Author Topic: How much cash vs. investment?  (Read 1960 times)

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Re: How much cash vs. investment?
« Reply #15 on: July 06, 2021, 10:29:37 AM »
I'm curious how much you guys/gals carry in cash in checking/savings (relative to your overall stash or general income).
For a long time I always kept ~100k or so in plain ol' cash (stupid, i know) because I had variable income due to contract work and that seemed like a magic comfort number.    At one point I realized I had a car loan and a bunch of cash not doing anything so I paid off my car loan.
Meanwhile my stock investments have gone crazy the last few years.  How aggressive is everyone in terms of investing vs. parking cash in a money market or CD or something that won't have the possibility of tanking.
Last year we probably had 20% of our non RE net worth in various cash or cash equivalents.  Now I'm thinking of all the $$$ I missed out on looking at the stock market.  Thoughts?

First, I would caution against posting about large sums kept in your bank account on public forum.  Like it or not large amounts of personal info is already avail on the web, so be careful about what you post online.

Second, hindsight is always 20-20 and someone else is always a genius.  If you kept your money in cash, someone else will have invested their money in Tesla stocks last year with 1000% returns making you look stupid.  And if you had invested your money in stocks last year, chances are you may have bought a lemon or sold too early, while someone else made a different financial decision that makes you look stupid.  Don't go down this road in your thinking.

You need to decide for yourself how much you need in cash reserve vs what you can put in stocks.  Even if you invested in S&P index there is a risk that the market may crash and not recover to previous level for many years.  But putting your cash in "safe" CD's with ultra low returns while inflation eats away at your money's purchasing power is also a losing position.

Key point is to beat inflation.

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Re: How much cash vs. investment?
« Reply #16 on: July 06, 2021, 08:50:44 PM »
How about invest all of your liquid funds in a margin account and keep some nominal amount of cash in a bank account?  With a margin account, you can always pull out the cash you need in an emergency without having to sell any investments.

Planning on margin suffers from the same fears as selling and overall fears during market downturns.  If I remember during the last economic hiccup correctly, margin requirements tighten way up and the rates spiked up too.  Even at present, you're looking at an 8% loan on balances over $100K, higher if less.

Expensive money, far better to sell a loser or eminent loser from the portfolio and use the cash.

If you've got the stomach, great, but in general, pile on debt when you hit an emergency isn't the best advice.

I think Martin means you invest all the cash but *not* trade on margin, then if you need cash you withdraw while trading on margin, that shouldn't cost 8% right? 

It works the same as if you are trading on margin.  If you are 100% invested and you decide to transfer $10K cash to yourself you can.  The $10K just becomes a margin loan against your portfolio at the current margin rates for a $10K margin balance (note: debit [margin] balance and not portfolio value).

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Re: How much cash vs. investment?
« Reply #17 on: July 06, 2021, 09:05:49 PM »
How about invest all of your liquid funds in a margin account and keep some nominal amount of cash in a bank account?  With a margin account, you can always pull out the cash you need in an emergency without having to sell any investments.

Planning on margin suffers from the same fears as selling and overall fears during market downturns.  If I remember during the last economic hiccup correctly, margin requirements tighten way up and the rates spiked up too.  Even at present, you're looking at an 8% loan on balances over $100K, higher if less.

Expensive money, far better to sell a loser or eminent loser from the portfolio and use the cash.

If you've got the stomach, great, but in general, pile on debt when you hit an emergency isn't the best advice.

I think Martin means you invest all the cash but *not* trade on margin, then if you need cash you withdraw while trading on margin, that shouldn't cost 8% right? 

It works the same as if you are trading on margin.  If you are 100% invested and you decide to transfer $10K cash to yourself you can.  The $10K just becomes a margin loan against your portfolio at the current margin rates for a $10K margin balance (note: debit [margin] balance and not portfolio value).

Correct, you don't trade on margin but have a margin account open just in case you need access to capital but don't want to close out any positions and have taxable gains.  Also, margin interest is tax deductible. Interactive Brokers has very low margin interest rates.
Martin Mania, CPA
AgencyOne
CA BRE License # 01799007
CA CPA License # 107675
mmania001@yahoo.com
714-747-3884 cell

Often imitated....Never duplicated!
Have license, will travel!

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Re: How much cash vs. investment?
« Reply #18 on: July 07, 2021, 08:15:44 AM »
How about invest all of your liquid funds in a margin account and keep some nominal amount of cash in a bank account?  With a margin account, you can always pull out the cash you need in an emergency without having to sell any investments.

Planning on margin suffers from the same fears as selling and overall fears during market downturns.  If I remember during the last economic hiccup correctly, margin requirements tighten way up and the rates spiked up too.  Even at present, you're looking at an 8% loan on balances over $100K, higher if less.

Expensive money, far better to sell a loser or eminent loser from the portfolio and use the cash.

If you've got the stomach, great, but in general, pile on debt when you hit an emergency isn't the best advice.

I think Martin means you invest all the cash but *not* trade on margin, then if you need cash you withdraw while trading on margin, that shouldn't cost 8% right? 

It works the same as if you are trading on margin.  If you are 100% invested and you decide to transfer $10K cash to yourself you can.  The $10K just becomes a margin loan against your portfolio at the current margin rates for a $10K margin balance (note: debit [margin] balance and not portfolio value).

Correct, you don't trade on margin but have a margin account open just in case you need access to capital but don't want to close out any positions and have taxable gains.  Also, margin interest is tax deductible. Interactive Brokers has very low margin interest rates.

That is what I understood you were planning. It works the same either way.  If you have low rates and they stay low, great, but traditionally, in crises, the rates spike.  The debt pile on is the same and the falling portfolio balance continues.  It's all psychological so if you shake that off, you're fine, otherwise, you are leveraging high into falling market.

In 2008, a lot of people got kicked.  You could have a $1M starting balance, leverage yourself $100K of margin over 6-9 months and have your portfolio correct 30% or 40%.  You find yourself 9 months later, hopefully back working, but you're riding a $700K or $600K portfolio with a $100,000 margin balance.

You're riding the $700K or $600K either way.

Were you better off keeping the full investment?  Maybe.  All I'm saying is going to the well for that next $10K or $15K withdrawal and your portfolio has shrunk another 50K, 100K, sucks.  Sucks a lot.

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Re: How much cash vs. investment?
« Reply #19 on: July 07, 2021, 08:56:34 AM »
How about invest all of your liquid funds in a margin account and keep some nominal amount of cash in a bank account?  With a margin account, you can always pull out the cash you need in an emergency without having to sell any investments.

Planning on margin suffers from the same fears as selling and overall fears during market downturns.  If I remember during the last economic hiccup correctly, margin requirements tighten way up and the rates spiked up too.  Even at present, you're looking at an 8% loan on balances over $100K, higher if less.

Expensive money, far better to sell a loser or eminent loser from the portfolio and use the cash.

If you've got the stomach, great, but in general, pile on debt when you hit an emergency isn't the best advice.

I think Martin means you invest all the cash but *not* trade on margin, then if you need cash you withdraw while trading on margin, that shouldn't cost 8% right? 

It works the same as if you are trading on margin.  If you are 100% invested and you decide to transfer $10K cash to yourself you can.  The $10K just becomes a margin loan against your portfolio at the current margin rates for a $10K margin balance (note: debit [margin] balance and not portfolio value).

Correct, you don't trade on margin but have a margin account open just in case you need access to capital but don't want to close out any positions and have taxable gains.  Also, margin interest is tax deductible. Interactive Brokers has very low margin interest rates.

That is what I understood you were planning. It works the same either way.  If you have low rates and they stay low, great, but traditionally, in crises, the rates spike.  The debt pile on is the same and the falling portfolio balance continues.  It's all psychological so if you shake that off, you're fine, otherwise, you are leveraging high into falling market.

In 2008, a lot of people got kicked.  You could have a $1M starting balance, leverage yourself $100K of margin over 6-9 months and have your portfolio correct 30% or 40%.  You find yourself 9 months later, hopefully back working, but you're riding a $700K or $600K portfolio with a $100,000 margin balance.

You're riding the $700K or $600K either way.

Were you better off keeping the full investment?  Maybe.  All I'm saying is going to the well for that next $10K or $15K withdrawal and your portfolio has shrunk another 50K, 100K, sucks.  Sucks a lot.

It all comes down to risk tolerance.  If someone doesn't want to liquidate their portfolio and be subject to capital gains tax then using margin for a line of credit is a smart play.  Another thing that I've told my clients is to open up a HELOC one their homes while the market is good because that could be a good safety net as well if the time comes.
Martin Mania, CPA
AgencyOne
CA BRE License # 01799007
CA CPA License # 107675
mmania001@yahoo.com
714-747-3884 cell

Often imitated....Never duplicated!
Have license, will travel!

 

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