Time To Build Cash?

[TomK]

So I see over on Yahoo finance a "breaking news!" alert: "Treasury to Reach Debt Limit by Mid-October." There's no article to click through to, just the headline. Seems to roughly coincide with an afternoon swoon in the prices of the big indexes.

If congress is about to embark on another round of debt-ceiling debacle grandstanding nonsense, perhaps it is time to build up some cash in anticipation of the bargains we might see as the markets react, once again, to the inability of elected officials to govern?

Tom

[Ok Red]

There are a few things to consider right now...

The federal reserve is buying most of our 10 year bonds. They currently own almost 30% of the outstanding 10 year debt. QE is the largest scale 'science' experiment ever. It has to end sometime (although the Japanese have kept it up for 20 years, but they're happy with a Zombie economy). The Fed is doing the best they can, but we cannot predict the outcome with any degree of certainty. Outcome? Uncertain.

Congress is either unable or unwilling to implement their responsibilities. They have proved this on multiple occasions. I've never seen congress so divided. Outcome? Uncertain.

Obama is getting ready to bomb Syria. Syria is a former Soviet satellite state and they are still closely aligned with Russia. Putin just tweaked Obama's nose during the Snowden issue. Syria is no Iraq of Afghanistan - they have a serious anti air defense system and Russian backing. The Russians are sending Naval forces to the med to counter our moves. We're now playing a nice little game of chicken with the Russians. Outcome? Uncertain.

Maybe I'll miss a giant upside move, but right now I'm 59% cash and 24% individual issue bonds (as long as I don't sell before maturity I get my principal back). I'm good with that. I'll think about adding to my new DGI portfolio in a month or so. Until then, I'll sit back and watch these events unfold...

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Oh... I'm not advocating liquidating existing positions based on current events, especially if you have a longer time horizon. I'm in the middle of revamping my portfolio and choose to wait until the clouds dissipate a bit before I redeploy assets. There may be a buying opportunity up the road a bit....

[Kerim]

Great post, Ok Rd.

I certainly don't wish any of those ills on the world, but if there is a bunch of turmoil coming. I will be watching closely for, and even welcoming, irrational short-term reactions from the market. Time to dust off those shopping lists, friends!

(Indeed, I may buy some today, if the morning futures are any indication. Wathcing KO, PM, and TGT, especially right now.)

[Cardiac]

I also have a large cash portion waiting to be invested in DGI stocks. I have a few thing I am watching to add to my portfolio . TGT, LO, MO, JNJ, PG, GIS, CL, and a few others. That will put me close to 38-40 Stocks. I am a fan of diversification.
I am about 15% cash

[Horace Cugle]

Things are a little scary right now and not a single person in Washington gives a rat's a$$ about anything so yeah I think some cash is a good idea to get you to the right comfort level.

OTOH there's a lot of good stocks 10%+ off their highs to be looked at. Some with dividend increases looming like PM, MSFT, WMT, BP, MCD to name a few.

With some recent nibbling I'm at 14% cash and that's about as low as I'm going with things the way they are right now. I have been 100% invested a few times over the years and it's a good thing to have all your money working and it's a good thing to be all-in when stocks are cheap and everybody hates them.

I guess I don't think we're going to make a big move down from here but that could all change tomorrow for any number of reasons. So some cash is certainly appropriate if you don't like what you're seeing out there.

One thing about being 100% invested though is it takes away some flexibility because you have to sell something to buy something. I don't like being boxed in like that so I keep some cash on hand, at least enough to make a meaningful difference in a few positions if a good opportunity popped up.

It costs you though because you get doodly on cash and you could be in a solid 3.0% stock like JNJ or PG and not have much to worry about. Shoot you could even think of a handful of stocks of that dividend quality as a Money Market with a little beta attached, if you can buy them right.

Take your total cash x 3% and divide by 12 and that's how much it costs you a month to hold that cash. If you get up to 25%-30% cash the cost is significant.

So you have to decide whether you can afford to hold cash and how much of a boat anchor you want on your portfolio. And you have to figure out whether you can make that cash pay off in the future and if you have the guts to deploy it at opportune times, if you get them.

[Kerim]

I'm not really sure how to calculate my percentage cash, simply because it is spread out across different accounts, and some of it is not earmarked for investment, but could be used that way if we had a serious drop in prices that creates an irresistible buying opportunity.

That said, I suspect I have waaaay more cash than is advisable. And Horace's post puts the cost of being under-invested in good perspective.

But, you also have to be able to sleep at night, and having a lot of cash makes me feel secure. And I am fortunate to have a little excess from income to be able to put into stocks each month. So my percentage cash may drift lower very slowly over time, barring any extreme market moves. But I do like very much the flexibility that excess cash gives me no matter what happens.

[Ok Red]

Interesting discussion....

Horace is right - cash * 3% / 12 is how much I'm losing a month in income.

And Kerim is right - when you buy a DGI equity you are really buying the income stream. The price of the equity doesn't really matter as long as the dividend growth rate remains acceptable.

And yet I'm comfortable with almost 60% cash in my primary retirement portfolio... soon to be more like 68% as I have a bond coming to maturity this month.

Why? I'm not sure the US or world economic growth is sufficient to support equity current prices. What will happen when the QE spigot is turned off? I believe it's already priced into bond yields. Is it priced into equity valuations? I'm not so sure. So I'm content to spend the extra commissions to dollar cost into the positions over the next year or two. And if there is a black swan event - like our president getting ready to start another freaking war like last week, or another financial crisis - then I have the cash on the sidelines to put to work. I always prefer to buy on sale if I can .

In the meantime I can watch my portfolio and get to understand how it behaves in certain market conditions, and to prune poor performers, and add other new equities, before I have built large positions.

My after tax brokerage account is easier; I remain almost 100% invested as I fund new purchases each month. It's much simpler that way!

[ronn38]

The last Budget ceiling crisis didn't offer to much of a dip--I'm not sure any new one will. But I'm sitting on a lot of E bonds paying 4% (old, I know). They matured past face value and that's where my cash is now. As a dips shows that I like, I cash a bond and buy a stock.

Thanks to my Dad for setting me up that way (never paid me cah all those summers I worked for him, just bought bonds--15-25 years makes a difference!)

Ronn

[Ok Red]

Sweet deal, Ronn!

I'm not so worried about the budget issues, but I am concerned with the QE taper. We may see money rotate out of dividend paying stocks and into bonds if 10 year Treasury rates go back up significantly. The 10 year was at 2.89% at today's close. My not so educated guess is that if we see the 10 year around 3.5% we may see a rotation into low risk 10 year bonds. Nobody really knows where rates are gonna go after QE gets turned off, but it wouldn't surprise me to see 10 year rates close to 4% once the taper is complete.

Of course, there are also folks that think that rising bond rates (and lower prices) will drive a rotation into stocks. I'm not smart enough to know which will happen, but I know in my own case (10 years from retirement) that I would welcome a chance to park a small portion of my port in a low risk vehicle yielding 4%.