# Optimum % of cash to hold to buy stocks in dips



## TPI (2 December 2014)

Hi,

I read that the Montgomery Private Fund has held on average 30% cash since inception, but still managed to outperform their index benchmarks.

For value investors looking to buy more stocks when they go on sale, what % of your portfolio do you hold in cash for this purpose?

I find that whenever I have any spare cash available my tendency is to find a place for it to be invested very quickly (as long as there is some value there) so as not to have any funds sitting idle.

But in the process probably miss out on days where there are much bigger bargains on offer.

How do others approach this issue?

Thanks.


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## So_Cynical (2 December 2014)

TPI said:


> I find that whenever I have any spare cash available my tendency is to find a place for it to be invested very quickly (as long as there is some value there) so as not to have any funds sitting idle.
> 
> But in the process probably miss out on days where there are much bigger bargains on offer.




I do the same and have found that its an issue, one really should wait for outstanding opportunity's to enter...easier said than done.


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## Wysiwyg (3 December 2014)

TPI said:


> But in the process probably miss out on days where there are much bigger bargains on offer.
> 
> How do others approach this issue?
> 
> Thanks.



I did just that last Friday by buying into a stock that I was waiting for a pull back on. Had my target entry price and they went below so I bought. Then Black Monday and this stock dropped considerably more. The thing is you can rarely enter at the exact low on the stock so a decision has to be made prior about whether the fundamentals at price are the reason to enter. Partial position size (scale in) is one way to enter but they tell us not to add to losing positions. I don't buy that philosophy for long term holds.


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## Bill M (3 December 2014)

It's hard to say in percentages so I will try to say it a different way.

For me it is to buy 4 good sized parcels of stocks (what ever that amount may be to you). Plus I like to have a years worth of cash (as a minimum) for living expenses as well. It may sound like a lot but it is not for a self funded retiree, we don't really have a salary and need to keep quite a bit of cash on hand.


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## Ryan C (3 December 2014)

I don't know what is optimum but I don't set a percentage.  I just keep saving my cash to invest and have set a schedule to buy ETFs every six months with whatever I've saved.  If between those six months however I see a dip in an ETF I hold I'm happy to buy more earlier.
I'm try to hold 6 months worth of emergency funds in cash but if an opportunity arises I'd happily use some of it to buy in a dip because I figure I'm young, healthy, employable and insured and can work to top it up again.


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## joku (4 December 2014)

Prior to using leverage against property, I varied cash between 0% and 40% where 20% meant I generally agreed with market prices - I averaged a tad over 30% cash in that time, and did hit 0% on a couple of occasions. These days I don't hold net cash, I have property loans that are mostly offset and I remain open to using the cash in the offsets to invest into significant market corrections. As much as I hate debt, the home loan interest rate, tax deduct-ability, lack of margin calls, and interest on debt that would work out way below my dividends all adds up to me not worrying much about this debt. 

I'm liking the convenience of this setup too... I've got a very competitive loan rate due to the large debt and strong serviceability (they didn't need to know it was almost entirely going to be offset when I applied for the loan , with offset accounts and no fees for the life of the loan. I only really have to worry about standard interest rate and discount rate creep which is a lot less hassle than previously having to jump through all the hoops and switching accounts to ensure I was getting a respectable return on savings. I have a bit of an advantage here though, because I part own a mortgage broker, so if I need to refinance every few years due to the banks being bastards and creeping out their discount rates I actually profit at their expense via broker commissions that exceed the cost of re-financing.

BTW, I don't think there is such a thing as an optimum average level of cash. The better you are at timing the general market the more cash you want to hold on average above your minimal "rainy day" requirement. I'm very much a value investor but I find my timing of general market movements to be somewhat successful but too inexact to ensure I that I easily profit after compensating for the sub-par returns incurred while sitting in cash. Personally living within my means is still my largest wealth contributor but only because I'm young enough for this not to be dwarfed by returns just yet. Superior share portfolio returns via specific share selection and time in the market are the only other truly significant contributors to my wealth so far. Managing cash % has been immaterial really, it only beats what seems to be my inability to speculate on general market sectors, and my costly desire to support early stage tech stocks.


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## DeepState (4 December 2014)

You can determine the optimal figure under a bunch of assumptions.  This is the concept of the option value of cash. In the absence of inputs and, I assume, real interest in formulae and theory...

More cash if:

Your invested holdings are illiquid (or if your attention to stock portfolio management is limited);
Chance of finding opportunities which are superior to those in your portfolio (ie. they exist AND they can be identified);
Lower risk premium;
Frequency of arrival of opportunities; and
Level of regret at missing a new opportunity.

Have fun with that.  Or maybe 5%-10% will do as a rough number.


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## omac (4 December 2014)

Echo Bills thinking, I decided having enough around for a couple of big purchases (20-40% of portfolio) would keep me somewhat happy.

 I am currently around 40%, has come down from around ~60%, hard to be disciplined as I can be tempted to do 'something' but you can't get them all and would prefer a couple of top shelf picks rather than just being invested for the sake of it (only need one CSL).

I also try to remind myself the downside of too much cash is lower returns while the downside of poor share selection is negative returns, so that helps me temper my urges.
Can also look at cash as opportunity/flexibility yet to be realised rather than a 'low return burden'.


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## Julia (4 December 2014)

Depends entirely on circumstances.  In a rising market I'll be fully invested except for two years of living expenses always in cash.  When the GFC occurred, sold out completely and went 100% to cash while the market fell.

It doesn't make sense to me to have any specific % of available assets in cash regardless of what the market is doing.


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## minwa (5 December 2014)

Sell out of the money cash covered puts. 

-Allows you to be "in" a position and don't feel cash is just sitting there
-Only buy at your "bargain" level.
-If market goes up and you miss move at least you gained some premium

Only problem with this is if you trading ASX you will have a frustrating time with liquidity besides the few big ones. If you're trading US then it's easy.


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## TPI (6 December 2014)

Thanks for the replies, an interesting dilemma. 

I like the idea of having somewhere between 5% and say up to 20% in cash, and maybe a bit higher if an imminent correction is due, though I'm not confident I could pick the timing of this well, so I think I prefer just having a relatively set, stable and modest allocation to cash at this stage.

And Bill M's approach of holding a few meaningful sized parcels worth of cash relative to your portfolio size also makes sense.

minwa, I had considered cash covered puts, but not taken any action on this front just yet, but this is something I will consider further. The only thing I thought with this was that if there was a broad market correction and my put options got exercised, I may have preferred to use that cash instead on other stocks with deeper discounts to intrinsic value than the ones I had the put options on.

I also keep my cash in a home loan offset account like joku.


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## themeinvestor (5 February 2015)

I like to think of it another way.

I hate to quote Warren Buffett, but here I go anyway...

"I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better." 

In that case, you are _forced_ to hold cash, right?


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## galumay (5 February 2015)

themeinvestor said:


> In that case, you are _forced_ to hold cash, right?




Wrong, you are not forced to do anything, but if you are careful and find the right business to own at a compelling price, why would you keep any cash? I dont see Buffet's quote as advocating holding a cash position.


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## StockTrader010 (10 February 2015)

Personally, I don't have a % of cash in mind. I mean, if I would always aim to have a certain amount in cash just in case an 'opportunity' arises, I know I'll probably never invest that cash. As the opportunity cost of holding cash is too high, I rather see it invested. Instead, my aim is to have a % in cash depending on stock market valuations. 

One approach - proposed by Michael Edleson - that dictates whether you should sell or buy is the value averaging approach. Basically, if stock market valuations cause your portfolio to be above the 'value path' you set out, it's time to move into cash, and vice versa. While the method is not that common (dollar cost averaging is more popular), the method works for me .

Hope this helps.


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