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

zagfles

Sea_Shell said:

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.

Logic has nothing whatsoever to do with hindsight.

As an example, if someone offers you a bet where you can half or double your money on the toss of a coin, do you take it? So £1000 would become £500 if you lose, or £2000 if you win. Logically you should take the bet because the upside is £1000 gain whereas the downside is a £500 loss. You might lose, and hindsight says it was the wrong decision. But logic says it was the right decision. Emotionally, you might not be able to handle the risk of losing £500.

Of course the opposite is true for almost all forms of gambling. Logic says the bookies/casinos/fruit machines make profits, so the odds are against you. So don't gamble. But some people will win. Logic says "bad move", hindsight says "good move". Some people do it for fun, or because they are addicted, rather than because they think it's a good financial decision.

Now for "timing the market". Do you think you can do it successfully? If you really can call when the market is low, or high, then you should use those skills to make yourself a millionaire. Just look at a few share/fund graphs of the last few years, and imagine you'd started with £10000 and made all the right calls. You'd be filthy rich. Why didn't you? Didn't you trust yourself to get the calls right? Of course the stockmarket price is set by millions of people, investment firms etc trying to do the exact same thing. It's never obvious that the market is underpriced or overpriced, because the price is set by buyers and sellers, ie when there are equal numbers of each, where there is basically a 50/50 opinion in the marketplace of whether buying or selling is the right move. So why do you think you know better? Do you know something the other millions in the market don't?

And that applies to whether you speculate with your £10000, or whether you speculate by deciding to change the funds you drawdown from based on whether you think now is a good time to buy or sell. It's the same thing, you're timing the market.

Logically, if you're capable of calling whether now is a good time to buy or sell, then you should already be a billionaire. If you're not a billionaire, then why do you think you have those skills?

But of course it's not all about logic. Like with gambling, you may do it just for fun, as a bit of a flutter, rather than as a sensible financial decision. Or alternatively, you may do it for the opposite reason, as a comfort blanket. Nothing wrong with either, we all do it to some extent and not just with finances. But as long as you realise that's what you're doing, like when you place a bet on the 3:30 at Kempton Park.

NedS

Sea_Shell said:

BritishInvestor said:

NedS said:

I am amazed how many people have a cash buffer as part of their investment strategy 

Yep, Agreed

You both say that as if its a bad or stupid thing to have?    

Not at all, and @BritishInvestor deliberately partially quoted me when my full statement was:

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'.

So what problem are we trying to solve by having a cash buffer? Presumably it's to reduce the risk of catastrophic failure due to bad SoR risks near the start of drawdown. To allow a portfolio to survive such an event where without the cash buffer it would have otherwise reduced the longevity of the drawdown plan.

A cash buffer is going to act as a drag when equity markets rise but will help smooth the volatility of an equity heavy portfolio when equity markets fall, much like bonds may have done when bonds were negatively correlated to equity. So cash is effectively being used in place of bonds, except there is no yield on cash within a SIPP (and low yield outside of a tax wrapper), and higher inflation now also needs to be factored in and will reduce the case for holding a significant cash buffer over the long term.

So I guess the easiest answer to the question is simply to view the cash buffer as part of the non-equity portion of the portfolio and to employ an appropriate harvesting strategy (e.g, prime harvesting, MH McClung).

QrizB

zagfles said:

So why do you think you know better? Do you know something the other millions in the market don't?

You've reminded me of the (mandatory?) warnings on CFD trading sites, like this example from one of the more popular ones:

77% of retail investor accounts lose money when trading CFDs with this provider.

It's in bold there too, but people still trade. They never expect to be one of the 77%.

Sea_Shell

coyrls said:

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.

That seems like a very blurred distinction to me.

Our cash is 10% of every bean we currently own, excluding house/car etc.

So is this a cash buffer, savings, emergency pot, or part of our portfolio?

Maybe I've just been using the wrong terminology, as to me it's just cash, available to us, alongside our other funds.

coyrls

Sea_Shell said:

coyrls said:

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.

That seems like a very blurred distinction to me.

Our cash is 10% of every bean we currently own, excluding house/car etc.

So is this a cash buffer, savings, emergency pot, or part of our portfolio?

Maybe I've just been using the wrong terminology, as to me it's just cash, available to us, alongside our other funds.

I don't know in your case.  In my case I do keep cash in my non SIPP portfolio as part of the fixed interest portion, as fixed term savings accounts are a pretty good alternative to bonds but I don't try to flex the percentage of the portfolio allocated to cash depending on my view of market conditions, I rebalance the fixed interest portion to a fixed percentage of the total portfolio.

The title of this thread "What is your trigger point to start spending from cash buffer?"  Does imply that you are viewing your cash as a mechanism for avoiding selling when markets are low and that you want a definition of what "low" is.  If that is the case, as zagfiles suggests, you are asking about market timing and using your cash as a buffer.  It is not the sort of question somebody would ask about their savings, that would be something like, "is now a good time to buy a new ....?".

Audaxer

Sea_Shell said:

coyrls said:

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.

That seems like a very blurred distinction to me.

Our cash is 10% of every bean we currently own, excluding house/car etc.

So is this a cash buffer, savings, emergency pot, or part of our portfolio?

Maybe I've just been using the wrong terminology, as to me it's just cash, available to us, alongside our other funds.

I agree that it's just cash that could be used for any of these things. In your case I think it could be larger than 10% if you wished without any risk of you running out of money, especially with DB and State Pensions to come.

My general view on cash buffers is that someone that needs to drawdown only a very small percentage of their portfolio each year, say 2%, would not necessarily need a cash buffer - i.e. they could still drawdown 2% of their investments even in falling markets, and still be unlikely to run down their pot even with a poor sequence of returns. However the same person could also choose to hold a large percentage of cash if they so wished and have less invested, still without the risk of running out of money. 

Whereas someone needing to drawdown say 4% or more from their investments without a cash buffer, could be in trouble if there was a poor sequence of returns early on. I certainly wouldn't feel comfortable if I needed to drawdown 4% each year without having a cash buffer.

Sea_Shell

So I don't actually HAVE a "cash buffer", so my question is pointless in those circumstances.

Thanks for the clarification.   coyrls said:

Sea_Shell said:

coyrls said:

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.

That seems like a very blurred distinction to me.

Our cash is 10% of every bean we currently own, excluding house/car etc.

So is this a cash buffer, savings, emergency pot, or part of our portfolio?

Maybe I've just been using the wrong terminology, as to me it's just cash, available to us, alongside our other funds.

I don't know in your case.  In my case I do keep cash in my non SIPP portfolio as part of the fixed interest portion, as fixed term savings accounts are a pretty good alternative to bonds but I don't try to flex the percentage of the portfolio allocated to cash depending on my view of market conditions, I rebalance the fixed interest portion to a fixed percentage of the total portfolio.

The title of this thread "What is your trigger point to start spending from cash buffer?"  Does imply that you are viewing your cash as a mechanism for avoiding selling when markets are low and that you want a definition of what "low" is.  If that is the case, as zagfiles suggests, you are asking about market timing and using your cash as a buffer.  It is not the sort of question somebody would ask about their savings, that would be something like, "is now a good time to buy a new ....?".

We are working on a 3% drawdown rate, so somewhere betwixt and between!!

Audaxer said:

Sea_Shell said:

coyrls said:

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.

That seems like a very blurred distinction to me.

Our cash is 10% of every bean we currently own, excluding house/car etc.

So is this a cash buffer, savings, emergency pot, or part of our portfolio?

Maybe I've just been using the wrong terminology, as to me it's just cash, available to us, alongside our other funds.

I agree that it's just cash that could be used for any of these things. In your case I think it could be larger than 10% if you wished without any risk of you running out of money, especially with DB and State Pensions to come.

My general view on cash buffers is that someone that needs to drawdown only a very small percentage of their portfolio each year, say 2%, would not necessarily need a cash buffer - i.e. they could still drawdown 2% of their investments even in falling markets, and still be unlikely to run down their pot even with a poor sequence of returns. However the same person could also choose to hold a large percentage of cash if they so wished and have less invested, still without the risk of running out of money. 

Whereas someone needing to drawdown say 4% or more from their investments without a cash buffer, could be in trouble if there was a poor sequence of returns early on. I certainly wouldn't feel comfortable if I needed to drawdown 4% each year without having a cash buffer.

zagfles

Audaxer said:

Sea_Shell said:

coyrls said:

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.

That seems like a very blurred distinction to me.

Our cash is 10% of every bean we currently own, excluding house/car etc.

So is this a cash buffer, savings, emergency pot, or part of our portfolio?

Maybe I've just been using the wrong terminology, as to me it's just cash, available to us, alongside our other funds.

Whereas someone needing to drawdown say 4% or more from their investments without a cash buffer, could be in trouble if there was a poor sequence of returns early on. I certainly wouldn't feel comfortable if I needed to drawdown 4% each year without having a cash buffer.

So how would you use such a cash buffer? What would be your criteria for using it/topping it up? Does it involve judgements as to whether the market is high or low?

Linton

NedS said:

Sea_Shell said:

BritishInvestor said:

NedS said:

I am amazed how many people have a cash buffer as part of their investment strategy 

Yep, Agreed

You both say that as if its a bad or stupid thing to have?    

Not at all, and @BritishInvestor deliberately partially quoted me when my full statement was:

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'.

So what problem are we trying to solve by having a cash buffer? Presumably it's to reduce the risk of catastrophic failure due to bad SoR risks near the start of drawdown. To allow a portfolio to survive such an event where without the cash buffer it would have otherwise reduced the longevity of the drawdown plan.

A cash buffer is going to act as a drag when equity markets rise but will help smooth the volatility of an equity heavy portfolio when equity markets fall, much like bonds may have done when bonds were negatively correlated to equity. So cash is effectively being used in place of bonds, except there is no yield on cash within a SIPP (and low yield outside of a tax wrapper), and higher inflation now also needs to be factored in and will reduce the case for holding a significant cash buffer over the long term.

So I guess the easiest answer to the question is simply to view the cash buffer as part of the non-equity portion of the portfolio and to employ an appropriate harvesting strategy (e.g, prime harvesting, MH McClung).

I see the cash tranche, alongside Wealth Preservation and Income tranches, as having the permanent justification of minimising any dependence of  expenditure on the growth equity in the short/medium term.  One can then leave the 100% equity tranche alone to focus on long term inflation matching and, if required, real capital growth with only the very occasional rebalance to top up the other tranches.  Short/medium term equity volatility ceases to be an issue.  One does not need bonds purely to act as ballast with the non-equity having a vital positive role in its own right.

GazzaBloom

Interesting article here on cash buffers from Abraham Okusanya, creater of the Timeline.app planning software

Cash Buffers, Sustainable Withdrawal and Bear Markets - Timeline app

The article suggest that cash buffers reduce a portfolio's sustainability. His suggestion for the optimum is a "Good cash buffer" portfolio:

• Good Buffer: this portfolio consists of a 60/30/10 in global equity, bond and cash. Withdrawals are only ever taken from cash, which is replenished if the cash allocation drops below 2%. The portfolio is rebalanced if the equity allocation is more than 10% up or down from the original allocation. This approach draws on earlier research (Okusanya, 2018 referenced above) which shows that implementing a cash buffer by reducing ONLY the bond allocation is a more effective strategy. 

Interesting that this was written before this years remarkable drop in bonds and stocks at the same time with bonds not acting as a hedge against the drop this time around.