How much cash is too much cash?

[Itsallaguess]

Of course there is higher inflation now due to the cost of energy but that’s just one factor out of 700 used by the ONS to arrive at a supposed universal inflation rate.

That number does not represent my expenditure which is far less than it was this time last year. And I am afraid some people do not get that point.

If you change the word 'universal' to 'general', would it better describe what they're trying to do?

Is it really a useless measure just because it can never account for 100% of the general population?

Of course there will be outliers where people like yourself might declare that they're spending less, and I don't think anyone would really think to declare anything to be 'universal' when talking about inflation, but if we're talking in general, broad terms, then I think most people would agree that people are generally going through an inflationary period unlike the levels we've been used to for many years, and I think that was the main point being made earlier with regards to holding large amounts of cash...

Cheers,

Itsallaguess

[Itsallaguess]

I should add that I myself usually do carry a level of cash that others here might think to be very over-cautious

One might hold a third in hard US dollar bills with a expectation of a 2%/year loss of purchase power as per common 2% inflation rates that central banks might be under remit to target;

Another third in gold with a broad expectation of that maintaining purchase power;

The last third in stocks with the expectation of a share price that increases broadly by inflation and pays a 2% dividend yield - a 2% real outcome that counterbalances the expected loss of the third in US$.

I'm going to get a t-shirt printed that says 'Phouchg and Loonsuawl were clearly misinformed...'

Cheers,

Itsallaguess

[MrFoolish]

That’s not what I was meaning at all and you are twisting what I wrote. Of course there is higher inflation now due to the cost of energy but that’s just one factor out of 700 used by the ONS to arrive at a supposed universal inflation rate. That number does not represent my expenditure which is far less than it was this time last year. And I am afraid some people do not get that point.

Inflation and expenditure are not the same things.

[simoan]

I suppose it's semantics but I wouldn't call cash a "hedge" at the moment. I'd call it a way of losing around 8% purchasing power pa. But each to their own.

But that’s just not true. Why do people not understand inflation? All that matters to me with regard to my cash holdings is my own personal inflation rate, which is governed by which products I decide to buy and which services I choose to use. A lot of that expenditure is discretionary. I’m sorry, but the idea that anyone’s expenditure exactly matches a random basket of 700 items selected by the ONS is a nonsense.

I’m going to have to disagree with you there simoan. Your “personal” inflation argument cuts no ice when the arbiter of your wealth is the wider world. To be clear, say someone’s total wealth is £1m and RPI is 10%. They trim their spending to keep their personal inflation to 5%. This means reducing the quality or quantity of things they buy. And it’s damned near impossible to counter the increase in price of services (e.g. the cost of repairs etc). So they’ve “personally” just had shrinkflation. But by the end of the year, that £1m is viewed by “the market” as now being worth £900k. This is why CPI such a pernicious measure. Substituting margarine for butter and telling people they’re less worse off than they thought is just wrong. “Fuel price rises don’t affect me… I only ever put £20 in”.

I'm sorry but you've misinterpreted what I am saying and what you describe is exactly the problem I have with how the ONS figure for CPI is calculated. Not only is the basket of goods and the weightings of those goods a poor reflection of how I spend my money, but even leaving that aside, it makes the assumption that month after month, year after year, I buy exactly the same things in exactly the same quantities. That is just nonsense, I'm sorry. I can't speak for others but that does not reflect how I live (other than some basic food items and energy). The ONS itself admits this is a fundamental flaw in the calculation. I'm sorry but I don't buy a new car every year, I don't redecorate my house and fill it with new furniture every year, I negotiate with vendors of services (including TV and Broadband services), I shop around, I often get bored of something and stop buying or using it. None of this is "shrinkflation" it's just life!! I am not the rational, unemotional "Econ" (TM Richard Thaler) that the ONS presumes and neither are most people.

Unlike economics, I have a lot of time for statisticians and I understand why the CPI is useful and has value on a wider basis to various institutions, however on a personal level I do not see the point of paying much interest in it as a number because it takes no account of how people behave in the real world. And certainly with regard to how I invest my money it plays no part in the decision making process, because just like investing with one eye on tax, you should never let the tail wag the dog.

[simoan]

Of course there is higher inflation now due to the cost of energy but that’s just one factor out of 700 used by the ONS to arrive at a supposed universal inflation rate.

That number does not represent my expenditure which is far less than it was this time last year. And I am afraid some people do not get that point.

If you change the word 'universal' to 'general', would it better describe what they're trying to do?

Is it really a useless measure just because it can never account for 100% of the general population?

Of course there will be outliers where people like yourself might declare that they're spending less, and I don't think anyone would really think to declare anything to be 'universal' when talking about inflation, but if we're talking in general, broad terms, then I think most people would agree that people are generally going through an inflationary period unlike the levels we've been used to for many years, and I think that was the main point being made earlier with regards to holding large amounts of cash...

Cheers,

Itsallaguess

Please see my reply above.

[simoan]

That’s not what I was meaning at all and you are twisting what I wrote. Of course there is higher inflation now due to the cost of energy but that’s just one factor out of 700 used by the ONS to arrive at a supposed universal inflation rate. That number does not represent my expenditure which is far less than it was this time last year. And I am afraid some people do not get that point.

Inflation and expenditure are not the same things.

Who's playing with semantics now? Pathetic. Of course, inflation and expenditure are not the same but they are directly related. I won't be replying any further on this thread if this is how low we've sunk and how far we've now got from the OP.

[MrFoolish]

That’s not what I was meaning at all and you are twisting what I wrote. Of course there is higher inflation now due to the cost of energy but that’s just one factor out of 700 used by the ONS to arrive at a supposed universal inflation rate. That number does not represent my expenditure which is far less than it was this time last year. And I am afraid some people do not get that point.

Inflation and expenditure are not the same things.

Who's playing with semantics now? Pathetic. Of course, inflation and expenditure are not the same but they are directly related. I won't be replying any further on this thread if this is how low we've sunk and how far we've now got from the OP.

No they are not directly related, as various people are trying to explain to you. A short term reduction in expenditure will not save you from the de-valuation of your cash position caused by inflation.

[simoan]

That’s not what I was meaning at all and you are twisting what I wrote. Of course there is higher inflation now due to the cost of energy but that’s just one factor out of 700 used by the ONS to arrive at a supposed universal inflation rate. That number does not represent my expenditure which is far less than it was this time last year. And I am afraid some people do not get that point.

Inflation and expenditure are not the same things.

Who's playing with semantics now? Pathetic. Of course, inflation and expenditure are not the same but they are directly related. I won't be replying any further on this thread if this is how low we've sunk and how far we've now got from the OP.

No they are not directly related, as various people are trying to explain to you. A short term reduction in expenditure will not save you from the de-valuation of your cash position caused by inflation.

But I’m not talking about a short term conscious reduction in expenditure. Changes to lifestyle can naturally reduce it permanently and change your personal exposure to inflation. And I think I’ve made it perfectly clear by now I do not consider the effect of inflation on cash for investment. I am not denying there is no effect as you suggest.

[Itsallaguess]

Not only is the basket of goods and the weightings of those goods a poor reflection of how I spend my money, but even leaving that aside, it makes the assumption that month after month, year after year, I buy exactly the same things in exactly the same quantities. That is just nonsense, I'm sorry.

I can't speak for others but that does not reflect how I live (other than some basic food items and energy).

But it's not as if there's a single inflationary element in there, affecting something like aluminium for instance, and hence we might well be able to say that to a very large extent, your spending won't be affected by inflation in the aluminium market, which I'd agree might be a sensible approach to dismissing the inflationary figure if that were indeed the case.

But it's not the case - large inflationary pressures are currently heavily affecting huge parts of the *food* and *energy* markets, which is not only something that all consumers are likely to be affected by on a *personal basis*, but those factors are *also* likely to play a large part in almost every other sector *as well*,in terms of feed-through costs and pressures...

Perhaps it won't affect you...who's to argue?

I see that you've not directly answered my question asking if you are, indeed, an Eskimo.... :O)

Cheers,

Itsallaguess

[NotSure]

But I’m not talking about a short term conscious reduction in expenditure. Changes to lifestyle can naturally reduce it permanently and change your personal exposure to inflation. And I think I’ve made it perfectly clear by now I do not consider the effect of inflation on cash for investment. I am not denying there is no effect as you suggest.

A real life example - a do not own a car and while I pay most the bills, my wife buys the groceries. I got a 3-year energy fix last Autumn that seemed pricy at the time, but now less than 4p/kWh for gas is looking quite good. I am remortgaging but thanks to HPI and repayment, my LTV is much lower than the last deal. I got a decent raise this year as CPI is high. So my personal real income is up strongly. Smug emoji

Cash - what do I want if for? Well shares mainly, and they are currently deflating.

Of course in 3 years all may be very different - my personal energy costs will likely leap while for most they may be be flatlining. My wife may leave me so I choose to buy a small car as I cannot borrow hers on the few occasions I need to, and I'll be buying the groceries. I'm not a great cook, so likely some expensive ready meals in there.

TLDR - I agree with Simoan that headline CPI has little effect on my asset allocation.

However, if anyone can tell me a sure-fire and liquid investment that will retain simply its nominal value over the coming months, then please PM me

[simoan]

But I’m not talking about a short term conscious reduction in expenditure. Changes to lifestyle can naturally reduce it permanently and change your personal exposure to inflation. And I think I’ve made it perfectly clear by now I do not consider the effect of inflation on cash for investment. I am not denying there is no effect as you suggest.

A real life example - a do not own a car and while I pay most the bills, my wife buys the groceries. I got a 3-year energy fix last Autumn that seemed pricy at the time, but now less than 4p/kWh for gas is looking quite good. I am remortgaging but thanks to HPI and repayment, my LTV is much lower than the last deal. I got a decent raise this year as CPI is high. So my personal real income is up strongly. Smug emoji

Cash - what do I want if for? Well shares mainly, and they are currently deflating.

Of course in 3 years all may be very different - my personal energy costs will likely leap while for most they may be be flatlining. My wife may leave me so I choose to buy a small car as I cannot borrow hers on the few occasions I need to, and I'll be buying the groceries. I'm not a great cook, so likely some expensive ready meals in there.

TLDR - I agree with Simoan that headline CPI has little effect on my asset allocation.

However, if anyone can tell me a sure-fire and liquid investment that will retain simply its nominal value over the coming months, then please PM me

Oh, someone actually gets it! I thought I was on my own

All the best, Si

[simoan]

I see that you've not directly answered my question asking if you are, indeed, an Eskimo.... :O)

Cheers,

Itsallaguess

Well, I'm not but I did retire last July, which means I can stay in bed an extra hour, which means the heating now comes on an hour later...
you get the idea!

All the best, Si

[Itsallaguess]

On next week's episode of 'Inflation doesn't affect me' -

Dave from Bristol explains that he doesn't know what all the fuss is about rising holiday costs.

Since deciding to walk to Benidorm instead of taking a flight, the cost of his two-week break has actually come down!

Cheers,

Itsallaguess

[simoan]

On next week's episode of 'Inflation doesn't affect me' -

Dave from Bristol explains that he doesn't know what all the fuss is about rising holiday costs.

Since deciding to walk to Benidorm instead of taking a flight, the cost of his two-week break has actually come down!

Cheers,

Itsallaguess

Is this aimed at me? If so, please show me where I suggested inflation does not affect me.

[Itsallaguess]

On next week's episode of 'Inflation doesn't affect me' -

Dave from Bristol explains that he doesn't know what all the fuss is about rising holiday costs.

Since deciding to walk to Benidorm instead of taking a flight, the cost of his two-week break has actually come down!

Is this aimed at me? If so, please show me where I suggested inflation does not affect me.

Come on - chill....it was a joke...

Cheers,

Itsallaguess

[NotSure]

On next week's episode of 'Inflation doesn't affect me' -

Dave from Bristol explains that he doesn't know what all the fuss is about rising holiday costs.

Since deciding to walk to Benidorm instead of taking a flight, the cost of his two-week break has actually come down!

Cheers,

Itsallaguess

That seems to be how CPI works.....

[simoan]

On next week's episode of 'Inflation doesn't affect me' -

Dave from Bristol explains that he doesn't know what all the fuss is about rising holiday costs.

Since deciding to walk to Benidorm instead of taking a flight, the cost of his two-week break has actually come down!

Is this aimed at me? If so, please show me where I suggested inflation does not affect me.

Come on - chill....it was a joke...

Cheers,

Itsallaguess

Well, whether you find it funny depends on your perspective. You have not denied it was aimed at me, in which case it contravenes posting guidelines, because it was a personalised side swipe that is unbecoming of someone that others consider a respected contributor to TLF. And please don’t tell me to chill as a result. That’s so condescending.

Moderator Message:
Come on. Don't make a meal of it. How could it be aimed at you? You were not quoted.

TJH

[dealtn]

On next week's episode of 'Inflation doesn't affect me' -

Dave from Bristol explains that he doesn't know what all the fuss is about rising holiday costs.

Since deciding to walk to Benidorm instead of taking a flight, the cost of his two-week break has actually come down!

Cheers,

Itsallaguess

That seems to be how CPI works.....

Actually its a good example of how CPI is better than RPI - albeit quite extreme, but extreme examples are often the best way of illustrating things.

Acknowledging that substitution, including not purchasing, occurs in the real world, is a better way of looking at inflation. It is, after all, a macro-economic measure, and not a measure of any individual's (change in) micro-economic cost of living.

Simoan seems to have got this distinction better than some. Inflation and individual's (change) in cost of living, aren't the same thing.

[NotSure]

Actually its a good example of how CPI is better than RPI - albeit quite extreme, but extreme examples are often the best way of illustrating things.

Acknowledging that substitution, including not purchasing, occurs in the real world, is a better way of looking at inflation. It is, after all, a macro-economic measure, and not a measure of any individual's (change in) micro-economic cost of living.

I think the consensus is on your side, but I think both are of interest. CPI just seems somewhat arbitrary. Who decides on the substitutions?

e.g. branded beans, were 50p, now 55p, 10% increase. Unbranded beans, were 40p, now 50p, a 25% increase. But if you substitute, CPI = 0% despite the fact that the unbranded beans you are now buying have just gone up 25%.

Probably a very naïve example, but gives an idea why some are suspicious of CPI. That and the fact that things you pay for tend to be linked to RPI, while benefits you receive tend to be linked to CPI, and CPI always seems lower (though I believe there are hypothetical circumstances that can lead to exceptions to this, they just never to seem to happen in real life).

On the other hand, a £100 smart phone bought today would have cost 10x a few years ago for the same specification.

I don't envy whoever it is that arbitrates all this, or is there some mechanical process at work.

Getting a little OT, but regarding the decision on how much cash to hold, while headline CPI/RPI may be relevant, IMHO, it is far from the only or even the dominant factor it depends very much on personal circumstance and one's outlook on alternative asset classes. E.g. commodities seem to do well when inflation is rising, regardless of its absolute level, and badly when inflation is falling. Vice versa for bonds, that is, it seems it is the rate of change of inflation is more important than the level.

[JohnB]

One thing people forget about cash buffers is that you must expect them to vary in size with the market. If you religiously have 10% in cash, and keep selling shares in a downturn to maintain it, you will be sure to underperform. You need a variable buffer for the 7 fat years, 7 lean years, which varies in size from say 2% to 10% of your portfolio.

Me, I aim to be 100% invested apart from the few months to tide me over if I can't sell a holding for some reason. But I've got enough to survive 7 lean years even when selling at a loss.