Forum Topics Cash is a position
Timocracy
2 years ago

@Strawman How does the SM portfolio deal with cash?

I noticed a whopping $0.11 cash holding in the Strawman portfolio and wanted to hear more about how "we" (the SM community) dictate a holding of dry powder for market pullbacks?

Now, I'm not one to judge because both IRL and on my (somewhat loose) SM portfolio I don't tend to keep much cash BUT from what I can see we are always having companies move in and out of the SM portfolio - which is what is promoted on the homepage - without much to say for cash. I suppose another point would be that we'd be getting into the semantics of market timing which I still believe nobody can do consistently and accurately and if most of these are long, long term holdings then it will all even out after the dust settles - also the 20th idea generally won't be much better than the other 19 ideas.

Is it a case of just selling off winners that have had their time in the sun and liquidating losers that failed to deliver and then reallocating? I suppose that's how I approach it IRL and understand the much longer-term approach with the SM portfolio but to reiterate a comment of which I am unable to cite specifically, selling one stock to buy another involves getting the decision right *twice*.

I don't necessarily feel like there needs to be a change, I kind of like the approach. Was just curious!


Cheers,

Tim

8
Strawman
2 years ago

hi @tbra97 -- you can find more detail here, but the index always tries to be fully invested. (There will be a small amount of residual cash as we cant buy fractional shares).

In order to avoid the problems with over-trading, a stock needs to be in the top 15 to make it into the index, but will only get kicked out when it falls outside of the top 20.

tbh, it's somewhat arbitrary in its design. I'm sure there are dozens of other valid approaches. The general idea is to just show what returns would look like if you invested in the companies that had the most backing from the community at large.

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Timocracy
2 years ago

Ahhh yes I see. makes more sense to have it that way especially benchmarked to that VAS.

6
DrPete
2 years ago

@Valueinvestor0909 Interesting reflections of yours on the pros and cons of patience. My personal bias/risk is being too conservative and patient. My age (52), career point, and level of wealth that I've accumulated probably plays a part in that. I'm happy to lock a lot in, and only risk an amount that, if I were to lose a lot of it, I'd still be comfortable. I was more risk tolerant when younger..

For the last 2.5 years (since late 2019, just before the gyrations of Covid), if I include both my super and personal savings, I've been a bear moving to roughly 50% cash, 20% conservative high yield Australian and International ETFs (SYI and WDIV), and 30% Australian micro/small caps (more than half of which is in Stealth). I just haven't seen much value, and haven't bought into the excitement around most loss-making technology/growth stocks. Give me net income, either now or pretty confidently coming in the near future.

As an aside this profile doesn't match my Strawman profile because I haven't, so far at least, included in Strawman my super holdings (which are in Choiceplus/Hostplus that lets me choose my own shares and ETFs). Do others include super in their Strawman holdings/trades?.

A consequence of my bearish allocations is that I didn't move down or, unfortunately, up as quickly as the market throughout Covid. So I've been looking on enviously over much of the last 2 years. But the market has now mostly come back to me, so I now feel somewhat vindicated that my patient conservatism has helped me take the less risky route. My bias for patience means I'm not rushing back in yet, believing there is still some way to go down and/or there won't be the same quick rush back up that we saw during Mar 2020 because there won't be the same massive monetary and fiscal support that has been thrown around in the last two years.

Still, with the discounts that are becoming increasingly common, I'm now starting to average back into the market as prices continue to decline. If prices are right I'll steadily move to 80% equities, but there probably needs to be a general decline of another 30% before I'd get back to 80% equities (which would be 30% in diversified ETFs, 50% micro/small caps). I will always keep at least 20% cash as nest egg.

John Addis from Intelligent Investor today wrote an article saying "things are getting interesting" which feels right to me (ie, not quite there yet, but opportunities are approaching). He described his article as a "call to arms", wanting their members to be vigilant for a possible rush of buying opportunities. My patience will mean I won't rush, and so will miss out if there is a quick uptick. But I'm also not a perma-bear and will slowly move back in where I see healthy risk/return opportunities.

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reddogaustin
2 years ago

@DrPete123

Mate. Random question for you.

I commonly read about peoples in your age bracket, on the final approach for retirement being more conservative, and I get that.

What I wonder is though, say you retire at 70, and live until 90, that is another 'investment cycle' of 20yrs. You can build an entire portfolio in that time! Have a few bull and bear markets!

So the question is does that extra investment cycle of post retirement ever factor into your risk profile?

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DrPete
2 years ago

@reddogaustin Great question. If you ask 10 people about how they'll allocate their wealth as they get older you'll get 10 different answers. It's very dependent on preferences and circumstances. So I won't pretend to answer for others but I'll list a few points explaining my personal situation. Here are a few reasons why cash has been, or might be, increasingly valuable for me as I get older: 

1) If I stumble financially I have less time to recover. If I just get unlucky and there is a big drop in value across my portfolio, I don't have an entire career ahead of me to recover. 

2) Once I retire (not there yet, not sure when that will be) I won't have the cash flow from a job. I'll be reliant upon a cash pool to avoid having to draw down capital, because I don't want to have to sell shares during a market dip.

3) Good aged care is damn expensive. I recently put $700k towards a "refundable accommodation deposit" for my divorced mum who lived alone when she started to develop dementia (it was thankfully only mild) and needed to move to a higher care facility. Maybe I'll need to help with my dad or step-mum at some point, although they are more financially independent. And as my wife and I get older, one of us may need similar care. Again, don't want to have to sell shares during a possible market dip if a health emergency hits.

4) Bank of mum and dad is damn expensive. Both our daughters are now in uni and sometime will start to consider buying a place. If we're to help with a deposit, we'll need cash.

5) Our chosen lifestyle can be damn expensive. Rightly or wrongly, our taste in cars, holidays, etc has escalated. Cars in particular are lumpy expenses with a big chunk of cash needed at one time. 

6) There's a point where you just have enough money. More money now mostly means a bigger inheritance for our daughters. And loss aversion is greater than desire to gain. My wife and I don't want yachts and Ferraris, but we do want our smashed avo and café coffees. So we're happy to lock a lot in to maximise the chance we can maintain our current great lifestyle. And thankfully we're in a position where we can go conservative with 20-50% of our wealth, while still having 50-80% to play with across ETFs and micro/small caps.

7) Finally, a point that I don't think gets enough discussion, when I'm old I don't believe a complex and risky financial structure involving direct share ownership is "safe". Even without dementia, cognitive decline is possible, even likely. And I've seen and heard about older people making bad financial decisions, or worse get scammed. Unless my daughters take up a passion for shares and take over my portfolio, then I hope I have the foresight and humility at some point to dramatically simplify my portfolio into a couple of term deposits and a couple of ETFs. 


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reddogaustin
2 years ago

@DrPete123 a most excellent reply. Thank you for sharing!

Your points all ring true, in particular numbers 3 and 7... perhaps its recency bias, but as i did something similar for my father whom investments are... well, do not have good record keeping *sigh*

I guess I wonder about points 1, 2, 4, and 5 - which in my mind, if one has a suitable cash ammount or living account set aside to buffer bear markets and black swan events (eg 3yrs cash), then perhaps with a little more capital loss aversion in play, 20yrs of retirement is truckloads of time for current investments to continue to compound or new investments to '10x bag' - with our enjoyable analysis and fingers in pies helping it along - then in theory you'd find yourself at point 6, and by loathed by the feds, living off your returns and not touching capital.

Its that 20yrs phase of retirement i find no one talks about. Perhaps i am missing a trick, and if one's setup when you start retirement, that 20yrs is irrelevant as one has set one's self to live off the returns only, and the capital grows in the background anyway?

Finally, you won't hear shame from me for wanting cafe eggs and brews. Its in my plan also!

14
Rapstar
2 years ago

Growth remains healthy and we can see inflation is high now, but it appears to be rolling over, with rate-of-change decelerating (but it still remains too high for the US Fed).

Looking forward, liquidity is drying up, evidenced most markedly in Crypto, but also notably the US corporate credit cycle is drying up , with a number of large US companies withdrawing bond issuance this week ($10 BN issuance vs $35 BN forecast) due to significantly increasing borrowing costs. This means there are significant headwinds that will slow economies down, and adversely impact profits.

Base metal prices are collapsing - they are often the first sign of a transition to deflation. The collapsing AUD is another warning sign. Energy and food look like the last dominos to fall.

I can't predict the future, but I think the most likely outcome is "The Fed" will only pivot dovish when they have the inflation genie tamed - Look for further deterioration in liquidity, US employment vacancies to fall, & for oil to start making lower lows - this will be what the Fed will be looking for. I reckon we are looking at ASX 200 possibly below 6000. The war complicates this, as there is a risk the Fed will need to go harder and longer to achieve the desired deflationary impulse.

But, there is a wildcard - China - If Xi actually follows through with the big infrastructure stimulus spending, Australia will be a beneficiary of this. No sign of this happening, and I have no idea what China's COVID-19 exit strategy is, and how this will impact China's demand for materials.

Given the above, I feel I am still underweight cash/bonds, which is currently at around 45-50%. I some point, we will hit an inflection point in the macro cycle. I don't think this is it....

31
Valueinvestor0909
2 years ago

Thanks, @Rapstar . You have done an excellent job in protecting the capital from this drawdown.

9
Rapstar
2 years ago

Growth remains healthy and we can see inflation is high now, but it appears to be rolling over, with rate-of-change decelerating (but it still remains too high for the US Fed).

Looking forward, liquidity is drying up, evidenced most markedly in Crypto, but also notably the US corporate credit cycle is drying up , with a number of large US companies withdrawing bond issuance this week ($10 BN issuance vs $35 BN forecast) due to significantly increasing borrowing costs. This means there are significant headwinds that will slow economies down, and adversely impact profits.

Base metal prices are collapsing - they are often the first sign of a transition to deflation. The collapsing AUD is another warning sign. Energy and food look like the last dominos to fall.

I can't predict the future, but I think the most likely outcome is "The Fed" will only pivot dovish when they have the inflation genie tamed - Look for further deterioration in liquidity, US employment vacancies to fall, & for oil to start making lower lows - this will be what the Fed will be looking for. I reckon we are looking at ASX 200 possibly below 6000. The war complicates this, as there is a risk the Fed will need to go harder and longer to achieve the desired deflationary impulse.

But, there is a wildcard - China - If Xi actually follows through with the big infrastructure stimulus spending, Australia will be a beneficiary of this. No sign of this happening, and I have no idea what China's COVID-19 exit strategy is, and how this will impact China's demand for materials.

Given the above, I feel I am still underweight cash/bonds, which is currently at around 45-50%. I some point, we will hit an inflection point in the macro cycle. I don't think this is it....

14