Where to hold SIPP cash buffer?

[simoan]

you cannot meaningfully compare the interest rate on any given day with the rate of inflation on the same day. The fact is, holding cash in an interest bearing account has beaten inflation over the past 12 months. What more do you want? My SIPP has seen the interest rate paid grow from about 1% to 3%, a 300% increase in interest, which is way more than inflation.

Inflation is the change (increase) in prices. Interest is the time value of money. So suppose a good costs 100 this year and 110 next year. If you have 100 in cash this year, earn 3 in interest, then you have 103 next year. I make that a net loss in purchasing power. I don't see the point of measuring the change in interest rates, it's the absolute value that matters and how that compares to the cheange in prices.

In theory, this is correct if you view cash in a SIPP in this very naive and simplistic manner. As I tried to make clear, I do not, although I failed. I treat cash as a position just like any equity, bond etc. within my SIPP. If you view it in that way it’s done rather well in the past year; better than the so called wealth preservation ITs. And the income from it has increased massively.There have been far worse places to be invested than cash since interest rates started to rise on a risk adjusted basis. I’m not sure why no/one else can see this? Do you fret that some of your equity holdings have not kept up with inflation? Some may even have lost you money.

[Alaric]

If you view it in that way it’s done rather well in the past year

I would not regard 3% as "rather well". Better than some alternatives, but to be "well" should imply that the assets at least retained their purchasing power.

[simoan]

If you view it in that way it’s done rather well in the past year

I would not regard 3% as "rather well". Better than some alternatives, but to be "well" should imply that the assets at least retained their purchasing power.

It seems you are wilfully disregarding the key term that I have mentioned in virtually every post I have made on this thread. if you completely ignore RISK then 3% is not great in absolute terms. How many times do I have to use the term RISK ADJUSTED before the penny drops? This is typical of threads I read on TLF which completely disregard risk. You concentrate on a purely theoretical loss of purchasing power whilst completely ignoring the risk of permanent capital loss. Which is worse? because to me the latter is far worse - inflation does not permanently lose you purchasing power but the latter does. If you held an equity that was the same price now as it was a year ago but the dividend had trebled, would you be happy? Investing is about the future, not the past, and inflation is a backward looking measure. If you can tell me how to invest now with zero risk to overcome inflation in the next 12 months, I'm all ears, as I'm sure are other people. But you can't, can you?

[Alaric]

. You concentrate on a purely theoretical loss of purchasing power .

If something cost 90 last year and 100 this year, that isn't a theoretical loss of purchasing power, it's an actual loss. Unless the real return on cash is at least 0%, one would need to invest in assets with risk to maintain purchasing power. Hence the OP's original question about what to do with cash in a SIPP. One solution is to do what ITs would do, Retain a notional reserve but invest it back in the underlying risk portfolio.

[simoan]

. You concentrate on a purely theoretical loss of purchasing power .

If something cost 90 last year and 100 this year, that isn't a theoretical loss of purchasing power, it's an actual loss.

This assumes you know how I spend my money. My own "personal inflation rate" will be vastly different to the ONS number. That's why it is a theoretical number - it does not represent MY purchasing power which is all that matters to ME. It also assumes that I need to make back this perceived loss in purchasing power over the same time period as the loss, rather than the longer time period over which I will be spending that money. At least I have a chance of the latter if I do not suffer permanent capital loss.

BTW I give up if you are prepared to completely ignore risk.

[Eboli]

I find the discussion here a repeat of so many I've read over the last 30 years.

In truth if you want an investment designed to preserve value in volatile conditions then cash is unlikely to be the right choice. I have no idea what might be better. Instead I have simple used a fund designed to preserve real value and simply hold Personal Assets (PNL) as my cash substitute. This might be wrong but so far it has not been wrong. As a total of my portfolio my holding in PNL has varied from 3% to 48% over the last 30 years. It has never served me badly for what I want it to do.

Eb.

[simoan]

I find the discussion here a repeat of so many I've read over the last 30 years.

In truth if you want an investment designed to preserve value in volatile conditions then cash is unlikely to be the right choice. I have no idea what might be better. Instead I have simple used a fund designed to preserve real value and simply hold Personal Assets (PNL) as my cash substitute. This might be wrong but so far it has not been wrong. As a total of my portfolio my holding in PNL has varied from 3% to 48% over the last 30 years. It has never served me badly for what I want it to do.

Eb.

This is all very well and good, but the truth is that PAT has returned only 0.6% in the past 12 months including dividends paid according to AIC. That’s worse than cash even not adjusting for the risk taken. Holding PAT has not preserved anything. In the meantime, Fundsmith Equity (which looks very similar to the equity portion of PAT) has returned around 17%. Why should the OP expect any better performance over the next 12 months?

[Eboli]

simoan comments:

This is all very well and good, but the truth is that PAT has returned only 0.6% in the past 12 months including dividends paid according to AIC. That’s worse than cash even not adjusting for the risk taken. Holding PAT has not preserved anything. In the meantime, Fundsmith Equity (which looks very similar to the equity portion of PAT) has returned around 17%. Why should the OP expect any better performance over the next 12 months?

That may well be right - I have not checked but the figures seem right. But I'm not interested in the last 12 months but a highly variable amount held over several decades. Rather like Blackjack, you bet bigger when the count is in your favour, assuming you can find a shoe game.

Eb.

[simoan]

simoan comments:

This is all very well and good, but the truth is that PAT has returned only 0.6% in the past 12 months including dividends paid according to AIC. That’s worse than cash even not adjusting for the risk taken. Holding PAT has not preserved anything. In the meantime, Fundsmith Equity (which looks very similar to the equity portion of PAT) has returned around 17%. Why should the OP expect any better performance over the next 12 months?

That may well be right - I have not checked but the figures seem right. But I'm not interested in the last 12 months but a highly variable amount held over several decades. Rather like Blackjack, you bet bigger when the count is in your favour, assuming you can find a shoe game.

Eb.

The figures are from the AIC website, so assume they are correct although maybe 24 hours delayed. The huge irony is that the equity and gold positions held by PAT have done well and it is the Index Linked Gilts and US TIPS, the very instruments designed to combat inflation, that have tanked in the past 12 months (down around 25% in the case of the IL Gilts) as real yields have increased. Given there is also significant currency exposure I do not believe these types of trusts are really what the OP needs given, I assume, that the cash buffer is held in sterling and it will be spent in sterling.

[MDW1954]

Given there is also significant currency exposure I do not believe these types of trusts are really what the OP needs given, I assume, that the cash buffer is held in sterling and it will be spent in sterling.

As the OP, let me confirm that. I had initially wondered about money market funds, but as you say, Simoan, many brokers are paying a reasonable amount of monthly interest -- higher than money market funds' yields, from what I could see from a quick look.

MDW1954

[simoan]

Given there is also significant currency exposure I do not believe these types of trusts are really what the OP needs given, I assume, that the cash buffer is held in sterling and it will be spent in sterling.

As the OP, let me confirm that. I had initially wondered about money market funds, but as you say, Simoan, many brokers are paying a reasonable amount of monthly interest -- higher than money market funds' yields, from what I could see from a quick look.

MDW1954

Most of these preservation trusts hold Gold, which is priced in USD. PAT holds about 10% as of last datasheet. It also holds 34% in US TIPS and 15% in Short dated US Treasuries which are all priced in USD. Of the Equity holdings >20% are listed on overseas markets giving exposure to various currencies including USD, CAD, EUR and CHF. Most of the UK Equity exposure is Unilever and Diageo.

Depends who your broker is. I noticed ii upped their interest rate to 3% for cash > £10k in a SIPP just this week.

All the best, Si

[Eboli]

simoan said:

The figures are from the AIC website, so assume they are correct although maybe 24 hours delayed. The huge irony is that the equity and gold positions held by PAT have done well and it is the Index Linked Gilts and US TIPS, the very instruments designed to combat inflation, that have tanked in the past 12 months (down around 25% in the case of the IL Gilts) as real yields have increased. Given there is also significant currency exposure I do not believe these types of trusts are really what the OP needs given, I assume, that the cash buffer is held in sterling and it will be spent in sterling.

To repeat, I do not doubt the accuracy of the figures. I was attempting (obviously badly) to present an alternative way of looking at things that focused on the much longer term and that recognised that your "cash" holding would be likely to vary considerably over such a longer term. The Blackjack analogy serves well here.

Eb.

[moorfield]

52 posts in I'm surprised no-one has yet considered the transaction costs involved in the various wheezes of jumping surplus SIPP cash around, which likely will drag more than inflation. Apply Occam's Razor, I would suggest.

[XFool]

52 posts in I'm surprised no-one has yet considered the transaction costs involved in the various wheezes of jumping surplus SIPP cash around, which likely will drag more than inflation. Apply Occam's Razor, I would suggest.

Yes. Regarding chasing "higher" interest rates on cash deposits - where inevitably there is at least "just a few" dead days involved - it is always worth doing a day based annual APR calculation, comparing the interest lost to that gained.