How do you keep money ready for opportunities?

25th Apr '21 by Andy Sav

12 comments 711 reads

Hi,

I am, in large, a stock picker. I am happy with the risk of investing in single companies. My thinking is that managing my own portfolio, my rewards should be greater than investing in a Fund or ETF. Mainly because Funds or ETFs add additional cost and tend to spread risk across a wider portfolio of stocks, so have lower growth / returns. Funds / ETFs also bring additional cost (albeit with the latter, the costs tend to be small)

I am particularly bad at keeping cash on the side-lines and tend to be 100% invested. This means its hard to action sterling opportunities that present themselves. I like to commit to a stock once its in the portfolio and I don't think its healthy to try and rebalance the portfolio; to jump onboard a new opportunity, or even buy in to a dip if it presents itself.

So, I have decided to change my approach and keep somewhere in the region of 5% in cash, to keep options open. I note Edmund Shing's article: https://www.stockopedia.com/co... that infers; to be invested 100% stocks is generally a good approach for the time we are in now and this is the reason why I am not considering a higher cash portion in my portfolio

However, as an investor, I find it very hard just to hold cash. It won't earn any interest and will be subject to inflationary decline. Therefore, I think it makes sense to push the cash in to an ETF instead. I'm thinking ETF rather than a Fund due to the lower costs. Also, selling an ETF is quicker than selling a Fund, so cash can be made readily available. I am thinking an ETF that follows property may be a good idea, as this should be defensive to a down turn in some of the growth areas we are seeing. Also, having an income return will further protect the holding.

Do you agree with this approach? Are you doing something similar? Can you recommend an ETF / other approach which you use to hold and make cash readily available for investing?

Thanks,

Andy

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gus 1065

25th Apr '21

Observation about keeping your “cash” fully invested in e.g. an ETF, bear in mind that although these are liquid and can be sold quickly, bear in mind it will take a few days to settle and for you to be able to reinvest the cash. Fine if you like to take a few days to research and enter a position, less so if you’re more of an opportunist investor. Likewise, I like to keep a reasonable float of cash in my account so that I’m never put in the position of being a forced seller during periods of market volatility if I need the cash for other expenditures (or indeed want to fund a new investment).

Probably depends on individual circumstances - I’m retired so have a reasonable pool of capital but no regular salaried income (not yet drawing from the SIPP), hence for me the convenience of having a cash float outweighs the inefficiency of lost investment return.

Gus.

Andy Sav

Thanks Gus, all valid points :) I'm a 15 years (or so) of retirement, so still trying to build the investment. I think its wise to keep an emergency float, but I prefer to keep that readily available in a bank account, rather than with in my investment account. Although, as you mention, i am still receive a salaried income, so I feel less pressured about keeping a large emergency float.

Rusty2

I don't agree about property funds in a downturn, these tend to fall and can be suspended. You would need to look at them going back to around 2007 and see their performance. You will only outperform funds, if you are a better investor than the fund manager, sometimes they can buy shares at a discount which is not available to PIs. Some funds last year went up over 100%, which far out performs my performance. Actually I think markets are looking overvalued, so I don't think it is the right time to be fully invested, 97% of US shares are above 200MA, that is the highest it has been for over 15 years I believe, better to be fully invested after a correction?

I also don't agree about settlement, if I sell a share or EFT, then I can buy using the funds straight away in my accounts, I don't need to wait until the funds have cleared.

At the moment I would probably favour some of the metal ETFs which are performing well such as Copper etc. I tend to have a cash float, so I can quickly buy shares if the opportunity arises, if you are fully invested then what happens, if the market does suddenly crash as we saw last March, 2020?

Brilliant Leader

Hi Andy

I share your dilemma and find it really hard to hold cash in any meaningful size for any more than just a few days ( I can always find things to deploy it on, even if just topping up existing holdings). If I were to find myself with a meaningful amount of cash at the moment (e.g. if the investment thesis failed for an existing holding or there was a takeover) while the market appears stretched on valuation, I would probably buy a gold ETC such as Royal Mint Physical Gold ETC Securities (LON:RMAP) but that is just at this moment in time. More generally I would have to sell or top slice something in order to buy something new which is a state of affairs I have come to accept as being right for me. I don’t think there are truly any reliable cash proxies other than cash itself which as you say, also has its drawbacks.

Incidentally, I don’t agree with the point made by Gus that there is a delay on funds being available when selling an ETF. While it is true that there is usually a two day settlement period (as standard) on selling a holding, this really only affects cash withdrawals as most brokers will allow you to reinvest the funds immediately as buys are also on a two day settlement period - at least this is the case with all the brokers/platforms that I use.

Cheers
Simon

Thank you Herbie

bryans1311

It’s actually something I’ve always wondered, whenever some investors mention having cash available for great opportunities. OK, so a great investment presents itself, you have 5% cash and decide to buy. You’re then back to the position of having no cash. How do you get back to your original requirement of holding cash? You’ll have to sell something.

Anyway, rant over! Personally, I prefer to invest in what I want to invest in, rather than worrying about % cash etc. If I have 0% cash, then I need to consider if I have anything worth selling first. I find it a good mental test, as to whether the new proposed investment is actually good enough to displace something I already have. If not, why bother?!

Effortless Cool

i typically hold between 2.5%-7.5% in cash (currently 3.6%). I would never own more than 20 different shares (currently 16), so my cash is generally close to but lower than my average holding. This lets me put a toe in on anything that grabs my interest whilst I do further research. Thus, it gives flexibility without a meaningful drag on performance. I value this flexibility and don't feel any pressure to have every last penny invested.

Gromley

Fully agree with bryans's point here; if you hold 5% cash so that you have scope to buy the next fantastic opportunity, then a second unmissable opportunity crops up tomorrow that you will miss out on.

Of course the 5% buffer does present the luxury of having time to consider what to sell to restore your buffer. I think you do need a strong plan of how to restore your buffer.

I take a slightly different approach to this by using a modest amount of leverage.

Warning leverage can be dangerous, so please think very carefully if you decide to use it.

I'm actually recalibrating how I do this, so instead of using my own 'rules' I'll just use an example - probably better anyway as my appetite for risk and my methods of mitigating it may be different from yours for a huge number of reasons.

Suppose I consider myself to be fully invested if my leverage reaches 1.2X (IE for every £1,000 I have I am exposed to £1,200 of stock value.

If I do not think there are enough things that I want to own I don't have to go to 1.2X , but in this example it would be the expected norm.

I would have two levels above this , lets say 1.3X and 1.4X.

If there were stocks I definitely wanted to buy and nothing I wanted to sell then I would be prepared to buy up to the 1.3X level. Above 1.3X I would be 'on notice' that I need to work hard to find something to sell. If there are no obvious selling candidates, then potentially I would still buy up to 1.4X leverage but at 1.4X a hard and fast rule that there should be no more buys without a sale.

Of course I am actually conflating two ideas here; use of leverage and a graduated approach to exposure. The equivalent to the gradation I use in my example would be :

Normal invested level 86%
Higher threshold 93%
Absolute maximum : 100%

In those terms it all looks quite conservative.

I should also just add that "keeping some powder dry" is only one reason to be in "cash" there is also protection against a market crash, but that's a whole different discussion.

On the question of whether to hold your reserves in cash, ETFs, funds or something else; I would just observe that all of the (liquid) alternatives to cash are investments with some degree of volatility. Would it actually be emotionally easier to sell your ETF at an unreasonable low point in order to fund you next purchase than in it would be to sell a stock that you think still has value left in it?

As ever, I cannot see that there is a right answer here, so I think you just need a plan that fits your investment psyche and to stick to it.

26th Apr '21

Thanks for all the great replies. Its given me lots of points to consider :-)

PLS1nve5t

I also don't agree about settlement, if I sell a share or EFT, then I can buy using the funds straight away in my accounts, I don't need to wait until the funds have cleared.

I think that is your broker giving you a small line of credit here. They know the funds will be available to you in 3 days time due to your sell, they also know that they don't need to hand over the cash for the new shares for 3 days, so it sort of evens out.

I think if you sell and wish to withdraw the cash, then you have to wait for settlement day so it is available in your account.

My point is you don’t have to wait a few days. Yes if you want to withdraw the money then that is different.

27th Apr '21

Ahhhh I get it now, that was a reply to Gus without hitting the "reply" button so it was unthreaded. Glad we agree :-)

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Andy Sav

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