Good Reasons to Hold Cash

GeorgeHowell

There has been a lot of debate about cash vs equities and other investments in the present stagflation situation. The discussion has tended to sidetrack other threads, so here's one on that specific subject.

Five good reasons to hold cash :-

http://goo.gl/UNY8Q

In essence this says that cash is liquid, it reliably holds 100% of its nominal value, it is simple to understand and invest, within the £85K FSCS limit it is 100% secure, and it is cheap - no fees.

Maybe holding a large proportion of cash is now the ultimate contrarian view ?

mr_fishbulb

Having a large chunk of cash at these times is also good because you can buy bargains when the markets fall

Glen_Clark

GeorgeHowell wrote: »

In essence this says that cash is liquid, it reliably holds 100% of its nominal value, it is simple to understand and invest, within the £85K FSCS limit it is 100% secure, and it is cheap - no fees.

?

The fees are in the hefty mark up between savings rates and borrowing rates.
Plus the taxmans fee of course.

Glen_Clark

mr_fishbulb wrote: »

Having a large chunk of cash at these times is also good because you can buy bargains when the markets fall

Thats the ideal, but easier said than done.
Timing the bottom of the market is notoriously difficult.

Linton

A problem with holding cash is how do you decide when to get out of it and into something that will at least beat inflation. The chances are that people nervous and inexperienced enough to move a significant part of their wealth into cash now will leave it far too late and so lose out compared with the hardened investor who knows that volatility is part of the game and simply rides the waves.

No, I can only see two reasons to hold a significant amount of cash:
1) Emergency funds and needs within a 5 year timeframe
2) As a park whilst waiting for the next opportunity

mr_fishbulb

Glen_Clark wrote: »

Thats the ideal, but easier said than done.
Timing the bottom of the market is notoriously difficult.

It doesn't have to be the bottom though, just below what you value the stock to be worth.

Consider the scenario - Panic hits the markets and all FTSE100 stocks fall because something happens in Europe. A lot of stocks will be sold off including ones who don't really have a market in Europe.

Suppose you have a FTSE100 company who makes the majority of its money selling things to Emerging Markets - its stock price would have fallen because of the market contagion, but once the dust settles it should go back up once it's realised that the company wouldn't be affected by the European news.

Whether you buy it at rock bottom, or at half of the fall, you'd still make money when the price goes back up.

Ark_Welder

The MoneyWeek article does show an inconsistency with itself by suggesting that holders of cash should go on to indulge in currency speculation.

Glen_Clark

mr_fishbulb wrote: »

It doesn't have to be the bottom though, just below what you value the stock to be worth.

Consider the scenario - Panic hits the markets and all FTSE100 stocks fall because something happens in Europe. A lot of stocks will be sold off including ones who don't really have a market in Europe.

Suppose you have a FTSE100 company who makes the majority of its money selling things to Emerging Markets - its stock price would have fallen because of the market contagion, but once the dust settles it should go back up once it's realised that the company wouldn't be affected by the European news.

Whether you buy it at rock bottom, or at half of the fall, you'd still make money when the price goes back up.

Yes, its about seeing things that others don't.

At the height of the Macondo well tragedy, BP shares fell to £3 out of fear of inflated compensation claims. Not everyone realised that said compensation claims would be for loss of earnings. Earnings would be assessed on the very modest amounts declared to the taxman the previous year, so BP compensation bill would be far less than feared.

MarcoM

Linton wrote: »

A problem with holding cash is how do you decide when to get out of it and into something that will at least beat inflation. The chances are that people nervous and inexperienced enough to move a significant part of their wealth into cash now will leave it far too late and so lose out compared with the hardened investor who knows that volatility is part of the game and simply rides the waves.

No, I can only see two reasons to hold a significant amount of cash:
1) Emergency funds and needs within a 5 year timeframe
2) As a park whilst waiting for the next opportunity

Yes but for someone that is not self employed consideration needs to be given to job loss.

I have a few thousands saved up and getting nothing in the bank (3%). I earn the average wage and own a property. But if I lost my job I know that I would not get a similar one as all companies in my field are getting rid. So I may be faced with retraining for a period of time or moving away if a job was somewhere else. Cost of property elsewhere may be 30% higher than where I live now. Also include commute cost or even renting a pad for during the week.

For me the old mantra of having six months of wage accessible in cash does not cover the risk of losing my job. I know it would take me a lot longer to gain reasonable employment and I would not want to risk having to sell after the six months worth of savings is erased.

Am I being too cautious?

Rollinghome

Glen_Clark wrote: »

The fees are in the hefty mark up between savings rates and borrowing rates.
Plus the taxmans fee of course.

That's a line often used by those selling investments but probably intended to confuse rather than enlighten. The important thing is to be consistent and look at all investments/savings after costs. Too often that isn't done.

A good example is the venerated and much quoted annual Barclay's Equity Gilt study which is given to Barclay's Wealth clients and compares the return on cash and equities. The latest study (up to Dec 2010) gives the annualised real return over the last 10 years for the FTSE All-share, including all dividends, as +0.6% and as +1.1% for cash. For the 12 months to Dec 2010 the figures are 8.9% for equities and –4.1% for cash.

But look more carefully and you'll see that the returns given for equities include no deductions for costs. For someone investing in a retail managed unit trust those costs, including PT costs, were likely to be 2-3% pa. If they also paid for advice, as do Barclay's Wealth clients, they will have had other charges or have paid a large intitial charge. At the beginning of that 10 year period the initial charge was difficult to avoid. So all together that's quite a chunk to deduct. Even for a modern low cost index tracker the cumulative total costs become substantial.

The figure for cash on the other hand seems to be minimised. The data is based on the rate paid on the Nationwide Invest Direct account which currently pays just 0.2% pa. Clearly it wouldn't have been difficult to have got a far higher rate in 2010 when Lloyds were paying 4% on their current account, NS&I index linked certs were available and the the real smartipants were getting better than 6% on fixed rates they'd locked into some time earlier.

None of the figures take into acount tax which will vary from person to person. What it does show is that the difference between cash and equities may be less than we're encouraged to believe and we shouldn't just accept the sales patter of the investment industry without a closer look.

I'd also be hesitant to accept the very common line on the impossibility of timing. Obviously it serves the industry to have us give them our money asap and to keep it with them. But to benefit from timing you don't have to be right 100% of the time, just more often right than wrong - allowing for costs. I've been investing and using timing for over 30 years and timing, whether due to luck or judgement, has mostly served me well.

Obviously it has to be a personal decision and those who don't trust themselves to get it right more often than wrong should avoid it. But if you can learn to trust yourself then you might just benefit.

Ark_Welder

MarcoM wrote: »

Yes but for someone that is not self employed consideration needs to be given to job loss.

I have a few thousands saved up and getting nothing in the bank (3%). I earn the average wage and own a property. But if I lost my job I know that I would not get a similar one as all companies in my field are getting rid. So I may be faced with retraining for a period of time or moving away if a job was somewhere else. Cost of property elsewhere may be 30% higher than where I live now. Also include commute cost or even renting a pad for during the week.

For me the old mantra of having six months of wage accessible in cash does not cover the risk of losing my job. I know it would take me a lot longer to gain reasonable employment and I would not want to risk having to sell after the six months worth of savings is erased.

Am I being too cautious?

Self-employed can be more precarious then employed because no work means no income, whereas a company should continue to pay its employees until it does start to make some money again - or it does eventually lay people off.

Are you being cautious? I used to keep around 12 to 18 months' worth of expenditure readily available as cash! And then there were higher paying fixed-rate deposits on top of that too. However, I also built up other investments from which my income could be supplemented during any dry spells - especially investments where I could minimise taxes, such as through ISAs.

Ultimately, how much cash that is held is a personal decision: the '6 months' suggestion is just that, a suggestion - but good as a suggestion for a minimum holding.