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% cash to hold?
PabloMartini
Posted: 13 March 2018 14:49:17(UTC)
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So I'm tidying up my modest portfolio (<100k) and wanted to ask forumites advise on what % cash I should hold?

I have a core holding of SMT and Fundsmith with smaller holdings in Emerging Markets, a Robotics fund and some shares from my work share scheme. Currently my cash position is 25%. What % should I be looking at?

My investment timeline is 20 - 25 years, I plan to add monthly and I have an emergency cash pot elsewhere.


P.S. I've been a long time lurker on the forum I've learnt a lot from the discussions here. Special mentions to Micawber, TonyP, Sara G and King Lodos for their contributions
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Tony Peterson
Posted: 13 March 2018 15:18:43(UTC)
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I'd say 0% in cash. Have it all working for you. You wouldn't want idle workers if you were running a factory, would you?

As this view can be expected to attract a certain amount of ridicule, I would invite those of a more nervous disposition who disagree, to give us a backtest of the dividends they have lost and the gains they have missed by keeping any cash on deposit since the credit crunch.

And if it was me setting out with your pot today I would simply split it between GSK and Vodafone and keep as much as possible in ISA.

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Chris Callue
Posted: 13 March 2018 15:29:58(UTC)
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Tony Peterson;58644 wrote:
I'd say 0% in cash. Have it all working for you. You wouldn't want idle workers if you were running a factory, would you?

As this view can be expected to attract a certain amount of ridicule, I would invite those of a more nervous disposition who disagree, to give us a backtest of the dividends they have lost and the gains they have missed by keeping any cash on deposit since the credit crunch.

And if it was me setting out with your pot today I would simply split it between GSK and Vodafone and keep as much as possible in ISA.



agreed
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Sara G
Posted: 13 March 2018 16:58:34(UTC)
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Thanks for the kind feedback, Pablo.

I think with time on your side and your emergency cash needs covered, then being fully invested is a realistic option. In those circumstances the main purpose of holding cash in a portfolio is to take advantage of buying opportunities, however, and so I think it is possible to do just as well (or even better) by keeping 5-10% in cash - while taking a bit less risk. It depends on how you think markets might behave (I say 'think' as nobody knows of course) and more importantly how you tend to behave if/when markets fall... In my case I want to be topping up on low valuations, but not everyone is comfortable doing that.

KL always says that your future income can be treated as part of your cash allocation too though, so in reality as long as you have an income you're fine either way.
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Micawber
Posted: 13 March 2018 17:01:38(UTC)
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Assuming that you have some cash savings elsewhere to meet life's running costs and contingencies, and noting that your time horizon is pretty long term, then you should probably be fully invested in good prospects.

However, you'd be buying or holding only those stocks that you think are good value at present. If there are some which don't really stand re-thinking at present prices, sell them and there's your cash. Reinvest it if you have better stocks you think are good value. If none, wait till you find some.

At present, only one of our family pfs is fully invested, and that is running in second place to my risky but well-performing fun portfolio over the past fifteen months (which continues in the lead this year despite carrying 30% in cash). In the others, cash proportions currently average about 12% but that's because I can find few bargains, or have stocks I want to add to but only if/when their prices drop during the year, or there is new money going into the pfs which is being used to build up existing holdings in phases over time.
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Captain Slugwash
Posted: 13 March 2018 17:56:14(UTC)
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By all means keep some cash if you have your eye on something, and are just waiting for the right price.
But don't sit on a certain percentage of cash just because people tell you it is the sensible thing to do.
Odds are that those sort of people will never invest that X% even in a massive downturn, which begs the question, why is it in a trading account/SIPP/ISA portfolio in the first place?

You have your emergency cash elsewhere, so plan to keep your portfolio fully invested.
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Mr Helpful
Posted: 13 March 2018 18:34:10(UTC)
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PabloMartini;58643 wrote:
So I'm tidying up my modest portfolio (<100k) and wanted to ask forumites advise on what % cash I should hold?
My investment timeline is 20 - 25 years, I plan to add monthly and I have an emergency cash pot elsewhere.


Some good responses coming in.

In the event inclined to hold some Cash and/or Defensives on a long term basis, just wondering :-
a) Is it likely a Constant Ratio (e.g. 75/25) would be used, with rebalancing occasionally back to that Ratio as drifting takes place, or
b) A Variable Ratio dependent on the apparent value or otherwise of markets?
Or is that a decision yet to be taken?
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PabloMartini on 14/03/2018(UTC)
King Lodos
Posted: 13 March 2018 18:48:52(UTC)
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Pleasure to meet you, Pablo.

This is the big question, especially when markets are historically overvalued.

I think it's first a psychological question .. If you can imagine your portfolio taking a 70% hit now – seeing the Total at £30k – how does it sit with you? Stress can lead to bad decisions .. Then it's a practical question: what are the worst case scenarios for not having cash?

One might be that the recession that crashes the market sees you lose your job, or business dry up – very good investors lost big having to sell at the bottom of the financial crisis (which, at the time of course, no one thinks is the bottom .. Japan had lost 80% over 20 years, and many thought we were at the beginning of that).

Ben Graham (godfather of value investing) advised 'Never more than 75% in the market, never less than 25%' .. I'd think by £100k you want *some* capital preservation within a portfolio – as emergency cash should be kept separate, and income streams can dry up .. You need some facility to use make use of investments, and the ability to buy when opportunities present.

The kind of stocks TP's in are more bond proxies – so they ensure a stream of cash and less market reactivity .. You're more in growth stocks, where a wobble in fundamentals would see growth estimates cut, and prices fall fairly sharply, while income's only in the 1% region .. So I think you need a little more buffering on this kind of portfolio.

I'd say 10% cash is always prudent, and it's what Warren Buffett recommends .. 25% cash feels sensible to me at this stage in a business cycle, and with you already having SMT (which is over 100% exposure) – and you could put it in NS&I income bonds at nearly 2% .. If you'd been 75:25 in 2000, your returns would've been ahead of 100% stocks for the next 15 years, just from slightly better capital preservation
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Keith Cobby
Posted: 13 March 2018 19:45:07(UTC)
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Hi, as you are still working and have a 20-25 year investment horizon, I would be 100% invested in growth funds. High yielders may be bond proxies and I think are to be avoided as, whilst they may provide an illusionary high income today, they may not grow much over your timeline.
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PabloMartini on 14/03/2018(UTC)
King Lodos
Posted: 13 March 2018 20:47:44(UTC)
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But you have to consider a sufficiently severe recession could put the working part of the equation at risk – and now there's the double threat of technology.

A few years ago I could make £1,000 in an afternoon writing a few thousand words for a magazine .. I can only think of one editor from back then who's still in the industry now .. Similar thing happening with retail, and I think you can see similar things happening in IT and finance

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Alan M on 15/03/2018(UTC)
Tony Peterson
Posted: 13 March 2018 21:44:52(UTC)
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A stream of cash can be very helpful to the serious investor.

It allows you to choose where to invest that stream in such a manner as to maximise the compounding of your total investments.
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Alan M on 15/03/2018(UTC)
Mickey
Posted: 13 March 2018 22:06:41(UTC)
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I keep 25% in cash, my wife 50%. Cash is held in ISA's and NS&I plus some premium Bonds. The stock portfolios tend to stay fully invested. I track my pf against the Life Strategy 80 fund, it is during times of too much cash in the pf that the LS fund starts to catch up. Lesson for me is to stay fully invested.
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philip gosling
Posted: 13 March 2018 22:26:09(UTC)
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[quote=PabloMartini;58643]So I'm tidying up my modest portfolio (<100k) and wanted to ask forumites advise on what % cash I should hold?



Follow Tony Peterson's advice. Why? You said!

"My investment timeline is 20 - 25 years"

-------It makes no sense to hold 25% or anything more than 5% in cash for 25 years and the 5% is to take advantage of falls in the stock market to invest it all in next 1 or 2 years.

I assume you are diversified and should have already an immediate cash fund for a period of unemployment (12 months?) , the new car, new boiler, next year's holidays and kid's nursery fees for a couple of years and maybe a mortgage on a house. Life insurance if with a partner and with kids even more essential. So this money is for your retirement and for the next Pablo generation - don't waste it on holding 25% in 0% interest cash for 25 years it will be worth 10-15% less then.
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King Lodos
Posted: 13 March 2018 22:49:48(UTC)
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Mickey;58671 wrote:
I keep 25% in cash, my wife 50%. Cash is held in ISA's and NS&I plus some premium Bonds. The stock portfolios tend to stay fully invested. I track my pf against the Life Strategy 80 fund, it is during times of too much cash in the pf that the LS fund starts to catch up. Lesson for me is to stay fully invested.


'Fully invested' would usually mean not holding any cash.


When it comes to worst possible outcomes – Black Swans (from Japan losing 80% over 2 decades, to 70 straight years when stocks lagged bonds .. and even times some markets have gone to 0, which is always a threat with a far-left government) – they usually involve being fully invested.

It's a funny phenomenon, but most of us are happy to take more risk with our portfolios than we do choosing a mid-priced car (to paraphrase Jesse Livermore) .. Certainly big bets on funds like SMT are high risk – not saying it's bad risk, but high valuations + leverage is also a pretty good predictor of Black Swan events
King Lodos
Posted: 13 March 2018 22:55:26(UTC)
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philip gosling;58673 wrote:
[quote=PabloMartini;58643]So I'm tidying up my modest portfolio (<100k) and wanted to ask forumites advise on what % cash I should hold?



Follow Tony Peterson's advice. Why? You said!

"My investment timeline is 20 - 25 years"

-------It makes no sense to hold 25% or anything more than 5% in cash for 25 years and the 5% is to take advantage of falls in the stock market to invest it all in next 1 or 2 years.

I assume you are diversified and should have already an immediate cash fund for a period of unemployment (12 months?) , the new car, new boiler, next year's holidays and kid's nursery fees for a couple of years and maybe a mortgage on a house. Life insurance if with a partner and with kids even more essential. So this money is for your retirement and for the next Pablo generation - don't waste it on holding 25% in 0% interest cash for 25 years it will be worth 10-15% less then.


But .. remember what a worst case scenario looks like.

2nd largest economy in the world at the time – no Mad Max scenarios .. Yet from 1990 to 2010, an 80% loss.

Many false starts – this is why these kinds of markets are so hard to get out of

https://static.seekingalpha.com/uploads/2010/5/13/saupload_n225_bubble_since_1984.png
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Tyrion Lannister
Posted: 14 March 2018 00:39:25(UTC)
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If your investment timeline is 20 years plus, then it’s simple - 1) invest on a regular basis, say monthly 2) be well diversified, and 3) always be 100% invested.

There are numerous studies that show this has been the best strategy historically but what the future holds, no one knows!
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john_r
Posted: 14 March 2018 01:56:58(UTC)
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I agree with Tyrion.
My crystal ball shows the UK heading for long periods of inflation. But it doesn't show interest rates rising that much.
So in this scenario then you should surely stay fully invested so that your assets grow with inflation.
As for the example of the Nikkei 225 bubble - that was about by one thing only - an hysteria of Land Prices. Land in or around Tokyo became so valuable that factories sitting on owned land became megastars - not for what they produced but for what their land was worth. Make sure you stay diversified and avoid the effects of such bubbles.
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King Lodos
Posted: 14 March 2018 02:02:08(UTC)
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Tyrion Lannister;58681 wrote:
If your investment timeline is 20 years plus, then it’s simple - 1) invest on a regular basis, say monthly 2) be well diversified, and 3) always be 100% invested.

There are numerous studies that show this has been the best strategy historically but what the future holds, no one knows!


Just to take over the thread a bit more ..

The problem is you hit a point (sometimes quite soon) when your capital is so much larger than your contributions, they're not protecting you.

The example of £1,000/month compounding at 10% over 22 years, getting you to £1m .. By the time you're at £1m, £1,000 is a rounding error, and a market crash of 60% is going to sting.

At that point, it would be ideal to have another £400k on the sidelines to take advantage of a generational buying opportunity .. Otherwise it could easily be a decade or more just trying to get back to £1m (for European markets it's been 20 years to get back to the peak now).

I'd say the average person would want to be in 2/3rds capital preservation by £1m .. Even 2% NS&I bonds on £600k gives you an income of £12k – so even the nonproductive part of your portfolio could keep you.

So by £100k, you would logically want some capital preservation (unless you're able to invest significantly more than £1k/month) .. Ideally you want a job that grows the amount it pays exponentially – and that's what I use the hedged part of my portfolio for .. Although 2% is fairly abysmal, low inflation makes holding cash less of a problem.








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PabloMartini on 14/03/2018(UTC)
King Lodos
Posted: 14 March 2018 02:26:34(UTC)
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john_r;58683 wrote:
I agree with Tyrion.
My crystal ball shows the UK heading for long periods of inflation. But it doesn't show interest rates rising that much.
So in this scenario then you should surely stay fully invested so that your assets grow with inflation.
As for the example of the Nikkei 225 bubble - that was about by one thing only - an hysteria of Land Prices. Land in or around Tokyo became so valuable that factories sitting on owned land became megastars - not for what they produced but for what their land was worth. Make sure you stay diversified and avoid the effects of such bubbles.


The fundamental thing it was caused by was the long-term debt cycle .. It might manifest in land prices, or bank crises, or social unrest, but Japan hit that part of this century-long cycle first.

The Financial Crisis was us hitting our first iceberg – which is why we immediately fled into Japan's QE policy .. The big unknown – and the reason there are so many excessively bearish managers – is whether it's actually fixing the problem, or letting it balloon into something worse.

A lot of the parallels with the 1920/30s today have to do with debt .. I suspect World Wars are an emergent phenomenon caused by debt, because they happen to be an effective way to tear a lot of it up .. Automation's our silver lining, because it might enable us to grow our way out of the problem, if central banks can get the balancing act right along the way.
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Freefall Junkie
Posted: 14 March 2018 07:18:35(UTC)
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Very interesting discussion - with some thought provoking responses as usual from KL and others. I have been fully invested for most of the last 7 or 8 years, but have moved to around 25% cash in the last 3 months, boosted by a chunk I had in and S&P 500 tracker which I sold just last week. It is a mugs game trying to predict the short term path of the markets of course, but I do believe there are reasons to be very cautious over the next couple of years with historically high valuations and the unwinding of QE. QE has been a massive economic experiment, and while it probably prevented a prolonged deflationary bust after the 2008 crisis, no one really knows the long term outcome.
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PabloMartini on 14/03/2018(UTC)
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