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Going 100% cash

Discussion in 'Managed Funds & Index Funds' started by MrDarcy, 22nd Oct, 2008.

  1. MrDarcy

    MrDarcy Well-Known Member

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    In the spirit of informed discussion, and less deletion, please let us assume this thread is NOT related to any fund in particular :)

    In this swinging market, a share fund 100% in cash has advantages and disadvantages. The capital is safe in the short term until lost opportunity and inflation erode it, but how and when one would re-enter such a fund has me perplexed.

    To buy units before the fund starts to reinvest, one misses out on the risk and rewards of entering the market in a fully invested fund.

    To buy units after the fund starts to invest, if the market has increased then one is buying too late and has missed some value buying. If the market has dropped then I see good opportunity still.

    Anyone have any thoughts on a personal strategy for handling such a situation?

    Has anyone experienced this before?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I don't think it needs to be this complicated.

    It is effectively the same argument about whether to invest the cash you have now or to wait and hold onto your cash.

    I have a large amount of cash sitting in my bank account since I sold out of the market back in Q1 this year. The question is - by sitting out of the market now, am I missing out on opportunity ... or am I minimising risk ... or both ? (those are rhetorical questions - I won't actually be reinvesting that money for other, personal reasons).

    At what point should one re-enter the market ?

    Is buy-and-hold-no-matter-what a good strategy ?

    Is buy-and-hold in a flat or falling market a good strategy when you have holding costs such as leverage ?

    Let's assume you had $100K sitting in your bank account and would love to invest it.

    Did you invest when the market hit new lows in July thinking you were getting a bargain ?

    Did you invest more when the market his new lows in September thinking you were getting better bargains ?

    Are you investing now because the market hasn't been this cheap in over 2 years ?

    What is stopping you buying into the market now ?

    Yes, some people are averaging in - and have been for some time.

    But what are the others waiting for ?

    Are you sure it won't go down more? It has taken us 12 months to find the lows we are at now ... are you convinced we've actually seen the bottom ?

    On thing that must concern you is when the market can move by 7% in a single day ... in both directions! ... if you buy one day because the market is up a bit but it falls 7% the next ... is that a good strategy ?

    When do you buy ? Do you buy the up days (because the market seems to be recovering) or do you buy the down days (because things are cheaper) ? Do you buy when you have money available no matter what the price (DCA ?). Or do you choose to sit this out until a clear direction is seen ?

    Personally - I won't be investing any more money into this market until I see a confirmed trend and a return to more "normal" volatility levels.

    I sold out of each of my funds as their value dropped below the 200-day moving average, and I won't even consider getting back in until they manage to sustain a rally above the (now much lower) 200 day moving average. That's just my personal strategy.

    However, even then it's a bit more complicated - since I am of the belief that we will see the markets continue to drift without firm direction for quite some time (possibly years) and gearing into this type of market is difficult to justify when borrowing costs are so high. If it's costing you 10%pa, you need to be pretty confident of making substantially more than this to justify gearing into any investment.

    I've analysed the way some funds have behaved in previous non-boom periods and note that they sometimes hover around their 200 day moving averages without making much headway in either direction ... so a buy/sell trigger on that level isn't going to achieve much without a strongly trending market. Yet more reason to stay out in my books.

    PS. I will not let this thread be a proxy for talking about a specific fund without actually naming it :rolleyes:
     
  3. Young Gun

    Young Gun Guest

    Your decision doesn't have to be too complicated.

    If you strongly think the market has significantly further to fall say below the 3,500 mark, WAIT.

    If you strongly think the market as reached the bottom or is nearing it, INVEST.

    If you have no idea which way it's going to go and you have a long term view with a long term investment horizion, there shouldn't be too much harm in investing now (dollar cost averaging preferably).

    An Australian share fund which is 100% invested in cash will do the thinking for you, but you'll pay more in fees while you wait.

    I'm of the personal beleif that if your a long term investor stay invested regardless, weather the storm and wait for the upswing. Only those that can perfectly time markets should consider switching in and out of cash. If your one of these gurus you would have sold out over 12 months ago and would have a massive smile on your face right now as you'd be bargin hunting.
     
  4. ffc1883_1996

    ffc1883_1996 Active Member

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    Great thread MrDarcy. Now I’m no expert (far from it) but I can think of three ways…

    1) If you think the bottom is nearby then you could average back in over a period of time. This would likely smooth out any volatility.

    2) If you can see opportunities in the market and wish to have your funds invested, but really have no confidence of where the slide could end, then perhaps you could seek to purchase some sort of downside protection.

    3) Just buy in NOW and take advantage of the yields that are on offer, disregarding the swinging day-to-day price. Of course, this would not be a sensible option for the highly geared because of the risk of a margin call or stop loss event.

    Throughout 2008, I’ve been steadfastly pursuing option 1 but now I'm not so sure.
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Of course with falling interest rates, cash is becoming somewhat less attractive.

    Even worse, if we were to enter a deflationary environment, then debt also becomes less attractive (inflation makes debt cheaper over time, deflation makes it more expensive) ... although that's probably a relatively small impact over the time period we are likely to be facing.
     
  6. MrDarcy

    MrDarcy Well-Known Member

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    Sim, YG and ffc1883_1996, thanks for your responses.

    These form part of my plan.


    I think market may go down further and was DCA on days of market downs up until last week. On those -7% days I would jump in my car with a cheque (as I did the Thursday before that Friday :eek:) and purchase units that day.

    I am willing to invest with the risk the market will go down more. Long term the upside is worth it, but I also want to try and make the most of any significant moments of weakness.

    I have stopped buying as my prefered fund is... 100% cash! and those -7% days are not currently reflected in the value of the fund.

    A share fund being 100% in cash is no longer a share fund. It is like a motorbike stopped at the side of the road waiting for the rain to stop. The rider is safe and dry, but will always be behind the traffic once the rain stops. Of course, the bike won't crash either. For some, this choice may be the best action.

    Cash in my bank is not the same as cash in a fund. Until an epiphany occures, I'll keep my cash in the LOC at 9% no fees.
     
    Last edited by a moderator: 22nd Oct, 2008
  7. Young Gun

    Young Gun Guest

    there are plenty of other fish in the sea, diversification across managers isn't a bad thing.

    you could always sell out of your investment, lock in so capital losses to be offset against some future gains and reinvest your money in another fund which is fully invested or something like STW.
     
  8. MrDarcy

    MrDarcy Well-Known Member

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    Hi YG,

    Fund selection and diversification are not issues here, just strategy for a DCA into a share fund 100% in cash. None the less, the above is good investing advice. (BTW I've got some other funds that are real dogs to sell to for capital loses :eek:, happy with this hypothetical one)
     
  9. ffc1883_1996

    ffc1883_1996 Active Member

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    Getting back to the topic of this thread (please don’t mention Buffett again CRC), I’ve a question for MrDarcy. On the big down days (like today maybe), will you be DCA into your other managed funds – the ‘dog loss’ funds that are still invested in shares?

    I ask because I’m facing similar decisions myself.

    Regards - Ben
     
  10. MrDarcy

    MrDarcy Well-Known Member

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    Hi FFC,

    Oh ignore lists, wonderful thing. Back to topic as you say.

    I have thought about this. One fund is CFS Geared, I'm down about 65%. Being geared it has had large swings so today may be a good day:rolleyes: and would certainly bring down my average cost. However, this is a growth fund and I'm allocated for growth funds right now, but it is tempting. Even to dump and buy back, but this may smell of a wash sale to the ATO. Another big loser is Macquarie Property Income, down nearly a cool 75% for me with bugger all income at present. In the light of these, I think my hypothetical 100% cash fund has performed quite well…

    Also, as I’m obviously trying to time the market a bit here, I can't choose the day exactly, with the subject fund I would deliver a cheque on the day and so I knew the value I was buying.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I face a similar situation with my SMSF.

    Originally I invested about half of it in the CFS W/S Geared share fund. That is currently down about 55%, but I'm not overly concerned given that my investment timeframe there is roughly 30 years.

    The other 50% of the SMSF is holding cash (thanks to the timing of the rollovers into the fund - not because we sold out to cash).

    Although now would be a great time to buy more units in the Geared fund while it is cheap - I don't want to overallocate to that fund/sector ... so I'll probably just sit on that investment for now and reinvest distributions (which achieves a bit of the same effect).
     
  12. ffc1883_1996

    ffc1883_1996 Active Member

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    I too have a share fund which has “beat the market” for the last twelve months. However the fund has gone to cash for the time being so I’ve been considering my options.

    It’s interesting that you hold units in the CFS internally geared fund because that’s one of the alternatives I’ve been thinking about. It’s obviously a bad place to be at the top of the market but one would imagine that were relatively close to the bottom now. Maybe?

    Looking forward with the benefit of hindsight, have you any thoughts to share on GEARED Australian share funds?
     
  13. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes (at the risk of taking this thread off topic again :rolleyes: ) ... it is fairly obvious when one observes the long term performance charts for geared funds that they greatly magnify the gains and losses. The volatility of these funds is HUGE since they effectively do their own internal margin calls to maintain their LVR within their acceptable levels.

    One of the mistakes I made last year in my personal portfolio was to gear into a geared fund. It does sound obviously risky when you step back and think about it - but I was mislead by looking at the long term average performance figures published by the funds management industry and believing that the average result would see me through.

    That didn't take into account the volatility - you have to be able to hold onto your investment to be able to profit from it - and volatility is going to blow you out of the water if you gear into it. This doesn't just apply to geared funds - I held several other non-geared funds which are just as volatile (and the combined effect on my portfolio was catastrophic ... especially when one of the funds turned form showing very low day to day volatility to extreme volatility when the correction came (the first one in Q3 last year).

    This is one of the reasons I ended up building the Compare Funds site - when I realised how misleading those average performance figures were ... especially when leveraging into the market. You really need to take volatility into account when gearing - since a sharp dive can wipe you out such that you miss out on the subsequent bounce (again - referring to corrections and bounces like in Q3 07).

    I've attached a chart showing the "market" (STW), and three of the funds I have previously invested in - CFS W/S Geared, CFS W/S Small Companies, CFS W/S Global Resources over the past couple of years.

    You can quite clearly see the relatively low volatility of the broader market STW = light blue line), while the other funds, two of which are not geared ... are just as volatile as the geared fund.

    There are great opportunities to be had from volatility ... but at what cost ?

    There are also far more opportunities to completely mess things up during periods of high volatility.

    In these kinds of situations, I'm not entirely against a fund choosing to sit out the volatility by moving to cash temporarily while seeking some form of protection ... although with the benefit of hindsight (easy for us to say now), it may have been better to arrange such protection well before the market got as bad as it has (but who of us would have believed it was necessary 10 months ago ???).
     

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  14. Thudd

    Thudd Well-Known Member

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    From my very amateur point of view, I've been looking at the market going down and people rubbing their hands together in glee saying "Bargains! Get in now to avoid losing out on the upswing!" But then I see the market still dropping and ask myself "What is the advantage of being on board for a 10% increase if you've suffered a 25% decrease beforehand?"

    So I'm happy to keep pouring cash into my mortgage offset and if I miss the bottom percent of an eventual market turnaround because of that then I'm confident I'll have 'made' far more in the meantime than if I'd been chasing bargains in a wildly volatile and southward-plunging market.
     
  15. MrDarcy

    MrDarcy Well-Known Member

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    You have a strategy and a plan and you stick to it. I think that's what most professional planners get paid to do. Sudden, dramatic and emotive changes to the plan are not good (like going 100% cash perhaps).

    Amateur, not at all.
     
  16. Young Gun

    Young Gun Guest

    The way I see it is:

    Every dollar you don't save/invest your getting a return of -100%.

    So I don't care if I get a short term loss as if I hadn't invested it I would have spent it on some other crap.
     
  17. Thudd

    Thudd Well-Known Member

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    That's a remarkably concise and clear point of view and I'm going to store that away for future use. In my own case I know that I'm saving lots and not spending it all on crap, ahaha, but it's something I can use when I'm considering spending money on short term no-return crap! (eg: "I'm about to spend $50 on cheap booze that is just going to be pissed out tomorrow, why don't I chuck that into a fund instead?")
     
  18. crc_error

    crc_error The Rule of 72

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    What bargains at the moment, just picked up stock code OIF paying 20% PA yield at its current price.

    Orchard Funds Management - Orchard Industrial Property Fund

    with secure tenants like woolworths making up most of the property holdings, and 11 year average lease, how can one go wrong with this!!
     
  19. crc_error

    crc_error The Rule of 72

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    the market hasn't been going down, its yet to break its previous low of 3900 which its bounced off twice from this point.

    Plus quality stocks like say CBA have been sideways trending for months!

    Its only stocks like RIO and BHP killing our market, the rest of the market isn't doing to bad and certainly not continuing to fall.

    This is unexpected cause I always thought resources were way over valued.
     
  20. Chris C

    Chris C Well-Known Member

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    I'm not certain but I thought its low of Oct 10th was 3937, which it has flirted with on a couple of occasions both today and over the last two weeks. Ironically the market closed at 3939 today so depending on how Europe and Wall St hold up tonight we may well see brand new lows tomorrow.