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Cash the side line has been a great allocation for this whole year. As the mantra goes, don’t fight the fed.

by tmn 4y ago

throw0101c 4y ago
The problem is getting out before things drop, and getting back in when the drop is "over": * https://awealthofcommonsense.com/2018/10/the-psychology-of-sitting-in-cash-part-deux/ https://awealthofcommonsense.com/2018/10/the-psychology-of-s... By sitting in cash you're also losing money through inflation: * https://ofdollarsanddata.com/the-cost-of-waiting/ https://ofdollarsanddata.com/the-cost-of-waiting/ At the end of the day you should always be invested, and if you're worried about market undulations then you should own some bonds. And besides reducing gyrations, bonds give another advantage: a source of 'dry powder'. If stocks get "too high" you rebalance by selling off some equities and buying bonds to 'lock in' the returns. When stocks drop you rebalance again by selling off bonds and 'buying low' in equities. Bonds/diversification can really help returns: * https://www.forbes.com/sites/investor/2010/12/17/the-lost-decade-was-a-golden-age-if-you-rebalanced/ https://www.forbes.com/sites/investor/2010/12/17/the-lost-de... At least in Canada you can get "all-in-one" ETFs that do this rebalancing automatically: * https://www.youngandthrifty.ca/picking-the-best-all-in-one-etfs-canada/ https://www.youngandthrifty.ca/picking-the-best-all-in-one-e...
- dragontamer 4y ago
  > By sitting in cash you're also losing money through inflation: Also by sitting in Stocks, you not only lost 20% this year, but also 9% due to inflation for a total loss of ~30%+. Cash is cash. It gets the job done. I'm not saying go 100% cash btw, but it has its place in this time of uncertainty. You cannot buy the dip if you're 100% invested, you have to be holding cash. --------- I suggest holding 10% cash and rebalancing as needed. As the market goes up, you naturally sell stocks for more cash. As the market goes down, you naturally sell cash to buy more stock. This stabilizes the portfolio significantly.
  - quesera 4y ago
    > Also by sitting in Stocks, you not only lost 20% this year, but also 9% due to inflation for a total loss of ~30%+. But if you sold the stocks, you would have taken an immediate tax hit of ~20-35%, and you would have to time the bottom to get back in. So, it's not at all clear that getting out makes sense. Depends on the depth of the decline, and that is unknowable.
    - remote_phone 4y ago
      Only on the profits, if you even have it.
    - dragontamer 4y ago
      Surely you have some cost-basis lot where selling just 10% of your portfolio results in a capital loss (ie: a tax _break_) if you were going to switch into Cash today. > you would have to time the bottom to get back in. Nah, you just rebalance at 10%.
- czbond 4y ago
  Think of cash as a call option premium for being able to buy future investments at a lower price. People tout the "cash loses to inflation" mantra as an absolute - they forget that in large market downturns, cash availability compresses while assets become in greatly less demand. So cash being available when everyone desperately needs it, but few have it, gives cash a value explodes on a opportunity basis for a window of time.
- richliss 4y ago
  If you cut early and miss the top 5% of profits then buy back in at 5% above the bottom when it rebounds you'll do pretty well.
  - pzs 4y ago
    That sounds great in theory, but you can't implement it in practice. It's often easy in hindsight to identify where are those suboptimal 5%-away-from-perfect-timing points where you should have done a rebalancing, but we have no idea how close we are to the next peak/trough.
    - opportune 4y ago
      It was very easy to identify as it happened, when inflation hit 8% while rates were at 0% and unemployment was at like 4%.
      - UncleMeat 4y ago
        You also have to get back in at the right time. A lot of people called that the market would drop in March 2020. But how many realized that by August, long before vaccines were in sight, that the market wouldn't go below the pre-covid peak again? Somebody who sells in March and then buys in October loses a lot.
  - throw0101c 4y ago
    If you try to miss the bad/worst days you'll probably miss the best days: * https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/ https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-... * https://aaiila.org/wp-content/uploads/2020/05/Tuchman-Best-and-Worst-Days.pdf https://aaiila.org/wp-content/uploads/2020/05/Tuchman-Best-a... * https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html https://www.capitalgroup.com/individual/planning/investing-f... * https://www.cnbc.com/2021/03/24/this-chart-shows-why-investors-should-never-try-to-time-the-stock-market.html https://www.cnbc.com/2021/03/24/this-chart-shows-why-investo...
- opportune 4y ago
  By keeping your stocks you lost your money to inflation too, and then another 20+% because you held through a bubble pop. I think a lot of the personal finance investing advice given to people in the vein of “solid advice for 90% of people to follow without too much expertise” is becoming some weird dogmatic religion. You must never time the market (even at a loose monetary policy induced bubble), you must always hold total market/sp500 ETFs (even when they’re filled with overpriced companies), you should diversify into bonds (the most garbage asset class available for the past 20 years, until the last 6 months, when they became only partially garbage). This advice has gone from being labeled as generalist advice with asterisks, through many rounds of telephone, to now being something that invites angry replies if you disagree with it.
  - throw0101c 4y ago
    > By keeping your stocks you lost your money to inflation too, and then another 20+% because you held through a bubble pop. By holding stocks and not selling you have lost nothing: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... "Losses" only occur when you lock them in. If your trading account is down now you have lost nothing—just like you haven't made money until you sell your holdings for cash. * https://www.investopedia.com/terms/c/crystallization.asp https://www.investopedia.com/terms/c/crystallization.asp
    - senko 4y ago
      To the downvoters: this is correct. Marking to market (looking at unrealized losses or gains, ie. the value of your portfolio before you sell) is useful if you trade on margin, use this as a collateral (borrowed against it), or plan to sell soon. In all these cases, this is because you need to sell (directly or indirectly) and thus lock in whatever the current value is. But until you sell, you have no actual (realized) loss (or gain).

Cash the side line has been a great allocation for this whole year. As the mantra goes, don’t fight the fed.

by tmn 4y ago

Cash the side line has been a great allocation for this whole year. As the mantra goes, don’t fight the fed.

The problem is getting out before things drop, and getting back in when the drop is "over": * https://awealthofcommonsense.com/2018/10/the-psychology-of-sitting-in-cash-part-deux/ https://awealthofcommonsense.com/2018/10/the-psychology-of-s... By sitting in cash you're also losing money through inflation: * https://ofdollarsanddata.com/the-cost-of-waiting/ https://ofdollarsanddata.com/the-cost-of-waiting/ At the end of the day you should always be invested, and if you're worried about market undulations then you should own some bonds. And besides reducing gyrations, bonds give another advantage: a source of 'dry powder'. If stocks get "too high" you rebalance by selling off some equities and buying bonds to 'lock in' the returns. When stocks drop you rebalance again by selling off bonds and 'buying low' in equities. Bonds/diversification can really help returns: * https://www.forbes.com/sites/investor/2010/12/17/the-lost-decade-was-a-golden-age-if-you-rebalanced/ https://www.forbes.com/sites/investor/2010/12/17/the-lost-de... At least in Canada you can get "all-in-one" ETFs that do this rebalancing automatically: * https://www.youngandthrifty.ca/picking-the-best-all-in-one-etfs-canada/ https://www.youngandthrifty.ca/picking-the-best-all-in-one-e...

dragontamer 4y ago
> By sitting in cash you're also losing money through inflation: Also by sitting in Stocks, you not only lost 20% this year, but also 9% due to inflation for a total loss of ~30%+. Cash is cash. It gets the job done. I'm not saying go 100% cash btw, but it has its place in this time of uncertainty. You cannot buy the dip if you're 100% invested, you have to be holding cash. --------- I suggest holding 10% cash and rebalancing as needed. As the market goes up, you naturally sell stocks for more cash. As the market goes down, you naturally sell cash to buy more stock. This stabilizes the portfolio significantly.
- quesera 4y ago
  > Also by sitting in Stocks, you not only lost 20% this year, but also 9% due to inflation for a total loss of ~30%+. But if you sold the stocks, you would have taken an immediate tax hit of ~20-35%, and you would have to time the bottom to get back in. So, it's not at all clear that getting out makes sense. Depends on the depth of the decline, and that is unknowable.
  - remote_phone 4y ago
    Only on the profits, if you even have it.
  - dragontamer 4y ago
    Surely you have some cost-basis lot where selling just 10% of your portfolio results in a capital loss (ie: a tax _break_) if you were going to switch into Cash today. > you would have to time the bottom to get back in. Nah, you just rebalance at 10%.
czbond 4y ago
Think of cash as a call option premium for being able to buy future investments at a lower price. People tout the "cash loses to inflation" mantra as an absolute - they forget that in large market downturns, cash availability compresses while assets become in greatly less demand. So cash being available when everyone desperately needs it, but few have it, gives cash a value explodes on a opportunity basis for a window of time.
richliss 4y ago
If you cut early and miss the top 5% of profits then buy back in at 5% above the bottom when it rebounds you'll do pretty well.
- pzs 4y ago
  That sounds great in theory, but you can't implement it in practice. It's often easy in hindsight to identify where are those suboptimal 5%-away-from-perfect-timing points where you should have done a rebalancing, but we have no idea how close we are to the next peak/trough.
  - opportune 4y ago
    It was very easy to identify as it happened, when inflation hit 8% while rates were at 0% and unemployment was at like 4%.
    - UncleMeat 4y ago
      You also have to get back in at the right time. A lot of people called that the market would drop in March 2020. But how many realized that by August, long before vaccines were in sight, that the market wouldn't go below the pre-covid peak again? Somebody who sells in March and then buys in October loses a lot.
- throw0101c 4y ago
  If you try to miss the bad/worst days you'll probably miss the best days: * https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/ https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-... * https://aaiila.org/wp-content/uploads/2020/05/Tuchman-Best-and-Worst-Days.pdf https://aaiila.org/wp-content/uploads/2020/05/Tuchman-Best-a... * https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html https://www.capitalgroup.com/individual/planning/investing-f... * https://www.cnbc.com/2021/03/24/this-chart-shows-why-investors-should-never-try-to-time-the-stock-market.html https://www.cnbc.com/2021/03/24/this-chart-shows-why-investo...
opportune 4y ago
By keeping your stocks you lost your money to inflation too, and then another 20+% because you held through a bubble pop. I think a lot of the personal finance investing advice given to people in the vein of “solid advice for 90% of people to follow without too much expertise” is becoming some weird dogmatic religion. You must never time the market (even at a loose monetary policy induced bubble), you must always hold total market/sp500 ETFs (even when they’re filled with overpriced companies), you should diversify into bonds (the most garbage asset class available for the past 20 years, until the last 6 months, when they became only partially garbage). This advice has gone from being labeled as generalist advice with asterisks, through many rounds of telephone, to now being something that invites angry replies if you disagree with it.
- throw0101c 4y ago
  > By keeping your stocks you lost your money to inflation too, and then another 20+% because you held through a bubble pop. By holding stocks and not selling you have lost nothing: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... "Losses" only occur when you lock them in. If your trading account is down now you have lost nothing—just like you haven't made money until you sell your holdings for cash. * https://www.investopedia.com/terms/c/crystallization.asp https://www.investopedia.com/terms/c/crystallization.asp
  - senko 4y ago
    To the downvoters: this is correct. Marking to market (looking at unrealized losses or gains, ie. the value of your portfolio before you sell) is useful if you trade on margin, use this as a collateral (borrowed against it), or plan to sell soon. In all these cases, this is because you need to sell (directly or indirectly) and thus lock in whatever the current value is. But until you sell, you have no actual (realized) loss (or gain).