Author Topic: ETF investors, do you keep any ''cash'' in case of market meltdown?  (Read 3692 times)

max9505672

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Hey guys!

Quick overview of my situation before I ask my question:
I'm a 27 y.o. newly employed guy. I make $60K/year and save around 60% of my net paycheck.
I have 0 debt and about $75K currently in mutual fonds.

I'm planning on investing 100% of $75K in ETF's. From that 100%, around 80% would be in stocks ETF's and 20% in bonds.

But before I do that, I'd like to get opinions on keeping cash on the side in case for financial crisis in order to massively reinvest after the market drop. Anyone doing this? Advantages and disadvantages on doing so?

Thank you

Classical_Liberal

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #1 on: January 28, 2017, 01:09:57 PM »
Most on this forum will tell you to minimize your cash holdings, as more often than not, your returns will suffer the more cash you hold.  My AA has a 10 percent cash/STT component for personal reasons.  When I see market dips, if my employment and income stream is stable, I reduce my cash component.  This is market timing and I should be shamed for it!

force majeure

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #2 on: January 28, 2017, 01:29:05 PM »
I stick by the Bogle rule, hold roughly your age in bonds. Adjust this yearly, as you age, and as the markets move. Then, get on with life, Mustachian-wise.

boarder42

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #3 on: January 28, 2017, 02:05:10 PM »
Your age in bonds. Hell no that's crazy conservative and will not allow the 4% rule to work at all. Many more failures if you adjust bonds to age.

As to the OP question. I keep no cash on hand as soon as I get money it goes in.  How much run up has your 10k missed sitting on the sidelines. The us markets made over 12% last year

Keeping cash for that reason is market timing and as a general practice you will lose

boarder42

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #4 on: January 28, 2017, 02:07:21 PM »
The market may be slightly over valued right now but have a flat year in appreciation and steady earnings and we're back to not over valued. It doesn't have to have a big pull back. And if it does who knows when that will happen and how far it will fall

cakie

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #5 on: January 28, 2017, 04:04:06 PM »
Do you have a cash emergency fund? Few months of expenses? Apart from that, I wouldn't keep any extra cash...

RichMoose

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #6 on: January 28, 2017, 09:35:07 PM »
Hey guys!

Quick overview of my situation before I ask my question:
I'm a 27 y.o. newly employed guy. I make $60K/year and save around 60% of my net paycheck.
I have 0 debt and about $75K currently in mutual fonds.

I'm planning on investing 100% of $75K in ETF's. From that 100%, around 80% would be in stocks ETF's and 20% in bonds.

But before I do that, I'd like to get opinions on keeping cash on the side in case for financial crisis in order to massively reinvest after the market drop. Anyone doing this? Advantages and disadvantages on doing so?

Thank you

If you're keeping an 80/20 portfolio the bonds should remain pretty stable in a market downturn. Especially if they're short term government bonds. The reallocation process is going to result in you selling bonds to buy stocks in a crash.

Personally I don't keep much cash and wouldn't recommend it unless you're retired or using some cash as an emergency fund. Different than what you're talking about though...

You're young like me so be as invested as you can. Time is on our side!

dreams_and_discoveries

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #7 on: January 29, 2017, 01:53:09 AM »
No, don't keep any cash to invest in a crash, just enough to cover  my expenses, any excess funds are invested.

ShoulderThingThatGoesUp

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #8 on: January 29, 2017, 04:55:13 AM »
Not really, but why would this be special for ETF investors?

2Birds1Stone

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #9 on: January 29, 2017, 06:04:29 AM »
No, that cash will create drag on your portfolio.....negating any sort of gains from "buying the dip"...and that assumes your timing is perfect on both the buy and the subsequent sell.

Indexer

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #10 on: January 29, 2017, 08:04:08 AM »
Build a portfolio based on your goals, make sure it is something you are comfortable holding onto in a good year or bad, and stick to it no matter what. If your AA is 80/20 stick to that. Now, to the OP, you don't need cash in your portfolio for buying on dips. That is what bonds are for. Sure, bonds don't earn as much as stocks, but they normally earn more than cash. In addition, when stocks are crashing high quality bonds tend to go up in value. If you had an 80/20% $100k portfolio, so 80k/20k, in a crash it might look like this...

Start: 80k stocks. 20k bonds. Historical return: about 9.5%
At the bottom if you didn't rebalance: 39k stocks, 22k bonds*. 61k AA= 64/36
After rebalance: 49k stocks, 12k bonds. AA= 80/20.

Since the bonds went up when the stocks were going down you had that much more in bonds to be able to throw into stocks at their lows. If you compare any AA with stocks/bonds VS stocks/cash you will see that the stock/bond combination will almost always have higher returns and less risk.

*I based this on the returns of VTSAX and VBTLX from 4th quarter of 2007 through 1st quarter of 2009.

max9505672

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #11 on: January 29, 2017, 08:37:07 AM »
If you're keeping an 80/20 portfolio the bonds should remain pretty stable in a market downturn. Especially if they're short term government bonds. The reallocation process is going to result in you selling bonds to buy stocks in a crash.

Personally I don't keep much cash and wouldn't recommend it unless you're retired or using some cash as an emergency fund. Different than what you're talking about though...

You're young like me so be as invested as you can. Time is on our side!
Makes sense!

Not really, but why would this be special for ETF investors?
It's not.

Build a portfolio based on your goals, make sure it is something you are comfortable holding onto in a good year or bad, and stick to it no matter what. If your AA is 80/20 stick to that. Now, to the OP, you don't need cash in your portfolio for buying on dips. That is what bonds are for. Sure, bonds don't earn as much as stocks, but they normally earn more than cash. In addition, when stocks are crashing high quality bonds tend to go up in value. If you had an 80/20% $100k portfolio, so 80k/20k, in a crash it might look like this...

Start: 80k stocks. 20k bonds. Historical return: about 9.5%
At the bottom if you didn't rebalance: 39k stocks, 22k bonds*. 61k AA= 64/36
After rebalance: 49k stocks, 12k bonds. AA= 80/20.

Since the bonds went up when the stocks were going down you had that much more in bonds to be able to throw into stocks at their lows. If you compare any AA with stocks/bonds VS stocks/cash you will see that the stock/bond combination will almost always have higher returns and less risk.

*I based this on the returns of VTSAX and VBTLX from 4th quarter of 2007 through 1st quarter of 2009.
Get it, thanks!

WallStreetPhysician

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #12 on: January 29, 2017, 11:57:52 AM »
Hey guys!

Quick overview of my situation before I ask my question:
I'm a 27 y.o. newly employed guy. I make $60K/year and save around 60% of my net paycheck.
I have 0 debt and about $75K currently in mutual fonds.

I'm planning on investing 100% of $75K in ETF's. From that 100%, around 80% would be in stocks ETF's and 20% in bonds.

But before I do that, I'd like to get opinions on keeping cash on the side in case for financial crisis in order to massively reinvest after the market drop. Anyone doing this? Advantages and disadvantages on doing so?

Thank you

No.  Many people talk about "keeping your powder dry", but cash on the sidelines has made you miss a lot of gains in the past 8 years.

cincystache

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #13 on: January 29, 2017, 12:07:17 PM »
I know this isn't what you asked but please tell me you've maxed out your IRA and 401k. No sense in talking about taxable investments at your age and income until you've maxed those out right?

max9505672

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #14 on: January 29, 2017, 02:59:53 PM »
I know this isn't what you asked but please tell me you've maxed out your IRA and 401k. No sense in talking about taxable investments at your age and income until you've maxed those out right?
I am Canadian so no IRA or 401k but we have equivalent accounts. I am quite well aware of of the taxes advantages of those and yes, they are maxed out.

Retire-Canada

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #15 on: January 29, 2017, 05:08:13 PM »
No cash. I'm fully invested. Unless you get lucky having cash sitting on the sidelines will cost you more than you'll gain waiting on a crash. We've been warned about a "devastating" crash for the last few years and instead have had solid gains.

I'm not suggesting a crash won't happen, but rather it's better to be invested and not try and time the market waiting on a crash. You just have no idea when it will happen or what it will look like.

If you plan to hold a significant amount of bonds you can use them to buy equities during a crash. That's a better plan than sitting on cash.

Metric Mouse

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #16 on: January 29, 2017, 05:13:51 PM »
I keep some cash. Mostly to ride out a downturn; at my current 'stache and situation I have no need for more upside - as long as I can mitigate the downside in a crash, I will be fine. Being able to buy back in with anything left over is just a bonus, but not the primary reason to I keep some reserve.

Retire-Canada

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #17 on: January 29, 2017, 05:39:18 PM »
I keep some cash. Mostly to ride out a downturn; at my current 'stache and situation I have no need for more upside - as long as I can mitigate the downside in a crash, I will be fine. Being able to buy back in with anything left over is just a bonus, but not the primary reason to I keep some reserve.

Good point. Pre-FIRE [putting money in with no WRs] and post-FIRE [taking money out and not adding] are two very different situations and they need different plans to address them. I plan to add bonds to my portfolio in FIRE for the same reason Metric Mouse is holding cash...to ride out a downturn.

GreatLaker

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #18 on: January 29, 2017, 06:27:38 PM »
I rebalanced at the start of the year, so have 0.045% cash in my investment accounts. When VAB pays its Feb distribution I will invest that plus a little cash I have in my RRSP, bringing that % down even lower.

I expect the market to go up long term, so why would I hold cash in case it might go down? It just creates cash drag.

I can understand individual stock investors, especially value and growth investors, holding some cash for when the stocks they hold or want to buy drop. But for indexers or total market investors I think holding cash will be a drag on returns.

Guide2003

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Re: ETF investors, do you keep any ''cash'' in case of market meltdown?
« Reply #19 on: January 31, 2017, 01:58:37 PM »
keeping cash on the side in case for financial crisis in order to massively reinvest after the market drop
The term for this would be "market timing," not super common among passive, index investors hahaha. Consider your substantial savings rate in a downturn to be dollar cost averaging working at its best. Maybe if you had cash on hand for a vacation, or home renovations, or some reasonable purchase and due to market conditions you decided to postpone that for a while in favor of throwing it in the market, but that's the only circumstance that I'd advocate for market timing and even then, how do you know you're getting the best deal at the bottom?