Greater focus on cash in this environment: opinions?

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diabelli
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Greater focus on cash in this environment: opinions?

Post by diabelli »

At the start of my amateurish investing career I'd read only Graham, Buffett, Munger. I can't honestly say that I came close to replicating any of their methods, absent any personal knowledge on the actual valuation of individual companies, but the general influence did cause me to focus on value funds and to hold cash until some indicator led me to believe it should be deployed (P/E or P/B falling below a certain value, market downturn, etc). I did pretty well with this approach, as it turns out, but then of course every buy-and-hold investor has done well regardless of their approach in recent years.

I then read Bogle and found this board, and have since been ploughing the same weekly amount into broad index funds. I've gotten away from the value focus and have tried not to let changes in the market affect my regular contributions.

But something about the current environment, whether high valuations historically, bond yields, etc, caused me this past weekend to pick up "Poor Charlie's Almanac" once again. Now that I've been reminded I must say... I'd felt better some years ago with the methods his philosophy had inspired. It feels good to hold lots of cash and to wait for an opportunity, abundantly prepared to respond to any large and unexpected events. The nostalgia for my old method is compounded by how uncomfortable it feels nowadays to keep shoving large portions of my hard earnings into the SP500, ever-rising and seemingly disconnected from fundamentals.

I'm well aware of the argument that I can't decide the appropriate value of anything in any manner rivaling the professionals; that timing the market is a fool's game and that it may run-up by another 40% prior to declining by 30%. **But here's my question: does deciding to let more cash savings accumulate when valuations are high really deserve to be derided as "timing the market"? And would anybody really contest that they are currently high? If I walk into a clothing store and choose not to buy anything for lack of anything offered at an appealing price, am I a fool for keeping my money ---not necessarily with the expectation that the store will drop the prices (i.e. timing), but perhaps for ANYTHING else (just to feel an even greater security, or perhaps eventually to use for a different type of product altogether -- in this analogy perhaps real estate, vacation fund, whatever).

So instead of defaulting to index investing with all income left over after expenses, with a small allowance for fixed income and cash, what if the standard were instead a default mainly to cash....then to be deployed (and deployed in an aggressive way) only when something were to look appealing or at least more reasonable? This approximates my understanding of the Buffett/Munger approach, although in order to follow it you must of course credit yourself with the ability to understand something about something. Although I can get on-board with Socratic modesty as well as most, it doesn't take a genius to understand when the market has crashed, nor even when articles in respected publications marveling at the market's euphoria begin to dry up.

There must be some level at which even Bogleheads look at market pricing and decide that it's time to stop ploughing into it. Anyone feeling the same way or able to explain why I'm wrong?
theorist
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Re: Greater focus on cash in this environment: opinions?

Post by theorist »

diabelli wrote: Tue Sep 14, 2021 6:25 pm At the start of my amateurish investing career I'd read only Graham, Buffett, Munger. I can't honestly say that I came close to replicating any of their methods, absent any personal knowledge on the actual valuation of individual companies, but the general influence did cause me to focus on value funds and to hold cash until some indicator led me to believe it should be deployed (P/E or P/B falling below a certain value, market downturn, etc). I did pretty well with this approach, as it turns out, but then of course every buy-and-hold investor has done well regardless of their approach in recent years.

I then read Bogle and found this board, and have since been ploughing the same weekly amount into broad index funds. I've gotten away from the value focus and have tried not to let changes in the market affect my regular contributions.

But something about the current environment, whether high valuations historically, bond yields, etc, caused me this past weekend to pick up "Poor Charlie's Almanac" once again. Now that I've been reminded I must say... I'd felt better some years ago with the methods his philosophy had inspired. It feels good to hold lots of cash and to wait for an opportunity, abundantly prepared to respond to any large and unexpected events. The nostalgia for my old method is compounded by how uncomfortable it feels nowadays to keep shoving large portions of my hard earnings into the SP500, ever-rising and seemingly disconnected from fundamentals.

I'm well aware of the argument that I can't decide the appropriate value of anything in any manner rivaling the professionals; that timing the market is a fool's game and that it may run-up by another 40% prior to declining by 30%. **But here's my question: does deciding to let more cash savings accumulate when valuations are high really deserve to be derided as "timing the market"? And would anybody really contest that they are currently high? If I walk into a clothing store and choose not to buy anything for lack of anything offered at an appealing price, am I a fool for keeping my money ---not necessarily with the expectation that the store will drop the prices (i.e. timing), but perhaps for ANYTHING else (just to feel an even greater security, or perhaps eventually to use for a different type of product altogether -- in this analogy perhaps real estate, vacation fund, whatever).

So instead of defaulting to index investing with all income left over after expenses, with a small allowance for fixed income and cash, what if the standard were instead a default mainly to cash....then to be deployed (and deployed in an aggressive way) only when something were to look appealing or at least more reasonable? This approximates my understanding of the Buffett/Munger approach, although in order to follow it you must of course credit yourself with the ability to understand something about something. Although I can get on-board with Socratic modesty as well as most, it doesn't take a genius to understand when the market has crashed, nor even when articles in respected publications marveling at the market's euphoria begin to dry up.

There must be some level at which even Bogleheads look at market pricing and decide that it's time to stop ploughing into it. Anyone feeling the same way or able to explain why I'm wrong?
Suppose we grant that valuations of the S&P 500 are inflated, heralding poor medium term returns. The latter is far from certain. See a nuanced discussion here

https://awealthofcommonsense.com/2021/0 ... right-now/

(I’ll assume you’ve already seen the fable of the world’s worst market timer, so the link isn’t to that….).

Anyway, granting that, there are plenty of less overvalued investments available. The standard quantitative value measures are much happier with US value stocks than they are with US growth. Meanwhile, developed foreign / emerging markets in general — and e.g. emerging markets value in particular — are on sale, relatively speaking.

So why sit on cash, given the dangers of underperformance that so clearly brings with it?
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retired@50
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Re: Greater focus on cash in this environment: opinions?

Post by retired@50 »

I'm not adding to my cash position, but after reading "How I Invest My Money", I've practically given up on trying to convince anyone of anything.

See link for more about the book: https://www.goodreads.com/book/show/550 ... PSb&rank=1

Some of the contributors to the book have what I would call unbelievably silly portfolios, but hey, they're in the business, so what do I know?

Regards,
This is one person's opinion. Nothing more.
whereskyle
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Re: Greater focus on cash in this environment: opinions?

Post by whereskyle »

diabelli wrote: Tue Sep 14, 2021 6:25 pm At the start of my amateurish investing career I'd read only Graham, Buffett, Munger. I can't honestly say that I came close to replicating any of their methods, absent any personal knowledge on the actual valuation of individual companies, but the general influence did cause me to focus on value funds and to hold cash until some indicator led me to believe it should be deployed (P/E or P/B falling below a certain value, market downturn, etc). I did pretty well with this approach, as it turns out, but then of course every buy-and-hold investor has done well regardless of their approach in recent years.

I then read Bogle and found this board, and have since been ploughing the same weekly amount into broad index funds. I've gotten away from the value focus and have tried not to let changes in the market affect my regular contributions.

But something about the current environment, whether high valuations historically, bond yields, etc, caused me this past weekend to pick up "Poor Charlie's Almanac" once again. Now that I've been reminded I must say... I'd felt better some years ago with the methods his philosophy had inspired. It feels good to hold lots of cash and to wait for an opportunity, abundantly prepared to respond to any large and unexpected events. The nostalgia for my old method is compounded by how uncomfortable it feels nowadays to keep shoving large portions of my hard earnings into the SP500, ever-rising and seemingly disconnected from fundamentals.

I'm well aware of the argument that I can't decide the appropriate value of anything in any manner rivaling the professionals; that timing the market is a fool's game and that it may run-up by another 40% prior to declining by 30%. **But here's my question: does deciding to let more cash savings accumulate when valuations are high really deserve to be derided as "timing the market"? And would anybody really contest that they are currently high? If I walk into a clothing store and choose not to buy anything for lack of anything offered at an appealing price, am I a fool for keeping my money ---not necessarily with the expectation that the store will drop the prices (i.e. timing), but perhaps for ANYTHING else (just to feel an even greater security, or perhaps eventually to use for a different type of product altogether -- in this analogy perhaps real estate, vacation fund, whatever).

So instead of defaulting to index investing with all income left over after expenses, with a small allowance for fixed income and cash, what if the standard were instead a default mainly to cash....then to be deployed (and deployed in an aggressive way) only when something were to look appealing or at least more reasonable? This approximates my understanding of the Buffett/Munger approach, although in order to follow it you must of course credit yourself with the ability to understand something about something. Although I can get on-board with Socratic modesty as well as most, it doesn't take a genius to understand when the market has crashed, nor even when articles in respected publications marveling at the market's euphoria begin to dry up.

There must be some level at which even Bogleheads look at market pricing and decide that it's time to stop ploughing into it. Anyone feeling the same way or able to explain why I'm wrong?
There is no price/earnings multiple that would convince me I need to reduce my equity allocation UNLESS I already had enough money to retire and for that reason did not need to keep pursuing large capital gains.

For every year of the 18-year bull market that ended 21 years ago, prices, relative to recent history, were shockingly high, and they kept going up more forcefully than the relatively wimpy bull market (minus 2018 and covid) of the past 11 years:

https://www.portfoliovisualizer.com/bac ... ion1_1=100

By "keeping more cash," (i.e., "not investing") you are timing the market. If you make a decision to "keep more cash" (not invest), you will likely develop an emotional attachment to your decision, including regret if you miss out on a big gain. Emotions like this can destroy a long-term investing strategy. Regret is often followed by impulsivity.

If you're feeling fear, the right thing to do is to look at your asset allocation. Is it too stock heavy? If you're not ready to see your equity position cut in half without panicking, then you're holding too much in stocks. The key is to develop an asset allocation that enables you to invest your chosen amount at the same time every time no matter what. If you can't do that, you need to look at your asset allocation rather than attempt to time the market.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Topic Author
diabelli
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Re: Greater focus on cash in this environment: opinions?

Post by diabelli »

whereskyle wrote: Tue Sep 14, 2021 7:09 pm
diabelli wrote: Tue Sep 14, 2021 6:25 pm At the start of my amateurish investing career I'd read only Graham, Buffett, Munger. I can't honestly say that I came close to replicating any of their methods, absent any personal knowledge on the actual valuation of individual companies, but the general influence did cause me to focus on value funds and to hold cash until some indicator led me to believe it should be deployed (P/E or P/B falling below a certain value, market downturn, etc). I did pretty well with this approach, as it turns out, but then of course every buy-and-hold investor has done well regardless of their approach in recent years.

I then read Bogle and found this board, and have since been ploughing the same weekly amount into broad index funds. I've gotten away from the value focus and have tried not to let changes in the market affect my regular contributions.

But something about the current environment, whether high valuations historically, bond yields, etc, caused me this past weekend to pick up "Poor Charlie's Almanac" once again. Now that I've been reminded I must say... I'd felt better some years ago with the methods his philosophy had inspired. It feels good to hold lots of cash and to wait for an opportunity, abundantly prepared to respond to any large and unexpected events. The nostalgia for my old method is compounded by how uncomfortable it feels nowadays to keep shoving large portions of my hard earnings into the SP500, ever-rising and seemingly disconnected from fundamentals.

I'm well aware of the argument that I can't decide the appropriate value of anything in any manner rivaling the professionals; that timing the market is a fool's game and that it may run-up by another 40% prior to declining by 30%. **But here's my question: does deciding to let more cash savings accumulate when valuations are high really deserve to be derided as "timing the market"? And would anybody really contest that they are currently high? If I walk into a clothing store and choose not to buy anything for lack of anything offered at an appealing price, am I a fool for keeping my money ---not necessarily with the expectation that the store will drop the prices (i.e. timing), but perhaps for ANYTHING else (just to feel an even greater security, or perhaps eventually to use for a different type of product altogether -- in this analogy perhaps real estate, vacation fund, whatever).

So instead of defaulting to index investing with all income left over after expenses, with a small allowance for fixed income and cash, what if the standard were instead a default mainly to cash....then to be deployed (and deployed in an aggressive way) only when something were to look appealing or at least more reasonable? This approximates my understanding of the Buffett/Munger approach, although in order to follow it you must of course credit yourself with the ability to understand something about something. Although I can get on-board with Socratic modesty as well as most, it doesn't take a genius to understand when the market has crashed, nor even when articles in respected publications marveling at the market's euphoria begin to dry up.

There must be some level at which even Bogleheads look at market pricing and decide that it's time to stop ploughing into it. Anyone feeling the same way or able to explain why I'm wrong?
There is no price/earnings multiple that would convince me I need to reduce my equity allocation UNLESS I already had enough money to retire and for that reason did not need to keep pursuing large capital gains.

For every year of the 18-year bull market that ended 21 years ago, prices, relative to recent history, were shockingly high, and they kept going up more forcefully than the relatively wimpy bull market (minus 2018 and covid) of the past 11 years:

https://www.portfoliovisualizer.com/bac ... ion1_1=100

By "keeping more cash," (i.e., "not investing") you are timing the market. If you make a decision to "keep more cash" (not invest), you will likely develop an emotional attachment to your decision, including regret if you miss out on a big gain. Emotions like this can destroy a long-term investing strategy. Regret is often followed by impulsivity.

If you're feeling fear, the right thing to do is to look at your asset allocation. Is it too stock heavy? If you're not ready to see your equity position cut in half without panicking, then you're holding too much in stocks. The key is to develop an asset allocation that enables you to invest your chosen amount at the same time every time no matter what. If you can't do that, you need to look at your asset allocation rather than attempt to time the market.
Thank you. This is helpful.
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Re: Greater focus on cash in this environment: opinions?

Post by Tom_T »

There's nothing special about "this environment." I've been an investor for 40 years. I don't remember a time when the environment didn't have something for people to worry about. The market reflects a collective mixture of expectations, good and bad. If there were no concerns at all, the Dow would be 40,000.

And, even if you have a stash of cash waiting for some kind of buying opportunity, how are you going to identify it? Does the market have to drop by 10 percent? 15? 20? What if it drops 10, you deploy your cash, and then it drops another 10? What if you are sitting on your cash pile right now, and the market goes up another 10 percent and then it drops? You are never, ever going to know the right time to get out and the right time to get back in. That is only known in hindsight.

Trust me: the only way to sleep at night is to have a proper asset allocation that you are comfortable with even if the market falls 30 percent.
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Re: Greater focus on cash in this environment: opinions?

Post by JoMoney »

Early this year I got spooked and made some changes to my equity holdings after otherwise "staying the course" and averaging into my S&P 500 for the past 13+ years. Something about the momentum of Tesla, "Meme Stocks", Crypto-Coins, discount brokers like Robin Hood, and the level of discussion of trading and markets among people I work around and places I go that never would have previously discussed finances or markets. It had a very uncomfortable feeling to me in a way that had echos of the dot-com boom.
So far, I would have been better off just "staying the course" in my S&P 500 fund. Although I do feel more comfortable with my current allocation, no plans to switch back, there is definitely still a part of me that thinks the better course of action would have just road it out. Some times the market valuations will be high and go higher, sometimes it will be high and go lower, if you "stay the course" averaging in and out over time your average across the time period will be much closer to the average valuation and results closer to the underlying fundamental, and all the fluctuations in between specific individual points just noise.
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Re: Greater focus on cash in this environment: opinions?

Post by dbr »

Our asset allocation was determined long ago to be suitable for the long run, overvalued, undervalued, or whatever happens.

If you want to engage in tactical asset allocation according to the environment you are probably abandoning the basic concept of asset allocation for long term investing. I myself would not be expert enough in how to manage that to advise anyone.
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Re: Greater focus on cash in this environment: opinions?

Post by MIretired »

For me, the idea of not investing anything further(not timing) would be more about keeping up with inflation with that cash. Like I own a house, I hope it maintains a real value, but I'm not looking for an opportune time to sell it for something else. That is I'm maintaining a real value, so no real worries other than not growing wealth.
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Re: Greater focus on cash in this environment: opinions?

Post by KlangFool »

diabelli wrote: Tue Sep 14, 2021 6:25 pm
does deciding to let more cash savings accumulate when valuations are high really deserve to be derided as "timing the market"?
diabelli,

1) Yes. You assume that the market cannot go higher. Aka, you think you predict the market.

2) I do not totally trust passive index strategy. Hence, 40% of my portfolio is in the Wellington Fund.

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Re: Greater focus on cash in this environment: opinions?

Post by KlangFool »

OP,

I am prepared for the market to crash and stay down for 5 to 8 years at any time. If the market down turn lasted more than 5 years, it is no longer a money problem.

I am prepared. Hence, I do not need to know and care how the market will move. Why are you not prepared?

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Re: Greater focus on cash in this environment: opinions?

Post by Wiggums »

dbr wrote: Wed Sep 15, 2021 8:55 am Our asset allocation was determined long ago to be suitable for the long run, overvalued, undervalued, or whatever happens.

If you want to engage in tactical asset allocation according to the environment you are probably abandoning the basic concept of asset allocation for long term investing. I myself would not be expert enough in how to manage that to advise anyone.
+1
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Re: Greater focus on cash in this environment: opinions?

Post by Leif »

Since you started by reading Graham, Buffett, Munger I can understand your concern about current valuations. I started with Bogle, Swedrow, Bernstein and I'm only now reading Graham.

But none of us are in the league with Graham, Buffett, etc. We have various goals, but primarily most are investing for retirement. Long term. We are not managing large investment funds.

Since it is nearly impossible for us mere mortals to match them we try to buy the market and not try to time it. If you have money you invest. If you need money you sell.

Having said that, valuations matter, as Graham, or even Bogle would tell you. So if you feel uncomfortable with valuation, but you have money to invest, you spread it out over time. If you feel bonds are not returning sufficient yield for risk than you might have more cash for fixed income. I have some CDs coming due. My plan is to put those in short term nominal bonds and TIPS. Adding to my cash position is also a reasonable option for CDs, IMO. Depends on your term for the money.
Last edited by Leif on Wed Sep 15, 2021 12:33 pm, edited 4 times in total.
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Re: Greater focus on cash in this environment: opinions?

Post by CyclingDuo »

diabelli wrote: Tue Sep 14, 2021 6:25 pmThere must be some level at which even Bogleheads look at market pricing and decide that it's time to stop ploughing into it. Anyone feeling the same way or able to explain why I'm wrong?
What if you had purchased at the peak in 1929 and held for 30 years right through the crash, the depression, WWII, etc...?

https://awealthofcommonsense.com/2020/1 ... -30-years/

You can see the worst entry point in history came at the peak in 1929 just before the onset of the Great Depression. Shockingly, the 30 year performance of the stock market from that point forward was a gain of 7.8% per year. That’s a pretty good worst-case scenario.

No guarantees for the future, but heck - I'd take 6-7% annual (averaged) for the next 30 years.

:sharebeer

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Re: Greater focus on cash in this environment: opinions?

Post by 1789 »

retired@50 wrote: Tue Sep 14, 2021 7:04 pm I'm not adding to my cash position, but after reading "How I Invest My Money", I've practically given up on trying to convince anyone of anything.

See link for more about the book: https://www.goodreads.com/book/show/550 ... PSb&rank=1

Some of the contributors to the book have what I would call unbelievably silly portfolios, but hey, they're in the business, so what do I know?

Regards,
Can you elaborate more? I haven't read this book yet.
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Re: Greater focus on cash in this environment: opinions?

Post by dbr »

Leif wrote: Wed Sep 15, 2021 12:25 pm Since you started by reading Graham, Buffett, Munger I can understand your concern about current valuations. I started with Bogle, Swedrow, Bernstein and I'm only now reading Graham.

But none of us are in the league with Graham, Buffett, etc. We have various goals, but primarily most are investing for retirement. Long term. We are not managing large investment funds.

Since it is nearly impossible for us mere mortals to match them we try to buy the market and not try to time it. If you have money you invest. If you need money you sell.

Having said that, valuations matter, as Graham, or even Bogle would tell you. So if you feel uncomfortable with valuation, but you have money to invest, you spread it out over time. If you feel bonds are not returning sufficient yield for risk than you might have more cash for fixed income. I have some CDs coming due. My plan is to put those in short term nominal bonds and TIPS. Adding to my cash position is also a reasonable option for CDs, IMO. Depends on your term for the money.
It might be an important insight that long term asset allocation to low cost investments holding the total market is just a complete alternative to the approach of Graham, Buffett, et al. It is offered with the insight that anyone can invest successfully enough with the Bogle perspective while success at being Warren Buffett is a dicey proposition. It is not even clear that Warren Buffett can repeat being Warren Buffett.
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Re: Greater focus on cash in this environment: opinions?

Post by goodenyou »

Tom_T wrote: Wed Sep 15, 2021 8:16 am There's nothing special about "this environment." I've been an investor for 40 years. I don't remember a time when the environment didn't have something for people to worry about. The market reflects a collective mixture of expectations, good and bad. If there were no concerns at all, the Dow would be 40,000.

And, even if you have a stash of cash waiting for some kind of buying opportunity, how are you going to identify it? Does the market have to drop by 10 percent? 15? 20? What if it drops 10, you deploy your cash, and then it drops another 10? What if you are sitting on your cash pile right now, and the market goes up another 10 percent and then it drops? You are never, ever going to know the right time to get out and the right time to get back in. That is only known in hindsight.

Trust me: the only way to sleep at night is to have a proper asset allocation that you are comfortable with even if the market falls 30 percent.
^This +1
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Re: Greater focus on cash in this environment: opinions?

Post by HanSolo »

diabelli wrote: Tue Sep 14, 2021 6:25 pm **But here's my question: does deciding to let more cash savings accumulate when valuations are high really deserve to be derided as "timing the market"?
Yes, it is timing the market. No, it does not deserve to be derided.

Market timing on the basis of valuation concerns is simply one approach to risk management. There's a certain faction here on the forum who will deride it. Their argument is that it hasn't worked well in the past (e.g., people going to high cash allocations in 1997, or 2014, etc.). It's a pretty good argument. But they tend to neglect two things: (a) that different people have different investment objectives; for example, some people place more emphasis on managing downside risk than others, or have different ways of evaluating downside risk; and (b) recovery from a severe bear market during your investing lifetime is not a certainty.

The above-mentioned faction will often say "do XYZ, and if you don't, you're wrong." I'm of the faction that says "different strokes for different folks... if you understand what you're doing, and you're aware of the inherent risks, then there's nothing wrong with it."

Personally, I've been conservatively positioned for a long time, and it can be argued that I did the wrong thing because my net worth is much lower than it would've been, had I invested more aggressively. However, I had the benefit of being fairly certain that my downside was very limited. And I still have that benefit now. And I'm satisfied with the upside I've gotten. If other people think there's a problem, then that's their problem, not mine. I don't have FOMO.

In regard to risk management, it says in the wiki that "a common rule of thumb is to be prepared for a 50% loss in the stock portion of one's portfolio". On the other hand, someone upthread said "the only way to sleep at night is to have a proper asset allocation that you are comfortable with even if the market falls 30 percent". Which is right, 50% or 30%? The answer is, these magic numbers are chosen arbitrarily, in that no number is objectively "right" or "wrong". The next question is, should the magic number take valuation into account, or not? As stated, these rules of thumb seem to be saying "no". And that is also neither "right" nor "wrong". It's just a matter of personal preference, how you want to approach risk management.

My approach is to consider the possibility of the stock market dropping 50% below it's long-term median valuation levels, because it's done that before. This gets into a tricky question which is open for debate, what valuation metrics are valid. I look at a variety of metrics (Shiller PE, price-to-sales, price-to-book, market-cap-to-GDP, etc.). There are a bunch more metrics summarized in a table in this article:
https://www.cmgwealth.com/ri/on-my-rada ... r-returns/

The metrics I'm looking at are now about double their long-term medians. A drop to half their long-term medians means a drop of 75% from current levels. So I'm prepared for that (I'm currently at about 30% in stocks).

I'm not advocating that anyone do what I'm doing. Most people probably shouldn't. The only things I advocate are (a) understanding of the various investment choices and their inherent risks, and (b) mutual respect among people who make different choices.

I think you asked an important question. Thanks for asking.
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Re: Greater focus on cash in this environment: opinions?

Post by UpperNwGuy »

I do not hold cash and wait for opportunities. I invest the same amount at the beginning of every month, and I invest in the same set of funds that I always invest it in. Market timing doesn't appeal to me. My IPS says to ignore valuations.
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Re: Greater focus on cash in this environment: opinions?

Post by PVW »

diabelli wrote: Tue Sep 14, 2021 6:25 pm **But here's my question: does deciding to let more cash savings accumulate when valuations are high really deserve to be derided as "timing the market"?

[...]

So instead of defaulting to index investing with all income left over after expenses, with a small allowance for fixed income and cash, what if the standard were instead a default mainly to cash....then to be deployed (and deployed in an aggressive way) only when something were to look appealing or at least more reasonable?
For me, the essence of the Boglehead Philosophy is that you don't know enough to beat the market, so be happy with the average.

There are many methods used to guide investment strategy. As you point out, value investing is one. Another is momentum investing - which would tell you to dump your cash into the market right now.

I have no idea if these approaches are better than the Boglehead method, but it doesn't sound like you do either. Are you willing to guess? What do you win or lose if you don't guess correctly?

Be happy with the mediocrity.
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Re: Greater focus on cash in this environment: opinions?

Post by Escapevelocity »

If you've spent any significant time on this board it should be obvious you're barking up the wrong tree with your question.
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climber2020
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Re: Greater focus on cash in this environment: opinions?

Post by climber2020 »

HanSolo wrote: Wed Sep 15, 2021 1:42 pm
Personally, I've been conservatively positioned for a long time, and it can be argued that I did the wrong thing because my net worth is much lower than it would've been, had I invested more aggressively. However, I had the benefit of being fairly certain that my downside was very limited. And I still have that benefit now. And I'm satisfied with the upside I've gotten. If other people think there's a problem, then that's their problem, not mine. I don't have FOMO.

In regard to risk management, it says in the wiki that "a common rule of thumb is to be prepared for a 50% loss in the stock portion of one's portfolio". On the other hand, someone upthread said "the only way to sleep at night is to have a proper asset allocation that you are comfortable with even if the market falls 30 percent". Which is right, 50% or 30%? The answer is, these magic numbers are chosen arbitrarily, in that no number is objectively "right" or "wrong". The next question is, should the magic number take valuation into account, or not? As stated, these rules of thumb seem to be saying "no". And that is also neither "right" nor "wrong". It's just a matter of personal preference, how you want to approach risk management.

My approach is to consider the possibility of the stock market dropping 50% below it's long-term median valuation levels, because it's done that before. This gets into a tricky question which is open for debate, what valuation metrics are valid. I look at a variety of metrics (Shiller PE, price-to-sales, price-to-book, market-cap-to-GDP, etc.). There are a bunch more metrics summarized in a table in this article:
https://www.cmgwealth.com/ri/on-my-rada ... r-returns/

The metrics I'm looking at are now about double their long-term medians. A drop to half their long-term medians means a drop of 75% from current levels. So I'm prepared for that (I'm currently at about 30% in stocks).

I'm not advocating that anyone do what I'm doing. Most people probably shouldn't. The only things I advocate are (a) understanding of the various investment choices and their inherent risks, and (b) mutual respect among people who make different choices.
It sounds like you chose an appropriate asset allocation based on your own risk tolerance. I don't think anyone here believes that's a bad idea.

The question is: do you significantly alter your asset allocation in anticipation of what you think the market will do in the near future? That's the part that many here will object to.
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Re: Greater focus on cash in this environment: opinions?

Post by HanSolo »

climber2020 wrote: Wed Sep 15, 2021 2:29 pm It sounds like you chose an appropriate asset allocation based on your own risk tolerance. I don't think anyone here believes that's a bad idea.

The question is: do you significantly alter your asset allocation in anticipation of what you think the market will do in the near future? That's the part that many here will object to.
The short answer is no, I don't make any predictions about the future (except for fun, like the Bogleheads Contest). I alter my asset allocation based on present conditions, specifically, how much downside risk is currently in the market (which I estimate to be the difference between current prices and going to half the medians of the valuation metrics I mentioned... which, as I posted, currently suggests being prepared for a potential downside of 75%). Then I don't keep more in stocks than I'm willing to lose in the pessimistic scenario. That doesn't mean I expect the pessimistic scenario to materialize, only that it's a risk.

Some people follow the suggestion in the wiki that I quoted (being prepared for 50% downside in stocks). I'm not saying they're wrong, just that I choose to adjust the 50% figure according to valuation. Basically, I don't know why I'd use the 50% number when valuations are at half their median levels, and also use 50% when valuations are at double the median levels. So I choose to adjust it.

Again, I'm not claiming one risk management approach is right and another is wrong. It's just a different choice.
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Re: Greater focus on cash in this environment: opinions?

Post by Jazztonight »

whereskyle wrote: Tue Sep 14, 2021 7:09 pm If you're feeling fear, the right thing to do is to look at your asset allocation. Is it too stock heavy? If you're not ready to see your equity position cut in half without panicking, then you're holding too much in stocks. The key is to develop an asset allocation that enables you to invest your chosen amount at the same time every time no matter what. If you can't do that, you need to look at your asset allocation rather than attempt to time the market.
+1
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Re: Greater focus on cash in this environment: opinions?

Post by retired@50 »

1789 wrote: Wed Sep 15, 2021 12:56 pm
retired@50 wrote: Tue Sep 14, 2021 7:04 pm I'm not adding to my cash position, but after reading "How I Invest My Money", I've practically given up on trying to convince anyone of anything.

See link for more about the book: https://www.goodreads.com/book/show/550 ... PSb&rank=1

Some of the contributors to the book have what I would call unbelievably silly portfolios, but hey, they're in the business, so what do I know?

Regards,
Can you elaborate more? I haven't read this book yet.
The book is a collection of essays by "financial professionals" of one form or another. Some of them are bloggers, some have started small investment advisory firms, etc. Others work for Morningstar or places that you've heard of. I think there were a total of around 20+ contributing authors and probably less than 5 of them held "Boglehead style" portfolios that made any kind of sense to me. Many of them were taking what I would consider risky positions, or investing in things that I didn't understand. Much of the "why" they invest the way they do has to do with their own personal circumstances, whether they came from a poor household, or a well-off one, and which direction they've taken, once they became involved in the financial industry. Some of them were trying to make their portfolio a statement about social issues, etc.

If you can snag a free loaner copy from your local library, I'd do that before buying a copy.

Regards,
This is one person's opinion. Nothing more.
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Re: Greater focus on cash in this environment: opinions?

Post by placeholder »

I'm not holding more cash and really my stable value fund is exceeding most cash investments with only a small degree more of risk so if I did anything it would be to shift some of my bond index to stable value (currently 50/50).
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Re: Greater focus on cash in this environment: opinions?

Post by ruralavalon »

But here's my question: does deciding to let more cash savings accumulate when valuations are high really deserve to be derided as "timing the market"? . . . . .

So instead of defaulting to index investing with all income left over after expenses, with a small allowance for fixed income and cash, what if the standard were instead a default mainly to cash....then to be deployed (and deployed in an aggressive way) only when something were to look appealing or at least more reasonable?
Yes, what you describe is market timing.

The old wisdom was not "defaulting to [stock] index investing with all income left over after expenses, with a small allowance for fixed income and cash".

The old and current wisdom is a reasonable asset allocation of stocks/fixed income based on your own individual ability, willingness and need to take risk, considering age, time to retirement, pension eligibility and other facts.

Asset allocation is a very personal decision and is very fact-sensitive.

Often that could be a substantial allocation to fixed income, often 40-60% fixed income when in or nearing retirement.

Fixed income can include cash and cash-like funds. Currently cash can be a good choice to diversify stock investments. Morningstar (4/13/2021), "Which Bonds Provide the Biggest Diversification Benefits?", link. ". . . it's worth noting that patterns of diversification benefits aren't static. Cash has recently looked nearly as effective as a diversifier as Treasuries, possibly because Treasury and cash yields are both so low." Please see the correlation matrix, T-bills had the highest negative correlation to the stock market.
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Re: Greater focus on cash in this environment: opinions?

Post by whodidntante »

Stocks are always risky. They don't just feel risky, but they actually are risky, always. Here's the investor's struggle:
If the market had gone down or been flat => Why would I buy that? It's too risky and the performance is terrible!
If the market had gone up => Why would I buy that? It's too expensive and it's gonna crash!

There is no reason why you have to exclusively buy one of the world's most expensive markets. Buy markets that have seen less valuation expansion, or buy a global stock portfolio so you don't only own expensive stocks. If you still can't convince yourself to do that, your risk tolerance might not be what you think it is.

My guess is you'll have more money 30 years from now if you buy as soon as you can rather than if you hold cash and try to find good entry points. But I don't know. Maybe the big doom cloud will move over and eat our lunch.

There is always someone with a portfolio that outperformed yours. Unless you held 100% bitcoin. But don't buy now. It's too expensive and it's gonna crash! :twisted:
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Re: Greater focus on cash in this environment: opinions?

Post by bltn »

HanSolo wrote: Wed Sep 15, 2021 2:56 pm
climber2020 wrote: Wed Sep 15, 2021 2:29 pm It sounds like you chose an appropriate asset allocation based on your own risk tolerance. I don't think anyone here believes that's a bad idea.

The question is: do you significantly alter your asset allocation in anticipation of what you think the market will do in the near future? That's the part that many here will object to.
The short answer is no, I don't make any predictions about the future (except for fun, like the Bogleheads Contest). I alter my asset allocation based on present conditions, specifically, how much downside risk is currently in the market (which I estimate to be the difference between current prices and going to half the medians of the valuation metrics I mentioned... which, as I posted, currently suggests being prepared for a potential downside of 75%). Then I don't keep more in stocks than I'm willing to lose in the pessimistic scenario. That doesn't mean I expect the pessimistic scenario to materialize, only that it's a risk.

Some people follow the suggestion in the wiki that I quoted (being prepared for 50% downside in stocks). I'm not saying they're wrong, just that I choose to adjust the 50% figure according to valuation. Basically, I don't know why I'd use the 50% number when valuations are at half their median levels, and also use 50% when valuations are at double the median levels. So I choose to adjust it.

Again, I'm not claiming one risk management approach is right and another is wrong. It's just a different choice.
I ve been a dollar cost average investor into index funds for the last 30 years. I paid no attention to market corrections in about 2001 and 2009. I just continued to periodically invest in the market. My casual observations were that when the s&p p/e ratio got past 25, a correction followed reducing the ratio to 15-20. With the current p/e ratio at 35, I m motivated to make a move with my asset allocation I ve been considering for some time. Being recently retired and needing no further growth to fund my retirement, I would like to reduce my stock allocation from 65% to 55%. My problem is I have limited stock investment remaining in my tax deferred accounts. Sales of index funds would push me well into the next tax bracket. And this would cancel my intended transfer from my IRA to my Roth.

I believe that paying too much is not a good idea for any purchase I make. The stock market , with current valuations, seems to fall into that situation. At least, if you believe, as I do, in Jack Bogle s teaching of market reversion to the mean.

I m probably going to sell some stock investments.
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Re: Greater focus on cash in this environment: opinions?

Post by placeholder »

bltn wrote: Thu Sep 16, 2021 9:36 am I ve been a dollar cost average investor into index funds for the last 30 years. I paid no attention to market corrections in about 2001 and 2009. I just continued to periodically invest in the market.
That's not what's meant by dca in this context but rather holding a large amount of cash and putting equal amounts of that into the market at regular intervals.
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Re: Greater focus on cash in this environment: opinions?

Post by Caduceus »

I think some Bogleheads can get too dogmatic about market timing in relation to cash holdings. Hypothetically, if the stock market were trading at 200 times earnings, holding cash would be preferable to owning the market. So there is some theoretical point at which holding cash will turn out, over the short or medium term, to have been the superior strategy. It is certainly debatable whether this point has been reached with the market at 30x or 40x earnings (the shiller CAPE is 38), but I think good arguments can be advanced for holding cash.

After all, stocks are simply fractional interests in businesses. In real life, if you were to overpay for a business, you know for a fact your returns are going to be lower going forward. Business people see this all the time, right?

Cash is a universal put option on all assets at current prices, which means that its value increases when assets are expensive and decreases when alternative investment opportunities are cheap.

I am not invested at all in the market index at current valuations. 67% of my portfolio is in one stock, 5% in another stock, and 28% in cash. I don't feel more comfortable owning a market index just because it's "diversified" because I don't think that means it's less risky (the way I define risk, which is not volatility, but failure to reach my investment goals, or permanent impairment of capital)
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Re: Greater focus on cash in this environment: opinions?

Post by 000 »

Caduceus wrote: Fri Sep 17, 2021 12:56 am 67% of my portfolio is in one stock
:shock:

And I thought I was a heterodox boglehead....

Is it BRK?
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Re: Greater focus on cash in this environment: opinions?

Post by Caduceus »

000 wrote: Fri Sep 17, 2021 1:22 am
Caduceus wrote: Fri Sep 17, 2021 12:56 am 67% of my portfolio is in one stock
:shock:

And I thought I was a heterodox boglehead....

Is it BRK?
No. I would rather buy BRK than the US stock market, but I don't own either.
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Re: Greater focus on cash in this environment: opinions?

Post by 000 »

Caduceus wrote: Fri Sep 17, 2021 1:27 am No. I would rather buy BRK than the US stock market, but I don't own either.
You've piqued my curiosity. Would you mind sharing what two stocks you own?
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Re: Greater focus on cash in this environment: opinions?

Post by radR investing »

Caduceus wrote: Fri Sep 17, 2021 12:56 am I think some Bogleheads can get too dogmatic about market timing in relation to cash holdings. Hypothetically, if the stock market were trading at 200 times earnings, holding cash would be preferable to owning the market. So there is some theoretical point at which holding cash will turn out, over the short or medium term, to have been the superior strategy. It is certainly debatable whether this point has been reached with the market at 30x or 40x earnings (the shiller CAPE is 38), but I think good arguments can be advanced for holding cash.

After all, stocks are simply fractional interests in businesses. In real life, if you were to overpay for a business, you know for a fact your returns are going to be lower going forward. Business people see this all the time, right?

Cash is a universal put option on all assets at current prices, which means that its value increases when assets are expensive and decreases when alternative investment opportunities are cheap.

I am not invested at all in the market index at current valuations. 67% of my portfolio is in one stock, 5% in another stock, and 28% in cash. I don't feel more comfortable owning a market index just because it's "diversified" because I don't think that means it's less risky (the way I define risk, which is not volatility, but failure to reach my investment goals, or permanent impairment of capital)
I share your philosophy to some extent. I also look at investments as business ownership. I am a part owner in six amazing businesses, all demonstrating strong double-digit growth in revenue, earnings, and free cash flow. The free cash flow will get them through any potential downturn. I also only own companies that have a strong AI component to their business model, and provide a platform for their industry going forward (yes, I am fortunate to understand technology and its potential impact on industry ecosystems).

I have a solo401k and deposit that money twice a year. I let it accumulate until I see an opportunity to buy a quality company at a good price. For example, I used that 401k cash to invest in Tesla when it was announced that it would be included in the S&P500 - purchased at $453 and currently at $750. I also 'took a chance' with this year's cash in my 401k to invest in Lucid. This is a departure from my free cash flow/rev growth/earnings growth model, but it is less than 1.5% of my portfolio so I was okay doing this. I did this because the lockout period ended and the stock price dropped significantly - another opportune time to buy an interest in a business.

Am I diversified enough? Not by most people's standards, but 'my businesses' span multiple sectors (technology, communication services, consumer discretionary, financial, energy) so I sleep very well at night.
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Re: Greater focus on cash in this environment: opinions?

Post by Ed 2 »

Do you know why celebrities making most money after their death? Because they do nothing. Stay the course, make a plan and never look back.
P.S. we always keep the second cash account for buying opportunities/ unexpected expenses/ emergency’s. Enough to pay our bills for at list 6 months without tapping our Investments’s. Everything else goes to equity funds and ETFs.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
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