How much cash is too much cash?

[absolutezero]

With inflation currently rather elevated (!), I'm seeing my cash depreciated in spending power by at least 6% a year.

My portfolio is currently 25% cash. Or stuff that's as good as cash.

- A full holding of Premium Bonds (returning an average of 1.5% a year over around 5 years so far),
- Some NS&I Index Linked Certificates (which will not be getting cashed in!)
- Cash on deposit in savings and current accounts (as close to 0% as you can get).

I am a self-employed freelancer in something that is pretty much recession proof - and if it wasn't I could easily go back to the day job that got me into this (but would rather not).
Part of the current.savings account cash is around (as I type) 15 months of living expenses.
I have no mortgage or rent to pay.

Do I have too much cash at 25% of my portfolio?

My shares are 66% of my overall portfolio.
Of which, I have around 50% of my shares in something that resembles an HYP.
12% in SIPPs that I cant access for another 15 years or so. (I'm early 40s)
35% in funds and trackers.

Weighing up drip feeding the Premium Bonds into a FTSE 100/S&P 500/Developed World tracker.

Any thoughts?

[DrFfybes]

Nobody can tell you how much cash is too much, or too little, for you.

I can tell you how much is too much for me, we run about 10-15% cash mainly in older fixed rate ISAs that are probably up for renewal in the next 3 months, but have a FS pension that covers a chunk of our needs so only need to draw circa 1.2% from our equities. As the cash ISAs mature we're moving them over to equities, and cashing in equities outside of a tax wrapper to keep the balance. We keep a few year's spend in cash, and with current rates you could have (as a couple) £350k or so (inc premium bonds) before paying tax on the interest.

If you want long term growth then investments are the way forward, but trying to time the market is nigh on impossible. I put a chunk into VEVE and similar into Berkshire about a month ago. One is up 10%, the other gone the other way. The VEVE I topped up more recently has fared somewhat better.

Well, it has today, but by Monday lunchtime who knows?

Paul

[simoan]

With inflation currently rather elevated (!), I'm seeing my cash depreciated in spending power by at least 6% a year.

My portfolio is currently 25% cash. Or stuff that's as good as cash.

- A full holding of Premium Bonds (returning an average of 1.5% a year over around 5 years so far),
- Some NS&I Index Linked Certificates (which will not be getting cashed in!)
- Cash on deposit in savings and current accounts (as close to 0% as you can get).

I am a self-employed freelancer in something that is pretty much recession proof - and if it wasn't I could easily go back to the day job that got me into this (but would rather not).
Part of the current.savings account cash is around (as I type) 15 months of living expenses.
I have no mortgage or rent to pay.

Do I have too much cash at 25% of my portfolio?

My shares are 66% of my overall portfolio.
Of which, I have around 50% of my shares in something that resembles an HYP.
12% in SIPPs that I cant access for another 15 years or so. (I'm early 40s)
35% in funds and trackers.

Weighing up drip feeding the Premium Bonds into a FTSE 100/S&P 500/Developed World tracker.

Any thoughts?

All I would say is that for mental accounting purposes I have two separate types of cash; Cash for a rainy day (12 months or so "salary") and Cash awaiting investment. I don't consider inflation with regard to cash awaiting investment, it can be very useful for reducing portfolio volatility and Buffett's first and second law of investing apply to it at all times. But then I'm now retired and comfortably off. At your age and in similar circumstances I never held anywhere near the percentage amount of cash you have, but then I've never been a Premium Bonds and NS&I type of investor. And that high equity exposure is why I'm where I am currently. Without it I'd likely still be working!

There's no simple answer and everyone has a different set of circumstances and risk appetite. As long as you are comfortable and can sleep at night, that is all you can ask. Maybe taking on higher equity exposure would change that for the worse. How would you feel if you upped the equity exposure and the markets dropped 20-30%?

All the best, Si

[absolutezero]

How would you feel if you upped the equity exposure and the markets dropped 20-30%?

I'd be annoyed.
But give it 5 years and the cash will have effectively dropped 20-30%

It's a quandary for sure.
But what is cash for?

[Newroad]

Hi AbsoluteZero.

According to my model, if you were born in early 1982, 66% equities is about right. However, that's a trite answer and without context.

To expand a little, some recent reading I've been doing suggests 78% equities is optimal if you wish to maximise return, 29% equities is optimal if you want to target Sharpe Ratio (roughly, minimise excess risk) and that particular author's suggestion of a reasonable compromise is 48% equities. I'm sure there are other views.

For purposes of discussion, let's say that author's data is broadly accurate. I have then extrapolated that to the conclusion that I wanted to be 78% equities at birth and be 48% equities if I live to 100 then die. I am now, for all four family members, planning to traverse that spectrum linearly by age (hence the 1982 bit).

The problem is there are many degrees of freedom - e.g. what are you investing in other than equities, do you have a house and have you paid it off, etc. Strictly speaking, the above assumes the balance is in bonds and that there is minimal cash being held. I am personally combining bonds and cash in that second category - and simply using the equity ratio as the proverbial North Star.

As a practical matter, for Mrs Newroad and I, we put £1K a month into an NS&I rainy day account and the rest we are "running down" into equities (and where relevant, bonds - see later) until we hit the age suggested ratio - at which point we'll maintain it.

The big thing I missed until I took a truly holistic view is how much cash we held - I originally only monitored investments (and we've paid off our house). The other thing is final salary pensions, if any - I truly can't think of a sensible way to factor them in. Logically, they seem to fit close to the cash/bond pool, but for purposes of simplicity, I am currently choosing to ignore them completely (and similarly, the house, which seems more equity-like to me, or an "alternative" investment if you were considering that as a category). So, our situation is actually

Net Position = House + Nominal Final Salary Pension + Investments

where

Investments = Equities + Bonds/Cash

with the Equity Ratio targeted, the Cash drip fed as described above and the Bonds picking up whatever slack is left.

Whether that is useful at all - or helpful to you specfically - I don't know. I hope it is!

Regards, Newroad

PS To answer your question about cash, it is

1. To live with in an emergency, and
2. To provide optionality if other asset prices fall

[scotview]

I am waiting with cash to invest, probably wrongly, for a significant market correction.

But what does it take ? Major European War (with open discussion of actually using the ultimate deterrent ), UK CPI Inflation possibly 10% (RPI 14% ?) towards year end, potential civil unrest when energy bills hit front door mats.

I mean, what does it take ??

Today, the gold market seems to think that all is solved, curiouser and curiouser.

[Urbandreamer]

As others have said, there is no general answer to your question.

I regard 6 months worth of cash as sufficient. Others would strongly disagree with my position.
Were I a Freelancer, I too might wish for a bigger cash float.

I'm a fan of equity investment and have been doing it long enough that I know how I react to crashes. I also can expect a full* state pension relatively soon and a modest DB pension even earlier. My situation is nothing like yours and what works for me might well be wrong for you.

That said I do strongly recommend that you consider diversifying the "cash" part of your portfolio. You don't say, but imply, that 25% of your wealth is tied to the UK currency. Have you considered diversifying via things like international bond funds, gold or a capital preservation investment trust or fund?

As suggested, I don't like "cash". However some of my holdings are, a bond fund, HFEL (IT that invests in Asian banks and bonds) and RICA (Ruffer IT). Ruffer have in the past raised eyebrows by investing in Bitcoin as a low risk asset! They no longer own any, but do have an huge position in "cash" like investments. Ie international index linked bonds, gold and various currencies. Their past performance has been "boring". That is to say no stunning growth, but no significant falls. NO not even due to Covid or recent war like events.

*I hope that it's obvious, but check that you are paying the right stamp to get your state pension eventually.

[simoan]

But give it 5 years and the cash will have effectively dropped 20-30%

We don’t know what the future holds for inflation or equity markets, so this is irrelevant to deciding how to allocate your portfolio. It has to come down to your individual risk profile and balancing it appropriately. I’d say your portfolio is very conservative for someone employed and in their 40’s. I never held cash ISAs, bond funds or NS&I savings when I was your age and in similar circumstances. Everything went into equities. but I was less risk averse than I am now that I have no income from employment.

All the best, Si

[tjh290633]

I think that, as a freelancer, at least a year's normal expenses would be a minimum to see you over any blank periods. Here I am talking about cash deposits, apart from index-linked NS&I and premium bonds. They give you a further cushion. Apart from those you should be 100% in equities.

Presumably all those will be in tax shelters, either a SIPP and/or an ISA. I would ignore suggestions about trying to time the market, but keep on investing regularly, regardless of the state of the market. My experience over 50 years has been that staying fully invested is the best way to go. You may have to take action from time to time with odd shares that misbehave, but normally you can just carry on reinvesting dividends in the most appropriate places.

Hope that comment helps.

TJH

[fisher]

Have you considered any of the "wealth preservation" trusts such as Capital Gearing Trust (CGT) and Personal Assets (PNL). If you are wary of putting more into equities but would rather not hold so much cash then perhaps one of these trusts might appeal as a sort of half way house.

[Wuffle]

My perspective is skewed.
I work in the logistics industry in the North. Temporary contracts, minimum ish wage, a high proportion of self destructive idiots. Some of whom stand outside in the cold to take wages out of a cashpoint overnight Thursday through Friday. Yes, really.
And yet, with a little flexibility, most of them make it work most of the time and turn up.
There is the odd 'blow up' but these people live on a cliff edge.
You are a serious professional.
What are you envisaging that requires that much firepower?
Flexibility is different, but I don't think that is what you are asking.

As I say, I have a very particular perspective, very distinct from the trend here so I will not be at all ofended if this is so other worldly as to be a waste of everyones time.

W.

[DrFfybes]

But give it 5 years and the cash will have effectively dropped 20-30%

We don’t know what the future holds for inflation or equity markets, so this is irrelevant to deciding how to allocate your portfolio. It has to come down to your individual risk profile and balancing it appropriately. I’d say your portfolio is very conservative for someone employed and in their 40’s. I never held cash ISAs, bond funds or NS&I savings when I was your age and in similar circumstances. Everything went into equities. but I was less risk averse than I am now that I have no income from employment.
All the best, Si

I wish I'd done as Si said. I split my savings cash/equities about 50/50 when I was in my 30s. Had I gone all in to a global fund I would have done a lot better. I had a lot of short contracts, but was never out of work, so if you always LBYM and have a few months cash buffer, then long term equities should(!) outperform.

We've had a global pandemic, a European war, and are entering an energy crisis, and yet global markets are still within 10% of their all time high. There are people predicting a crash, and there will be another crash, sometime, but who knows when and it will be triggered by something really obvious with the benefit of hindsight. 2 years ago we were heading for a recession and a house price crash.

Paul

[Adamski]

Have you considered any of the "wealth preservation" trusts such as Capital Gearing Trust (CGT) and Personal Assets (PNL). If you are wary of putting more into equities but would rather not hold so much cash then perhaps one of these trusts might appeal as a sort of half way house.

That's my approach too, prefer Steady Eddie rather than rollercoaster ride of pure equities. Just accept get less than stocks but more than cash. Cause my focus is preserve what have whilst keeping up with inflation.

CGT risen c 33% in 5 years, or c 6% annualised.

[simoan]

I wish I'd done as Si said. I split my savings cash/equities about 50/50 when I was in my 30s. Had I gone all in to a global fund I would have done a lot better. I had a lot of short contracts, but was never out of work, so if you always LBYM and have a few months cash buffer, then long term equities should(!) outperform.

Paul

Don’t get me wrong, I am not trying to sound clever. I had no idea about risk when I was younger because I had bigger fish to fry. I bought my first place in 1991 during a recession on an interest rate of 15% and used all my savings as a deposit. The monthly mortgage payment alone was around 2/3 my net pay and I could’ve lost my job at any point. Absolutely crazy!! Not clever at all with hindsight.

I only started investing in equities 5 years later with similar disregard for risk. I was just lucky it all worked out pretty well.

All the best, Si

[MrFoolish]

Anyone worrying about the effect of wars could hedge to a certain extent by buying into a defence equipment manufacturer. BAE, for example, has already gone up in price somewhat, but it still yields about 3.5%.

If the world becomes so dangerous that even BAE suffers, then it's baked beans and tin hats time.

[simoan]

Anyone worrying about the effect of wars could hedge to a certain extent by buying into a defence equipment manufacturer. BAE, for example, has already gone up in price somewhat, but it still yields about 3.5%.

If the world becomes so dangerous that even BAE suffers, then it's baked beans and tin hats time.

This is not really hedging though and opens you to stock specific risk. People forget that cash acts as a natural hedge against equity exposure whilst reducing risk and volatility within a portfolio.

It depends how you view cash within your investment accounts... If you are desperate to invest in equities just because you are worried about inflation eating your cash then you're starting from a pretty bad place psychologically IMHO. When it comes to investing, you should never feel any kind of desperation to "do something" whether it's worrying about inflation or FOMO in a rising equity market. And you need to remember that if we get a prolonged period of inflation, rising interest rates, stagflation, a recession etc, then equities are not going to do well either. More often than not, just sitting on your hands is the best approach.

All the best, Si

[tjh290633]

As I say, I have a very particular perspective, very distinct from the trend here so I will not be at all ofended if this is so other worldly as to be a waste of everyones time.

W.

Wuffle, yours is the extreme opposite and obviously some people manage to get by on it. Even they would be well advised to start saving (if they can) and living well within their means.

Lifestyles vary and the people that you mention obviously live from week to week, just about managing. One wonders what they spend their money on.

TJH

[MrFoolish]

This is not really hedging though and opens you to stock specific risk. People forget that cash acts as a natural hedge against equity exposure whilst reducing risk and volatility within a portfolio.

I'd say the stock specific risk of a large, diversified defence manufacturer is exceedingly low at the moment. But you could split it between two such companies if it helps you sleep at night.

I suppose it's semantics but I wouldn't call cash a "hedge" at the moment. I'd call it a way of losing around 8% purchasing power pa. But each to their own.

[1nvest]

With inflation currently rather elevated (!), I'm seeing my cash depreciated in spending power by at least 6% a year.

My portfolio is currently 25% cash. Or stuff that's as good as cash.

- A full holding of Premium Bonds (returning an average of 1.5% a year over around 5 years so far),
- Some NS&I Index Linked Certificates (which will not be getting cashed in!)
- Cash on deposit in savings and current accounts (as close to 0% as you can get).

I am a self-employed freelancer in something that is pretty much recession proof - and if it wasn't I could easily go back to the day job that got me into this (but would rather not).
Part of the current.savings account cash is around (as I type) 15 months of living expenses.
I have no mortgage or rent to pay.

Do I have too much cash at 25% of my portfolio?

My shares are 66% of my overall portfolio.
Of which, I have around 50% of my shares in something that resembles an HYP.
12% in SIPPs that I cant access for another 15 years or so. (I'm early 40s)
35% in funds and trackers.

Weighing up drip feeding the Premium Bonds into a FTSE 100/S&P 500/Developed World tracker.

Any thoughts?

-6% only for your definition of 'cash'. All very subjective, other definitions might be (but not limited to)

1. Hard (in hand) domestic (Pound) legal tender currency/coins
2. Domestic and/or other countries in-hand legal tender notes/coins
3. Assets that can be liquidated in 90 days or less
4. Liquid assets held-in-hand, no counter party risk

1. indeed has a 0% nominal (-6% real) expectancy
2. and 4. year on year (yoy) could be up 11% (in Pounds value of hard/in-hand US$/gold 50/50)
3. Yoy 13% (or more)

Britannia one ounce gold coins are £100 legal tender value, but gold is up 17% yoy,
so combined 50/50 with hard £'s notes stuffed under a mattress 8.5% yoy. If Britannia's combined with hard US$'s then 11% yoy.

T+3 trading time means that stocks could be sold into hard £ currency relatively
quickly (fulfilling 3. definition) and thirds each in $, UK stocks, gold is collectively up around 13% yoy.

Your choice of definition is more a depository system choice, similar to banks where you deposit your money onto their books, free to do with what they like along with a promise to (maybe) return it to you upon demand. That's not really cash, more a generous gift under the present climate. "Here's a chunk of my wealth - for as good as free, use it how you like and I hope that you might return it whenever I may ask and I understand that it will have lost purchase power". Some banks will say "great, very generous of you, we'd like to say a token thanks in the way of we'll give you 0.5% more back if you stick to that deal for a year".

[simoan]

I suppose it's semantics but I wouldn't call cash a "hedge" at the moment. I'd call it a way of losing around 8% purchasing power pa. But each to their own.

But that’s just not true. Why do people not understand inflation? All that matters to me with regard to my cash holdings is my own personal inflation rate, which is governed by which products I decide to buy and which services I choose to use. A lot of that expenditure is discretionary. I’m sorry, but the idea that anyone’s expenditure exactly matches a random basket of 700 items selected by the ONS is a nonsense.