take-home pay in a high-interest savings account (given I am self-employed, I measure a month’s pay to be the average of what I pay myself). This is my comfort zone money. Given that interest income is not taxed efficiently, there is always a push-pull factor in amassing large cash reserves outside a registered account but, emotionally speaking, there is nothing like knowing that you have money to pay the mortgage if something happens to you so paying tax is a small price to pay for this comfort (consider it a “comfort tax”).
In my registered account, I have approximately 5%-10% of my portfolio in cash. 10% is an artificial limit. This is no real reason why I cannot hold more. In fact, I previously posted that the rich held more than 10% last year. As a general rule, the greater the uncertainty, the greater my cash holdings. This is my acquisition reserve- I use this money to hunt for bargains or to enter into the market when others are exiting. As another general rule, the greater the cash holdings of successful mutual fund managers, the greater my holdings are on the theory that you model the best in the field.
I believe one of the reasons why some investors lag market returns is that they have no cash to buy when its time to go bargain hunting. They know, fundamentally speaking, that the best time to buy is when the markets are low but don’t have the means to do so. I learned this lesson the hard way years ago when bank stocks were cheap but I had all my money locked up (in Science and Tech funds no less- the follies of youth!).
I have read a lot of articles recently about what to do now that the bond market is officially in bear territory and bond yields are pushing up (which, in turn, is moving money out of stocks and into bonds as bond yields begin to look attractive). Why not build up a cash position? For anyone who has graduated recently, this may be a prudent move given how many contradictory things are being written about the state of the economy. Save some money. Pay down debt. Research what you believe to be a good investing strategy is for you in the meantime.
I would be interested to know what % of a portfolio people keep in cash.
June 20th, 2007 at 8:51 am
Ideally, I’d like to have about 5% of my portfolio in cash, money market, or high yeild savings account.
June 20th, 2007 at 12:07 pm
What you write makes some sense, but I keep my cash reserves very low. In support of what you say, after the tech crash I wanted to start buying, but didn’t have the cash (or a job) to do so.
In terms of the living expenses, get a unsecured LOC with enough to cover your costs for 3 months and your sleep-at-night is taken care of (you don’t pay interest if you don’t use it, and you’re not wasting capital preparing for an emergency that may never come).
Similarly for taking advantage of buying opportunities. If you have ready access to borrow capital, you don’t need to have the cash on-hand. My intention is to use my LOC for emergencies, and buy on margin when the correction hits (and start buying up as much as I can with each paycheck). If I get a new property, my plan is to get one with a built in HELOC, then I can use that line for buying deals in the future as well.
This wouldn’t be worth doing if it interferred with my sleeping, but I’m fairly confident about what I’m doing (and I know I can live cheap and pay down the debt gradually if things don’t work out for some reason).
June 20th, 2007 at 2:53 pm
Thanks. The LOC is a good alternative to the emergency cash reserve but, for my own comfort, the last thing I want to do in a financial emergency is to get into more debt.
June 20th, 2007 at 9:00 pm
I’m sitting on 17-18% cash due to the limited bargains in the market right now. Since most of the cash position is earning 4% from President’s Choice, I’m in no hurry to deploy quickly.
My opinion on LOC is it depends if you have a mortgage. If you do, a better alternative to invest your cash in your mortgage, and take out a HELOC. Most likely, the HELOC will sit idle while you cash is productively saving you tax-free mortgage interests.
June 20th, 2007 at 11:41 pm
I have a phobia against cash since I’d rather do what FJ mentioned and pay off debt, even if it’s just temporarily.
Thicken – can you enable your comments feed or add one? The thought of missing out on a comment somewhere in the blogosphere keeps me up at night.
Mike
June 21st, 2007 at 9:55 am
Thanks. Comments feeds… I’ll add it as soon I figure out how (said the Luddite). I’ll ask someone or if you know email me thickenmywallet@gmail.com. Thanks.
June 22nd, 2007 at 8:53 pm
Just up-ed my cash holdings from 10% to 38% from April through this week. Based on the volatility of the markets and overvalued stocks (or, really, the absence of undervalued stocks), corporate heavy debt loads and interest rate fears creating wild jitters, I want to simply wait for a good correction. There is nothing more liberating than loading up on great stocks after a sizeable drop. But, you have to move quickly – oftentimes, sudden rises occur days after large drops. Cash is the only way to go. The gains made in those initial transient and recovery periods, which can vary from weeks to years, are truly spectacular.
June 26th, 2007 at 8:03 am
33% cash. I have a phobia that the market will crash one day, and I want to make sure I am not totally wiped out.
I wonder if I am correct in thinking that a good place to hold cash would be in a Canadian Money Market Fund. I would avoid taxes, and when I cash in some units, I pay a capital gains tax. Whereas in a savings account, I pay a punitive tax on interest. Too good to be true, right ?
June 26th, 2007 at 9:07 am
John:
Thanks for the comment. Most Cdn. money market funds are taxed as income outside of a RSP.
July 1st, 2007 at 10:24 pm
We keep nearly all our money in cash! (not counting the condo). It’s kind of broken into strange amounts and some parts are locked up at 4.5%, others are in high savings accounts at 4%. I only recently started looking into investing.
July 5th, 2007 at 8:04 am
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