By Guest Blogger Doug Rowat
One of my first blog posts back in August spoke of the pointlessness of holding excessive amounts of cash. So, let’s spend some time examining perhaps the world’s most boring asset class.
For some investors, holding large amounts of cash is a prudent response to volatile and down-trending markets: after all, holding cash during the credit crisis, to provide an extreme example, would have saved most investors a considerable amount of money. However, it’s important not to overlook the consequences of remaining in cash.
First, there’s the loss of purchasing power. Over the past 30 years, the average annual inflation rate in Canada has been about 2.2%. This can also be viewed as the annual percentage decline in the value of money. Simply put, because of inflation, we’re losing money each year. An investment in cash will never overcome this “loss”. To see for yourself, try the Bank of Canada’s inflation calculator at http://www.bankofcanada.ca/rates/related/inflation-calculator/. Having an excessive weighting to an investment that’s guaranteed to lose is, of course, a waste of capital.
Secondly, there’s the impossibility of market timing, which I also spoke of in my August post. Ryan also mentioned this last week by highlighting the Dalbar report and how badly average US retail investors underperform a simple buy-and-hold-the-benchmark approach. Some investors fashion themselves brilliant short-term tactical market timers. Some may be, but most aren’t. The chart below indicates how holdings in Canadian money market funds align with Canadian equity market direction.
Canadian Cash Levels Peak At the Wrong Times
Investment Funds Institute of Cda, Bloomberg, Turner Investments
Looking at the past two major market meltdowns (2000–02 and 2008–09) Canadians’ cash levels peaked at or near both market bottoms (i.e., the worst timing) and it took months, if not years, as the market rallied off these bottoms, before cash levels dipped below the long-term average (red line). Holding 30%, 40% or even 50% cash with the intent of putting it to work at the exact right moment is actually pointless on several levels: 1) you probably won’t do this (again, see chart) and 2) holding cash means you’ve failed to identify any other asset class likely to outperform.
Which brings me to my final point.
In virtually any market and economy there is an asset class doing better than cash. For instance, if you’re a portfolio manager who believes equity markets will come under pressure you should probably direct funds to bonds not cash. During the worst of the credit crisis, as a simple example, cash had a zero correlation to equities, but bonds had a negative correlation. In other words, bonds controlled volatility better.
And, indeed, they performed better. To use the plain-vanilla iShares Canadian Government Bond Index ETF (XGB) as a bond-market proxy, while the Canadian equity market was plunging roughly 50% from mid-June 2008 to early March 2009, XGB actually managed a 6% positive total return. Cash? It returned, once again, less than inflation.
Holding a bit of cash (a 5–10% portfolio weighting) makes sense as a portfolio shock absorber for those rare instances when all other asset classes decline simultaneously. And certainly having some cash on hand makes sense to cover unexpected expenses, but to hold excessive amounts of cash, particularly for any length of time, only implies paralysis.
Show me a portfolio manager who holds lots of cash and I’ll show you a portfolio manager who probably doesn’t know what they’re doing.
101 comments ↓
Good afternoon Doug and your saying its better to buy bonds with cash as an alternative. Now I can see all the little old ladies running out to buy Canada Savings Bonds or Ontario Savings Bonds to fight inflation after tax as they have historical tunnel vision. They will not comprehend your essay hypothesis fully. Perhaps those with a lot of green need the services of a fee based investment advisor instead of the banker.
So how does someone who just fell upon $100,000 cash invest that in such an expensive equities market in US and Canada (part of a balance 60-40) portfolio?
If equities are expensive to buy currently, do we just hold this portion of the portfolio in cash until prices pull back a bit?
If the Seahawks lose today it might be a good thing for the markets as I am concerned that Paul Allen is sitting in too much cash…
M42BC
Few yrs ago, sitting on a pile of money, quickly realized had no idea what to do with it. Got somebody who did. Best financial decision EVER…..
PS: Marc Cohodes apparently doesn’t like our BC Premier. Stand in Line Marc……
http://www.howestreet.com/2017/01/14/this-week-in-money-87/
It’s not there anymore.
Does anyone know what happened to GTAsoldview.com ?
It looks like they’ve been taken off the air.
Doug…you are aware of the issues of reading comprehension that Garth oft times suffers.
I can hardly wait to see how your commentary is torqued and subsumed…prepare for opinions presented as fact.
eh?
Holding a bit of cash (a 5–10% portfolio weighting) makes sense as a portfolio shock absorber for those rare instances when all other asset classes decline simultaneously. And certainly having some cash on hand makes sense to cover unexpected expenses-Dougie
What about someone retired like me who has regular and expected expenses. Your strategies don’t account for that.
Cash in the long run does decline in value through the effects of inflation. Diversified investments in equities, bonds or even housing (Vancouver included!), in the long run will increase in value over a long enough period. I don’t think anyone can argue against either point.
However, the author uses the declining long term value of cash as a case to NEVER hold a large amount of cash, which I believe is bad advice (perhaps in the case of a professional portfolio manager this holds as they are being paid a fee to “do something”)
Most of the readers here are not professional money managers. Advocating to them that cash should never be held in a large amount can be poor advice. If an individuals cash holdings meet all their future goals then the lowest risk undertaking for them is to do nothing/hold cash. I understand that this may not cover the majority of people, but for the older, just cashed out of my multi-million dollar house crowd, this likely applies.
For younger investors yet to make their millions, cash needs to be invested at some point and the argument here is to not attempt to time markets and invest when you have it. This is fairly good advice for the mostpart as market timers and stock pickers tend to lose in the long run. However the timing of your purchase has a huge impact on future returns, and cash does have some value in the short run as an option against volatility aka asset prices falling. So if you find yourself in a position with cash holdings and a market that looks expensive relative to historical metrics, it may pay to wait as values tend to revert to the mean.
#2 Marx on 01.14.17 at 3:57 pm
So how does someone who just fell upon $100,000 cash invest that in such an expensive equities market in US and Canada (part of a balance 60-40) portfolio?
If equities are expensive to buy currently, do we just hold this portion of the portfolio in cash until prices pull back a bit?
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If $100,000 is 5-10% of your portfolio then, yes, leave it in cash. If it’s more as a percentage, then invest it.
And valuation is only part of the picture. The US economy is strong and markets have momentum. Uptrending markets often exceed historical valuation averages.
Also, if you invest in a global and balanced portfolio there will be foreign equity markets and other asset classes that are inexpensive.
–Doug
In virtually any market and economy there is an asset class doing better than cash.
____________________________
Most true, … to me, however, holding a bit of cash is like holding an option, … an option to take advantage of some volatile, yet grossly undeserving stock – like ALA the other day [… just as example, no plug.]
Anyway, … a value of having some cash increases when market volatility rises, … volatile market, … most often than not, presents itself with increased ‘retail investor irrationality’.
… my two nickels for today.
F.S. – Comox, BC.
Buffett’s Berkshire Hathaway BRK.B,closed the third quarter with $84.8 billion in cash, a gain of some $13 billion during the course of 2016.
http://www.marketwatch.com/story/cash-at-buffetts-berkshire-hathaway-hits-new-record-with-stock-market-near-highs-2016-11-05
#8 John on 01.14.17 at 4:54 pm
Most of the readers here are not professional money managers. Advocating to them that cash should never be held in a large amount can be poor advice. If an individuals cash holdings meet all their future goals then the lowest risk undertaking for them is to do nothing/hold cash.
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You and Penny Henny make the same point. You act like I would know the lifestyle and exact financial situation of every reader.
If you have the cash you need for your entire expected lifetime and you’re uninterested in growing this sum, then, of course, you’re correct.
Talk about being a 1%-er.
–Doug
Hi Garth
Why don’t you write about the myth of a tight rental market in Toronto? I think readers would be interested in know just how out of balance it truly is.
Cash is trash.
That is why their printing it so much of it, everywhere.
Dow trying to punch the 20K ceiling.
US debt gone bonkers at 20 trillion, with no end in sight.
Perpetual Gov. money pimping.
Swaps to other equally bankrupt sovereigns to keep the ponzi race going.
Social Security is running out of positive tax contributions and now stealing from Peter to rob Paul to stay out of the red.
Most State gov pension funds are now “technically bankrupt.” They need an 8% annual return for solvency, which has not occurred at anytime during this “bull” market.
The Euro is sclerotic and on life support with 4 million uninvited guests added the welfare roles.
Boomer’s are retiring en-mass and those that aren’t … are gobbling up half of new Canuck jobs …. well, because they’ll discount their hours as opposed to the Moisters who are unwilling to deliver up the same performance for skills-hungry employers.
At eight years plus, in a very long-in-the-tooth and very faux bull market, heck …. what could possibly go wrong?
Invest everything you have .. get out of cash.
Ya, thats the answer.
The markets can go nowhere else … but up … forever.
It kind of reminds me of my trusty 35-year 1000 lb. (but very rusty, oh-so-reliable propane tank).
The one that is planted just a few feet outside my kitchen window. Well reliable, at least until just recently, when it seems occasionally to be just a little bit smelly, and has developed an ever so slight wheezing sound.
Kind of like the stock market.
Nah what to worry. She’s been good for over half-a- lifetime … so I guess its business as usual.
Back to theme.
Cash is useless.
At least until you need it back.
First there is a slight “sissing” sound, then a “flash,” then a “boom”, then a “ringing” in your ears. Then that stunned look when you are trying to figure out where you are let alone where your going.
Try getting you cash back when the market’s “propane tank” lets off the “big one.”
Remember. Cash is trash
Are emergency funds part of the cash holding %s discussed by the article or they sit aside in a diff category?
5-10% cash in a beginner’s portfolio may not add up to a couple of months living expenses. Wondering what’s the pros take on this.
In any trading portfolio it is prudent to register such ahead of time with a line of credit against existing assets. In this way one can take a temporary position during a chaotic period for discounted purchases. This buys you time to rebalance later when the panic is over.
Waiting for the pullback is risky because it will drop sharply, and as everyone rushes back in, it will rise sharply. I was waiting for Trump to blow up the market. It didn’t happen. So now I wait for the pull-back… all the while the markets went up.
Same thing with ZPR last week! I watched it climb to 10.96 and decided to buy some. The following week, it dropped to 10.82. Oops. What do you do? Can’t sell at a loss. It went back up anyway, but that is my point. I don’t even know why there was a mini pullback with ZPR. Will there be another one? Who knows. We all want a nice entry point, but just buy and hold. In 5 years you might be up 25%. Or you might break even.
It takes a really smart investor with an ear to the ground to time the bottom. Or a really good guess. Will a Trump pull-back materialize? So far the markets say no.
So basically if you just hold a few index funds to minimize your fees so they don’t eat into your returns, and continue to add to them during your working years this is the best strategy?
#11 What would Warren do? on 01.14.17 at 5:18 pm
Buffett’s Berkshire Hathaway BRK.B,closed the third quarter with $84.8 billion in cash, a gain of some $13 billion during the course of 2016.
http://www.marketwatch.com/story/cash-at-buffetts-berkshire-hathaway-hits-new-record-with-stock-market-near-highs-2016-11-05
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Here’s what he had to say in 1987 after the crash.
http://www.begintoinvest.com/quote-week-buffett-black-monday-october-19th-1987/
Show me a portfolio manager that doesn’t have a large personal collection cash and I’ll show you someone who doesn’t know what they are doing.
Cash is capital waiting to de deployed for the right opportunities. Can’t be lost at 2% fees annually while speculating on future capital appreciation.
#13 I’m stupid on 01.14.17 at 5:54 pm
Hi Garth
Why don’t you write about the myth of a tight rental market in Toronto? I think readers would be interested in know just how out of balance it truly is.
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Condo rents have been divorced from condo prices for years, well for 1 br condos.
I thought 2 br condo rents were more aligned with prices but that may not be the case either. A friend recently picked up a brand new 2 br unit right on the corner of Yonge/Eglinton for 2100/mth, after negotiating down the posted rental rate by 200/month. These condos would sell for 650-750k. When you consider condo fees are going to run around 600/month, where is the value in owning.
Again anecdotal but another friend used to rent an older 2 br apartment at Yonge/Davisville 10 years ago for 1600/mth …. so we’re talking a rental rate increase of about 3%/year, but we’re comparing an old building vs a brand new building (with all the amenities).
Seems like the best value right now is in renting the newest and highest quality condos …. your rental price in a luxury building is not that much higher than in an older building (along Yonge street anyway)
Stock and Bond Correlation during crtedit crisis
During the worst of the credit crisis, as a simple example, cash had a zero correlation to equities, but bonds had a negative correlation.
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Only government bonds had this negative correlation in the flight to quality. Corporate bonds most certainly did not have a negative correlation did they? Corporate bonds fell in value during the credit crisis, did they not?
Money Market fund levels and stock value negative correlation
I am surprised by the correlation in the chart. One would have to think about what a money market fund is and how the amount invested there grows and shrinks. When money market funds declined did this mean the cash went into equities or just into simple cash in the investment account.
I believe there was a move to cash and high interest savings accounts and away from money market funds after the financial crisis (some money market funds broke the buck and traded at 99 cents).
Bonds versus Cash
ONLY cash can provide 100% stability in an investment account. Any bond over one year could fluctuate in value. *And bonds are ALL over one year by definition, less than a year is not a bond.
Bonds and bond ETFs have a buy/sell spread and a commission to trade. Not so for cash.
Few of us want long-term bonds. In a world where a 5 year government bond pays 1.1% I might just as soon stay in cash which is INSTANTLY available for deployment.
In today’s low inflation, low interest rate world the opportunity cost of holding cash versus a short-bond is at a record low.
“Show me a portfolio manager who holds lots of cash and I’ll show you a portfolio manager who probably doesn’t know what they’re doing”
So right you are. No MER’s on cash is there. Bullion does quite well. Yeah no MER on that either. Cant drive a porsche with no MER.
Turner Investments does not collect a cent in commissions, trailer fees, incentives, sales charges or free lunches. — Garth
$84 billion, is that a lot?
#11 What would Warren do? on 01.14.17 at 5:18 pm noted:
Buffett’s Berkshire Hathaway BRK.B,closed the third quarter with $84.8 billion in cash, a gain of some $13 billion during the course of 2016.
*************************************
But is that a record as a percent of Berkshire’s assets? I don’t think it is.
Good evening Doug.
I believe your “meme” picture has been used before in one of Garth’s blogs.
Investing 101: holding cash is for dummies.
Cheers to that.
Only entity that holding cash benefits is banks (unless you’re holding it in your mattress or in a secret space under your bedroom floor).
Banks loan your cash out, at a higher rate of interest than they are paying you.
That is why you always lose by holding cash.
History of cash: way back when, before the internet or telephones or wire banking (or even banks) folks used to need a way of giving other folks “IOUs”. So cash was invented. Basically, cash was a signed IOU from a reputable individual or entity, guaranteeing that a certain amount of a precious metal was available, for redemption of the IOU. In this way it was possible to avoid having to cart large amounts of gold around to pay for things.
Have a look at an old British pound note. You will see it says something to the effect “promise to pay the bearer the sum of one pound”.
It’s an IOU.
There is no business in holding IOUs. They do not produce anything and they do not appreciate. They are just a way of storing value.
Don’t hold cash. Hold assets.
“Cash is a call option with no expiration date, an option for any asset class, with no strike price.” – Warren Buffett
Warren’s current asset mix is 50% stocks, 15% bonds, and 35% cash.
Thanks Doug for the (personally speaking) sanity check. Kudos to you Garth and Ryan for sharing these freebie snippets from a professional POV.
Mr. Rowat, What would you say to a healthy and active 75 year old (road-biker, married (wife 73), pension, mortgage-free 1.3 million house) with 300-400K sitting mainly in GICs? With a bit of luck we’ll live another ten or fifteen years. And annually the 300-400k invested to achieve 6% interest wouldn’t make that much difference to our already comfortable lives. Moreover, because of our age, the possibility of earning significant compounded interest doesn’t really exist. So, why not just carry on as we’re doing now? Even if we live to be 100, its unlikely we’ll be physically able to kick ourselves for not investing more aggressively. Cheers.
No longer the Maple Laughs. Can my Sens cope with the gravity of the current situation?
4-2 : (
Sorry, not convinced. I have a couple hundred thousand in cash in the bank hedged with precious metals. For the short term it is an excellent strategy.
Globalism is toast.
T2 doubles down on being a feminist, and says the oil sands should be fazed out. George Soros student.
What a stupid jack ass. The capitan of ship Canada steaming hard toward the rocks.
Again my point of the over schooled fools right there for you to see.
I invest in dividend paying equities….even some ETFslike ZWH…many pay monthly…the cash piles up monthly, straight into my account, more comes quarterly, semi annually and annually…. Cash is good….what I do is reinvest it as it comes in….no timing…just buying buying buying…..which creates more cash flow. ….and more buyin….and more cash flow. I never rebalance…I don’t believe in selling my winners….which just keep winning. I just redirect the dividends to more that haven’t as yet shot up as fast. Ex….two months ago I posted a note about buying PD at under four dollars…..it’s over seven today…..now why would I sell PD when it’s on fire. I expect the drillers are likely to go to double it’s over the net Trumpian years and I’ll have another ten bagged on my hands…..talk to me then about selling.
Garth, Ryan, Doug.
I know that it’s important for a highly visable business to take a non partazin side when it comes to the left and right thing.
We are not dealing with left right shit.
Dealing with mental case that are driving the bus off the cliff.
Grow some balls.
Why do I have to do all the heavy lifting. You might lose a client or to.
Do your bit to save canada.
When you hold cash you don’t have to pay someone a commission to get your hands on it. Nor do you have to pay someone to “manage” it.
Trade cash, that is, forex. Or buy high yielding international government bonds and reinvest the interest until they mature. That’s how I crossed the 1MM threshold.
Return of capital is more important than return on capital right now.
Cash is trash ??? Try surviving without it after the coming collapse of the Ponzi Schemed out financial markets, esp. in that US of A. Try to get your money after bank machines are boarded up or banks have withdrawal limits of 50 bucks. Hard assets in safe locations and enough cash to last at least 3 months…….and how about the best performing assets of all, gold/silver/mining shares. Just make sure it’s real metals, not some ETF….and make sure you sell your mining shares after the coming mania, get your money out before your broker goes broke.
Who left the gate open again? Sheesh. Zombies everywhere. — Garth
The whole team of breaking bad.
Brilliant writer by the way.
Helping people whose backs aginst the wall.
You have my sympathy. But this is nothing compared to my buying tickets to watch my Habs get kicked 7-1 by the Wild in Minnesota earlier this week.
Relationship are complicated .
Being a loner. So under rated.
#33 Smoking Man on 01.14.17 at 10:03 pm
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Ditto
#15 ccc on 01.14.17 at 7:05 pm
Are emergency funds part of the cash holding %s discussed by the article or they sit aside in a diff category?
5-10% cash in a beginner’s portfolio may not add up to a couple of months living expenses. Wondering what’s the pros take on this.
—
If 5-10% cash doesn’t provide you with an emergency fund to live a month or two (e.g., $10-20k on a $200k portfolio) then I think your portfolio is probably at a size where the emergency plan is a move back with the parents.
–Doug
is there an ETF with a higher dividend that mirrors the S&P 500 that costs less than
iShares Russell 3000 Index (ETF): IWV?
#30 HDJ on 01.14.17 at 9:19 pm
Mr. Rowat, What would you say to a healthy and active 75 year old (road-biker, married (wife 73), pension, mortgage-free 1.3 million house) with 300-400K sitting mainly in GICs? With a bit of luck we’ll live another ten or fifteen years. And annually the 300-400k invested to achieve 6% interest wouldn’t make that much difference to our already comfortable lives. Moreover, because of our age, the possibility of earning significant compounded interest doesn’t really exist. So, why not just carry on as we’re doing now? Even if we live to be 100, its unlikely we’ll be physically able to kick ourselves for not investing more aggressively. Cheers.
—
See #12, my previous response to “John”
–Doug
Pink Snow falling in Burnaby.
This one is a bit unusual in the fact that one guy already made it to safety.
It was bought in Jan 2015 for 868k and then flipped later that year for 1.235m.
Now the current guys are stuck trying to flog it to a greater fool in a declining market.
It’s a 1966 one story ,two tears,three times is not the charm, mistake…
M42BC
6502 Balmoral Street, Burnaby
Oct 15:$1,658,000
Jan 14: $1,499,000
Change: – 159000.00 -10%
https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDAzV0JVVw==
#40 Smoking Man on 01.14.17 at 11:15 pm
Relationship are complicated .
Being a loner. So under rated.
…
Only you and the mrs and this blog on your moat surrounded island!!! Sounds blissful.
No one can predict when a correction can occur
Having 2yrs of expenses in liquid cashable account is a good idea . This way one would not touch principle as the Market tanks – or., not selling low
The chap is currently 30%+ cash
Perhaps he missed this blog? :)
Doug or Ryan or Both:
I seek your advice after the Flames lost the Battle of Alberta and it relates to the frailties of the +/- stat in hockey. You are both handy with graphs, numbers, stats and especially pie charts. Over 800 men have played an NHL game this year and over 800 of them have better +/- numbers than Gaudreau, Monahan, Brodie and Brouwer (the heart of the Flames lineup at about $25 MM per year). Should I bail on my emotional investment in and allegiance to my local heroes or stay the course?
Thanks in advance.
Yours,
Heartbroken in McMurray
“Show me a portfolio manager who holds lots of cash and I’ll show you a portfolio manager who probably doesn’t know what they’re doing.”
Bit of a strong statement. Lots of PM’s hold lots of cash if stuff is expensive or a dip is coming. As an example, check out Joel Tillinghast of Fidelity in the North Star fund. Holding 40% cash presently. The guy is ridiculously good and consistent.
Do people go to cash at the wrong time or do stocks go low as people go to cash.
#40 Smoking Man
Yes. Freedom is priceless. Of course I love a few people in my life. And I love my girlfriends, past, present, and future. All at arms length of course. Honest about it too.
No compromise given. Certainly no compromise
expected. I am a man.
About cash. Cash, cash flow, and income streams are all good. Never be without it. Anything can happen.
#1
Freedom First
Master of Freedomonics
Don’t compare Warren Buffets cash pile to yours. The reason he has so much cash on hand is because his business are generating cash faster than he can find a place to invest it and he needs liquidity to run all the businesses.
Some strong opinions here. I think it’s a great time to be a little heavier in cash, IMO. 5% to 10% is on the lowish side.
Folks are calling us all the time in the pursuit of putting our cash to work, offering a myriad of options & opportunities, all with varying degrees of pillow factor and risk.
Yes investing more cash may supercharge your risk-reward future, though having an an extended cash cushion is also beneficial in it’s own right.
Cash is likely to go through a renaissance as tech continues to transform the world, which I believe is absolutely deflationary in the long run.
#30 Hdj
God bless you… if you’re happy with your life and your pension is enough to give you the retirement you want then don’t change a thing. This is a finance blog everything said here is based on the best way to invest money. In your situation the cash in the Gic loses purchasing power year over year and is taxable at your marginal tax rate. Financially speaking it’s better to invest it but it’s also better financially for you to go to work. The point is that if you have enough and you’re happy the extra money of investing might not be worth
the emotional risk of short term loses.
Appreciate the primer, Doug.
All of this makes perfect sense intuitively but it’s always helpful to have the principle organized into concise and direct layman’s terms to crystallize the idea.
Cash?
Was ist das?
Coupon with expiration date with value subject to the menopause caprices of the governor of BOC?
T Bills? I don’t think so.
http://www.investorsfriend.com/time-in-the-market/
interesting talk, if you have an hour.
https://youtu.be/1JPYtNeHtKg
Doug, Doug, Doug……there are many who are not at all interested in the equity game for a number of, imho, very good reasons:
– Have reached retirement age and do not wish to risk hard-earned savings;
– Have more than enough cash to fund the balance of their lives;
– Have a multitude of pensions creating permanent cash streams;
– Perhaps have foreign pensions creating a hedge on the CAD;
– Have been burned by, pick one or several: central banks; banks; investment firms (no reflection on Turner Investments);
– Are wary of central bank policy that provides icing on the cake by squashing interest rates to the advantage of FIRE industries;
– Are distrustful of government policy that seeks a Venturi effect on taxes by diddling with regs that hurt conservative and/or risk-averse investors (oh yes, even they have a right to exist) to the great advantage of FIRE;
– Have zero desire to “play with” or think about what their money’s doing day in, day out. They prefer to sleep, eat, travel and play unfettered.
– Yes, cash holders may be paying a premium for peace of mind, but there are many reasons for which they are comfortable living with that and that has VALUE to them.
The day we see a written, guaranteed-return performance contract from an investment firm is the day many of us will migrate.
What a silly comment. Every post here is not for everyman. Those who want to pay less tax, find workable strategies in volatile times, garner second opinions on real estate, the economy and assets, build wealth or learn investment techniques, are welcome. Those who want words to reinforce their own decisions should go elsewhere. There are no guarantees about anything, only probabilities which can be enhanced by using sound ideas or sharp people. Contrary to your paranoia, the world is not out to rip you off. I write this blog daily to help people. You, Mr. Anon, have no right to question it or the time the contributors put into original, researched and valid content. — Garth
RE: Warren Buffett. The only reason he is sitting 30% cash is because he is waiting for an opportunity. A dip in the market. When it happens, he will top up all current assets. This will increase his wealth down the road. This is what investors do. They look for opportunities to invest.
A core fundamental of Investing is #1 Buy undervalued assets. This aspect is never discussed on this blog. It goes against Turner Investments core values… Balanced, Indexed, Long Term.
Wrong. Rebalancing is a core principle of successful investing. Trim the winners, buy the losers. It’s what 99% of the population lacks the wisdom or courage to do. — Garth
#50 VanDammeCouver on 01.15.17 at 1:28 am
“Show me a portfolio manager who holds lots of cash and I’ll show you a portfolio manager who probably doesn’t know what they’re doing.”
Bit of a strong statement. Lots of PM’s hold lots of cash if stuff is expensive or a dip is coming. As an example, check out Joel Tillinghast of Fidelity in the North Star fund. Holding 40% cash presently. The guy is ridiculously good and consistent.
—
There’ll always be Gretzkys, but most are Semenkos. It’s also hard to tell when a Gretzky will become a Semenko. I also don’t think Joel is going to chat with you about your kid’s RESP.
–Doug
Yup. Whenever people make gross generalizations I’m always weary .
And yes , Joel is brilliant . Consistently beats the comparable index . A manager worth his fee. He’ll put that money to work in due time , no doubt
Russell 3000 ETF with higher dividend?
#43 joe socks on 01.14.17 at 11:49 pm asked:
is there an ETF with a higher dividend that mirrors the S&P 500 that costs less than
iShares Russell 3000 Index (ETF): IWV?
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Well, IWV is 0.20% which is pretty low already…
There is no possibility of finding a higher dividend for the same index when the stocks in the index are what determine the dividend. (Save a tiny tiny bit higher if a lower fee is found, but that is just from the lower fee)
My best investment decision ever was to be in cash during the 2007-2008 crash. That said I have to agree it is hard to time the markets and over the long haul it is smarter to stay invested. Nevertheless one reason I manage my own money is I want to keep the option to sell everything if my gut tells me everything is going to go over a cliff.
In spite of the massive uncertainty I don’t think we are there right now. Your opinion and Garth’s reinforce my resolve.
Emotion is the enemy of successful investing. — Garth
So a lot of Canadians’ cash levels peaked at or near both market bottoms you say? I don’t understand that, never did and never will. When stocks are on sale that’s when you should be on a ruthless, break the doors down, and rudely push everyone and everything out of the way frantic buying binge. If everything is really cheap and you don’t mind a bit of risk, buy more stocks or equity ETFs on margin, but don’t get too heavily margined. When stocks or other assets are on sale that’s the ONLY time you can justify using margin debt.
What about now, that stocks have gone way up? If you can’t sleep at night, worried about high valuations, then take some profits and buy bond ETFs. From what I see, XGB and XCB are good bets.
Newtons’s Third law of Motion Applies to Investing
For every action there is an equal and opposite re-action.
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People often seem to forget that this third law of motion also applies to investments and to emotional reactions.
* Every stock bought is also sold, and at the exact same price. So no money “flows” into or out of equities in the process. (Money flows into equities only when companies issue new shares)
* When people feel insulted, offended or belittled or whatever they tend to come back with an insult. Most of us commenting here tend to forget that from time to time. (Never under estimate the capacity of people to be insulted or offended. The new U.S. President is a prime example.)
* When ANY position or theory is set out, there is a natural reaction to think about why that theory or position may be wrong. Proponents of ANYTHING should be prepared for this. (But I know readers will feel free, to disagree with me.)
#142 Blacksheep yest. – war is a business and business is good. It must be sold to us.
Even Wikipedia admits it, in “Gulf War 1” that little girl before congress claiming Iraq forces ripped out incubators in hospitals…was bought and paid for by a PR Agency. 100% lies and we eat it up. It’s all lies.
Syria was a business operation.
So was WW2. Why, they used it to turn Germany into a communist (1/2 of it) industrial powerhouse.
Vietnam still is communist to this day.
#25 Rick
Bullion has not performed that well,a co worker invested his whole portfolio into bullion in the summer of 2011,I believe in the last six years he has achieved a -30% loss to date. There is the possibility that in the next 2-4 years he might break even back to his original purchase price so he will have achieved a ten year return of 0%. Take into account inflation he will still be down 20+%.
WUL on 01.15.17 at 1:24 am
…You are both handy with graphs, numbers, stats and especially pie charts. Over 800 men have played an NHL game this year and over 800 of them have better +/- numbers than Gaudreau, Monahan, Brodie and Brouwer (the heart of the Flames lineup at about $25 MM per year).
————->>>>>
Should I bail on my emotional investment in and allegiance to my local heroes or stay the course?
Heartbroken in McMurray
==========================
Hey Wully,
In regards to your E.I. (emoting investment), why not adopt a re-balance strategy?
Say, mid-season do a balancing structure to buy players “on sale” and lessen exposure to over-achievers.
In this case you will add emotion to G M & B B ’cause they’re a down at re-balance time.
Good luck and please don’t cry.
Cheers, R
What about being in cash for Trumps inauguration? Markets have already priced in a pro-business president his first weeks might only cause panic with an “oh god what have we done moment”.
But if his two-terms go well then it’ll be Ivanka 2028. First female POTUS.
Sitting heavy in cash one worries when peeps says you are a loser due to inflation.
Sounds ominous.
Then you do the math and its like 10 or 20K and your like whatever.
#safetyfirst
Trump represent the best opportunity for timing the market since its inception. How much can I lose to inflation over 3 months compared to the potential loss WHEN things go off the rails.
Water is way more valuable resource than oil.
We can get energy from many sources, we can’t live without clean water.
Neither blog dogs, nor their dogs or cats, not even tobacco and JD.
True when I stand in line at a store and they ask me did you find everything you wanted…the real speak is do you have any cash because we have lots of stuff for sale…and my job depends on you spending some cash…the system is designed to separate you from your cash…when this happens someone gets paid and its usually not you…
Why do all the new homes have medical like cabinets in the kitchen?
Why are their restaurant like appliances in the kitchen?
Is it to remind you to visit the doctor after you fill up?
Re: Doug in London on 01.15.17 at 11:17 am
During the great depression AAA bonds from Corporations and Government doubled in value. Everything else went to
Hell.
I am still very convinced that managed bond funds are the way to go.
the problem with millionaire advisors advising others with a lot of cash sitting around is that they will gladly show you charts and graphs that this cash problem you have, (like really) has to be recycled into asset growing anti inflationary hedges so you get to have more cash in the future. More millionaire people problems. what to do with excessive amounts of cash sitting around?
Do you know what 40% of all Canadians are going to be eating this week, i can tell you know. irrisistable frozen pizza is $2.88, buy 2 get 1 free pillers shaved meats,8kg basmati rice bags are $6.88 for chinese new years. THIS IS THE REALITY. poor people buy whats on special that are at freshco, no frills, and foodbasics, the discount branches of the major 3 grocery stores. poor people have no choices, have no too much cash problems. its like prison, they eat what the masters tell them to eat. when your poor reality sets in very quickly.
Where does it say this site is for poor people? The NDP blog was that orange door you passed on the left.– Garth
RE: #64 David McDonald:
“My best investment decision ever was to be in cash during the 2007-2008 crash.”
Really? My best investment decision ever was to purchase as many shares of Canadian Chartered Banks as I could get, during the 2007-2008 crash. I got RBC for $24.00 per share, and the other big banks for similar amounts.
RBC trades at $94.50 today. The other banks are similar.
If I had moved to cash in 2008 I would have lost probably about $300,000.00 CDN.
Holding cash.
Good general guidelines there Ryan. Sometimes, it’s prudent to hold cash, if you look at your chart, technically, when investors drop below the red line in cash holdings, it would say the market is about to “underperform” (inverse correlation) and a good contrarian investor would start holding cash (ie, NOW). In fact, NOW would be the best time technically to hold cash then.
Also, if you get say, $100,000 windfall, it is prudent to NOT put that into the market in one shot, but to dollar-cost-average into the market in 5% steps.
Buying low can only be done when you have cash.
Cash is king. It depends on how you let it rule.
My next best investment decision will be, whenever the Canadian housing bubble bursts, to purchase, again, as many shares of Canadian Chartered banks as I can get my hands on. Probably for similar, or better, discounts than I got back in 2008……
#64 David McDonald on 01.15.17 at 11:10 am
..Nevertheless one reason I manage my own money is I want to keep the option to sell everything if my gut tells me everything is going to go over a cliff…
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As Garth mentioned, that’s not the best way to approach your investment strategy. Your “Gut” tells you when to sell? Good luck with that. As I’ve mentioned before, I buy equities as cash comes available, yes my purchase may go down in the near future or it just may go up. You have to look to the long term. Unless society goes all “Walking Dead” you will be just fine staying in the market instead of jumping in and out based on Gut feelings.
Erode returns . Kill them
Ferri/benke gave us the numbers . An fez based portfolio outperformed the actively managed portfolio 82.9% of the time . In addition , professionals typically underperformed by 1.25% per year . And the less than 20% of professionals that did beat the market do so by .52%
With that , people STILL engage in active investing . Let random thoughts poison them – ‘we’re at a top, …..’
If you can’t sleep at night , your asset allocation is off . Set it so it lets you sleep . And then turn down the noise
Re #77 Ace Goodhart
Dear Ace,
I did buy back into the market in the spring of 2008 with all the cash I had in hand. You bought the banks and that turned out really well but I also did Ok.
My point was that both of us had cash at the right time. My worry with a financial advisor would be that they would feel obliged to be fully invested so as not to appear to be taking fees for doing nothing. That could lead me right over a cliff.
“What a silly comment. Every post here is not for everyman. Those who want to pay less tax, find workable strategies in volatile times, garner second opinions on real estate, the economy and assets, build wealth or learn investment techniques, are welcome. Those who want words to reinforce their own decisions should go elsewhere. There are no guarantees about anything, only probabilities which can be enhanced by using sound ideas or sharp people. Contrary to your paranoia, the world is not out to rip you off. I write this blog daily to help people. You, Mr. Anon, have no right to question it or the time the contributors put into original, researched and valid content. — Garth”
Tough. I don’t come here for appui, nor to dis anyone.
I am certainly not alone in my views.
The problem with FIRE is its reputation.
Your choice of adjectives is beneath you.
When you figure out what an adjective is, come back. — Garth
I’m going to put my spare cash in Senate seats…I hear they will be for sale pretty soon.
Maybe what the underlying tone in the comments today is that there are married people with 100 grand of GIC’s in a pair of TSFA’s, living in the lower tax bracket or partially in the next one, that don’t need a financial planner for tax strategies, but do need a knowledgeable financial guru to tell them specific choices of stock and ETF’s to swap out the GIC’s for.
That may well fit more than just a few individuals that peruse this site.
Just an observation….
Yikes- to all criminal organizations – BC is open for the shady stuff.
https://mobile.nytimes.com/2017/01/13/world/canada/british-columbia-christy-clark.html?_r=0&referer
10 Figmund Sreud on 01.14.17 at 5:12 pm
In virtually any market and economy there is an asset class doing better than cash.
____________________________
Most true, … to me, however, holding a bit of cash is like holding an option, … an option to take advantage of some volatile, yet grossly undeserving stock – like ALA the other day [… just as example, no plug.]
________________________________________
Something going on with ALA
http://ca.reuters.com/article/businessNews/idCAKBN14W2XL?pageNumber=1&virtualBrandChannel=0&sp=true
For #76 crossbordershopper
Stop whining about poor people, poor are not poor because rich guys made their money stealing them ! You can eat awesome natural food for very cheap if you are a bit clever and not too lazy…. The poor I know wouldn’t want food when panhandling, they want cash to buy smoke and booze !
Garth you are wrong when you say your site is not for poor people, not so fortunate people understand what you talk about and will thank you later for the free good advice you give to anybody ! You are better with the poor that any NDP that use the poors to exist but don’t care at all about them, these apparatchiks just need more and more poor to tax people over and over again for their own low life people benefits !
#82 David McDonald on 01.15.17 at 2:40 pm
Re #77 Ace Goodhart
Dear Ace,
I did buy back into the market in the spring of 2008 with all the cash I had in hand. You bought the banks and that turned out really well but I also did Ok.
My point was that both of us had cash at the right time. My worry with a financial advisor would be that they would feel obliged to be fully invested so as not to appear to be taking fees for doing nothing. That could lead me right over a cliff.
———————————————————
Ace, I think you meant to say the spring of 09 when the banks bottomed on Feb. 23rd having dropped 50% from their highs. That’s when I jumped in. The recovery in the bank stocks was incredible afterwards and the strange part was that the markets recovered with extremely small volumes which was an indication that not many firms were holding cash with which to take advantage of the situation. Certainly not the large financials institutions who saw the value of their portfolios drop 40% or more. What I discovered was after the markets bottomed out, financial advisors both at the large institutions and the banks especially were so gun shy to get the average the investor back into equities at this time because they’d had lost so much money for their investors and afraid it would drop further. When my wife went to one of the big banks to open a trading account in order to purchase bank related stocks for her TFSA in February 09, they wanted her to sign a form basically stating that they would not be responsible for any losses she would sustain. They were suggesting she should buy GIC’s. In fact, two banks she went to weren’t even aware that the TFSA’s were or purchasing other than interest bearing investments. That was indeed an eye opener.
Doug,
Do you also have a hot trophy wife, drive expensive cars and wear a 3000 $ suit ?
Cheers,
The second part of your explanation is not supported by facts.
See the consolidated statement of cash flows on p. 6 of Buffett’s latest SEC filing of Form 10-Q (link supplied below).
http://www.berkshirehathaway.com/qtrly/3rdqtr16.pdf
#76 crossbordershopper on 01.15.17 at 1:33 pm
…
poor people have no choices, have no too much cash problems. its like prison, they eat what the masters tell them to eat. when your poor reality sets in very quickly.
Where does it say this site is for poor people? The NDP blog was that orange door you passed on the left.– Garth
— Hey Garth, as a formerly poor person I could be offended but I’m not. In 2008 I was dirt poor for various reasons and lived a very frugal existence just to keep afloat. Reading your blog a few years ago gave me the balls to build some decent investing habits, start some accounts, put every dollar I could spare into (somewhat aggressive) balanced RESPs for the just-born grublings.
After seeing them perform, we opened up some TFSAs all the while going back to school and working when I could, while still living poor, buying food only when it was on sale at no frills.
The thing is, this blog can be for poor people who need to kick their own asses and make what little money they have perform in the best way possible. We still live like poor people and keep the expenses down as best we can, but the TFSAs are full and kicking ass and so are the kids’ RESPs. They have more money invested than I had ever made during my wasted youth. We make the rent and pay for daycare. It’s possible to get out of the ghetto. Better late than never.
So, thanks, Garth. Your blog is not just for the 1%. Peace.
#76… I dont get your post. Do you also troll Ferrari forums and yell at readers to let them know less fortunate people take transit or drive Kias?
why are you reading an investment blog if not for investment advice?
#68 millmech on 01.15.17 at 11:52 am
#25 Rick
Bullion has not performed that well,a co worker invested his whole portfolio into bullion in the summer of 2011,I believe in the last six years he has achieved a -30% loss to date. There is the possibility that in the next 2-4 years he might break even back to his original purchase price so he will have achieved a ten year return of 0%. Take into account inflation he will still be down 20+%.
———————————————————
That is a perfect example of someone not understanding the markets and getting in at the worst possible time. May 1st/11 was the peak and was the time to be out and into USD’s when our dollar was at $1.06. Holding those USD’s until Jan. 15/16 would have resulted in a 50% gain over that time period. That was a no brainer. One of those rare moments.
Doug I wish you hadn’t posted that chart! Now I feel like I should be sitting on some cash waiting for the downturn! Garth has repeatedly hit us readers over the head with the stupidity of timing the market. But I’m not a robot and emotions are a powerful thing. The fear of making a mistake buying in right now with a lump sum, 5500, is strong.
If i’m afraid of a big purchase now maybe I’ll just massage the purchasing over a few months. Thank goodness VB has such a low fee transaction.
“When you figure out what an adjective is, come back.” — Garth
“Silly”.
Isn’t it?
@conam, post #75:
In the unlikely event that a depression should happen again, that will be the time to cash in those bond funds that increased in price then go on a frantic buying binge of DIRT CHEAP stocks or equity ETFs.
During the financial crisis of 2008-09 I had the presence of mind to cash in some of my bond funds that went up or at least held their value and buy much cheaper equity funds.
John on 01.14.17 at 4:54 pm
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so, what you’re saying is…”yes, time the market”
Clearly Warren Buffet doesn’t know what he’s doing – he thinks of cash as a call option on every asset class with no expiration date or strike price.
Doug wrote>Show me a portfolio manager who holds lots of cash and I’ll show you a portfolio manager who probably doesn’t know what they’re doing.
It was the nice one :-) I will show you Mohamed El-Erian with the net worth $2.3 billion holding 30% of his own money in cash https://www.bloomberg.com/news/articles/2016-10-20/el-erian-says-december-fed-hike-likely-but-not-a-done-deal
@Larry1, post #99:
Either that or he knows exactly what he’s doing. Remember, patience is a virtue and not a vice. Most US stocks are highly priced right now, so he’s waiting for something to go on sale. While there’s no guarantee a big across the board correction is coming, individual companies or sectors can go on sale. Remember what happened with oil companies 2 years ago from now?