What is your trigger point to start spending from cash buffer?? + QE, Does it change the game?

Sea_Shell

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Well we are human after all, not robo-investors😉

I doubt there are many (any?) aspects of financial life that are devoid of the psychological, when decision making.

zagfles

michaels said:

Amazing how many market timers we see even on this board.

And it you are making different decisions based on whether markets are 'high' or 'low' then you are a market timer.

Separate observation, even though my portfolio is down by15% ish from the highs my safe withdrawal monthly amount (if you filter price history for the market position vs peak) is only down by about 3%

And even more worringly it seems some IFAs are "market timers"!!

zagfles

NedS said:

I am amazed how many people have a cash buffer as part of their investment strategy but with no predefined plan in place as to how it will be used other than 'when markets are down'.

I see two options - either used as part of a rule based system such as Guyton-Klinger's to reduce drawdown from the pot and use the cash buffer to make up the difference, or a simple percentage-based rule that the cash buffer will be drawn upon once markets are down a set percentage from previous highs until a certain recovery point is reached. A sliding percentage rule could also be used - e.g, draw 50% from cash buffer when markets are down 20% up to 100% from cash buffer when markets drop 50% or more.

It should be relatively easy to perform some simplistic spreadsheet modelling of how such strategies would have performed during recent downturns versus a do nothing strategy to find optimum percentages and see if there is any benefit in holding a cash buffer at all.

For now, I'm sticking with my income portfolio so do not have to worry about such things as it just keeps paying out the dividend income, but I'm genuinely interested in seeing any modelling as to how best to deploy a cash buffer in a downturn.

I did have a go at modelling it using adverse SOR data, and it seemed to make very little difference whatever rules you used. But using a small'ish buffer (about 3 years worth).

More discussion on this here including a link to a US study which concluded the same: https://forums.moneysavingexpert.com/discussion/6345084/pension-funds-and-de-risking/p5

Strategies like Prime Harvesting seem to produce better results, they're similar to a much longer term version of using a cash buffer

zagfles

Sea_Shell said:

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Well we are human after all, not robo-investors😉

I doubt there are many (any?) aspects of financial life that are devoid of the psychological, when decision making.

Which is of course why so many people don't like equities and are 100% in cash, because they can't psychologically cope with their investments going down. Or why people are scared of going to the dentist, or flying etc. And for others, they find it fun taking a gamble so take risks which aren't necessary or sensible.

But the best investors will be the ones who can look at risk/reward logically and rationally rather than emotionally

Linton

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Define "benefit".  My objective for investing in retirement is to be able to support steady inflation matching expenditure on a comfortable standard of living  and sufficient cash available at perhaps 1 year's notice for major one-off expenditures for the rest of my and my wife's life with minimal excitement, worry and effort.  Inheritance is not a factor. A % return beyond that necessary to achieve the required level of expenditure provides no benefit and therefore does not come into the equation.

What studies do you  suggest to show that something other than my strategy with
 
37% growth equity 
30% equity + bonds+infrastructure income funds
17% Wealth Preservation funds
16% Cash (mainly PBs)

 would better meet my objectives?

zagfles

Linton said:

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Define "benefit".  My objective for investing in retirement is to be able to support steady inflation matching expenditure on a comfortable standard of living  and sufficient cash available at perhaps 1 year's notice for major one-off expenditures for the rest of my and my wife's life with minimal excitement, worry and effort.  Inheritance is not a factor. A % return beyond that necessary to achieve the required level of expenditure provides no benefit and therefore does not come into the equation.

What studies do you  suggest to show that something other than my strategy with
 
37% growth equity 
30% equity + bonds+infrastructure income funds
17% Wealth Preservation funds
16% Cash (mainly PBs)

 would better meet my objectives?

You seem to be missing the point. It's not about what balance of assets you have, or about having ready cash available for "major one-off expenditure". It's about having a variable "cash buffer" as an investment strategy, where the idea is you draw from the cash buffer at times when equities are considered "low" and top up the cash buffer at times equities are considered "high".

This is entirely equivalent to maintaining a constant asset allocation in your main portfolio but having a smaller side portfolio which you switch between equities and cash depending on the state of the market. Of course doing that makes it more obvious that you're trying to time the market...

Sea_Shell

zagfles said:

Sea_Shell said:

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Well we are human after all, not robo-investors😉

I doubt there are many (any?) aspects of financial life that are devoid of the psychological, when decision making.

Which is of course why so many people don't like equities and are 100% in cash, because they can't psychologically cope with their investments going down. Or why people are scared of going to the dentist, or flying etc. And for others, they find it fun taking a gamble so take risks which aren't necessary or sensible.

But the best investors will be the ones who can look at risk/reward logically and rationally rather than emotionally

But what is "logical" without the benefit of hindsight?

Would it be "logical" to sell funds on the way up, and put the cash in "safe" savings instead.

Would it have been logical to have sold after the first 5% drop?

One could probably give "logical" arguments for any of my 1-5 options up thread.
 
These days it seems possible to talk yourself in or out of any "logical" decision depending on what you read or whose videos you watch.

Maybe openly discussing our own "logic", just leads to perceived flaws in our logic being pointed out.

SouthCoastBoy

The key point for me is everybody is different, different aspirations, different personalities, different anxieties, different attitudes to risk etc. I think it I's important to make decisions on what you want, investing is a very personal thing, there is no one answer, by definition there can't be, otherwise there wouldn't be a market.

You just need to do what is right for you. I find forums interesting for debate but take much of what is said with a pinch of salt, we don't really know who we are interacting with, what experience they have etc. We are all strangers to one another.

coyrls

zagfles said:

Linton said:

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Define "benefit".  My objective for investing in retirement is to be able to support steady inflation matching expenditure on a comfortable standard of living  and sufficient cash available at perhaps 1 year's notice for major one-off expenditures for the rest of my and my wife's life with minimal excitement, worry and effort.  Inheritance is not a factor. A % return beyond that necessary to achieve the required level of expenditure provides no benefit and therefore does not come into the equation.

What studies do you  suggest to show that something other than my strategy with
 
37% growth equity 
30% equity + bonds+infrastructure income funds
17% Wealth Preservation funds
16% Cash (mainly PBs)

 would better meet my objectives?

You seem to be missing the point. It's not about what balance of assets you have, or about having ready cash available for "major one-off expenditure". It's about having a variable "cash buffer" as an investment strategy, where the idea is you draw from the cash buffer at times when equities are considered "low" and top up the cash buffer at times equities are considered "high".

This is entirely equivalent to maintaining a constant asset allocation in your main portfolio but having a smaller side portfolio which you switch between equities and cash depending on the state of the market. Of course doing that makes it more obvious that you're trying to time the market...

Exactly, the cash buffer doesn't refer to savings or an emergency fund outside an investment portfolio, it is an asset class within the portfolio but not at a fixed percentage of the portfolio, it is increased and decreased depending on the market.  There is a lack of clarity under what market conditions it should be increased or decreased but the general principle seems to be that the cash buffer is used for income when the market is "down", to prevent selling equities at a "low" price but "down" and "low" are not defined, when the market is "up" equities are sold at a "high" price to replenish the buffer but "up" and "high" are also not defined.

Pat38493

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

I find this an interesting comment because from a gut feel point of view, I'm also not seeing the real benefit of this.  I would certainly be interested in some real life studies proving that the cash buffer is beneficial.  In order to show this you would have to presumably show a repeatable scenario where the cash buffer strategy turned out better in the long run than if you had just left the cash invested with the rest of your funds.  If you do some playing around on an application like Timeline, it looked hard to see that there are any scenarios where having a cash buffer gives you a higher percentage chance of success based on history.

I guess the key point is that the cash buffer is probably shrinking in real terms.