Is it smart to hold more cash right now?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
TheBogleWay
Posts: 154
Joined: Mon Dec 05, 2016 9:04 pm

Is it smart to hold more cash right now?

Post by TheBogleWay » Thu Oct 11, 2018 12:23 am

I'm not entirely sure if this falls under the "market timing" umbrella, however a lot of posters here (even those who stay the course) agree that valuations are high.

I'm very heavy in stocks and US stocks and they're so high right now, I'm wondering if it would be smart to increase my "emergency fund" by a few months temporarily, as in hold a bit more cash right now.

Any thoughts on this?

User avatar
steve321
Posts: 195
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Is it smart to hold more cash right now?

Post by steve321 » Thu Oct 11, 2018 12:39 am

TheBogleWay wrote:
Thu Oct 11, 2018 12:23 am
I'm not entirely sure if this falls under the "market timing" umbrella, however a lot of posters here (even those who stay the course) agree that valuations are high.

I'm very heavy in stocks and US stocks and they're so high right now, I'm wondering if it would be smart to increase my "emergency fund" by a few months temporarily, as in hold a bit more cash right now.

Any thoughts on this?
personally I think it's smart to use one's cash to buy more stocks now; look at it this way: they're 3%-4% cheaper than yesterday depending on which market we are talking about.
At least that's what I'm doing this morning :happy

User avatar
JoMoney
Posts: 5821
Joined: Tue Jul 23, 2013 5:31 am

Re: Is it smart to hold more cash right now?

Post by JoMoney » Thu Oct 11, 2018 12:49 am

For myself, I wouldn't sell any stocks with the expectation that someone else will sell them back to me cheaper down the road.
I do think having an 'emergency fund' of cash/bonds to help you sleep at night knowing your short-term expenses are covered and it doesn't matter what the stock market is doing is worthwhile.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

McGilicutty
Posts: 149
Joined: Tue Dec 13, 2016 5:24 pm

Re: Is it smart to hold more cash right now?

Post by McGilicutty » Thu Oct 11, 2018 1:04 am

First, I'm not a true boglehead. I sometimes own individual stocks. I sometimes engage in market timing. I don't own any bonds. My current allocation is 87% U.S. stock index ETFs and 13% cash.

With that being said, if you are feeling uncomfortable with your stock allocation, then I think it's wise to raise some cash to make yourself feel more comfortable with your allocations. That doesn't mean it's going to be the 'right' thing to do. For example, you could sell off 5% of your stocks tomorrow and the market could then go up 10% next week.

U.S. stocks are only down about 6% from their highs. So although it would have been great if you could have raised that cash 6% ago, you are still not that far away from all-time highs.

I say, do what makes you feel comfortable. If you are uncomfortable with your current stock allocation, then raise cash. However, also think about what you will do if the market goes up. Are you going to get back in? If so, when (after some percentage increase, after some amount of time, etc.)?

Even if you raise cash and the market goes up, the stock allocation you have left is still going to make money. You will just be losing the opportunity cost of that raised cash that could have been in the market.

smectym
Posts: 214
Joined: Thu May 26, 2011 5:07 pm

Re: Is it smart to hold more cash right now?

Post by smectym » Thu Oct 11, 2018 1:05 am

steve321 wrote:
Thu Oct 11, 2018 12:39 am
TheBogleWay wrote:
Thu Oct 11, 2018 12:23 am
I'm not entirely sure if this falls under the "market timing" umbrella, however a lot of posters here (even those who stay the course) agree that valuations are high.

I'm very heavy in stocks and US stocks and they're so high right now, I'm wondering if it would be smart to increase my "emergency fund" by a few months temporarily, as in hold a bit more cash right now.

Any thoughts on this?
personally I think it's smart to use one's cash to buy more stocks now; look at it this way: they're 3%-4% cheaper than yesterday depending on which market we are talking about.
At least that's what I'm doing this morning :happy
No problem with the buy the dip strategy...once it’s clear the selling is exhausted. Of course if the selling isn’t exhausted, buying the dip is, um, what? Premature.

But to OP: there are many good reasons for holding a healthy cash position. One such reason is that cash nominally doesn’t go down, unlike both stocks and bonds. Plus with today’s flat yield curve you’re not really being rewarded for taking on longer dated debt with its associated risk. I think a good argument could be made to fill out the “bond allocation” in one’s portfolio today with nothing but cash (preferably in funds invested in treasury bills) and treasuries out to the 2-year.

I would also remark that if your portfolio is stock-heavy and cash-poor, it can do no harm to follow your instincts and raise some cash. These days cash even offers some yield again, and if Fed Chair Powell follows through on what he says the plan is, the risk-free yield may continue to rise.

Smectym

User avatar
steve321
Posts: 195
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Is it smart to hold more cash right now?

Post by steve321 » Thu Oct 11, 2018 1:25 am

smectym wrote:
Thu Oct 11, 2018 1:05 am


No problem with the buy the dip strategy...once it’s clear the selling is exhausted. Of course if the selling isn’t exhausted, buying the dip is, um, what? Premature.

I agree with that, the way I deal with this is by thinking that I am still better off than if I had bought last week. In fact I bought 20K worth of small caps on Tuesday, then yesterday they fell further and I bought a lot more, whilst telling myself that in any case I was a lot better off than those who had bought them last week.

User avatar
Earl Lemongrab
Posts: 5403
Joined: Tue Jun 10, 2014 1:14 am

Re: Is it smart to hold more cash right now?

Post by Earl Lemongrab » Thu Oct 11, 2018 1:33 am

Interesting that I can use the same answer as in the thread about loading up on stocks:

I don't market time, and I don't have "cash reserves". I do have an IPS that specifies that I rebalance when certain criteria are met (5/25 rules).
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

User avatar
CaliJim
Posts: 2982
Joined: Sun Feb 28, 2010 8:47 pm
Location: California, near the beach

Re: Is it smart to hold more cash right now?

Post by CaliJim » Thu Oct 11, 2018 1:37 am

Earl Lemongrab wrote:
Thu Oct 11, 2018 1:33 am
Interesting that I can use the same answer as in the thread about loading up on stocks:

I don't market time, and I don't have "cash reserves". I do have an IPS that specifies that I rebalance when certain criteria are met (5/25 rules).
Hi Earl,

this is the correct approach. when do you make lemonaid?
-calijim- | | For more info, click this Wiki

User avatar
Earl Lemongrab
Posts: 5403
Joined: Tue Jun 10, 2014 1:14 am

Re: Is it smart to hold more cash right now?

Post by Earl Lemongrab » Thu Oct 11, 2018 1:41 am

CaliJim wrote:
Thu Oct 11, 2018 1:37 am
Earl Lemongrab wrote:
Thu Oct 11, 2018 1:33 am
Interesting that I can use the same answer as in the thread about loading up on stocks:

I don't market time, and I don't have "cash reserves". I do have an IPS that specifies that I rebalance when certain criteria are met (5/25 rules).
Hi Earl,

this is the correct approach. when do you make lemonaid?
Lemon need not squeeze lemon to survive.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

smectym
Posts: 214
Joined: Thu May 26, 2011 5:07 pm

Re: Is it smart to hold more cash right now?

Post by smectym » Thu Oct 11, 2018 1:53 am

steve321 wrote:
Thu Oct 11, 2018 1:25 am
smectym wrote:
Thu Oct 11, 2018 1:05 am


No problem with the buy the dip strategy...once it’s clear the selling is exhausted. Of course if the selling isn’t exhausted, buying the dip is, um, what? Premature.

I agree with that, the way I deal with this is by thinking that I am still better off than if I had bought last week. In fact I bought 20K worth of small caps on Tuesday, then yesterday they fell further and I bought a lot more, whilst telling myself that in any case I was a lot better off than those who had bought them last week.
steve321, good luck and I think your tactics may pay off.

One day, we’re told, “buy the dip” won’t work because the dip will turn out to be merely the initial slalom in a vertiginous slide that will crash through SPX 666. Ouch. Hope not this week.

Smectym

User avatar
steve321
Posts: 195
Joined: Sat Sep 09, 2017 9:16 am
Location: Southampton, UK

Re: Is it smart to hold more cash right now?

Post by steve321 » Thu Oct 11, 2018 1:59 am

smectym wrote:
Thu Oct 11, 2018 1:53 am
steve321 wrote:
Thu Oct 11, 2018 1:25 am
smectym wrote:
Thu Oct 11, 2018 1:05 am


No problem with the buy the dip strategy...once it’s clear the selling is exhausted. Of course if the selling isn’t exhausted, buying the dip is, um, what? Premature.

I agree with that, the way I deal with this is by thinking that I am still better off than if I had bought last week. In fact I bought 20K worth of small caps on Tuesday, then yesterday they fell further and I bought a lot more, whilst telling myself that in any case I was a lot better off than those who had bought them last week.
steve321, good luck and I think your tactics may pay off.

One day, we’re told, “buy the dip” won’t work because the dip will turn out to be merely the initial slalom in a vertiginous slide that will crash through SPX 666. Ouch. Hope not this week.

Smectym
Yes I know that, but this will also equally damage all buy and hold investors - in fact it will damage them more because they bought before the dip, so at an even higher price relative to the market bottom.
Anyway I needed to add a couple of100K to stocks to bring my AA in line with my plan, so I think it's a good time to do it now.

User avatar
CaliJim
Posts: 2982
Joined: Sun Feb 28, 2010 8:47 pm
Location: California, near the beach

Re: Is it smart to hold more cash right now?

Post by CaliJim » Thu Oct 11, 2018 2:03 am

i like having a little extra cash. not for 'corrections' but because it reduces volatility and keeps me from worrying too much about little ups and downs.
-calijim- | | For more info, click this Wiki

smectym
Posts: 214
Joined: Thu May 26, 2011 5:07 pm

Re: Is it smart to hold more cash right now?

Post by smectym » Thu Oct 11, 2018 2:09 am

steve321 wrote:
Thu Oct 11, 2018 1:59 am
smectym wrote:
Thu Oct 11, 2018 1:53 am
steve321 wrote:
Thu Oct 11, 2018 1:25 am
smectym wrote:
Thu Oct 11, 2018 1:05 am


No problem with the buy the dip strategy...once it’s clear the selling is exhausted. Of course if the selling isn’t exhausted, buying the dip is, um, what? Premature.

I agree with that, the way I deal with this is by thinking that I am still better off than if I had bought last week. In fact I bought 20K worth of small caps on Tuesday, then yesterday they fell further and I bought a lot more, whilst telling myself that in any case I was a lot better off than those who had bought them last week.
steve321, good luck and I think your tactics may pay off.

One day, we’re told, “buy the dip” won’t work because the dip will turn out to be merely the initial slalom in a vertiginous slide that will crash through SPX 666. Ouch. Hope not this week.

Smectym
Yes I know that, but this will also equally damage all buy and hold investors - in fact it will damage them more because they bought before the dip, so at an even higher price relative to the market bottom.
Anyway I needed to add a couple of100K to stocks to bring my AA in line with my plan, so I think it's a good time to do it now.
“...this will equally damage all buy and hold investors—in fact it will damage them more...”

You’re exactly correct. “Buy and hold” works wonders in many market scenarios, but the complacent investor who believes that’s the magic sauce 100% of the time may live to regret.

We hear a lot about “staying the course” and “tuning out the noise.” But when the smoke alarm goes off at 2:30 AM, rare as that event may be, tuning out the noise isn’t the best strategy.

Smectym

NYCwriter
Posts: 182
Joined: Thu Sep 17, 2015 12:46 am

Re: Is it smart to hold more cash right now?

Post by NYCwriter » Thu Oct 11, 2018 2:21 am

Setting aside the fact that the market dropped quite a bit yesterday....

It's never a bad idea to have safe reserves, especially if you are heavy in equities. I make the distinction between an "emergency fund" and "investable" cash. The emergency fund Is a sacred cow. It's not really dry powder for buying on the dip. It's there if I need to cover living expenses or emergency expenses (medical, etc) for a period of time. How much you need depends on your age and situation.

Right now I have more "investable" cash in an interest-bearing money market fund that would normally be in bond funds. I've been adding more of this to short treasuries recently, and with both bonds and equities dropping recently, I have some to add to these funds.

Holding more cash because you think the market will sour may not work, since we don't know what will happen. If you think you're too heavy in equities, then it's really about your allocation and risk. Not an emergency fund, but a portion that exists in a safe income vehicle (CDs, MM, bonds).

Nissanzx1
Posts: 250
Joined: Wed Jul 18, 2018 11:13 pm

Re: Is it smart to hold more cash right now?

Post by Nissanzx1 » Thu Oct 11, 2018 2:32 am

NYCwriter wrote:
Thu Oct 11, 2018 2:21 am
Setting aside the fact that the market dropped quite a bit yesterday....

It's never a bad idea to have safe reserves, especially if you are heavy in equities. I make the distinction between an "emergency fund" and "investable" cash. The emergency fund Is a sacred cow. It's not really dry powder for buying on the dip. It's there if I need to cover living expenses or emergency expenses (medical, etc) for a period of time. How much you need depends on your age and situation.

Right now I have more "investable" cash in an interest-bearing money market fund that would normally be in bond funds. I've been adding more of this to short treasuries recently, and with both bonds and equities dropping recently, I have some to add to these funds.

Holding more cash because you think the market will sour may not work, since we don't know what will happen. If you think you're too heavy in equities, then it's really about your allocation and risk. Not an emergency fund, but a portion that exists in a safe income vehicle (CDs, MM, bonds).
+1 on the sacred cow. Everyone will have different tolerances and some here carry no debt- while others owe millions. All things being equal, if you have an emergency fund of six months expenses, housing stable or payed for- continue to buy. However, if you feel that things are overvalued, you can always sit on cash and wait and see. We really don't know yet if this is the top. Things will be jittery in the USA through the midterm elections I believe.

User avatar
nisiprius
Advisory Board
Posts: 36637
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Is it smart to hold more cash right now?

Post by nisiprius » Thu Oct 11, 2018 5:36 am

The fact that the market dropped 3% yesterday is a bad reason to increase your cash holdings. The fact that you want to do it "for a few months, temporarily" is another indication that this is a bad move. Finally, the reason that you have chosen "cash" rather than "bonds" is interesting and needs to be examined.

The daily standard deviation of the S&P 500 is about 1%. So a 3% drop in one day is only a "three-sigma event." Even on the face of it, using (oversimplified and inappropriate) Statistics 101 models, it's something you'd expect to happen 0.3% of the time, or about once a year.

The idea that you want to go to cash "for a few months, temporarily" means that you actually have a very precise mental prediction of what you think is going to happen. You believe that the 3% drop is going to be followed by a farther, serious drop (or else you wouldn't need to do anything), and you also believe that it will recover within "a few months." If the stock market does almost anything else, it will have been a bad move.

The stock market moves in strange lurches. If you look at any classic crash or correction, even if it looks smooth on a multiyear chart, it doesn't look smooth if you zoom in on it. Even the wonderful bull market of 2009 to today has had many bumps, during which people seriously thought it was over, such as the -20% correction in 2011. As the stock market is about to open today (October 11th), it is going to react to yesterday. Maybe it will bounce most of the way back. That isn't rare. Maybe it will fall more. That isn't rare, either. Maybe it will seem to have established a new lower level for a while, and then just when you are relaxing suddenly drop more. Maybe it will continue to go "straight up" and you'll feel troubled by having taken cash out and thus profiting less than you might have.

Since a 3% loss in your portfolio is hardly serious enough to imperil your retirement, what has probably happened is that it has made you more aware of what has been true all the time. It has made you aware of how much stocks really do fluctuate.

A good reason for reducing your stock allocation would be if you realized, based on yesterday's move, that you actually are not really comfortable having as much in stocks as you do. If that's the case, it would be rational to cut your stock allocation at a time when the market is still close to its high, but it should be a permanent reduction, not a temporary one.

Finally, if you are going to take your money out of stocks, the question becomes what will you put it into? I don't want to go into this in detail. The best bank CDs you can find are probably just about as good as a bond fund, but low-interest bank accounts probably are not. You should go to cash if you want a truly liquid, rapidly available emergency fund. But, again, if you don't feel comfortable with the size of your emergency fund, you should have done this already and it shouldn't be temporary. If you are just trying to get out of stocks, you ought to have some better reason for choosing "cash" than "because it's not stocks."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
watchnerd
Posts: 1417
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Is it smart to hold more cash right now?

Post by watchnerd » Thu Oct 11, 2018 9:07 am

About 5% of my asset allocation has shifted to cash against my will because of a slow 401k to Rollover IRA transfer that is expected to take 2 weeks to complete....

The funds have already been withdrawn, but not re-appeared in the new account.

My money is floating in the ether somewhere. :?
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

Post Reply