Cash? Don't Hold Too Much

Investment Analysis Clubs Macro Economic Trends and Risks
1

Cash Buckets Are Earning Their Keep as Markets Slide. Just Don’t Hold Too Much
https://www.barrons.com/articles/cash-bucket-strategy-retire…

He originally told clients to keep two years’ worth of supplemental living expenses in the cash bucket, but later cut that down to a single year’s worth.

Evensky, now 79 years old and retired from planning, disagrees with how the bucket approach is often used today. Some advisors keep up to 10 years’ worth of living expenses in short-term and intermediate-term buckets, and long-term investments in a third bucket. Evensky prefers his simpler two-bucket approach: one for cash, the other for long-term investments. He says a year’s worth of cash is plenty to protect investors from market volatility, and holding more than that drags down returns.

True dat. The i-bonds I bought about 25 years ago are by far the most poorly performing asset in my portfolio. Fortunately, it’s only about 1% of assets.

intercst

7 Likes
2

Wait and see. The stock market slide has just begun. The bubble has just begun to pop.

Many investors were wiped out when the 2001 stock market bubble burst. Many of the stocks that went to zero never recovered. Entire nest eggs vanished. I have met people who experienced that, living in small apartments with furniture from their “wealthy” time.

But not you! Oh, no! All your investments always go up!

Of course, you love to pat yourself on the shoulder. Yes, you are VERY, VERY SMART, intercst!!!

I hope that makes you happy. :slight_smile: :slight_smile:

Time will tell. And every investor has different needs.

One year’s cash may be enough…or not.

Of course, don’t expect an investment advisor to tell clients to hold cash. What good would that do him?

Do you think that this market environment is the right one for a (naive, cash-heavy) investor to say, “Oh, intercst says I shouldn’t be in cash. I’ll call my broker and put it all in the stock market today!”

??
Wendy

10 Likes
3

Wait and see. The stock market slide has just begun. The bubble has just begun to pop.

Many investors were wiped out when the 2001 stock market bubble burst. Many of the stocks that went to zero never recovered. Entire nest eggs vanished. I have met people who experienced that, living in small apartments with furniture from their “wealthy” time.

But not you! Oh, no! All your investments always go up!

Not at all. My long-term buy & hold (LTB&H), “minimize the skim” strategy had yielded 50% drops in my net worth in 2000 and 2008, but recovered to new all-time highs in both cases. I’m very fortunate that I learned my lesson at an early age (31) in the 1987 Black Monday stock market crash when the DOW had a 22.6% one-day decline. I stayed out of the market for 2 years after that. I’m at least 25% poorer today as a result versus had I been a LTB&H investor all along.

Keep the money you plan to spend in the next 5 or 10 years out of the market, but the keep the rest “all-in”. What wipes out investors is the “churn of trading costs and taxes” as they attempt to trade market fluctuations over time and the need to raise cash when the market is down, thus the “keep the money you plan to spend in the next 5 or 10 years out of the market” rule.

It’s actually quite easy and boring. I guess people need to make it harder than that to provide a topic of conversation.

intercst

15 Likes
4

Define “Too much.”

The Captain

5

Many of the stocks that went to zero never recovered.

That was one of the most important lessons of 2000, don’t buy stocks that won’t bounce back.

It’s not speed that kills, it’s that sudden stop. It’s not growth that’s risky, it’s bankruptcy that kills portfolios!

How much cash? Enough to outlast the bear market. Your bank account may vary!

The Captain

2 Likes
6

captainccs advises,

That was one of the most important lessons of 2000, don’t buy stocks that won’t bounce back.

Timeless and sage advice.

“Buy stocks that go up, if they don’t go up, don’t buy them.”

Will Rogers, Nov 1, 1929

intercst

7

That was one of the most important lessons of 2000, don’t buy stocks that won’t bounce back.

Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.
– Will Rogers

8

The stock market slide has just begun. The bubble has just begun to pop.

That’s an interesting take.

As of Friday’s close, The Nasdaq 100 was at 11,835 versus a peak towards the end of 2021 of 16,573, a drop of 29%. Already. Yes on the charts it looks like 11,000 maybe 10,000 could easily be hit. But if we drop another 29% it’d be at 8,500 … and if the bubble has really only just begun to pop we would be headed much lower.

Mungofitch reckons the stocks in this mainly large tech index have grown profits at about 8% pa plus inflation over the past decade or so (eg 10% pa total). The runup in the 2010s is a price appreciation of 17% pa (and we are right back on that trendline now after a bit of a blowoff top last year). If the current macro environment means we go back to 2010 p/e ratios that would bring this index to 6,000, a further 50% drop. That would be a change of paradigm as it were, a situation in which fortunes are made and lost.

And if we get a recession type environment, profits could collapse on top of p/e compression …

So I guess after a runup that has made people wealthy in a bull market, we need to work out which is right … “it always goes up” … or the alternate explanation “it’s expensive now” …

Looking at the S+P 500 index, maybe that ultimately might correlate with GDP growth? OK, glabalisation and the big profitable tech stocks distort the comparison but it would go like this.

4796 High Jan 3 2022
3901 Now (already -19%)

11% p.a. Price growth since mid 2010
4% p.a. GDP nominal growth since mid 2010

1837 Implied price if we revert to the same market cap : GDP ratio as in 2010 … and why shouldn’t we?

A further 53% drop. … in the S+P 500!

I’m starting the comparisons from 2010, and yes a lot hinges on the start point, but it was a middle ground between the heady 2007 and the sad 2009.

12 Likes
9 
The stock market slide has just begun. The bubble has just begun to pop.
*That's an interesting take.*

A picture is worth a thousand words. This picture says that falling to 7343 is possible which is down 35% from here, or down 55% from the 52 week high. I don’t think this is a good time to bet on a bottom.

BTW, 7343 is the level the NASDAQ fell to in 2002 in relative terms, -1 RMS on the chart.

https://invest.kleinnet.com/bmw1/stats40/^IXIC.html

I’m just trying to create enough income not to have to sell stocks.

The Captain

5 Likes
10

Nice chart Captain :+1:

Maybe the level I picked to start at 2010 was already below trend, a low start point, would suggest your 7,300 level for a bottom is more neutral.

However the gist of the “big growly bear” argument is that the whole trendline from 1980 to 2022 may have been driven by gloablisation and the resulting local underemployment and deflation and the central bank response function of free money. If this goes into reverse … or even moderates … the central rate of appreciation in that chart becomes history … change of paradigm …

3 Likes
11

Nice chart Captain :+1:

Thanks! I highly recommend the Klein charts: https://invest.kleinnet.com/bmw1/xref.html

Maybe the level I picked to start at 2010 was already below trend, a low start point, would suggest your 7,300 level for a bottom is more neutral.

Picking a starting date is ALWAYS a problem. The chart I linked is 40 years, 1982-2022. Look at the difference with the 16 year chart – already below average! But it tells a similar story – no bottom yet. :frowning:

But the bottom is closer to 10200. :wink:

https://invest.kleinnet.com/bmw1/stats16/^IXIC.html

But then, in 1982 they had not yet stated the never ending printing press, that’s a 2008 pair of dimes! Or is it? One has to look at the indicators, ARKK has been steady for over a week…

ARKK 10 market days: https://bigcharts.marketwatch.com/advchart/frames/frames.asp…

The Captain

1 Like
12

I am finding it really hard to find a good place to put my money. I don’t think any sector is safe, everything is overpriced, everyone has too much debt.

So I’m probably just going to sit here like a slug.

I remember my first overnight trade, back in the days when I was experimenting; I became so nauseous that I knew day trading would never be my thing.

Nowadays I don’t get excited about much of anything. I don’t think it’s smart to be a slug, but that’s what I’ve become.

Oh, well, I’ll try to slither into some stock screens sometime this week. Trying to find companies who are against debt as a matter of corporate philosophy (La-Z Boy is one. I’m not saying it’s a good investment, just saying that’s the strategy I’m looking for.)

13

Picking a starting date is ALWAYS a problem. The chart I linked is 40 years, 1982-2022.

This is a particularly interesting period. That’s because during this period, interest rates almost consistently dropped (from teens down to near zero). I wonder if it would be at all representative if we perhaps get a new period 2022-2062 of constantly increasing interest rates, perhaps from near zero to teens?

(I don’t think it is likely, first because I don’t think interest rates will go that high, second because it seems that interest rates tend to increase FAST and decline more slowly. So even if rates rise a lot now, they may rise a lot over 1-3 years, and then begin that inevitable inexorable decline back to near zero. I could be wrong, of course.)

4 Likes
14

I don’t think that is the main point. Intercst, of course, is often a little glib about it, but the point ISN’T that stock investments always go up; They clearly do not! The point is that stock investments (index funds for the vast majority of people) over a period of time almost always outperform any other readily available choice. So over most 5 or 10 year periods, and all 30 year periods, they outperform. This is a simple fact borne out by the numbers overt he last 100+ years.

Warren Buffett has a similar viewpoint. His view is that things that actually produce something, that sell stuff and earn money from selling that stuff, and that perhaps grow those earnings over time are the things he wants to own over the long-term. So he’s not interested in gold, not interested in crypto, those produce nothing at all. Then there are all sorts of bonds, they are designed to remain mostly fixed and roughly keep up with (and lately lag) inflation. So, the only things that can actually produce real income are companies (stocks) and real estate in many cases. And, sure enough, those are the kinds of things that Buffett invests in.

4 Likes
15

Define “Too much.”

I’d like to hold 50% of my assets, US$200 million, in cash.

(Of course, that would require me to have US$400 million in assets… so I guess I can’t do that.)

3 Likes
16

warrl: 50% of my assets, US$200 million

LOL

Thnx warrl, that sure made me sit up straight at first. “What’s he doing driving around the West and posting here? Why ain’t he at Davos’, cuz with that wealth he might even qualify for employment as a bartender’s assistant at an interesting party?”

thnx

david fb

17

It is the financials that are going to tank next. Might take a few months but China is going to have a Lehman Brothers moment. Trading desks are suddenly going to say what are we holding?

18

Your post sums up my concerns nicely. IF inflation is persistent and out of control like a huge western wildfire, the Fed may be forced to maintain a long term, sustained policy of increasing interest rates and tightening money supply. IF that happens, we could be facing an economic and stock downturn as bad as, or worse than, the downturn of the early 1980’s. Not just deeper, but more lasting.

I don’t know how likely that is. But my plan for now is to resist the urge to average in and/or shop for‘bargains’.

I guess inaction really is my plan for now. The point of accumulating ‘too much cash’ was to economically survive a ‘once in a lifetime’ downturn early in retirement.

1 Like