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Cash - how much to hold?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Aminatidi
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Cash - how much to hold?

#322361

Postby Aminatidi » June 28th, 2020, 7:40 pm

I keep seeing lots of mention about how cash is losing money in real terms especially right now.

Ray Dalio isn't a fan.

However we all need cash to live so holding some is unavoidable.

How much is "some"?

If people are happy sharing amounts plus personal situation i.e. working/retired that's fine or just in terms of how many months/years outgoings their cash buffer covers.

I'll go first.

I'm working and debt free and I usually run around £5-10K in my current account which has salary of around £3k/month going into it.

Outgoings of around £1K/month.

I have £40K in a "savings" account earning something like 0.1% but it could be 2% and you wouldn't even notice.

I then have £20K (ish) in NS&I linkers.

That lets me sleep well but I expect many reading it would say it's nuts to be sitting on so much in cash?

dealtn
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Re: Cash - how much to hold?

#322365

Postby dealtn » June 28th, 2020, 7:52 pm

Aminatidi wrote:I keep seeing lots of mention about how cash is losing money in real terms especially right now.

Ray Dalio isn't a fan.

However we all need cash to live so holding some is unavoidable.

How much is "some"?

If people are happy sharing amounts plus personal situation i.e. working/retired that's fine or just in terms of how many months/years outgoings their cash buffer covers.

I'll go first.

I'm working and debt free and I usually run around £5-10K in my current account which has salary of around £3k/month going into it.

Outgoings of around £1K/month.

I have £40K in a "savings" account earning something like 0.1% but it could be 2% and you wouldn't even notice.

I then have £20K (ish) in NS&I linkers.

That lets me sleep well but I expect many reading it would say it's nuts to be sitting on so much in cash?


Sleeping well is an important thing.

Normal cash for me would be sub 1% of my wealth, but I appreciate that depends on how much wealth one has to be useful as a comparison.

Alternatively, I am no longer working, but below "pension" age. My income is from investments, but I don't invest for income, rather for total return (with a marginal preference for Capital over Income as my marginal tax rate for that is lower). So I'm not sure the income comparator works very well either.

So for expenditure comparisons I spend between £2k and £10k a month, averaging say £5k. I suspect an average current account balance would be about the same at £5k. I don't have any savings accounts. There will be residual cash in my broker accounts in addition, and that will typically be £0-£5k, depending on any recent dividends and/or share sales/purchases. The balance has been in 6 figures on occasions as I have recycled from one investment to another, but rarely above £25k. I would expect any balance of 5-figures or higher to last less than a week before re-investment though.

Not sure any of that is particularly helpful though having now typed it!

Aminatidi
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Re: Cash - how much to hold?

#322368

Postby Aminatidi » June 28th, 2020, 8:07 pm

It's all useful thank you.

I should have said my investment "pot" outside of pension and stuff I can't get to in a dire emergency is around £190K.

Realistically so long as I'm employed (I'm in an industry that's affected by covid-19 but expect the company to survive and as I work in a key role I expect to survive) I'm not dependent on my investments for income and I don't invest for income

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Re: Cash - how much to hold?

#322370

Postby Dod101 » June 28th, 2020, 8:16 pm

I am well through my 70s but the numbers and general philosophy mentioned by dealtn sounds like me say 20 years ago. It is so much easier to be freewheeling it at that age for all sorts of reasons. I am not an ancient decrepit now but frankly the idea of funds floating around all over the place just does not interest me now. The subject is well down my list of concerns. In another thread I mentioned that I have about 6 months expenditure in my various accounts, ISAs, SIPP, Trading and then some in savings accounts but I do not dwell on it unless the PRA bullies HSBC to halt its dividend payments!

I also have another much large chunk of money in N S & I Index Linkers. It is more asset allocation though.

I should really do something about this spare cash.

Dod

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Re: Cash - how much to hold?

#322407

Postby 1nvest » June 28th, 2020, 11:13 pm

Aminatidi wrote:I keep seeing lots of mention about how cash is losing money in real terms especially right now.

There is the counter argument that ...
Cash buys 80% more BP shares now than it did a year ago.
A ounce of gold buys 132% more BP shares now than a year ago. (Gold could be considered as being cash - "a legal tender coin").

For a US investor starting January 1972 investing a third into stocks, two thirds cash (50/50 split between gold coins and Treasury Bills), rebalancing back to a third each once/year, at the end of 2008 with all dividends/interest reinvested they'd have a portfolio of the same value as another investor who invested all in stock (reinvesting dividends). The same also applied to the end of 1990. i.e. after a period of stock dips 100% stock investors saw little/no difference to had they held much less stock.

I like cash, but do look to hold less when stocks are down, replenish cash reserves when stocks have done well. Being no good at trading - simple yearly rebalancing back to target weightings tends to be 'good enough'. If you revise target weightings in a variable manner, looking to weight cash more lightly when stocks are down, more heavily when stocks look high then that can improve overall rewards. Determining appropriate cash weightings over time is the tricky part. I follow a ValueLine "price appreciation potential" metric for that, which for instance indicated very low levels of cash at the 2009 and recent stock lows, but at other times can be suggesting 60% cash as being appropriate, such as at the late 1990's highs.

So how much cash is a how long is a piece of string type question. Predicting the right/optimal amount in advance is little different to being able to predict which stocks will perform best in advance. Also has to fit in with your comfort level. Warren Buffett for instance proposes 10% cash - but that said he's sitting on £138Bn of cash, which is equivalent to a third of the recent Berkshire Hathaway market cap value i.e. he's perhaps anticipating yet worse to come for stocks as he opted to not deploy any of that cash during the recent dips.

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Re: Cash - how much to hold?

#322409

Postby tjh290633 » June 28th, 2020, 11:17 pm

I tend to have a fair amount of cash in savings accounts, which is available for any major expense, be that a new car, a cruise, or a family celebration. It probably amounts to about 2 years' normal expenditure, but is continually being fed with more cash. This really started when I replaced my second car, and was able to do it with cash, rather than HP, and I started saving for car replacements. The amount needed was usually a lot less than I had bargained for, so balances grew. Moving house was another major event, when I needed a big deposit before my existing house was sold. That was funded by selling some unit funds, and they were replaced by setting up savings schemes in more funds.

An advantage of being retired is that cash arrives from various sources, in the case of the state pension at 4-weekly intervals, and this cash inflow leads to a surplus over expenditure.

I suppose that it comes down to living within one's means.

TJH

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Re: Cash - how much to hold?

#322459

Postby everhopeful » June 29th, 2020, 9:02 am

I look after my own and my wife's portfolio. I used to be very aggressive in my selection of investments for us but after losing a chunk of my wife's money in the Aberdeen split capital debacle she became very risk averse. This now means that she (we) have several cash savings accounts at the limit for compensation as well as a largish holding in NS&I index linked. This is far more than we need in cash but I still have IT, equity and fixed interest exposure in our two ISAs and in my SIPP. The result of the large cash position is that our portfolio fell much less in March than otherwise would be the case. I am also much more relaxed in my relationship with our money than I used to be. This attitude may also reflect advancing years and a decent index linked pension. In short I feel that if you can afford to keep a biggish cash position it does contribute to a good night's sleep.

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Re: Cash - how much to hold?

#322462

Postby scrumpyjack » June 29th, 2020, 9:09 am

I am more relaxed about keeping many years expenditure in cash now that inflation is relatively modest, I'm not earning anything and I have sufficient for it to be very unlikely that I'll ever run out.

In my youth, when inflation hit 27% at one point and the high interest on cash got taxed at 98%, it would have been crazy to keep much in cash. It was better to be negative in cash (have a large mortgage, the interest on which was then tax deductable). But I was earning then!

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Re: Cash - how much to hold?

#322486

Postby Urbandreamer » June 29th, 2020, 10:25 am

Everyones situation and risk tollerance is different. Which means that there is no "right" answer.

However there may be a range of good answers.

As my wife and I have seperate finances I can only speak for myself.

I really don't like cash. However at the moment am comfortable holding more than I used to.

I work and I spend just over £1.5k pcm.

I currently hold about £5k in my current account and £4k in brokers accounts waiting investment, no cash savings.

With the exception of my SIPP I regard cash in the brokers accounts as similar to cash in a current account. Some brokers actually have a debit card, but mine don't. That cash is actually more like a 5 day notice account.

If a "real" emergency turns up that needs more funds then I can sell some of my investments. I estimate the odds of that happening at a bad market time as less than the opertunity cost of failing to invest at the same point in time if there were no emergency.

When I retire I shall benefit from the state pension and a small DB scheme covering the bulk of what I spend, which will mean that I will be able to accept the risk of less cash or cash alternatives than some.

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Re: Cash - how much to hold?

#322527

Postby swill453 » June 29th, 2020, 12:28 pm

I keep a close eye on spending, and our personal inflation rate is much less than the headline figure. In the pre-covid year up to Feb 2020, our annual spend was less than 3% more than our first full year of retirement 6 years ago.

Given this, I'm very comfortable holding cash, premium bonds etc. of more than 3 years normal spending, as it's really not diminishing in value to me.

Scott.

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Re: Cash - how much to hold?

#322534

Postby Aminatidi » June 29th, 2020, 12:50 pm

Urbandreamer wrote:If a "real" emergency turns up that needs more funds then I can sell some of my investments. I estimate the odds of that happening at a bad market time as less than the opertunity cost of failing to invest at the same point in time if there were no emergency.


That perhaps sums up my debate/dilemma in a nutshell.

You can sell investments very quickly these days and I wonder if I'm being irrational in having so much cash in the bank when I can't think of a situation when I'd actually need it where selling some investments wouldn't apply.

There's an opportunity cost there.

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Re: Cash - how much to hold?

#322537

Postby bluedonkey » June 29th, 2020, 1:08 pm

I think a reasonable rule of thumb is as follows:

If in work, keep 6 months expenses in cash.
If retired and living off rental and/or dividend income, keep 2 years expenses in cash.

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Re: Cash - how much to hold?

#322538

Postby TUK020 » June 29th, 2020, 1:15 pm

bluedonkey wrote:I think a reasonable rule of thumb is as follows:

If in work, keep 6 months expenses in cash.
If retired and living off rental and/or dividend income, keep 2 years expenses in cash.

Discussion over on HYS&S
viewtopic.php?p=319484#p319484
Possibly need less cash for living off dividend income from ITs than for directly held stocks

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Re: Cash - how much to hold?

#322540

Postby 1nvest » June 29th, 2020, 1:30 pm

Spending is so subjective. For instance we own our own property so we don't have to find/pay rent. If we sold, invested the money and rented then we'd have more liquid assets but greater reliance upon liquid asset portfolio gains.

If you have pension(s) then lower portfolio rewards are more acceptable. You could count such pensions as a form of 'cash' - perhaps comparable to the yearly net pension amount times the number of years you anticipate living. £175 state pension at age 68, life expectancy 85 = $175 x 52 weeks x 17 years = £155K cash like value, in effect that will be drawn down to zero at death, and that paces inflation along the way (approximately).

Lifestyle/spending pattern matters. Some of current and former relatives get by spending incredibly little, near-as just living of the state pension and some cash in interest paying savings account and still manage to get by happily.

Broadly some investors are more inclined to and accepting of the higher volatility of a stock-heavy portfolio, perhaps in reflection of other sources of income (pension, owning their own home and not having to find/pay rent ...etc.). Others are uncomfortable with the fluctuations, such as stock values perhaps halving one year. The historic indications are that stock-light and stock-heavy can result in similar worst case outcomes, its inflation/taxation that are generally the killer and hit all variations of portfolios pretty much the same. In the average case stock heavy will tend to leave you as being one of the richer corpses in the graveyard or in a position of having been able to lead a more flamboyant lifestyle, but perhaps as the expense of a short lifestyle after a cardiac arrest at having seen your 'life savings' halve or more over a short period of time.

Perhaps the question should be flipped ... how much stock to hold. But again that's all so subjective to ones alternative sources of direct (pensions) and indirect (imputed rent) income streams. Maybe broadly the answer might be to have enough in 'cash' to liability match spending, and thereafter it doesn't matter what the surplus is invested in.

I'm soon to turn 60 and will start receiving a 14K/year occupational pension that is inflation linked. From age 68 I'll also receive a £175/week (around 9K/year) projected state pension. As part of the occupational pension I'll receive a lump sum of 90K, so drawing that down over the age 60 through 67 years in combination is like having a assured £23K/year between age 60 ... up to death. Owning our own home (I'd guess at a recent market value of around 1.5M) we don't have to find perhaps 4% imputed rent (£60K/year), if we did, we wouldn't, instead we'd more likely move to somewhere else with much more affordable rents. Lifestyle is that we could get by on just that alone (rent all paid, £23K/year disposable income), such that liquid asset wealth is superfluous - could all be invested in stocks, or all cash, or anything between. I suppose we should target the middle road 50/50 choice, as per Ben Graham's advice. Where the rewards that generates are for the luxuries, and for the (adult) kids benefit.

For another, perhaps also owning their own place, so rent all liability matched, that was receiving just the £9K/year state pension at age 68, desired £24K/year spending and who anticipated living to age 85, the £15K/year shortfall x 17 years life-expectancy and assuming a inflation adjusted 'cash' interest rate - and £250K cash would be appropriate. Anything above and beyond being free to be invested however they liked.

Like everhopeful posted earlier we also hold lots of cash spread across multiple banks for compensation limits protection and yet more in Gilts for their near instant access/fully protected qualities. The low even negative real returns aren't really a concern as we also hold other assets (stocks and gold) such that as a collective the overall rewards are more inclined to be positive/neutral in inflation adjusted terms. Not adverse however to periodically deploying some/much of that cash as opportunities present themselves (and replenishing it again later as profit take opportunities present). Whilst we could go all-in on stock (no cash) looking to maximise potential rewards, having a plan B backstop of a more conservative/wealth preservation asset allocation for if all else fails is comforting.

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Re: Cash - how much to hold?

#322545

Postby simoan » June 29th, 2020, 1:55 pm

Aminatidi wrote:I keep seeing lots of mention about how cash is losing money in real terms especially right now.

Ray Dalio isn't a fan.

Who's Ray Dalio? Who cares what he thinks? He's not you, and only you understand your own personal circumstances and what amount of cash you should be holding for your life situation, to make sure you can sleep at night no matter what is happening in commodity, stock and bond markets,

I believe it's wrong to see cash as something that is "losing money". This kind of thinking will likely drive you to make unwise investments. Cash is an investment position in itself - it is fungible and risk-free if you stay within the FCSA limits. With negative bond yields and low inflation and interest rates, it is not so much of a problem to be holding cash at the moment IMHO.

I am >30% cash in my portfolio and have been since the beginning of the year. I am beating the All Share by 13.5% YTD. Overall portfolio performance is all that matters to me and although not happy to be down 5% things could have been a lot worse without a cash holding to deploy over the past few months.

All the best, Si

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Re: Cash - how much to hold?

#322547

Postby 1nvest » June 29th, 2020, 2:00 pm

Aminatidi wrote:There's an opportunity cost there.

A risk with investing is that the more you look/monitor, the greater the 'missed opportunity' risk is. If looking back at the great 1980's/1990's stock bull run you feel that you missed out on potentially having achieved much higher rewards with a more aggressive all-stock portfolio - then more often you'll profit chase and likely at around the worst possible time. The 1980's/90's great Bull was predominately a reflection of the 1970's large losses that stocks saw.

This is US (portfoliovisualizer) data but not too dissimilar to the UK
Image
(note that I've renamed US 10 year Treasury to 10 year Gilt)

Primary is to decide a asset allocation that you are content with and then generally not deviate away from it, as deviating is more inclined towards profit chasing - which tends to be a sell-low/buy-high type transition. Absent Dorris' (passive investors) tend to relatively outperform active investors. IIRC the suggestion is that the 'average' private investor tends to lag the average by around 2%/year, which being the average include some individuals that lagged by considerably more. Buying high/capitulating low is a significant risk factor.

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Re: Cash - how much to hold?

#322549

Postby Itsallaguess » June 29th, 2020, 2:03 pm

It might be the lockdown finally getting to me, but if I see one more 1/3rd stocks/gilt/gold chart on this bulletin board, I think I'm going to jump off the nearest bridge...

Does the idea really have to infect every single thread?

Cheers,

Itsallaguess

Aminatidi
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Re: Cash - how much to hold?

#322567

Postby Aminatidi » June 29th, 2020, 3:23 pm

1nvest wrote:
Aminatidi wrote:There's an opportunity cost there.

A risk with investing is that the more you look/monitor, the greater the 'missed opportunity' risk is. If looking back at the great 1980's/1990's stock bull run you feel that you missed out on potentially having achieved much higher rewards with a more aggressive all-stock portfolio - then more often you'll profit chase and likely at around the worst possible time. The 1980's/90's great Bull was predominately a reflection of the 1970's large losses that stocks saw.


Yes I already invest cautiously so I have around 80% between Personal Assets Trust and Capital Gearing.

So when I refer to opportunity cost I'm not doing a crystal ball job and thinking I'll throw it all in Scottish Mortgage Trust :D

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Re: Cash - how much to hold?

#322575

Postby Itsallaguess » June 29th, 2020, 3:43 pm

Aminatidi wrote:
How much is "some"?

If people are happy sharing amounts plus personal situation i.e. working/retired that's fine or just in terms of how many months/years outgoings their cash buffer covers.


I'm still working, but have a relatively cautious outlook when it comes to investing, and I choose to carry around 2 'fairly good' years worth of living expenses in Premium Bonds as part of my 'ultimate back-up plan' fund.

On top of that, I like to carry an additional, more variable level of cash, which I tend to use as float for investment opportunities, depending on how the market looks. Some of those funds got deployed during the recent market downturn, but I tend not to reduce that secondary cash pile down to zero anyway, and always like to carry some level of 'emergency' market-cash, and doing so helps me maintain a 100%-invested approach with my already-invested holdings. That cash would probably get reduced before my Premium Bonds cash got touched, and might get me through a shorter period of potential market turbulence.

I take the point a few people have made earlier about the potential for 'opportunity-cost' with holding cash, but personally I just consider it as a natural cost of insurance, much like any other major insurance that I might have for my home or car.

Safety comes at a price, and I'm happy to pay that price when it comes to these specific cash piles...

I think this is a very personal aspect of investing, and whilst there might be swathes of data telling me that such-and-such an approach is 'safe' from a historical perspective, I don't think that really helps too much for those of us with a higher 'sleep at night' threshold than some others might have...

Cheers,

Itsallaguess
Last edited by Itsallaguess on June 29th, 2020, 3:43 pm, edited 1 time in total.

fca2019
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Re: Cash - how much to hold?

#322577

Postby fca2019 » June 29th, 2020, 3:43 pm

Most people are only losing on cash because they won't switch accounts and leave with the big banks. With CPI at 0.5% and RPI at 1%, should be able to at least match inflation. My cash savings vary from 1% for easy access (marcus), to over 2% for fixed term opened couple of years ago.


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