How cash brings down overall portfolio return

[ENP]

I’ve come to a bit of a road block and want some clarification.

I’m working out on excel whether it would be better to invest into a stock now or wait until it gets cheaper/earnings increase to make it better value. The quick calculation I’ve done is comparing if I buy a stock now and hold it for 7 years or if I theoretically wait and buy it in two years.

I’m assuming EPS, dividends grow at 10% p/a for the entire 7 years and that I will only buy if I can get a 15% p/a on the stock investment.

However, I’ve worked out if I wait the two years, even though in year 2, I will begin making 15% p/a on the investment, when averaged over the entire 7 years the return per year reduces to 10.5% p/a because it was sitting in cash earning nothing for 2 of those years.

I’m a bit confused as how to best effectively use cash in my portfolio. I want it there so it is accessible to be able to buy bargain stocks, but then I don’t want it sitting there for years at a time bringing down the overall return of my entire portfolio.

I guess the argument is whether to be fully invested or just buy when the stocks become cheap.

 

[tech/a]

I’ve come to a bit of a road block and want some clarification.

I’m working out on excel whether it would be better to invest into a stock now or wait until it gets cheaper/earnings increase to make it better value. The quick calculation I’ve done is comparing if I buy a stock now and hold it for 7 years or if I theoretically wait and buy it in two years.

I’m assuming EPS, dividends grow at 10% p/a for the entire 7 years and that I will only buy if I can get a 15% p/a on the stock investment.

However, I’ve worked out if I wait the two years, even though in year 2, I will begin making 15% p/a on the investment, when averaged over the entire 7 years the return per year reduces to 10.5% p/a because it was sitting in cash earning nothing for 2 of those years.

I’m a bit confused as how to best effectively use cash in my portfolio. I want it there so it is accessible to be able to buy bargain stocks, but then I don’t want it sitting there for years at a time bringing down the overall return of my entire portfolio.

I guess the argument is whether to be fully invested or just buy when the stocks become cheap.

Being Fully invested while your portfolio is falling in value even though your receiving a dividend maybe worse than sitting for sometime in cash.
If you can manage initial capital erosion and keep at least at break even (Not hard to do ) then full investment is wise and in fact preferable..

 

[skc]

I’ve come to a bit of a road block and want some clarification.

I’m working out on excel whether it would be better to invest into a stock now or wait until it gets cheaper/earnings increase to make it better value. The quick calculation I’ve done is comparing if I buy a stock now and hold it for 7 years or if I theoretically wait and buy it in two years.

I’m assuming EPS, dividends grow at 10% p/a for the entire 7 years and that I will only buy if I can get a 15% p/a on the stock investment.

However, I’ve worked out if I wait the two years, even though in year 2, I will begin making 15% p/a on the investment, when averaged over the entire 7 years the return per year reduces to 10.5% p/a because it was sitting in cash earning nothing for 2 of those years.

I’m a bit confused as how to best effectively use cash in my portfolio. I want it there so it is accessible to be able to buy bargain stocks, but then I don’t want it sitting there for years at a time bringing down the overall return of my entire portfolio.

I guess the argument is whether to be fully invested or just buy when the stocks become cheap.

Your question made little sense and your assumptions on what happens in the next 10 years are very unlikely to reflect reality. If the stock is growing at 15% p.a. while you are sitting in cash, of course you will experience lower returns. That's just maths.

The way to use cash efficiently, is to buy when the risk-reward is in your favour, and be prepared to switch if other higher reward-to-risk opportunities come around.

 

[white_goodman]

insert efficient frontier yada yada

 

[Knobby22]

I'm about a third in cash at the moment.

 

[qldfrog]

the dow trent in the last weeks saw me exiting a lot of position, with foreign currency funds my only increase, I also took a few bets (protected with put options on Rio/bhp and nab/tls just in case;
cash at 40% or so now of my asx portfolio whereas i was at 80/20 if not more a month ago
wait and see, I trust my system more than my gut feeling after too long a bad experience
So cash can be good

 

[sydboy007]

I followed Mr Buffett last month and sold out of some shares I felt had gotten over valued and moved more into hybrids and bonds.

Cash is king, and provides a lot of flexibility, but at the moment returns are not great - barely positive after tax and inflation.

Better off buying some decent bonds if ya willing to hold for 6-12 months.

 

[Valued]

If you have a regular source of income you could consider buying bargains on margin too without the need to keep a lot of cash around. The viability of that is equal to how much you earn. As always, seek professional advice, do your own research, and inform yourself of the risk of buying on margin.

 

[Hodgie]

If you have a regular source of income you could consider buying bargains on margin too without the need to keep a lot of cash around. The viability of that is equal to how much you earn. As always, seek professional advice, do your own research, and inform yourself of the risk of buying on margin.

I do exactly this, when an opportunity arises I buy on margin then just pay it down with income rather then waiting to build cash up and miss out on a good buy. But im still young and do not have a huge capital base yet so my position may change as time progresses.

 

[MARKETWINNER]

I’ve come to a bit of a road block and want some clarification.

I’m working out on excel whether it would be better to invest into a stock now or wait until it gets cheaper/earnings increase to make it better value. The quick calculation I’ve done is comparing if I buy a stock now and hold it for 7 years or if I theoretically wait and buy it in two years.

I’m assuming EPS, dividends grow at 10% p/a for the entire 7 years and that I will only buy if I can get a 15% p/a on the stock investment.

However, I’ve worked out if I wait the two years, even though in year 2, I will begin making 15% p/a on the investment, when averaged over the entire 7 years the return per year reduces to 10.5% p/a because it was sitting in cash earning nothing for 2 of those years.

I’m a bit confused as how to best effectively use cash in my portfolio. I want it there so it is accessible to be able to buy bargain stocks, but then I don’t want it sitting there for years at a time bringing down the overall return of my entire portfolio.

I guess the argument is whether to be fully invested or just buy when the stocks become cheap.

It depends on the individual and strategy that we apply. Actually if we can find winning stocks, commodities or other assets all the time we can keep fully invested. How do we do this? We may need portfolio adjustments, review of portfolio every month, every quarter and every year, more home work, sector rotations, market rotations, commodity rotations and currency rotations etc. I don’t think anybody can achieve some targets within short period. Value masters can pick at any time as long as they see good value and future prospects. Value masters may have some opportunities in some markets, sectors and commodities now.

If we analyse developed markets first I can see the scenario that we experienced. If we had allocated money at the wrong time wrong place we would have lost money massively. If we take period from 2007 to 2013 there were bull markets in many stocks markets and in commodities, in currencies and in sectors and selected stocks and commodities. Different markets, sectors, commodities and currencies had bull markets short term, mid term and long term at different times. For example we had bull trend in countries such as Germany, UK, USA and Japan in the recent past. Even in Australian and New Zealand had bull trend and few shares shined more than others. There were more than five baggers in Australasia as well. One year market return in USA is less than 80%. However there were few consumer staples which I was following during last 10 to 15 years gave more than 80% return within one year. We should nor forget frontier and emerging markets either. Recently I was doing some study and found some companies have given more than 100% within one year. Even our retirement funds have invested in so called frontier and emerging world.

If we analyse commodities corn, oil, gas, Soya bean, gold, silver and some other metals they also had different types of bull markets. Some emerging market commodities such as parm oil and rubber had their day during last five years. Then there were strong rally tea and other plantations stocks in emerging and frontier world in some period during last five years. If we analyse all markets and commodities some intelligent international investors have taken position in almost all the commodities I mentioned in the above and they know art of investing and adjusting their portfolios. Some long term investors never worry about short term events and short term market volatility.

So far I have followed fully invested method and I have no regrets. I may study whether I can do much better while raising cash time to time.

As I said before this is the time to identify next most bullish markets, sectors, commodities and currencies before others.

My ideas are not a recommendation to either buy or sell any security, commodity or currency. Please do your own research prior to making any investment decisions.

 

[ufo8mydog]

I’m a bit confused as how to best effectively use cash in my portfolio. I want it there so it is accessible to be able to buy bargain stocks, but then I don’t want it sitting there for years at a time bringing down the overall return of my entire portfolio.

It depends on how much cash you have. If the amounts are small the overall returns are going to be marginal in either situation.

Anyway, I would be set aside a portion of cash for potential bargain buys (or not - you can just use margin loans for quick trades). The opportunity cost of your cash sitting there being eroded by inflation is too high to just sit around and do nothing with it.