Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Investors Should Fight the Temptation of Cash (Opinion Piece from the FT)
”Cash looks tempting. With interest rates for cash in the region of 5 per cent, why not avoid the volatility that comes with stocks? And with short-rates higher than longer-term interest rates, why lock up cash in a longer-term government bond?”
I let the guys running my balanced fund worry about duration, and all that stuff.
Neither have I sold anything to raise cash. Looking forward to the two CD's coming off the books to do a little shopping.
An investor who bought a 10-year US Treasury bond at a yield of 4.5 per cent would see a total return of roughly 13 per cent if that yield fell 1 percentage point over 12 months. If the recession ended up being relatively nasty and the yield fell 2 percentage points, their return would exceed 20 per cent.
How will that feel for the folks that held bonds during the preceding vaporization? Will all be forgiven?
I agree. Will probably cancel my subscription when it expires as somewhat disappointed in the FT lately.
It occurs to me, however, there’s no way to dissuade people not to pile into cash. They will do whatever suits them. I like to take a longer term view personally. But to each his own.
… adopted a “barbell approach”, allocating more of his personal portfolio to low-risk cash and cash equivalents paying decent rates of interest, while at the same time increasing his exposure to much higher risk distressed debt situations to balance this out.
I speculate that he reduced his stock allocation but still have bonds and other asset in order to keep up with inflation.
This M* piece is oriented toward the long term investor:
Cash is yielding more than it has in a decade—so are equities even worth the trouble? We won’t bury the lede. The answer is still yes. But it’s a fair question. Using three-month Treasuries as a cash proxy, investors can earn more than 5% on cash. This is the highest yield since 1995. ...
[It goes on to show how much a pile of cash falls behind stocks over time, and the odds of cash doing better than stocks.]
The lesson is clear: The opportunity cost of sitting in cash is huge and grows over time. ...
There are no perfect allocations or times to invest in risk assets. ...The best thing investors can do is figure out an allocation that works for them and avoid guessing what will happen based on one’s feelings.
Considering that 2023 is turning out to be an unprecedented 3rd BAD year for general bonds (there are always some exceptions), the lesson is that cash is an important part of fixed-income (FI) allocation. Indeed, cash was trash until mid-2022 when the Fed got going in a rush. Timing is difficult even for FI - all cash vs all bond funds.
Cash defined broadly includes T-Bills, m-mkt funds/accounts, ST CDs, ultra-ST bond funds, stable-value funds (SVs; in 401k/403b), and off course that under the mattress or in a can in the backyard (-:).
The basic thing, in my mind, is that, at present, cash replaces traditional bonds for the purpose of 'balancing' equity risk. Eventually, you will likely see a return to said bonds for that purpose, but 5+% free of risk is a tough benchmark to exceed for 'safety' purposes. When 'bonds' start appreciating again; new analysis...
Thanks all for the enlightening thoughts. Especially to @msf for the M* story. Please know the article does not represent the view of the FT. The paper publishes a wide variety of viewpoints. As someone noted, there’s a nearby column in the same issue by El-Erian with a somewhat contrary opinion. I chose to share it more because of the attention-grabbing title plus what seems like a contrarian point of view. FWIW, former head of Bridgewater, Ray Dalio was calling cash “trash” just 2-3 years ago, but has changed his tune and thinks it’s an excellent investment today at higher rates. Who is Karen Ward? First time I ever heard of her. But she works for J.P. Morgan as some sort of investment analyst. Her job description appears in the article.
Cash represents safety. At around a 5% yield it represents a return at / near the recent level of inflation (depending which gage you use or who you believe). Personally, with Social Security and a decent pension I can afford to take more risk in investing than many. So, carrying a very low cash balance doesn’t upset me much. Most of my investments might be described as “alternative” type funds of one sort or another. I try to keep them in relative balance, adding to those that have lagged lately (utilities is one example) and skimming profits from the recent better performers. To me, that represents a more stable less risky approach than owning plain vanilla equity or balanced funds. A caveat, however, is that fees are a lot higher on most of the types of (alternative) funds I invest in. I’m willing to pay that extra price in betting I can at least keep pace with cash over multi-year periods with minimal volatility (ie: pain) and possibly exceed it by a percent or two.
To each his own. I’ve never found El-Erian particularity good at calling the shots. Always sounds pessimistic to me. Since David Giroux is such a favorite here, one might wonder what his position is currently regarding the opportunities in select stocks and longer dated fixed-income securities? Wouldn’t surprise me if his fund is carrying a healthy chunk or cash, being the conservative manager he is.
Investing is always a gamble. With an overweight cash allocation one gambles that other types of investments won’t appreciate substantially during the time one is sitting in cash and that the current appealing cash returns will persist for very long. From @msf’s linked M* article: ”Investing is a game where success usually follows those who think using probabilities, rather than certainty.”
>> ... cash should not be thought of as an equity substitute. >> Investing is a game where success usually follows those who think using probabilities, rather than certainty.
Who thinks like this?
>> Over a five-year period, the difference between stocks and cash is more than 50%. Over 20 years, it’s more than 700%.
Jeez does this need an editor for, what's the word, sophistication. It's the 5%, not only the certainty of cash.
This is kind of beating that poor old dead horse (yet again) but all of this stuff totally depends upon one's age, needs, and resources. I played the game for many years: stocks, stock funds (of many areas and types), bonds, bond funds, Mmkt funds, CDs and Treasuries, real estate rentals (both commercial and residential), even second mortgages (did very nicely on those).
Of course results varied over time, and certainly we weren't into all of those things at the same time. Some were certainly turkeys, but overall we did pretty darned well. At this point we are well out of the accumulation phase and into the preservation phase. 5% does the job very nicely, thank you.
I just checked with my wife about me possibly being "sophisticated”. She looked at me funny and broke into uncontrollable laughter. I wonder what that meant?
I just checked with my wife about me possibly being "sophisticated”. She looked at me funny and broke into uncontrollable laughter. I wonder what that meant?
I dunno. Better ask her.
As for investing being a game, none other than Roy Weitz, founder of Fund Alarm, chose as the site’s (unofficial) mantra a line from Kenny Rogers’ 1978 hit, “The Gambler”. Don’t need to be very sophisticated to understand the connection.
The trend of the thread DID take me there. I was thinking that all the "young", well younger, fund-alarmers are getting old. Then I thought of Ted who inspired the Comments+. Getting toward Christmas and I miss Farmer Ted most around Christmas.
Exactly. Cash position is for short term only to pay bills and others. Stocks, the most volatile asset class will likely be ahead of inflation in the long term.
When money market pays little for so many years, 5% yield today sounds pretty good. Back then inflation was about 2%.
Per TRP website PRWCX/TRAIX 2.68% cash as of 9/30/23. Giroux recently stated that the fund currently has its highest bond allocation since he became manager----domestic bonds at 30.96% and foreign bonds at 1.32%.
I'm expecting a pretty good year-end dividend distribution.
Per TRP website PRWCX/TRAIX 2.68% cash as of 9/30/23. Giroux recently stated that the fund currently has its highest bond allocation since he became manager----domestic bonds at 30.96% and foreign bonds at 1.32%.
Wow. That’s really low on cash for that fund. I know Giroux’s been bullish on investment grade bonds for over a year now (prematurely it turned out). Looks like he’s ”walking his talk …”
I just checked with my wife about me possibly being "sophisticated”. She looked at me funny and broke into uncontrollable laughter. I wonder what that meant?
a fine image
>> ... cash should not be thought of as an equity substitute. >> Investing is a game where success usually follows those who think using probabilities, rather than certainty. >> Over a five-year period, the difference between stocks and cash is more than 50%. Over 20 years, it’s more than 700%.
I mean, seriously.
Maybe I shoulda written 'unsavvy'. The first line above is prizewinning, though.
Comments
Neither have I sold anything to raise cash. Looking forward to the two CD's coming off the books to do a little shopping. How will that feel for the folks that held bonds during the preceding vaporization? Will all be forgiven?
It occurs to me, however, there’s no way to dissuade people not to pile into cash. They will do whatever suits them. I like to take a longer term view personally. But to each his own.
https://www.ft.com/content/2c060be2-4871-4704-97cf-86806007bb97
https://www.morningstar.com/personal-finance/cash-is-no-longer-trash-opportunity-cost-might-be-greater-than-you-think
This M* piece is oriented toward the long term investor:
Cash defined broadly includes T-Bills, m-mkt funds/accounts, ST CDs, ultra-ST bond funds, stable-value funds (SVs; in 401k/403b), and off course that under the mattress or in a can in the backyard (-:).
Cash represents safety. At around a 5% yield it represents a return at / near the recent level of inflation (depending which gage you use or who you believe). Personally, with Social Security and a decent pension I can afford to take more risk in investing than many. So, carrying a very low cash balance doesn’t upset me much. Most of my investments might be described as “alternative” type funds of one sort or another. I try to keep them in relative balance, adding to those that have lagged lately (utilities is one example) and skimming profits from the recent better performers. To me, that represents a more stable less risky approach than owning plain vanilla equity or balanced funds. A caveat, however, is that fees are a lot higher on most of the types of (alternative) funds I invest in. I’m willing to pay that extra price in betting I can at least keep pace with cash over multi-year periods with minimal volatility (ie: pain) and possibly exceed it by a percent or two.
To each his own. I’ve never found El-Erian particularity good at calling the shots. Always sounds pessimistic to me. Since David Giroux is such a favorite here, one might wonder what his position is currently regarding the opportunities in select stocks and longer dated fixed-income securities? Wouldn’t surprise me if his fund is carrying a healthy chunk or cash, being the conservative manager he is.
Investing is always a gamble. With an overweight cash allocation one gambles that other types of investments won’t appreciate substantially during the time one is sitting in cash and that the current appealing cash returns will persist for very long. From @msf’s linked M* article: ”Investing is a game where success usually follows those who think using probabilities, rather than certainty.”
Thanks again for all the comments.
>> Investing is a game where success usually follows those who think using probabilities, rather than certainty.
Who thinks like this?
>> Over a five-year period, the difference between stocks and cash is more than 50%. Over 20 years, it’s more than 700%.
Jeez does this need an editor for, what's the word, sophistication. It's the 5%, not only the certainty of cash.
US inflation the last year has been under 4%.
Of course results varied over time, and certainly we weren't into all of those things at the same time. Some were certainly turkeys, but overall we did pretty darned well. At this point we are well out of the accumulation phase and into the preservation phase. 5% does the job very nicely, thank you.
That’s my take too. It’s all about risk / reward. Than again, I’m not very “sophisticated”.
As for investing being a game, none other than Roy Weitz, founder of Fund Alarm, chose as the site’s (unofficial) mantra a line from Kenny Rogers’ 1978 hit, “The Gambler”. Don’t need to be very sophisticated to understand the connection.
Exactly. Cash position is for short term only to pay bills and others. Stocks, the most volatile asset class will likely be ahead of inflation in the long term.
When money market pays little for so many years, 5% yield today sounds pretty good. Back then inflation was about 2%.
Per TRP website PRWCX/TRAIX 2.68% cash as of 9/30/23. Giroux recently stated that the fund currently has its highest bond allocation since he became manager----domestic bonds at 30.96% and foreign bonds at 1.32%.
I'm expecting a pretty good year-end dividend distribution.
Wow. That’s really low on cash for that fund. I know Giroux’s been bullish on investment grade bonds for over a year now (prematurely it turned out). Looks like he’s ”walking his talk …”
>> ... cash should not be thought of as an equity substitute.
>> Investing is a game where success usually follows those who think using probabilities, rather than certainty.
>> Over a five-year period, the difference between stocks and cash is more than 50%. Over 20 years, it’s more than 700%.
I mean, seriously.
Maybe I shoulda written 'unsavvy'. The first line above is prizewinning, though.