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Cash is Trash?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
moneybagz
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Cash is Trash?

#302626

Postby moneybagz » April 23rd, 2020, 10:26 am

Hi

I've just read an interesting article from GMO with 7 year asset class real return forecasts:

Stocks
-1.5% US Large
1.4% US Small
1.9% Intl Large
3.7% Intl Small
4.9% Emerging
11.8% Emerging Value

Bonds
-3.8% US Bonds
-4.3% Intl Bonds Hedged
3.0% Emerging Debt
-2.4% US Inflation Linked Bonds
-0.5% US Cash

I know these are only forecasts but Ray Dalio and Jim Rogers have also described US Treasuries as the worst investment currently.

Looking at the figures, Cash is likely to outperform US Large Caps and Bonds over this 7 year period. Is Cash really trash or is a sensible place to hold the defensive part of your portfolio at the moment?

Also, can anyone suggest an investment to buy into Emerging Value?

Thanks

JohnW
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Re: Cash is Trash?

#302654

Postby JohnW » April 23rd, 2020, 11:41 am

It's quite difficult to forecast asset values six months ahead when the markets are not in turmoil; let's cast our minds back six months.
But seven years ahead, while chaos now reigns? Who's kidding whom?

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Re: Cash is Trash?

#302656

Postby Aminatidi » April 23rd, 2020, 11:46 am

Do you have the link to the article please?

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Re: Cash is Trash?

#302657

Postby Alaric » April 23rd, 2020, 11:46 am

moneybagz wrote:
I've just read an interesting article from GMO with 7 year asset class real return forecasts:


It's all very well quoting real returns, but what inflation assumptions did they make? What would the relative returns have been in money terms, an inflation assumption of 0% as it were?

moneybagz
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Re: Cash is Trash?

#302672

Postby moneybagz » April 23rd, 2020, 12:37 pm

https://www.gmo.com/europe/research-lib ... t-4q-2019/

U.S. inflation is assumed to mean revert to long-term inflation of 2.2% over 15 years.

moneybagz
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Re: Cash is Trash?

#302674

Postby moneybagz » April 23rd, 2020, 12:40 pm

Apologies...old link on my last message...here's the updated one:

https://www.gmo.com/europe/research-lib ... t-1q-2020/

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Re: Cash is Trash?

#302682

Postby scrumpyjack » April 23rd, 2020, 1:09 pm

In the end it is only cash that pays the bills, so in these uncertain times, and especially if you are retired, it would be risky not to have a substantial cash reserve, IMO.

Of course a separate issue is in what currency should you hold your cash? Historically Sterling has not been a good performer compared to other currencies.

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Re: Cash is Trash?

#302689

Postby Itsallaguess » April 23rd, 2020, 1:25 pm

scrumpyjack wrote:
In the end it is only cash that pays the bills, so in these uncertain times, and especially if you are retired, it would be risky not to have a substantial cash reserve, IMO.

Of course a separate issue is in what currency should you hold your cash?

Historically Sterling has not been a good performer compared to other currencies.


But isn't holding some level of cash reserve supposed to be about minimising the sort of risk that potentially holding it in a different currency would then just re-introduce?

We know that over long periods, cash is unlikely to perform as well as equities, but we're often happy to live with that under-performance as a trade-off to introduce a semblance of 'the cash will be there if and when I ever need it' to our approaches.

It seems to me that to then start thinking about carrying that cash in a different currency to the one you're likely to actually need it in would go some way to then re-introduce another different risk to that process...

All 'insurance' has a cost associated to it, and I personally see the opportunity-cost of holding some level of capital in cash as just another insurance cost, and one where there might well be false-economies in trying to keep such costs down too much....

Cheers,

Itsallaguess

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Re: Cash is Trash?

#302710

Postby scrumpyjack » April 23rd, 2020, 3:09 pm

Maybe my mindset is forged in the '70s when inflation hit 27% at one point and as I recall my great uncle saying when he went to Switzerland as a boy there were 23 sw fr to the pound. It's about 1.3 now

But yes for shorter term spending you should probably stick with your home currency, but if you are going to hold it long long term a major factor is the relative inflation rate in the currency's country. One of my clients in my youth was bankrupted by taking a Sw franc mortgage to buy a UK property.

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Re: Cash is Trash?

#302717

Postby 1nvest » April 23rd, 2020, 3:56 pm

Hard cash, notes in your pocket, recently buys over 30% more FT100 shares than it did at the start of the year. Down some from earlier - when it bought 50% more FT100 shares than at the start of the year.

Comparing assets stand alone isn't a good practice. Better to look at how assets work in combination - when they're traded and where that trading can be as simple as yearly rebalancing back to target weightings.

Some hate cash, and gold, but as a for-instance across the 1980’s and 1990’s (Jan 1980 to Dec 1999) inflation annualised 5.2%, something costing £1 at the start of January 1980 grew to £2.76 at the end of 1999. Price of gold in £’s declined a total of -23.5% between the start of 1980 and end of 1999. 50/50 yearly rebalanced US stock (Pound adjusted) and gold asset allocation saw the ounces of gold being held rise at a 10.4% annualised rate – ended the two decades with 7.24 times more ounces of gold being held. So even though gold prices declined, the increase in ounces of gold being held more than offset the declines.

Which of these is 'best' is subjective to what you consider to be best and over what time period you measure https://tinyurl.com/y8ogkr3r

Is Cash really trash or is a sensible place to hold the defensive part of your portfolio at the moment?

Gold and cash at the start of year were sensible assets to be holding - but we can only determine that with hindsight. Whether sensible in forward time ??? Maybe by the end of year we'll look back and see that deploying all of cash at the present time would have been the better, or maybe that holding onto cash was better. Unpredictable, so most just allocate a target weighting to each of the assets they wish to hold and rebalance back to those weightings once/year.

Should you hold cash as part of your asset allocation? Buffett thinks so. He strives to hold 10% in T-Bills that are liquid (available if/when he needs that cash) and that are fully insured by the state.

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Re: Cash is Trash?

#303903

Postby moneybagz » April 28th, 2020, 4:06 pm

I've found an ETF that covers EM small/mid cap value:

DGSE - Wisdomtree EM SmallCap Dividend

I've reduced my US exposure and re-allocated a small amount to DGSE to try and earn a return over the next 10-15 years.

I read that Rob Arnott is all-in on value in his portfolio!

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Re: Cash is Trash?

#427779

Postby 1nvest » July 15th, 2021, 2:11 am

1792 the year of the US$ and stuffing a third each US$, British Pounds and Precious metals under a mattress, yearly rebalanced back to a third each, and rolled forward to present would have lost around 0.4% annualised purchase power. Ditto, but from 1932, where the £ and $ were instead invested in their respective T-Bills ... and 1.8% annualised real gain. At that rate of return a 4% SWR would have been successful i.e. 4% of the initial portfolio value drawn/spent in the first year, and that £ amount uplifted by inflation as the amount drawn/spent in subsequent years. And that includes spanning periods when real yields (T-Bill interest minus inflation) were far deeper at times than of recent. Negative real yields don't tend to persist mid to longer term, and often a period of deep negative real yields is followed by compensatory years of tall positive real yields (periods of high negative/positive real yields tend to cluster, in effect the markets demanding compensation).

Stick with a single currency and outcome/volatility is concentrated, riskier. Three different currencies (gold can be considered as being both a global currency as well as being a commodity) and one will relatively outperform the others each year. But where no single currency consistently relatively outperforms. Trading those swings, which is what rebalancing in effect does, can yield 'satisfactory' results, even when some of the years include negative real yields.


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