Alternative to Holding Cash

(31-05-2013, 11:11 AM)Wildreamz Wrote: Holding large position in cash for long period of time may impact negatively on your long term returns.

return OF capital is more important than return ON capital.

but of cos that's cos i am using my money and not other people's money.

imo,

cash only becomes very important if one doesn't have it or doesn't have enough to buy what he/she desires.

beyond holding 3-5years of emergency funds (ie if one totally does not receive any income from active working) and that could well be placed in safe low yielding bonds, I don't see very much value in holding more than that.

and to hold wealth in rare paintings or rare antiques to "stand by" is not a wise thing to do. Because when big crisis comes, even the rich would think twice before parting their money to purchase such things, UNLESS, the antique involved is such a one of a kind thing and once a lifetime thing to possess. To the very rich of net worth 500m, even a drop of 50% during a crisis, would still place their net worth at 250m, and they are still very rich at that sort of wealth level.

in crisis, more often than not, we see cash strapped owners willing to part their prized possessions for a fraction of its worth, in order to raise funds to save their businesses or repay their debts.

unless one is purely an opportunist player and keep hording lots of cash to prepare to go all in to vulture on the next crash with anticipation of immense gains on recovery

to horde a few millions of cash sitting down doing nothing in FD and just to wait for the next crash
to appear I have still yet to meet personally.

(01-06-2013, 10:10 AM)weijian Wrote:

(31-05-2013, 11:11 AM)Wildreamz Wrote: At times when investments opportunities are not available, what would you do with your spare cash? Note that your overall portfolio returns also includes your cash holdings. Holding large position in cash for long period of time may impact negatively on your long term returns.

Hi Wilddreamz,

(1) All my cash have been used to buy 'call options'. I am not gaining anything from these options and in fact, i am paying for this options with my cash.
(2) The call options that i am buying, do not expire and allow me to buy the shares in the infinite future at a strike price that i decide.
(3) I am currently paying for these call options with the opportunity costs that i have lost (for not investing in dividend counters and other capital gains from potential investments) and also eaten away from inflation.
(4) I am TOTALLY fine with inflation corroding my portfolio slowly and surely, IF i am able to swing the big pitch when it comes.

P.S. Just sharing how Warren Buffett views his own cash holdings.

haha, this is an interesting way of looking at cash holdings

This is again a "NO ONE SIZE FIT ALL" situation.
i think (whatever you do) the most important thing is you must be able to maintain your liquidity (cash flow) for daily living expenses by passive incomes for retiree. If not, you will have to deplete your capital assets lol. Just try your best not to be forced to sell some of your assets because of your poor management cash flow or liquidity. Actually if you are still working, the difference is you based on your active incomes + all the passive incomes to manage your liquidity.
Another words, don't get yourself into a liquidity trap, you will be doing all right. Working or retire or the same as a company.

(01-06-2013, 10:17 AM)AlphaQuant Wrote:

(31-05-2013, 11:11 AM)Wildreamz Wrote: Holding large position in cash for long period of time may impact negatively on your long term returns.

return OF capital is more important than return ON capital.

but of cos that's cos i am using my money and not other people's money.

To put it in another way, it's still Risk vs Reward ie. Each Individual will have to assess whether the Risk-Reward is good enough for themselves,

Return OF Capital = Risk
ie. what's the risk of losing $$ if you're wrong and how much you can potentially lose in the worst case

Return ON Capital = Reward
ie. How much you can potentially make if you're right

So, yes, if you really can't find anything that fits your Risk-Reward requirements, there's nothing wrong with keeping cash, even if it deflates at the rate of inflation.

But then again, perhaps we have either not looked hard enough or we're being overly focussed on the Index and not individual stocks or we're too narrowly focussed in our area of competence or... Perhaps, a good time to widen our knowledge by reading widely or learning from others...

For me, I keep around 6 months salary as emergency funds.

My style is to:
- Buy dividend stocks, collect dividends
- Use the dividends to buy more dividends stocks and collect more dividends
- Rinse and repeat and compound over the next 30 years

I have been doing this for the past 4 years and it is already showing good progress.....

(01-06-2013, 11:14 AM)Dividend Warrior Wrote: For me, I keep around 6 months salary as emergency funds.

My style is to:
- Buy dividend stocks, collect dividends
- Use the dividends to buy more dividends stocks and collect more dividends
- Rinse and repeat and compound over the next 30 years

I have been doing this for the past 4 years and it is already showing good progress.....

Wouldn't valuations play an important role in your plan above? Buying "dividend stocks" means also taking into account their valuations during economic cycles, and ensuring one has the requisite margin of safety. Rinsing and repeating is not as simple as it sounds, for it should involve a detailed study of the underlying business characteristics of each dividend-paying company to ensure that one avoids the risk of permanent loss of capital.

I would also like to remind that if you started 4 years ago (i.e. May 2009), you would have only seen a rising market where valuations have ben heading upwards. Investing in such an environment is extremely comfortable - but the real test generally comes when crisis and trouble hits the fan. Always test your investment philosophy against a bear market cum economic downturn - if you are still able to avoid permanent capital loss and still earn a consistent return, then I would say you have a very sound philosophy in place. No offense I hope.

to add on:
unless one is drawing a huge 6-7 fig income, one's plan needs to be sound. simple reason is that one cannot turn back the clock when he is 65 n realises on hindside he shd have taken an alternative route instead.

(01-06-2013, 12:12 PM)Musicwhiz Wrote:

(01-06-2013, 11:14 AM)Dividend Warrior Wrote: For me, I keep around 6 months salary as emergency funds.

My style is to:
- Buy dividend stocks, collect dividends
- Use the dividends to buy more dividends stocks and collect more dividends
- Rinse and repeat and compound over the next 30 years

I have been doing this for the past 4 years and it is already showing good progress.....

Wouldn't valuations play an important role in your plan above? Buying "dividend stocks" means also taking into account their valuations during economic cycles, and ensuring one has the requisite margin of safety. Rinsing and repeating is not as simple as it sounds, for it should involve a detailed study of the underlying business characteristics of each dividend-paying company to ensure that one avoids the risk of permanent loss of capital.

I would also like to remind that if you started 4 years ago (i.e. May 2009), you would have only seen a rising market where valuations have ben heading upwards. Investing in such an environment is extremely comfortable - but the real test generally comes when crisis and trouble hits the fan. Always test your investment philosophy against a bear market cum economic downturn - if you are still able to avoid permanent capital loss and still earn a consistent return, then I would say you have a very sound philosophy in place. No offense I hope.

I started in 2007. Waiting for round 2 to test my strategy and see what need to change. Then round 3, then round 4, then ... ...

Or at least a safe 3 to 5 years of living expenses to see you can play with the Bear until at least you can see the Bull approaching. That is even if you buy all the "correct shares", it's no use if you are forced to sell because you need the money. Again it's about cash flow or liquidity again. If you are a retiree (even still working) with limited capital, always remember to ask yourself:
Is this risk necessary to take? More than where is the risk? Where is the return?
So maybe a more balance approach is better.