How much cash do you hold?

[Guest Schwab711]

~7%

[writser]

Across my various accounts (qualified and non-qualified), I'm probably about 50% cash.  I think I made a mistake by selling two of my favorite businesses in late 2012 (GGG and BRK.B).  They made up a significant portion of my holdings at that time.  I partially sold them for tax reasons.  Looking back, I think it was the wrong decision.  Both of these companies should have stayed in my portfolio as permanent holdings.  They will compound for years to come.  Now I have to wait until they are available at much more attractive prices (which could be a long while).  Meanwhile, my cash sits earning nothing.

Textbook example of mental biases at work here... you don't correct one mistake by making another.

 

With regards to this, I enjoyed these blogpost I stumbled upon a few days ago:

 

http://awealthofcommonsense.com/the-psychology-of-sitting-in-cash/

http://abnormalreturns.com/2013/02/04/cash-is-a-drug/

 

And that’s one of the biggest issues when you pull the trigger and go to all cash. It turns psychological warfare in your own head because there are always going to be good reasons to wait for a better buying opportunity. When stocks go up, you tell yourself you’ll wait for a correction and when stocks fall, you tell yourself you’ll wait for them to drop just a little further.

 

[..] most investors do not have the discipline to have a fully thought out strategy for employing cash on an opportunistic basis. For many cash becomes a bad habit. There is always a reasonable claim for another correction or bear market. That is the nature of markets that climb a “wall of worry.” There is ALWAYS something to worry about. The desire to flee to cash to avoid the next 5% downdraft is a gateway to a cash addiction.

 

We may or may not be entering a new secular bull market for stocks. Only time will tell. However those clinging to cash for the past five years will likely kick their habit at the very worst possible time. The only cure to a cash addiction is not to start in the first place. As Josh Brown notes the chances of you getting your market timing right is slim (to none) [..] Market timing is a gateway to cash addiction. One need only look at fund return statistics to see that individual investors have a horrible tendency to buy high and sell low. Have a strategic (or even tactical) asset allocation and stick to it.

[KinAlberta]

Across my various accounts (qualified and non-qualified), I'm probably about 50% cash.  I think I made a mistake by selling two of my favorite businesses in late 2012 (GGG and BRK.B).  They made up a significant portion of my holdings at that time.  I partially sold them for tax reasons.  Looking back, I think it was the wrong decision.  Both of these companies should have stayed in my portfolio as permanent holdings.  They will compound for years to come.  Now I have to wait until they are available at much more attractive prices (which could be a long while).  Meanwhile, my cash sits earning nothing.

Textbook example of mental biases at work here... you don't correct one mistake by making another.

 

With regards to this, I enjoyed these blogpost I stumbled upon a few days ago:

 

http://awealthofcommonsense.com/the-psychology-of-sitting-in-cash/

http://abnormalreturns.com/2013/02/04/cash-is-a-drug/

 

And that’s one of the biggest issues when you pull the trigger and go to all cash. It turns psychological warfare in your own head because there are always going to be good reasons to wait for a better buying opportunity. When stocks go up, you tell yourself you’ll wait for a correction and when stocks fall, you tell yourself you’ll wait for them to drop just a little further.

 

[..] most investors do not have the discipline to have a fully thought out strategy for employing cash on an opportunistic basis. For many cash becomes a bad habit. There is always a reasonable claim for another correction or bear market. That is the nature of markets that climb a “wall of worry.” There is ALWAYS something to worry about. The desire to flee to cash to avoid the next 5% downdraft is a gateway to a cash addiction.

 

We may or may not be entering a new secular bull market for stocks. Only time will tell. However those clinging to cash for the past five years will likely kick their habit at the very worst possible time. The only cure to a cash addiction is not to start in the first place. As Josh Brown notes the chances of you getting your market timing right is slim (to none) [..] Market timing is a gateway to cash addiction. One need only look at fund return statistics to see that individual investors have a horrible tendency to buy high and sell low. Have a strategic (or even tactical) asset allocation and stick to it.

 

Interesting. Thanks for posting.

 

So who is buying bonds now? In equal allocations to what they are buying in equities.  If people are avoiding bonds right now, are they not "market timing" and so destined to fail?  :-)

 

That said, I always have problems with comments that "market timing" fails, is a mugs game, etc.  We all "market time" whether we like it or not.  Age, career stage, debt free status, etc. all impact one's timing with respect to longer term trends and amounts invested. Few people dollar cost average into markets over their lifetime using the same amounts of money from their 20s to their 60s. Right now Buffett is suggesting that his heirs invest 90% in equities and 10% in cash.  No exposure to bonds. That is non-diversified investment advice and so is thus market timing.

 

Also, "market timing" where an investor builds significant cash maybe once or twice in their investing lifetime can be criticized for market timing, but investors like that tend to be able to buy and hold until market conditions or their assessment of risks exceed even their longstanding tolerance for staying the course.  (Think: people avoiding bonds now for the first time ever. Though, I guess, if we go into deflation they will wish they didn't market time.)

[ourkid8]

1% cash but continue to reduce leverage across my portfolio (paying down investment debt and selling leaps). There is just so many opportunities, I am shocked by how individuals can be in 50%+ cash!!!

 

Tks,

S

[jay21]

Interesting. Thanks for posting.

 

So who is buying bonds now? In equal allocations to what they are buying in equities.  If people are avoiding bonds right now, are they not "market timing" and so destined to fail?  :-)

 

That said, I always have problems with comments that "market timing" fails, is a mugs game, etc.  We all "market time" whether we like it or not.  Age, career stage, debt free status, etc. all impact one's timing with respect to longer term trends and amounts invested. Few people dollar cost average into markets over their lifetime using the same amounts of money from their 20s to their 60s. Right now Buffett is suggesting that his heirs invest 90% in equities and 10% in cash.  No exposure to bonds. That is non-diversified investment advice and so is thus market timing.

 

Also, "market timing" where an investor builds significant cash maybe once or twice in their investing lifetime can be criticized for market timing, but investors like that tend to be able to buy and hold until market conditions or their assessment of risks exceed even their longstanding tolerance for staying the course.  (Think: people avoiding bonds now for the first time ever. Though, I guess, if we go into deflation they will wish they didn't market time.)

 

Yeah - most of us invest for retirement/savings. Should your investments match your future consumption (i.e. you should match your assets to your liabilities)? I would expect so. If you plan on buying a house, paying tuition, buying a car, moving, in the next 5 years, potentially a good chunk of your savings should be in cash and FI instruments.

 

I have been looking more closely at Doubleline, TCW, and PIMCO over the past few weeks to get a better sense of fixed income investing as the more I think about it the more it makes sense to have some exposure to FI.

[Hielko]

That said, I always have problems with comments that "market timing" fails, is a mugs game, etc.  We all "market time" whether we like it or not.  Age, career stage, debt free status, etc. all impact one's timing with respect to longer term trends and amounts invested. Few people dollar cost average into markets over their lifetime using the same amounts of money from their 20s to their 60s. Right now Buffett is suggesting that his heirs invest 90% in equities and 10% in cash.  No exposure to bonds. That is non-diversified investment advice and so is thus market timing.

I think you have a different idea what market timing is compared to most people. Market timing is a conscious/deliberate move to actively reduce and add exposure to the market. If you don't have money and you don't invest anything you aren't timing the market. If you win the lottery and invest it all you are also not timing the market.

No exposure to bonds. That is non-diversified investment advice and so is thus market timing.

Perhaps, but not necessarily. It's only market timing if you want to change the allocation based on your market outlook. If you advise someone to keep 90% in equity forever there is no market timing component nor is there when you advise someone to change allocations based on their age or changing abilities to take risk.

[Guest Schwab711]

Interesting. Thanks for posting.

 

So who is buying bonds now? In equal allocations to what they are buying in equities.  If people are avoiding bonds right now, are they not "market timing" and so destined to fail?  :-)

 

That said, I always have problems with comments that "market timing" fails, is a mugs game, etc.  We all "market time" whether we like it or not.  Age, career stage, debt free status, etc. all impact one's timing with respect to longer term trends and amounts invested. Few people dollar cost average into markets over their lifetime using the same amounts of money from their 20s to their 60s. Right now Buffett is suggesting that his heirs invest 90% in equities and 10% in cash.  No exposure to bonds. That is non-diversified investment advice and so is thus market timing.

 

Also, "market timing" where an investor builds significant cash maybe once or twice in their investing lifetime can be criticized for market timing, but investors like that tend to be able to buy and hold until market conditions or their assessment of risks exceed even their longstanding tolerance for staying the course.  (Think: people avoiding bonds now for the first time ever. Though, I guess, if we go into deflation they will wish they didn't market time.)

 

Yeah - most of us invest for retirement/savings. Should your investments match your future consumption (i.e. you should match your assets to your liabilities)? I would expect so. If you plan on buying a house, paying tuition, buying a car, moving, in the next 5 years, potentially a good chunk of your savings should be in cash and FI instruments.

 

I have been looking more closely at Doubleline, TCW, and PIMCO over the past few weeks to get a better sense of fixed income investing as the more I think about it the more it makes sense to have some exposure to FI.

 

I have lived my entire investing life with 0% interest rates so I worry a lot that I can't fully understand the economic history (15% mortgage rates!) I read about. The idea of rates rising to 1% freaks me out much less back up to 4% - 5%. I don't understand how anyone can buy any FI product without being absolutely assured they can hold to maturity (so balance of payments/personal treasury ops make sense). I think I'm missing something but the future market-to-market losses for nearly all FI products seems imminent and obvious (maybe except housing/MBS - interestingly, lots of studies done in many different decades show rising mortgage rates have a zero to small positive effect on housing prices). Bond Funds/ETFs seem like the absolute worst option because managers will realize MTM losses through active management and the ETF/Fund itself will trade like a bond-linked stock.

 

How are others dealing or thinking about this? In theory, the move up from 0% should be deadly to all portfolios but 10 years post-1947 seems to imply I'm paranoid.

[jay21]

I have lived my entire investing life with 0% interest rates so I worry a lot that I can't fully understand the economic history (15% mortgage rates!) I read about. The idea of rates rising to 1% freaks me out much less back up to 4% - 5%. I don't understand how anyone can buy any FI product without being absolutely assured they can hold to maturity (so balance of payments/personal treasury ops make sense). I think I'm missing something but the future market-to-market losses for nearly all FI products seems imminent and obvious (maybe except housing/MBS - interestingly, lots of studies done in many different decades show rising mortgage rates have a zero to small positive effect on housing prices). Bond Funds/ETFs seem like the absolute worst option because managers will realize MTM losses through active management and the ETF/Fund itself will trade like a bond-linked stock.

 

How are others dealing or thinking about this? In theory, the move up from 0% should be deadly to all portfolios but 10 years post-1947 seems to imply I'm paranoid.

 

OK - two of the things high on the list are DBLTX, which is little bit of credit (PLRMBS) and duration (Agencies/TSY). These two should provide a little diversification and TCW's CEF, which is quoted at >5% discount to NAV and is unlevered exposure to PLRMBS and some other securitized products. Both incredibly managed.

 

I am not really interested in 10 to 30 year duration products as I think there is a lot of uncertainty in that time frame.

[thepupil]

it isn't market timing for an individual to not own bonds when CD's pay you the same or more with minimal duration.

 

GE Capital 5 yr CD's return 2.25% and have a 1.7% early withdrawal penalty.  Therefore, their return is 2.25% and have very little duration and no credit risk (assuming you have faith in GE and FDIC).  The Barclay's Agg yields 2% with a duration of 5. The intermediate term investment grade index fund offered by vanguard is at 2.4% with duration of 6.  I see no reason to get paid less (in the case of agg) to take on more duration risk or to take on IG credit risk for a meager 20 additional bps. Default adjusted high yield returns (even with lower than normal defaults) also don't give you enough spread or absolute return when compared to the GE CD's.

 

I-bonds offer a pre-tax 0% real return (the same as 5 yr tips). Once again, no duration (you have to hold them for one yr then you have a 6 mo. interest penalty in yr 1-5), no credit risk, same return as AGG (assuming 2% inflation). But you can only buy $10K / year.

 

In my opinion it is rational for all but the wealthiest of individuals to only own CD's and I-bonds as a substitute for bonds. No individual should own AGG or IG credit funds or high yield or anything of the sort. Leave that to the liability matchers who need to deploy massive sums in fixed income

 

Schwab, I don't understand why the thought of rising rates "freaks you out" or what exactly would be "deadly to all portfolios". Can you elaborate? The duration of the barclay's AGG is 5 ish and will generally decrease as rates rise (except for the large % of it in mortgage backed securities since those are negatively convex).

 

If rates rise 400 bps in one year, bonds will go down 20% (actually less because of convexity) and then will be earning more from there.

 

unless you own a bunch of agency mREITs and zero coupon treasuries, or growth stocks with lots of duration because their cash flows are way out, who cares? I'm not saying we shouldn't worry about the indirect affects on the economy or owned companies, but bonds going down with rates rising does not scare me at all and I don't understand why it would scare any indiividual investor who doesn't have to own bonds.

 

 

[randomep]

race,

 

I agree that it's impossible to time it perfectly. However, I do think there are times to be super aggressive (in times of extreme fear) or times to be super conservative (in times of extreme greed). Perhaps I'm wrong, but I think moving things slowly -as the pendulum swings - should help with overall results. Even Buffett (his personal account) and Munger were sitting in cash/bonds before 2008.

 

One thing to note with Marks--he is required to be fully invested.  When he talks about the pendulum and the corresponding amount of aggression he uses, he's talking about being conservative or aggressive with the hurdle and/or assumptions being made, not holding cash.  I think such a strategy makes a lot of sense (i.e., more conservative assumptions for specific investments as the pendulum moves toward greed).

 

With regard to using it for cash holding purposes, it sounds perfectly reasonable.  The problem I have, however, is that many ideas that are "reasonable" (e.g., using CAPE or other valuation metrics to move in and out of the market) are not supported by evidence in producing superior long-term results.  Basically, I'm taking the stance that there should be compelling evidence to use any particular strategy.  I feel like many of us use superstitions and gut feelings for a lot of this area of investing, which I'm not comfortable with, personally.

 

GMO site did a paper on that topic about the mix of bond/stocks and shows that using CAPE to rebalance is an optimal strategy. I tend to think so also, although that may be in question today because bond rates are so slow. I am in the process of simulating using real S&P data for the last 150yrs. And my preliminary results tends to agree with the paper.  (It is listed in my blog entry: http://bovinebear.blogspot.com/2015/01/some-reading-material-and-thoughts-on.html)

 

I have also simulated based on only stock market price input and I concluded that nothing beats 100% stocks.  Many successful investors like Peter Lynch were 100% in stock and they were very successful.