For fourteen years I have been managing my elderly mother's investment portfolio on her behalf/as her agent. She sometimes wants to withdraw cash, usually a few thousand but it has been larger sums when doing work on her house etc. Most of those 14 years I have run the portfolio with a large allocation of gilts and other fixed interest, but in the past couple of years with bond maturities, withdrawals and my increasingly bullish view of UK and emerging equity and growing cash-scepticism the allocation is largely shares and a few preference shares and thinly-traded fixed income securities.
On Friday my mother announces to me out of the blue and without any rationale that she wants £xxx amounting to 30% of the funds I manage transferred to her bank account immediately. I suspect she is going through a rough patch and has made a rash decision based on, well, who knows what...? So I agreed to start this process but will be putting to her that maybe the sales should be more gradual. [EDIT: Mother indicated that the cash would go into a fixed-term bond. The return from my management over the 14 years has been almost 12% CAGR. Maybe she has another motive...]
However it did make me think. I considered what I'd do if I were to literally raise the cash there and then and to be honest I didn't have a clue. I wondered how many people would suggest something like this:
RockRabbit wrote:Anyway, I cheat by retaining an overweight cash/liquid asset weighting to avoid this situation
because in the past I have managed the portfolio more or less in that way -- and raising the required amount from the gilts and liquid fixed interest we held would not have been difficult, with only the disadvantage of leaving the remaining portfolio temporarily overweight equities.
Not having the buffer has made it psychologically quite difficult to decide what to do: the fixed interest currently held is illiquid with large spreads and difficult to buy in the market, so one doesn't want to take the big hit on the spread. OTOH I consider practically all the shares/equity to be in the middle or near the bottom of their price range and close to their target weight, else I'd not have bought them or would already have reduced exposure. And I am more bullish equities than I've been for a long time. Also there are about 30 holdings so I don't really want to reduce them all by a small amount.
It made me think of the occasional examples where this happens to professional fund managers: where a large proportion of their investors demand their positions to urgently be liquidated. What are their options? ISTM they have similar difficulties, the main difference being that all the cost in my case falls on my mother who is the one asking for the cash, whereas the fund manager is also looking after his other investors whose unit prices might be cratered by a sudden liquidation. Very often, they seem to lock the fund, prohibiting further withdrawals to allow an orderly liquidation. I guess that is what I will be doing when I ask my mother to reconsider how quickly she needs these funds.
A very common suggestion from posters on this thread was to sell the losers. Could I ask whether this is driven mostly by the wish to avoid CGT or is it thought that there is a link between losers and the future returns on those shares? If it's the former I should make clear that all my mother's funds are in an ISA so the only tax implication is loss of ISA status; i.e. there's no CGT to pay.
It would be nice to hear from one or two sell-the-losers advocates who think it will improve future performance. In recent years I have tried to be disciplined about not adding to losing positions until prices are far better (lower) than the initial buy price, or till prices have steadied and are rising again, so I am sympathetic to a sell-losers philosophy. Does it actually work though, and well enough to rely on it in these circumstances?
Others suggested selling the lowest yielding shares. Again, I'm sympathetic but it's difficult to apply to this portfolio, with many non-payers and with my preference for considering all returns including present vs prospective market values in my investing decisions. A classic example is a fixed interest security which is currently in default but may resume payments in a few years and whose value would therefore rise significantly dispite the current zero yield. However I can see how this criterion works for other Fools' portfolios.
In considering all this it made me wonder whether, by not holding a larger proportion of cash and fixed interest, I had missed an important benefit of doing so? Is the risk of needing a large wad of cash in a hurry sufficient justification for permanently holding a large proportion of cash-like assets? Or have been hit by a fairly rare event which doesn't warrant forward planning?
I'm also wondering if I should rethink my own portfolio which is dominated by shares now and even leveraged long and accelerate the cash raising which I'd intended to do more gradually.
GS