Savings all in cash.... or diversify

masonic

economic wrote: »

i think its fair to say there is no proven method of investing that works best - if there was everyone would be dong it and you would not outperform. but certainly one should consider the following:

- past is no indication of future at all
- cash has its place as an asset class
- there are times to be bullish on stocks and times to be bearish
- portfolio diversification limits returns
- thinking putting money in the stock market will provide on average higher returns then savings in the long run is not proven at all even with 100 yeas of data.
- time horizon is very important and thus investing depends on personal circumstances with age being an important factor.

One should certainly consider those things.

The past cannot be used to predict the future with certainty, but it is a little extreme to say that it is no indication of the future at all. For example, I learned to read and write many years ago and have remembered how to do so ever since, and I think that probably indicates I'll be able to finish this sentence I am writing without forgetting how to do so, but I can't be certain (phew!) Anything said about the future is uncertain, which is why we have to resort to using phrases like "tends to" or "is likely to", which indicates an implicit uncertainty. Anyone who states that they can prove a particular investment or type of investment will beat all others should be given a very wide berth.

In the context of the past being no indication of the future at all, saving or investing in any capacity would seem bizarre, since there is no indication any form of delayed gratification will be worthwhile. But most people are willing to accept past events as giving some indication as to the likelihood of future events. One ends up limited to being able to create a model of the future which is in essence a probability distribution, but the lack of certainty does not render it useless. You may disagree.

I do agree with you that cash has its place as an asset class. It is essential for money that is needed in the short term. No other asset class can replace it effectively in this respect. It shares characteristics with other asset classes, such as not being risk free - in the case of cash, the main risk is inflation risk, this is especially so in the case of a low interest rate environment. It is possible for large sums of cash to become worthless in extreme cases, as has been seen in the past, although this is highly unlikely (unless you believe the past is no indication of the future at all - in which case, I guess all you can say is it's impossible to predict how likely such a situation will be in the future).

So, just as it can be risky to be in equities with a short time horizon, it can be risky to be in cash with a very long time horizon. So you are quite right that time horizon is very important in deciding one's asset allocation and age will factor in here insofar as it may limit one's time horizon.

Portfolio diversification does indeed limit returns, if and only if you can predict which single asset will be the best performing one, which, if I have understood anything you have written so far, I think you'll agree is impossible. So perhaps that point is somewhat academic. The same, I think, would go for there being times to be bullish and bearish on stocks. There certainly are, and we will know when those times were in hindsight.

So yes, those points are certainly worthy of consideration.

darkidoe

economic wrote: »

i think its fair to say there is no proven method of investing that works best - if there was everyone would be dong it and you would not outperform. .

The more I learn about investing, the more I think its a behavioral game. Its a test of fear, risk, caution. greed and learning to balance it all. Everyone will react different to the market. It is just too unpredictable to try to fathom it all.

Flobberchops

darkidoe wrote: »

The more I learn about investing, the more I think its a behavioral game. Its a test of fear, risk, caution. greed and learning to balance it all. Everyone will react different to the market. It is just too unpredictable to try to fathom it all.

I just finished skimming a precis of The Intelligent Investor (thought I'd bought the actual book but it was just Cliff Notes - grr) and one of the key points, to paraphrase, is that you should either do as much research as you can when picking stocks, or failing that none at all. It's an odd situation where a little knowledge is a dangerous thing, as it introduces emotion, thrill-seeking responses, superstition and gambler's fallacies into the mix.

So, it seems the take-away message is to either do your homework thoroughly (or pay somebody else to do so, as in the case of actively managed funds) or else accept the random nature of the stock market and simply play the odds by diversifying and hunkering down for the long run.

Glen_Clark

bigadaj wrote: »

I think given the many false dawns and the failure of qe and other measures to stoke up inflation to reduce both public and private debt then the smart money is on many more years of near zero rates. The fact this is electorally popular given that the average person has more debt than savings is another factor.

That may be so. Osborne and his overpaid puppet Carney have racked up so much debt, and are to much in love with rising house prices, to raise interest rates of their own volition. But with their National Debt rising at £5,170 a second there will come a point where they have to raise rates as they drive our credit rating down further. They are already having to pay more than 10 times as much as Germany to borrow money (10 year bond rates). Because Germany's 'Growth' is based on productive industry, whilst Osborne's 'Growth' and 'Recovery' is based on rising rents of existing properties through manipulating the housing market, and rising debt to subsidise their house prices. They can't fool all of the people all of the time