Cash - how much to hold?

[1nvest]

It might be the lockdown finally getting to me, but if I see one more 1/3rd stocks/gilt/gold chart on this bulletin board, I think I'm going to jump off the nearest bridge...

Does the idea really have to infect every single thread?

Likewise with HYP

[Julian]

I adopt a pretty conservative/extravagant/lazy/costly strategy for my cash buffer. I accept the cost (as in income forsaken) of holding quite a lot of cash in accounts with appalling rates of return (by necessity because that's all that's available in the current interest rate climate) in return for what to me is the valuable benefit of potentially only needing to ever look at my investments once a year.

My income is derived from a mixture of HYP & income IT dividends topped up by annual sales of a mixture of global index trackers and some wealth preservation funds. I pay myself a fixed "salary" each month and budget within that so, together with a full ISA contribution each year and knowing what my HMRC payments on account will be when I file my tax return in December each year, I know exactly what my cash requirement will be for the upcoming year.

What I do is once a year at the end of December I file my previous year's tax return so that I get the calculation for the payments on account that I will be asked for by HMRC for the following year plus any balancing payment (or refund) that might be due on the return I just filed, I also look at all the dividend income that has accumulated in my income collection account during the preceding year, and then solve the equation...

cash-needed-from-share-sales = cash-needed-for-next-year - dividends-received-in-previous-year - any-underspent-cash-from-current-year

I then sell sufficient shares to raise the cash I need such that my income collection account starts the upcoming year with a cash balance sufficient to fund my entire year's spending even if every single one of my investments cancelled their dividends entirely for the upcoming year. That has never happened of course, even my index trackers pay dividends(*), so by the time the next year-end planning cycle comes around there will be another year's worth of dividends in my account to reduce the scale of the sell-off I need to make plus maybe (in fact usually) some unspent "salary" from the previous year to return back into the income buffer to further reduce the amount of cash I need to raise from share sales.

From the above you can see that my income cash buffer starts each year at exactly one year's worth of spending, including £20,000 for the ISA subscription and the money for my HMRC payments on account due by 31st Jan and 31st July in the upcoming year. The cash balance will then fluctuate during the year but broadly speaking it trends downwards since about two thirds of my income comes from dividends and the remaining third from the year-end top-slicing of the trackers so the dividends flowing in during the year don't quite make up for the outflows from paying myself my monthly living allowance at the end of each month and the ISA/HMRC costs.

I actually do also have another cash buffer that has never been touched and is my rainy day disaster fund just to make me sleep doubly well at night. That is held in a combination of Premium Bonds and NS&I Income Bonds and is equivalent to pretty much exactly another year's worth of spending (again including my ISA subscription and typical annual tax liability) so in total, between my never-touched "rainy day" cash buffer and my fluctuating annual income buffer, I hold at any given time between 1 and 2 years of total annual spending in cash.

I don't really like giving exact income/spending numbers as some people on the thread have done (sorry) but to give some idea of scale my total annual spending (ISA sub + annual tax liability + 12 x my monthly spending allowance) is a six figure sum and when my total cash holding is at its highest at the start of each calendar year it amounts to approximately 7% of my total net worth (that's net worth excluding my primary residence and other investments I hold for personal utility/enjoyment as opposed to investment value e.g. artworks). Since that maximum cash is 2 years spending that means that I currently draw down about 3.5% of my net worth each year although £20,000 of that isn't really spending since my ISA sub is simply moving some of my portfolio from a taxable broker account into a tax-sheltered account.

- Julian

(*) I always buy income units. I consider accumulation units to be the work of the devil - far too much thought and hassle required to correctly account for accumulated income vs capital gains.

[ Edited multiple times to clear out a few typos & clumsy wording. ]

[simoan]

Most people are only losing on cash because they won't switch accounts and leave with the big banks. With CPI at 0.5% and RPI at 1%, should be able to at least match inflation. My cash savings vary from 1% for easy access (marcus), to over 2% for fixed term opened couple of years ago.

Again, IMHO this is not the right way to think about a cash holding that is considered suitable for investment. You don't need to look at the return on cash separately when it is part of an investment portfolio. Holding X% of a portfolio in cash is an investment position that acts to reduce the overall risk - just think of it as a bond with a zero coupon with zero risk and no dealing charges! It doesn't matter if the cash holding doesn't beat inflation as long as the portfolio as a whole comfortably does. And if you can't beat inflation, then there's no hope!

All the best, Si

[Arborbridge]

It might be the lockdown finally getting to me, but if I see one more 1/3rd stocks/gilt/gold chart on this bulletin board, I think I'm going to jump off the nearest bridge...

Does the idea really have to infect every single thread?

Likewise with HYP

Rather, the opposite has happened Since lockdown there has been more discussion calling HYP into doubt than usual - which has allowed room for the thoughts you have come up with.

Actually, your permanent portfolio idea is sound and as old as the Tora - so I'm told. I've just never been attracted to it, though I'm sure many people can make it work.

Arb.

[Arborbridge]

Most people are only losing on cash because they won't switch accounts and leave with the big banks. With CPI at 0.5% and RPI at 1%, should be able to at least match inflation. My cash savings vary from 1% for easy access (marcus), to over 2% for fixed term opened couple of years ago.

The difficulty here (and I used to be a switcher) is that rates are so low, I can't frankly be bothered with all that. You getting an advantage of an extra couple of peanuts for all that effort.

At one time, it use to be easy to invest in and find out about ZDPs which were quite useful, but the handy site for finding them disappeared. I'm not sure if they have any popularity, but I did use them for about five years - after Lootman first educated me in them.
Might be worth looking into if they are still around?

Arb.

[Aminatidi]

Most people are only losing on cash because they won't switch accounts and leave with the big banks. With CPI at 0.5% and RPI at 1%, should be able to at least match inflation. My cash savings vary from 1% for easy access (marcus), to over 2% for fixed term opened couple of years ago.

I think even if you do that the reward seems pitiful if you don't want your money tied up in a fixed term account.

Even on £40K 1% to 2% interest just doesn't seem worth the hassle.

I know some will say that's me being appallingly lazy and there's likely some truth in but rates are just depressing.

[mc2fool]

At one time, it use to be easy to invest in and find out about ZDPs which were quite useful, but the handy site for finding them disappeared.

https://www.theaic.co.uk/aic/find-compare-investment-companies/zdp-analytics

[Urbandreamer]

Who's Ray Dalio? Who cares what he thinks? He's not you, and only you understand your own personal circumstances and what amount of cash you should be holding for your life situation, to make sure you can sleep at night no matter what is happening in commodity, stock and bond markets,

BTW,

A search engine will show who Ray Dalio is and what he thinks.

For those who can't be bothered the appropriate search may be "Cash is Trash".

His argument is that there is a determined policy to destroy the value of cash by the state. He is US based and argues from a US view. However given that the BOE currently has a target of devaluing the £ by 2% pa (target of 2% inflation), I find it difficult to disagree with the argument.

Doing a quick check the latest CPIH is 0.7%, but the ONS regard that figure as just a best guess due to Covid.
It was 1.5% in March, before you couldn't buy most things in the basket used.
From what I can find:
The best five year fixed cash ISA is 1.3% (shawbrook bank).
Easy access 0.9% best.

I can't find an account that beats what I believe inflation actually is.

There may indeed be many reasons to hold cash, but Mr Dalio has a very good point.

I'm one of those who can't be bothered switching. I regard a fixed cash account as a LOT less flexible than buying shares. Certainly NOT a place to put emergency funds. Of course equities are far more risky and you may pay a penalty if you really need funds in an emergency (though you can get them).

I also question the implication that we can go out and open a Marcus account if we want a better rate. It closed to new money earlier this month!

[simoan]

Who's Ray Dalio? Who cares what he thinks? He's not you, and only you understand your own personal circumstances and what amount of cash you should be holding for your life situation, to make sure you can sleep at night no matter what is happening in commodity, stock and bond markets,

BTW,

A search engine will show who Ray Dalio is and what he thinks.

Sorry if it wasn't clear that I was being facetious. I know who Ray Dalio is but still don't care what he thinks! The point is the OP needs to do what they feel is right for their own personal financial circumstances, it really doesn't matter what anyone else thinks. Most importantly of all, you shouldn't invest your cash in commodities, bonds or stocks just because some talking head else tells you "cash is trash". What nonsense, we all need cash to meet our day to day needs. Nice pithy line though for attention seeking "big name" investors. Should secure a few more slots as a talking head on Bloomberg and CNBC to keep the ego sated.

All the best, Si

[Aminatidi]

Who's Ray Dalio? Who cares what he thinks? He's not you, and only you understand your own personal circumstances and what amount of cash you should be holding for your life situation, to make sure you can sleep at night no matter what is happening in commodity, stock and bond markets,

BTW,

A search engine will show who Ray Dalio is and what he thinks.

Sorry if it wasn't clear that I was being facetious. I know who Ray Dalio is but still don't care what he thinks! The point is the OP needs to do what they feel is right for their own personal financial circumstances, it really doesn't matter what anyone else thinks. Most importantly of all, you shouldn't invest your cash in commodities, bonds or stocks just because some talking head else tells you "cash is trash". What nonsense, we all need cash to meet our day to day needs. Nice pithy line though for attention seeking "big name" investors. Should secure a few more slots as a talking head on Bloomberg and CNBC to keep the ego sated.

All the best, Si

Yes I agree with that but with the caveat that I might think that what is "right" is to keep £300K in cash the bank.

It doesn't mean a gentle smack around the chops and some education on how much it's costing me to do so wouldn't go amiss

[simoan]

BTW,

A search engine will show who Ray Dalio is and what he thinks.

Sorry if it wasn't clear that I was being facetious. I know who Ray Dalio is but still don't care what he thinks! The point is the OP needs to do what they feel is right for their own personal financial circumstances, it really doesn't matter what anyone else thinks. Most importantly of all, you shouldn't invest your cash in commodities, bonds or stocks just because some talking head else tells you "cash is trash". What nonsense, we all need cash to meet our day to day needs. Nice pithy line though for attention seeking "big name" investors. Should secure a few more slots as a talking head on Bloomberg and CNBC to keep the ego sated.

All the best, Si

Yes I agree with that but with the caveat that I might think that what is "right" is to keep £300K in cash the bank.

It doesn't mean a gentle smack around the chops and some education on how much it's costing me to do so wouldn't go amiss

That's fine but I don't see the point of listening to people like Ray Dalio. He is after all talking his own book having loudly and publicly made his "cash is trash" proclamation at the WEF in Davos back in January, only to then sit and watch his hedge fund get trashed. These people never publicly admit they are wrong and they suffer just the same from the awful influence of "commitment and consistency" as the rest of us.

All the best, Si

[simoan]

That's fine but I don't see the point of listening to people like Ray Dalio. He is after all talking his own book having loudly and publicly made his "cash is trash" proclamation at the WEF in Davos back in January, only to then sit and watch his hedge fund get trashed. These people never publicly admit they are wrong and they suffer just the same from the awful influence of "commitment and consistency" as the rest of us.

You might be interested to know that his book Principles, which is about an inch and a half thick, is basically a catalogue of all the massive errors he’s made when investing.

Sounds like a good doorstop then

All the best, Si

[G3lc]

This is a question I ponder from time to time, I’m over 80 with no ambition to die rich, but don’t want to run out of money, I have no debts, live on a state pension and income from my HYP and investment trusts, this being enough (with Divs. as they are) to live a comfortable but (and not wanted) not extravagant life style (I have no wish for fast cars or travel these days)- I have cash available for the unknown unknowns, but should I invest more to get an extra 5% a year if I’m lucky, with whatever risk is involved, and then it would take 20 years to get less than my capital back after tax.
So its a bit of a risk reward question, and is money likely to become just shells and beads And how many investments will become tulip bulbs?

[Urbandreamer]

This is a question I ponder from time to time, I’m over 80 with no ambition to die rich, but don’t want to run out of money,

You don't say how much over 80. it makes a surprising difference. Try this calculator.
http://www.riskprediction.org.uk/index_lifeexp.php

The calculator estimates:

Most 80 year old men live to 88.
Most 87 year old men live to 92.
Most men my age live to almost 82.


I'd rather not get to 80 and realise that the odds are that I'll run out of money before I die, because I've dodged previous bullets.

Personally I'm taking my attitued from my great aunt Jean. She took out the 5 year warrenty when she replaced her fridge at the age of 95. She didn't plan on going anywhere and we think that the only reason that she eventually died is that she get fed up with the mayor inviting himself to her birthday.

She died a week before her 105th.

[monabri]

This is a question I ponder from time to time, I’m over 80 with no ambition to die rich, but don’t want to run out of money, I have no debts, live on a state pension and income from my HYP and investment trusts, this being enough (with Divs. as they are) to live a comfortable but (and not wanted) not extravagant life style (I have no wish for fast cars or travel these days)- I have cash available for the unknown unknowns, but should I invest more to get an extra 5% a year if I’m lucky, with whatever risk is involved, and then it would take 20 years to get less than my capital back after tax.
So its a bit of a risk reward question, and is money likely to become just shells and beads And how many investments will become tulip bulbs?

Keep your money...draw down 5% a year for indulgences and to hell with the consequences!

[Bouleversee]

This is a question I ponder from time to time, I’m over 80 with no ambition to die rich, but don’t want to run out of money,

You don't say how much over 80. it makes a surprising difference. Try this calculator.
http://www.riskprediction.org.uk/index_lifeexp.php

The calculator estimates:

Most 80 year old men live to 88.
Most 87 year old men live to 92.
Most men my age live to almost 82.


I'd rather not get to 80 and realise that the odds are that I'll run out of money before I die, because I've dodged previous bullets.

Personally I'm taking my attitued from my great aunt Jean. She took out the 5 year warrenty when she replaced her fridge at the age of 95. She didn't plan on going anywhere and we think that the only reason that she eventually died is that she get fed up with the mayor inviting himself to her birthday.

She died a week before her 105th.

"Most" is pretty meaningless when it comes down to oneself and why are you only quoting the figure for men? I think you will find life expectancy going down in the immediate future, especially since the NHS will be unable to investigate and treat illness in a timely way. In fact, it wasn't able to do that before Covid 19 intervened (I speak from experience). Since it is easier to lose money than make it on the Stock Exchange, I'd be inclined to agree with Monabri to keep what you have in cash accessible and gradually spend it to enjoy life. My father, the only person paying for himself and my mother (at a higher rate than the local council paid for everyone else) in the various care homes they lived in from the age of around 70, used to worry himself silly that he might run out of money before they died (which was at the age of 90) and I always used to reassure him that if he did the State would pick up the tab and that he had more than done his bit. He didn't run out but didn't leave much for his family either but that's the way it goes. Concentrate on the now. Covid and the disappearance of dividends has illustrated how important it is to have a decent reserve of accessible cash even if it is not producing much interest. I have avoided fixed rate savings but for some years have had a regular savings account which now holds a reasonable sum which is still attracting 2.05% (a lot less than originally) but reducing to 1.8% from 9 July. Apart from NS&I index linked certificates, also about to produce peanuts returns when switched to CPI, and premium bonds (fingers crossed for tomorrow) and a reasonable sum in my Santander current a/c, I have closed my cash accounts but I think there is sufficient in those to see me through these hard times. Fortunately, I do have some of the companies which at present are still paying dividends though a huge number of my holdings are not. I'm not inclined to risk more on the stock exchange with so much uncertainty but I daresay time will show I should have done. Who knows? I would rather reduce the value of my estate, which will be heavily taxed anyway, than leave myself strapped for cash.