# Keeping cash ready to jump on an opportunity?



## MrBlackhill (Jun 10, 2020)

I guess it's already discussed somewhere.

Like everybody, I've read about the benefits to have some cash ready to deploy when there's an opportunity or a crash, enabling to rapidly buy at discounted price.

After all, when I started stock-picking on April 15, 2020, that's what I did. I jumped on an opportunity.

But let's do the maths.

I'm trying to put an hypothetical market scenario. It's oversimplified. I could take the time to simulate with real historical data, but let's just use this as a starting point.

Say you have $100,000 and you allocate 5% of that money to cash. If the market crashes, you use that money to buy the discounted market. Once the market recovered, you sell some of your stocks to get back to that 5% cash allocation.

So here's my scenario. The market crashes -50%, then recovers in the next years. Ten years later, it crashes again, and so on.

The strategy to hold 5% cash ends up at 10.26% CAGR while the market's CAGR is 10.18%. Is it worth it? Or is the idea to have cash ready to buy the dip of a crash flawed?

My opinion is that letting cash sit there waiting for a huge opportunity is not worth it. Maybe I'm missing something here...


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## off.by.10 (Mar 16, 2014)

The elephant in the room: how do you know when to buy? If you wait for -50%, the crash might only be -45% next time. Or you could buy at -30% and miss the -60% opportunity.


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## MrBlackhill (Jun 10, 2020)

off.by.10 said:


> The elephant in the room: how do you know when to buy? If you wait for -50%, the crash might only be -45% next time. Or you could buy at -30% and miss the -60% opportunity.


Exactly, therefore holding cash is even more... worthless.


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## OneSeat (Apr 15, 2020)

It depends. I doubt whether many people see their total wealth as black and white as you - ie. 95% stocks + 5% cash just for a stock buying opportunity. I suggest most will have more total wealth (big or small) than they want to commit to investment - the rest being for 'safety' or 'a rainy day' - or maybe for a known upcoming expenditure. The ratio of the two could 25/75, 50/50 or 75/25 or anything else. So if a big dip opportunity comes up they may decide to invest some of it after changing their ratios - and may or may not un-invest some of it later. The world isn't black and white.


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## Tayls77 (Dec 10, 2019)

Interesting post and one I question myself on almost daily. I sold my company and had a large chunk to invest. I put quite a bit into unusual investments and sat on some cash for stocks. I sat on that for 7 months trying to decided everyday if I should just jump in. Then the crash hit and i started buying in March and I ended up with an average yield of 5.9% on high quality dividend stocks that would have only yielded an average of 3.2% had I bought them earlier (plus as of today a additional capital gain of 19% so in that case holding worked. 
But, I didn't invest all of it and still have 25% of my overall portfolio in cash and sit waiting for opportunities. And everyday I try to decide do I buy more or wait for the next correction? I will be following this one closely.


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## Tostig (Nov 18, 2020)

I hold 20% cash for the same reason.


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## MrBlackhill (Jun 10, 2020)

OneSeat said:


> It depends. I doubt whether many people see their total wealth as black and white as you - ie. 95% stocks + 5% cash just for a stock buying opportunity. I suggest most will have more total wealth (big or small) than they want to commit to investment - the rest being for 'safety' or 'a rainy day' - or maybe for a known upcoming expenditure. The ratio of the two could 25/75, 50/50 or 75/25 or anything else. So if a big dip opportunity comes up they may decide to invest some of it after changing their ratios - and may or may not un-invest some of it later. The world isn't black and white.


I agree, but I think the advice to keep some cash on hand is true for any portfolio?

For instance, a even if someone is holding 60% XSP.TO and 40% XBB.TO, when the market crashed, there was a buying opportunity for both the stocks and the bonds.

But is it worth it to keep cash for just a little opportunity once in a while when having that cash fully invested over time would have provided higher return than just buying during a few opportunities?



Tayls77 said:


> Then the crash hit and i started buying in March and I ended up with an average yield of 5.9% on high quality dividend stocks that would have only yielded an average of 3.2% had I bought them earlier (plus as of today a additional capital gain of 19% so in that case holding worked.


Another good point. Last time I checked the dividends I received, I was wondering why one of my stocks was paying so much in dividends. I usually don't buy dividend stocks, all my stocks usually pay less than 2% dividends. That's just my preference at the moment. But I bought a beaten down stock which then soared +170% in a matter of a few months and so my yield on cost is 5.7% (whereas its yield is currently only 2%).

But, again, even for dividend investors, is it worth it to keep cash to buy a potential crash that happens only once in a while? If, instead of keeping that cash, the investor had bought more dividend stocks, then he would receive more dividends which can be used to buy more stocks during a market crash.


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## MrBlackhill (Jun 10, 2020)

OneSeat said:


> It depends. I doubt whether many people see their total wealth as black and white as you - ie. 95% stocks + 5% cash just for a stock buying opportunity. I suggest most will have more total wealth (big or small) than they want to commit to investment - the rest being for 'safety' or 'a rainy day' - or maybe for a known upcoming expenditure. The ratio of the two could 25/75, 50/50 or 75/25 or anything else. So if a big dip opportunity comes up they may decide to invest some of it after changing their ratios - and may or may not un-invest some of it later. The world isn't black and white.


Also, holding cash as asset class allocation, I totally agree, it's a personal preference with a specific goal and I respect that. My question is more about whether it's worth to hold cash for the sole purpose of buying during crash opportunities. Is there any context where it's worth it?


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## londoncalling (Sep 17, 2011)

MrBlackhill said:


> Also, holding cash as asset class allocation, I totally agree, it's a personal preference with a specific goal and I respect that. My question is more about whether it's worth to hold cash for the sole purpose of buying during crash opportunities. Is there any context where it's worth it?


If you take the time to do some research I believe you will find that cash drag on a portfolio statistically lags being fully invested at all times over time. The same could be said of indexing over stock picking. In both scenarios some will win by luck and others by skill. If you have good control over your emotions when it comes to investing you may have an advantage. I tend to get antsy when my account exceeds 10% cash. Others here will sit for years waiting to pounce letting the warchest grow through dividend accumulation. Others will let Drips sop up their divvies every time they are paid.

Like most things regarding investing there are many roads to wealth and these decisions can also often be subjective.


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## MrBlackhill (Jun 10, 2020)

Tayls77 said:


> And everyday I try to decide do I buy more or wait for the next correction?


Studies show that LSI (Lump Sum Investing) beats DCA (Dollar Cost Averaging) most of the time.

But then there's all those people who invested a huge lump sum during the dot-com bubble...

DCA means reducing risk.
LSI means maximizing the outcome, whether it's a good or a bad outcome, but the market has more good outcomes than bad outcomes.

If you want to maximise the chance to preserve the lump sum, then you either LSI in a portfolio reducing risk accordingly (less stocks) or you DCA.

If you want to maximise the chance to have great returns, then you LSI.

*This is not an investment advice. Just my $0.02.*


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## MrBlackhill (Jun 10, 2020)

londoncalling said:


> If you take the time to do some research I believe you will find that cash drag on a portfolio statistically lags being fully invested at all times over time.


That's what I think. I hold cash only if it has an immediate purpose. Otherwise, I won't let cash sit there waiting for opportunities.


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## james4beach (Nov 15, 2012)

I used to keep cash around with the same idea (jumping on opportunities) but over the years, I've become convinced that it just results in cash drag. So I keep zero cash and am fully invested at all times.

Alternative explanation: I'm not good enough in market timing to perform better than a 'fully invested' approach. Even my passive, conservative portfolio in the last few years performed at over 7% CAGR. If my cash is yielding 1% and my portfolio is returning 7%, I would have to be amazingly good at jumping on opportunities and timing to make the cash worthwhile.

I've been fully invested for several years now. Zero cash within my investment portfolio.

However, I do keep cash for living expenses and emergencies, but I count this as separate from my investments. Currently I keep 100K cash (due to self employment, volatile income, and lingering tax liabilities). My policy is that I'm only allowed to invest cash in excess of my 100K minimum. Even if stocks crashed, and I'm sitting there with 100K cash, I'm not allowed to buy stocks.



MrBlackhill said:


> Studies show that LSI (Lump Sum Investing) beats DCA (Dollar Cost Averaging) most of the time.
> 
> But then there's all those people who invested a huge lump sum during the dot-com bubble...


People who invested into a diversified portfolio that wasn't excessively exposed to equities did just fine, no matter what time during the dot com bubble they invested. With a 50/50 portfolio for example (using equal weights Canada & US equity), the returns were
2000: +4.7%
2001: -2.6%
2002: -4.3%
2003: +10.7%
2004: +8.0%

Admittedly the 2001-2002 returns were disappointing but that's hardly a disaster; very mild losses in a diversified portfolio. By 2003, they are flying again.

But for people who want to be 75% or 100% equities... yeah they are taking a big risk about their entry timing. If they're unlucky, they will be savagely beaten by Mr Market.


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## cainvest (May 1, 2013)

MrBlackhill said:


> That's what I think. I hold cash only if it has an immediate purpose. Otherwise, I won't let cash sit there waiting for opportunities.


Same for me, cash (significant amounts) really don't get to sit around much. I might delay investing some cash for a short period (a few months) if I'm watching something but that doesn't happen often. Market timing is difficult and recovery times are always a wild guess.

.


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## james4beach (Nov 15, 2012)

cainvest said:


> Same for me, cash (significant amounts) really don't get to sit around much. I might delay investing some cash for a short period (a few months) if I'm watching something but that doesn't happen often. Market timing is difficult and recovery times are always a wild guess.


I have a few friends who got burned very badly playing the sitting-in-cash game since 2008/2009. Some of them are still sitting in cash today, waiting for the market to look and feel right.

I have a "Groundhog Day" kind of phone conversation with one of my buddies. For over 10 years now, he always says the same thing: "markets are so screwed up, where on earth can you even put your cash? It's impossible to invest". Each time he says that, I suggest a conservative mix of stocks and bonds or GICs. And then next time we talk, he says the same thing again, always asking "where on earth can you put your cash in today's screwed up world?"

While he's been saying that for 12 years, a conservative stock/bond mix has returned 6.7%. Even if he just went into GICs, he probably could have made 3% to 4% with zero risk, zero volatility.


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## dotnet_nerd (Jul 1, 2009)

I get the same thing from some of my friends James. It's _never_ a good time to invest.
The markets are too high - it's gonna crash
The markets are too low - don't catch a falling knife
Interest rates are too high
Interest rates are too low

It's too flat, too frothy, too uncertain, the moon's too full................


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## MrMatt (Dec 21, 2011)

Set your plan, follow your plan.
Market timing is a losing game.


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## cainvest (May 1, 2013)

james4beach said:


> I have a few friends who got burned very badly playing the sitting-in-cash game since 2008/2009. Some of them are still sitting in cash today, waiting for the market to look and feel right.


Many reasons people stay in cash and don't invest, losing money in the market is one of them. A few of my co-workers get sucked into a technical trading scheme back in the 2000's dot.com days, got burned and stayed away for many, many years. 

One of them just started investing again last year but is doing so at arms length. It's a good reminder that not all people are able to invest without a middle man holding their hand.


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## Just a Guy (Mar 27, 2012)

I’m not sure I understand you philosophy. You seem to be investing with only your origin investment funds. Why sell winners just to get cash? Why not add new cash?


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## MrBlackhill (Jun 10, 2020)

Just a Guy said:


> I’m not sure I understand you philosophy. You seem to be investing with only your origin investment funds. Why sell winners just to get cash? Why not add new cash?


It's not my philosophy, it's an analysis of a scenario of people "keeping cash for opportunities". I'm trying to understand why would they do so. What's their reasoning and is it justified. My conclusion is that it's useless.

I didn't consider adding cash in the scenario because it uses all the cash already available.


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## AltaRed (Jun 8, 2009)

Been DIY investing for circa 20-25 years. I've never found it financially rewarding longer term to have cash waiting for opportunities. Done it enough times along with DCA investing to know I should have just invested. As long as the 3-5-10 year rolling average trend of the stock markets is to the northeast, investing now is rarely at a disadvantage to market timing.


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## Just a Guy (Mar 27, 2012)

in my case, I have cash in my accounts due to dividend payouts. I’m not the type who monitors the accounts on a frequent basis, so cash builds up. When something significant happens, like the 10 year crashes, I tend to go on a buying spree. Not technically holding cash for an opportunity, but it could be viewed that way.


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## MrMike (Sep 30, 2020)

I don't have cash on hand but I do have a Home Equity Line of Credit that I can dip into. Only problem is that there is a 2 or 3 day delay between moving money from my HELOC and my brokerage. But I prefer that to having cash sitting my account doing nothing (and paying interest on it).


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## Juggernaut92 (Aug 9, 2020)

MrBlackhill said:


> Studies show that LSI (Lump Sum Investing) beats DCA (Dollar Cost Averaging) most of the time.


Can you reference these studies?

I always thought DCA was the best way to go but would be interested in see why LSI wins. I would get why LSI would win at a time around march-April 2020 as the entire market was discounted. 

Personally I may keep a bit of cash ($500-1000) on hand for this year as people have been talking about a "correction" coming soon. However, I would not see much of a point keeping more than 5% cash in my account at any given time.


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## MrBlackhill (Jun 10, 2020)

Juggernaut92 said:


> Can you reference these studies?
> 
> I always thought DCA was the best way to go but would be interested in see why LSI wins. I would get why LSI would win at a time around march-April 2020 as the entire market was discounted.
> 
> Personally I may keep a bit of cash ($500-1000) on hand for this year as people have been talking about a "correction" coming soon. However, I would not see much of a point keeping more than 5% cash in my account at any given time.


My pasted link from Google didn't work.

Search for Vanguard Dollar Cost Averaging Study or there's also PWL Dollar Cost Averaging Study. Search for a PDF of the study.


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## MrMatt (Dec 21, 2011)

Juggernaut92 said:


> Can you reference these studies?
> 
> I always thought DCA was the best way to go but would be interested in see why LSI wins. I would get why LSI would win at a time around march-April 2020 as the entire market was discounted.
> 
> Personally I may keep a bit of cash ($500-1000) on hand for this year as people have been talking about a "correction" coming soon. However, I would not see much of a point keeping more than 5% cash in my account at any given time.


Short answer, invest when you have the money.

Returns are highly correlated to time in the market.

Take a day, assume you get $52k, should you invest now or $1k/wk for a year.
In one years time you've got $52k invested for 1 year, vs $52k invested for on average 6 months.


DCA, or periodic contributions vs manually timed investments.
You can't time the market. If you were to pick 1 point during 2020 to invest your $52k, you'd likely not do as well as simply DCA. Also you might have waited for the next thing, again less time in market, lower return.

DCA/regular contributions are also great for investment companies.
1. You're buying Mutual funds with higher MERS, and they make more.
2. People don't notice the high cost of small contributions, Netflix at $15/month sounds way better than Netflix at $180/yr.

Nobody really pushes back, because regular scheduled contributions is actually a good money management strategy for almost everyone. The alternative is bad active timing of investments, or most people simply spend the money in their checking account.


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## MrBlackhill (Jun 10, 2020)

Juggernaut92 said:


> as people have been talking about a "correction" coming soon.


That's market timing. No one knows.

Sure, I believe NASDAQ is a bit overvalued at the moment, but I don't know how long it'll run before its next correction, so if I don't invest now, I may be missing an opportunity. We don't know, we just have to be careful where we put our money... as always.


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## Tostig (Nov 18, 2020)

Does it make a lot of difference if your cash is in your brokerage account or in your bank account? If it's in your bank account, then you risk spending that money and not have enough available for the next brokerage investment you want to make. Furthermore, if it's in your bank you also run the risk of the 3-day wait as the money transfers over to the brokerage that's not with the same bank.

What about the cash that you just deposited, like into your TFSA or your RRSP? Do you always invest it all right away? The $6000 annual TFSA contribution limit doesn't give you a lot of flexibility if you're looking at more than one stock. If you're already invested, you're not missing out on their price rise so no FOMO.

Thirdly, what about the cash you receive when you decide to take a profit and sell or if you receive a dividend payout? If your plan is to carry no cash, you'll be putting yourself in unnecessary stress trying to find the next big investment.


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## MrMatt (Dec 21, 2011)

Tostig said:


> Does it make a lot of difference if your cash is in your brokerage account or in your bank account? If it's in your bank account, then you risk spending that money and not have enough available for the next brokerage investment you want to make. Furthermore, if it's in your bank you also run the risk of the 3-day wait as the money transfers over to the brokerage that's not with the same bank.
> 
> What about the cash that you just deposited, like into your TFSA or your RRSP? Do you always invest it all right away? The $6000 annual TFSA contribution limit doesn't give you a lot of flexibility if you're looking at more than one stock. If you're already invested, you're not missing out on their price rise so no FOMO.
> 
> Thirdly, what about the cash you receive when you decide to take a profit and sell or if you receive a dividend payout? If your plan is to carry no cash, you'll be putting yourself in unnecessary stress trying to find the next big investment.


Make a plan, follow the plan.
Most people simply clean up that stuff when they rebalance.


Now if you're taking a profit, that's active management, and simply use that money on your next active investment.
Or use it to balance according to your plan.


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## Tostig (Nov 18, 2020)

MrMatt said:


> Make a plan, follow the plan.
> Most people simply clean up that stuff when they rebalance.
> 
> 
> ...


Of course. So unless I'm missing something more, I don't know why so many people are opposed to holding cash.


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## Just a Guy (Mar 27, 2012)

Because holding cash loses you money. Just like holding bonds.


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## Tostig (Nov 18, 2020)

Just a Guy said:


> Because holding cash loses you money. Just like holding bonds.


With inflation being so low or if it's part of the plan you've already factored-in, it's worth not missing any opportunity for those 5% dips that occur three times a year. But if you're really nervous, you can always park your cash in treasury bills.

And that should include your emergency cash fund, as well as your bank accounts for daily living.


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## MrMatt (Dec 21, 2011)

Tostig said:


> Of course. So unless I'm missing something more, I don't know why so many people are opposed to holding cash.





Just a Guy said:


> Because holding cash loses you money. Just like holding bonds.



I used to think 100% stock was best, but it's risky.
I now think that 100% is high risk, and holding bonds & cash can be a good way to reduce risk with only limited impact on returns.


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## Just a Guy (Mar 27, 2012)

Well, considerIng the double to triple digit returns I’ve gotten over the past few months, I’ll take the ”risks”. You guys can safely lose your money all you want.

btw, if you really believe inflation is so low, you obviously don’t actually do any shopping...and I’ve got a nice bridge I could sell you...


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## MrMatt (Dec 21, 2011)

Just a Guy said:


> Well, considerIng the double to triple digit returns I’ve gotten over the past few months, I’ll take the ”risks”. You guys can safely lose your money all you want.
> 
> btw, if you really believe inflation is so low, you obviously don’t actually do any shopping...and I’ve got a nice bridge I could sell you...


Inflation is incredibly high.

Your triple digit returns are very impressive, but they most likely involved a very high risk allocation.


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## MrBlackhill (Jun 10, 2020)

MrMatt said:


> Inflation is incredibly high.
> 
> Your triple digit returns are very impressive, but they most likely involved a very high risk allocation.


I'm not so sure, the market has been very easy since the crash.

I have stocks at +280%, +200%, +160%, +140%, +100%, +90% from the last 9 months or less. And my worst at -25%.

I don't think I will see such easy returns again.


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## Just a Guy (Mar 27, 2012)

MrMatt said:


> Inflation is incredibly high.
> 
> Your triple digit returns are very impressive, but they most likely involved a very high risk allocation.


spoken like someone afraid of making money. Yes, very high risk stuff like Disney, husky, live nation, cedar falls...how can I ever sleep at night.


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## cainvest (May 1, 2013)

Just a Guy said:


> btw, if you really believe inflation is so low, you obviously don’t actually do any shopping...and I’ve got a nice bridge I could sell you...





MrMatt said:


> Inflation is incredibly high.


I wonder what the statscan numbers say .. easy to check for those that are interested.


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## Just a Guy (Mar 27, 2012)

Easy to keep inflation low if you keep changing the things you measure against...meanwhile the costs go up despite what the government says.


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## cainvest (May 1, 2013)

Just a Guy said:


> Easy to keep inflation low if you keep changing the things you measure against...meanwhile the costs go up despite what the government says.


Not saying statscan numbers are perfect but given the choice between them and a guy on the internet ... well, people can decide for themselves.


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## Just a Guy (Mar 27, 2012)

I gather you don’t shop much, just buy groceries for a few years, you notice that it’s way more expensive. It’s easy to believe what you want, especially when one doesn’t want to think for yourself...or admit the truth. Of course the cost to buy my rentals has gone down by thousands, so I guess that’s “proof“ inflation is actually negative right now.


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## cainvest (May 1, 2013)

Just a Guy said:


> I gather you don’t shop much, just buy groceries for a few years, you notice that it’s way more expensive.


I do all my own shopping and just did a Costco run this week, nothing I bought was "way more expensive", all in the regular price range.


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## MrBlackhill (Jun 10, 2020)

Yeah, my understanding is that we had opposing forces. Production cost may have increased, which is inflationary, but the demand has decreased, which is deflationary.

Overall, we had low inflation so far, as an average. But that's an average and it doesn't represent what each individual is experiencing. If you've bought a lot of clothing, then you've experienced deflation. If you've bought a lot of meat at the grocery store, then you've experienced a lot of inflation.

Interestingly, we didn't get a lot of inflation for food _overall_, except during this summer. We should expect higher inflation for food this year, though.

During June-July 2020, compared to 2019, prices for steaks and beef increased by about 20% (!), prices for eggs, oranges and potatoes increased by about 10%. Luckily, those prices decreased through November 2020, except for eggs and oranges.

Also, as of April 2020, the CPI YoY for food purchased from stores increased 4%, which is on the high average.

All that from StatCan.

Seeing those prices increase in meat, I'm happy to be flex-vegan. I never buy meat.

Maybe @Just a Guy eats a lot of meat, that's why he's experiencing a lot of inflation.

That's why we should be careful with averages. In 2020, we experienced deflation on things we didn't buy (makes sense) and inflation on things we had to buy (essentials). So, the real experience of most Canadians is that they experienced more inflation than the average inflation, which is blending all subgroups.

Someone very frugal buying only essentials is always experiencing more inflation because the inflation on food is always higher than the overall inflation. Inflation for food during the past decade was mostly between 2% to 4% whereas overall inflation was mostly around 1% to 2%.


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## hboy54 (Sep 16, 2016)

There are other "currencies" besides cash to use when an opportunity shows up. For example borrowing or selling a stock that fell a little to buy a stock that fell a lot, aka rebalance. The problem with the latter is that many people's brains explode at the thought of selling at a loss, but I was quite happy to sell bank stocks down 50% to buy companies like Norbord, Methanex, GE etc. that were down 75 to 95% back circa 2008 2009.


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## Just a Guy (Mar 27, 2012)

Funny, no inflation, yet everyone wants a raise...why, your costs haven’t increased...take a look at the size of what you buy...can’t get 2L of ice cream anymore, 1.8L even though the tub looks the same. Same with 1L cartons now 900ml. Sure the price is the same, you just get less...also known as inflation.


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## Covariance (Oct 20, 2020)

I think about it this way.

For my passive portfolio, cashflows are reinvested as soon as possible to stay on track with allocations. There is no build up of cash.

In my active portfolio I invest when I have an opportunity that meets my criteria, one of which is risk adjusted return expectation. Over the years I have carried cash because there were not enough opportunities. At other times I have been fully invested (during which I resize positions according to expected return and concentration limits).


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## cainvest (May 1, 2013)

Just a Guy said:


> why, your costs haven’t increased...take a look at the size of what you buy...can’t get 2L of ice cream anymore, 1.8L even though the tub looks the same. Same with 1L cartons now 900ml. Sure the price is the same, you just get less...also known as inflation.


Sure product sizes can and do change, however ... every item I bought at Costco was the exact same size. If inflation was so high you'd figure I'd see at least one item change signficantly in either price or decreased size on a $200 grocery order.


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## Just a Guy (Mar 27, 2012)

Are you comparing shopping trips a week apart or over several years? My guess is you’re not looking very closely. But, as I said before, some people prefer to believe their version of the world, especially when it gets in the way of reality.


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## sags (May 15, 2010)

We have experienced deflation.

Our rent is frozen for another year. We have access to all the grocery stores and shop the "flyers" and that bill has gone down considerably. We got a new telco bundle and saved $100 a month. Our hydro has been cheaper. All the other bills are constant year over year.

I think it depends on a lot of factors. What you buy and where you live predominantly.

Meanwhile both our CPPs and OAS benefits are indexed and went up. My wifes pension went up. 

My pension went up because they eliminated the monthly healthcare premium. (the healthcare fund is well over funded)

So far.....so good...more disposable income than last year.


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## cainvest (May 1, 2013)

Just a Guy said:


> Are you comparing shopping trips a week apart or over several years? My guess is you’re not looking very closely.


I always keep a close eye on prices and for this comparison it's at least one year but likely longer than that. Inflation doesn't seem significant for 2020, at least for me and my spending habits. Aside from food I also saved a fair bit on fuel due to the lower prices in 2020.



Just a Guy said:


> But, as I said before, some people prefer to believe their version of the world, especially when it gets in the way of reality.


I agree, some people see only what they want to see and it doesn't always match reality.


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## Just a Guy (Mar 27, 2012)

Boy, I remember gas being under 35 cents, but we obviously don’t have inflation with the cheap prices of today...


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## cainvest (May 1, 2013)

Just a Guy said:


> Boy, I remember gas being under 35 cents, but we obviously don’t have inflation with the cheap prices of today...


Hey, we finally agree!


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## MrBlackhill (Jun 10, 2020)

Just a Guy said:


> Boy, I remember gas being under 35 cents, but we obviously don’t have inflation with the cheap prices of today...


We were debating the amount of inflation in 2020. Nobody said we don't have any inflation over the years.


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## cainvest (May 1, 2013)

MrBlackhill said:


> We were debating the amount of inflation in 2020. Nobody said we don't have any inflation over the years.


I think that was the point of the comment below, that there was no inflation in the past few years on gas. 


Just a Guy said:


> ... but we obviously don’t have inflation with the cheap prices of today...


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## sags (May 15, 2010)

The law of supply and demand is a far greater influence on prices than inflation.

Many products and services are less expensive today than they were even years ago..... relative to incomes.

Travel is cheaper. Electronics are cheaper. Household goods are cheaper. Access to lower priced goods is far more prevalent.

Home prices in areas of high demand and restricted supply have skyrocketed, while home prices is less demand areas have not seen an appreciable rise in price.

I think the theory that inflation is coming to get us is greatly exaggerated.

Inflation is the rack upon which gold bugs, bitcoiners, and conservative economists hang their hats.


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## Just a Guy (Mar 27, 2012)

MrBlackhill said:


> We were debating the amount of inflation in 2020. Nobody said we don't have any inflation over the years.


inflation happens over a number of years usually. If you take a short enough viewpoint, nothing changes, yet somehow, over the long term, it changed.


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## Retiredguy (Jul 24, 2013)

MrMike said:


> I don't have cash on hand but I do have a Home Equity Line of Credit that I can dip into. Only problem is that there is a 2 or 3 day delay between moving money from my HELOC and my brokerage. But I prefer that to having cash sitting my account doing nothing (and paying interest on it).


How about a margin account.?


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## MrMike (Sep 30, 2020)

Retiredguy said:


> How about a margin account.?


I have to plead ignorance. Never used it. What can you tell me about it or where can I learn more? 

Off the top of my head, is a margin account like a cash account? Meaning i'll have to pay taxes. With my example above, I am using a TFSA. If I use a margin account, is that like a cash account?

And if so...... should I be maxing my TFSA first or is this margin account like "extra" since I'm borrowing money?

Thanks so much for your help and advice.


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## Just a Guy (Mar 27, 2012)

If you have good sized investment savings, you can borrow against them similar to a heloc which borrows Against the equity of your real estate. The downside is,if your assets drop, near the loan, the bank will do A Margin call and sell your stocks to ensure you don’t go underwater.


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## Retiredguy (Jul 24, 2013)

MrMike said:


> I have to plead ignorance. Never used it. What can you tell me about it or where can I learn more?
> 
> Off the top of my head, is a margin account like a cash account? Meaning i'll have to pay taxes. With my example above, I am using a TFSA. If I use a margin account, is that like a cash account?
> 
> ...


Margin accounts are not available for TFSA accounts and they have nothing to do with taxes. They just allow you to borrow within the non registered account against securities in the account. . So rather than borrowing from your heloc which is against your real estate (home) you are using the stocks in your non registered investment account as collateral instead.
With a cash account you must have sufficient cash in the account to make a buy. With a margin account, you effectively have preapproved credit to make a buy. *BUT* the availability of the amount of credit fluctuates daily with the value of your securities so you must exercise extreme caution when using it and use only a small % of what's available to you. If the amount you owe the brokerage at anytime exceeds the amount of credit you have then they will without telIing you sell stock in your account to protect themselves. Suggest you go to whatever brokerage you're using and it will be fully explained there. You need to fully understand it before using it, but used wisely it can be a useful tool.


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## twowheeled (Jan 15, 2011)

I'd also consider it depends on what you are buying. If in index funds it is hard to time the market or call the bottoms, in which case DCA or regular investments and minimal cash make sense IE time in the market counts more than timing the market. However when buying individual stocks I rather consider the price paid is the most important factor in the return. However I still don't keep much cash on the sidelines for dips. Rather if a correction comes and I stock I really want to own is suddenly at a massive discount, I will use margin to buy it. Margin interest is really cheap at the moment. A lot of people will advise you never to use margin or leverage to own stocks. I read a study where the case was made to heavily use leverage in the beginning of your investment career and taper off as you get older. This makes a lot of sense because you can view it as advancing time instead of money. When you use leverage you are able to compound more for longer in the right circumstances. As such when I use margin I will decide how much to borrow in time terms, based on my take home after tax after expenses pay. This also helps line up event driven investments. 

For example if I was bullish on Boeing and planning to add a position over the coming year. Then the 737 debacle occurs and the stock takes a dive, but I believe the fundamentals of the business are still sound and it is undervalued. If I believe that by the time I accumulate the cash to take a position (say 6 months of paycheque saving), the price will have already rebounded then I would use margin to take my position immediately. Then I would not make any new buys until that time period has passed and I have paid the margin down, 6 months later.


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## MrMike (Sep 30, 2020)

Just a Guy said:


> If you have good sized investment savings, you can borrow against them similar to a heloc which borrows Against the equity of your real estate. The downside is,if your assets drop, near the loan, the bank will do A Margin call and sell your stocks to ensure you don’t go underwater.


What happen back in March 2020, assuming you used leverage? Because the value dropped so much, did a large number of margin-users get them called in?


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## Jimmy (May 19, 2017)

I am looking at maybe 15-20% in cash and 10% in bonds as my FI just to lower risk a little. The market does fall ~ 10% every 11 months or so but there is little adv to buying the dip vs just riding it out as the market recovers in the next period.

I may park some in min rate reset preferreds and make 4.5%/yr. Cash is really a waste and so are bonds.


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## Just a Guy (Mar 27, 2012)

MrMike said:


> What happen back in March 2020, assuming you used leverage? Because the value dropped so much, did a large number of margin-users get them called in?


depends on what happened to your portfolio and how much margin you used. For me, it was a Buying opportunity...I can’t speak for others. Not everything went down.


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## Pluto (Sep 12, 2013)

Normally I do not hold cash awaiting opportunities. I use a margin account for opportunities. 

These days however, I have cash and I am hesitant to buy due to the terrific run up post coiid crash. Looks like all the easy money has been made, so I will bide my time.


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## james4beach (Nov 15, 2012)

Pluto said:


> Normally I do not hold cash awaiting opportunities. I use a margin account for opportunities.
> 
> These days however, I have cash and I am hesitant to buy due to the terrific run up post coiid crash. Looks like all the easy money has been made, so I will bide my time.


How will you know when it's time?


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## Just a Guy (Mar 27, 2012)

When it reaches a price where I won’t regret buying it. It’s a personal choice. I rarely hit the botttom, but I do manage to be close most of the time.

if you stand around, maybe making charts, waiting for the perfect buying opportunity, I find you often miss that opportunity and then complain how others have money and you don’t. Thus they should be forced to give up their money and distribute it more “fairly“.


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## MrMike (Sep 30, 2020)

I've decided not to open a Margin account just yet. 

The reason is that although you can borrow money, it's only 70% of what you put in (based on stocks that have a 30% Marginal Revenue). If I put in $1K, I'd only be able to invest $3K (rounded). I mean that's good but it's not a crazy amount of money. I would have to deposit a lot more money in order for me to borrow more money - which is all fine except.....

My TFSAs are not maxed (counting both mine and my wife's - we have $20K room). So if I were to deposit a lot of money, it should be in my TFSA first for all the tax breaks. I'll get there eventually and when I do, then I'll open a Margin account.


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## Covariance (Oct 20, 2020)

The other consideration with margin is the Broker/Bank/IIROC can change the collateral % value of the stock you are borrowing against resulting in a margin call. It's at their discretion and you need to come up with more cash even though the price of the stock has not gone down.


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## Pluto (Sep 12, 2013)

james4beach said:


> How will you know when it's time?


Yes.


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## Pluto (Sep 12, 2013)

^
I miss read that. I thought you asked will I know it is time? The answer is yes. 
How will I know is not answerable in a post. there are too many moving parts and evaluations and judgments involved. Some if it has to do with experience. And other parts of it has to do with internalizing some of the thinking of very successful investors.


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## twowheeled (Jan 15, 2011)

MrMike said:


> I've decided not to open a Margin account just yet.
> 
> The reason is that although you can borrow money, it's only 70% of what you put in (based on stocks that have a 30% Marginal Revenue). If I put in $1K, I'd only be able to invest $3K (rounded). I mean that's good but it's not a crazy amount of money. I would have to deposit a lot more money in order for me to borrow more money - which is all fine except.....
> 
> My TFSAs are not maxed (counting both mine and my wife's - we have $20K room). So if I were to deposit a lot of money, it should be in my TFSA first for all the tax breaks. I'll get there eventually and when I do, then I'll open a Margin account.


It seems pretty crazy to me considering you're paying around 1.5-3% interest on what you borrow and the leverage you can apply. In your situation it's unrealistic to expect to borrow enormous sums of money with no skin in the game. A small move would wipe out your entire position or trigger the broker to liquidate. You don't have to put in a lot of money, you just have to put in more than $1k which is essentially nothing. A TFSA serves a different purpose. You cannot hold many types of investments over a TFSA. Also it doesn't make sense to hold foreign dividend paying stocks in a TFSA since you do not get any tax advantages.


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## MrMike (Sep 30, 2020)

twowheeled said:


> It seems pretty crazy to me considering you're paying around 1.5-3% interest on what you borrow and the leverage you can apply. In your situation it's unrealistic to expect to borrow enormous sums of money with no skin in the game. A small move would wipe out your entire position or trigger the broker to liquidate. You don't have to put in a lot of money, you just have to put in more than $1k which is essentially nothing. A TFSA serves a different purpose. You cannot hold many types of investments over a TFSA. Also it doesn't make sense to hold foreign dividend paying stocks in a TFSA since you do not get any tax advantages.


I guess the question is, whats better:

Putting in $5K into your TFSA; or
Putting $5K into a margin account, being able to invest a max of $15K and paying taxes.
I welcome everyone's input. And if it helps, in both scenarios, I would invest in blue chip companies. Nothing too risky that would go broke or skyrocket.


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## londoncalling (Sep 17, 2011)

Max your TFSA first


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## Jimmy (May 19, 2017)

Holding cash usually helps to lower risk a little with a little less return. Actually I looked at this a little closer and it can make sense to hold some cash to buy stocks after a decline too. The market falls 10% usually every 11 months .

They key is if you have some growth or other higher beta stocks they will fall 20-30% (or even more w some overreacting in the market). I know in a year I will have at least 1 stock fluctuate 20-30%

In this little study I looked at a 10% rise, 10% drop,then 10% recovery but being able to use 10% cash to buy a growth stock down 30% and see a 30% recovery Holding cash provides a 1.9% better return for the year. 


10% cashNo cashBalance Yr1 $ 9,000 $ 10,000Cash $ 1,000Rise10%10%Balance $ 9,900 $ 11,000Fall10%10%Balance $ 8,910 $ 9,900Rise10%10%Balance Yr2 $ 9,801 $ 10,890Stock A $ 1,000Rise30%Total A$1,300Total $ 11,101 $ 10,890Difference1.9%


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## MrBlackhill (Jun 10, 2020)

Jimmy said:


> Holding cash usually helps to lower risk a little with a little less return. Actually I looked at this a little closer and it can make sense to hold some cash to buy stocks after a decline too. The market falls 10% usually every 11 months .
> 
> They key is if you have some growth or other higher beta stocks they will fall 20-30% (or even more w some overreacting in the market). I know in a year I will have at least 1 stock fluctuate 20-30%
> 
> ...


Hmm, interesting but I think what your table is showing is that you should actually swing-trade a part of your portfolio (10%). What I mean here is that the flaw from that scenario is that you should actually be 100% cash to be optimal because all of your $10,000 would've catch that 30% rise.

I'm not sure if I'm expressing myself correctly, but test your exact same scenario with 20% cash, then 40% cash, then 70% cash, then 100% cash you'll see that your scenario becomes optimal with 100% cash, and that's because the scenario you provided is the case of a perfect swing-trade.

There's the same flaw in my initial post, except that I cover the part where you sell the recovery to get back the cash position.


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## Jimmy (May 19, 2017)

MrBlackhill said:


> Hmm, interesting but I think what your table is showing is that you should actually swing-trade a part of your portfolio (10%). What I mean here is that the flaw from that scenario is that you should actually be 100% cash to be optimal because all of your $10,000 would've catch that 30% rise.
> 
> I'm not sure if I'm expressing myself correctly, but test your exact same scenario with 20% cash, then 40% cash, then 70% cash, then 100% cash you'll see that your scenario becomes optimal with 100% cash, and that's because the scenario you provided is the case of a perfect swing-trade.
> 
> There's the same flaw in my initial post, except that I cover the part where you sell the recovery to get back the cash position.


Thanks. I see what you mean. I was trying to find something to show that some stocks will drop 30+% in a year as the market corrects 10% ( I know I have seen a few) or for other reasons. I think you should hold some cash for those times . I may hold 25-30% cash & HISA ETFs

I read an article I can't find now that calculated how much cash you should hold to take adv of the drops.

BTW MF was looking at Interfor but I think they are a little pricy now. I am looking at some stocks still way down for the recovery. Air Canada and Cineplex. Maybe Carnival or Keyera. Please advise of any other ideas.


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## MrBlackhill (Jun 10, 2020)

Jimmy said:


> I read an article I can't find now that calculated how much cash you should hold to take adv of the drops.


Yes, well, I was curious about this. My conclusion was no cash, but I'm furious when I can't pick on a stock that dropped because I have no more money available.

I still thought it was optimal instead of having that cash waiting because I think the flaw in the idea of keeping cash for drops is that at some point you must also sell to get back your cash position, unless the portfolio is very small.

I mean, if the portfolio is worth $50,000 with $2,000 cash, well if ever you use that cash it shouldn't take too long to gather back that $2,000.

But if the portfolio is worth $500,000 with $20,000 cash, well if ever you use that cash to buy a dip, you'll have to sell something at some point to get that $20,000 back. And that would be swing trading.

I must admit though that I'm interested by swing trades, but I'm not sure yet that I would have time to use that strategy.


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## Jimmy (May 19, 2017)

Lets say you have a portfolio that returns 10% yr and it is $10,000. During the year though your overall portfolio rises 10% but you have one wild stock that falls 30% then rises 40%. So you put the $1000 in that stock at the bottom and make $1400 

So you have $9,000 making 10% and 1000 making 40% = $9900 + $1400 = $11,300. vs $10k making 10% or $11,000. It could get worthwhile if there are larger swings ie 40-60%.

Each year you can just trim 10% to hold in cash.


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## MrBlackhill (Jun 10, 2020)

So. I've did the ultimate test, backtesting SPY.

What if you hold 95% stocks and 5% cash and as soon as the market drops -15% you use your cash to go 100% stocks and then you go back to 5% cash once the market recovered?

In the main graph below, you see the full history of SPY. The blue line is the stocks portion, the orange line is the cash portion and the grey line is the total. The yellow line is the scenario where you just hold 100% stocks. I also added a small graph to zoom on the cash portion.

Scenario 1 :

Starting with $95,000 stocks (in blue) [95% stocks]
Starting with $5,000 cash (in orange) [5% cash]
Starting total $100,000 (in grey)
Using cash when to buy stocks when the market drops below -15% (going 100% stocks)
Selling stocks to go back when the market recovers from its drop (going back to 95% stocks, 5% cash)
Scenario 2 :

Starting with $100,000 stocks (in yellow)
Holding all the way










This is another timeframe starting in 2010.










The buy & hold scenario in yellow is always better than the grey line scenario buying the dips.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> The buy & hold scenario in yellow is always better than the grey line scenario buying the dips.


Very interesting, thanks for sharing. This suggests that holding cash "waiting for opportunities" doesn't work. Using the method you describe, there is significant cash drag over the long term.

Then again, there will be people who say they can feel it out by reading the market and responding accordingly. This is also the claim made by just about every hedge fund manager and "tactical" fund manager.

Since nearly all of them underperform passive strategies in the long term, I think it's safe to say that navigating market conditions by feeling (or timing strategy) is something that usually doesn't work.


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## MrBlackhill (Jun 10, 2020)

Yup.

There's still a missing scenario though that I'll have to try to simulate some day. (In fact, there's many missing scenarios which are more complex strategies as I can't simulate every type of investor behaviour)

It's about comparing scenarios where investor A adds new money instantaneously every month vs investor B accumulates its new money to buy a small dip.

Here's what I think. Whether you are a passive investor or an active investor, you should always deploy your money instantaneously as there's always an opportunity in the market. Investing in the market is not about trying to time upcoming deals, but buying what you believe to be the current deals of the moment. If you are a passive investor, you should deploy your new money instantaneously to your most depressed asset class. But if you are an active investor, well, you should also deploy your money instantaneously in the stocks that have the most potential at that exact moment. You should not be waiting with that cash for one of your loved stocks to drop.

After all, even an active investor with 100% equity should behave like a passive investor with an asset class allocation between stocks, bonds and gold. That means you should buy uncorrelated stocks, buy what you believe to be the most undervalued and sell what you believe to be to most overvalued.

The active investor should know that it's all about a game of expectations. There's no certainty. If you hold 30 stocks and you have cash ready to deploy but you want to hold that cash to wait for your loved stock to drop, then I believe you are doing it wrong, because that means that you believe that cash will outperform all of your 30+ stocks in the short-term. So you should hold to that cash only if you are not confident enough that it'll do better elsewhere. And then if you don't hold cash and you are mad because you have no cash available to buy that loved stock which just dropped -15%, well you shouldn't be mad. Just sell a bit of your best performing and most overvalued stock to buy that undervalued opportunity.

Let's take an example. Stocks have dropped recently, so my portfolio as a whole has dropped -5% in one month, which is much worse than holding cash. *But* here's the performance of some of my holdings for the past month: +50%, +25%, +20%, +18%, +9%, +9%, +5%, etc. In fact, 11 of my 25 holdings are in the green for the past month. So, one month ago, as I expected the stock market to drop, if I had held cash instead of stocks, I would've missed the opportunity to make those gains. And now, if I want to buy the dip of a stock, I could simply sell a bit of my best performer which I believe to be overvalued and use that money to buy the dip of a stock I believe to be undervalued.

But you may ask "_If you believe you are so good at buying undervalued stocks which will perform well and selling overvalued stocks about to drop, why didn't you sell some stocks a month ago?_". Well, I could've, but my strategy is all about *not* timing the market, so I buy and hold as I don't know what's coming next. In fact, I have an opinion about what I believe to be coming next, but I don't know *when*. Therefore, I will sell a stock that I believe to be overvalued only if I strongly believe that there's currently a better opportunity elsewhere and matching my diversification strategy for my risk tolerance.


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## Jimmy (May 19, 2017)

Here is some food for thought though as shown recently. Let's say you own 50% blue chips and 50% high beta growth stocks. The market and your blue chips fall 10%, some growth stocks fall 30% though as many did last week.

You sell $1000 of blue chips for $900. The market recovers 10% but the high growth recover 30%. So instead of $900 x 110%, it is $900 x 130%. You rebalance later.

I have some stocks w +100% variance over 100days. It has to be in your favor to have some cash to take adv of a 30-40% declines at some stage.


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## Tostig (Nov 18, 2020)

As usual, I put the comparison to an excel spreadsheet study with data from Yahoo Finance.
The stock to study is QQQ.
The dates are:
February 4, 2019 $169.53 close
which is the same as the low price of $169.30 of March 16, 2020.

February 19, 2020 $236.98 close,
the high price before the Pandemic crash.

March 16, 2020 $169.30 low close
before the recovery.

June 3, 2020 $236.69
full recovery back to the February 2020 high price.

Buy commission is $9.95
Initial investment ~$100,000


Scenario A: From February 4, 2019 to June 3, 2020
Investor 1: Buy and hold, 600 shares, 0% cash
On February 4, 2019 is portfolio value is $101,708.05
Investor 2: 450shares with 20% cash
February 4, 2019: Portfolio value $101,708.05

Throughout Feb to March 2020, Investor 2 purchases another $5000 each time the QQQ share price drops another 5% from its high of February 19th. Those would be on February 24, 27th, March 9, 12 and 16th.

June 3, 2020
Investor 1 portfolio $143,181
Investor 2 portfolio $137,742.08
Investor 1 is 3.8% above Investor 2.

Scenario B: From February 19, 2020 to June 3, 2020
Investor 3: Unlucky investor, Buy and hold, 450 shares, 0% cash
On February 19, 2020 portfolio value $106,631.05
Investor 4: Unlucky investor, 350 shares with 20% cash
February 19, 2020: Portfolio value $106,621.10.

Throughout Feb to March 2020, Investor 4 purchases another $4500 each time the QQQ share price drops another 5% from its high of February 19th same as Investor 2.

June 3, 2020
Investor 3 portfolio is $106,673.85
Investor 4 portfolio is $110,930.64
Investor 4 is 3.99% higher than Investor 3.

So which is better? It depends.

Zero percent cash is better if you were lucky enough to have invested at the low point of a stock’s price cycle. You can ride and weather the ups and downs without losing any money. However, how many of us are skilled enough or lucky enough to consistently buy at the low price of a stock’s pricing cycle?

The difference is about 4% either way depending on how far between the low and high part of the stock's pricing cycle and how much cash reserve there is.


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## MrBlackhill (Jun 10, 2020)

Tostig said:


> June 3, 2020
> Investor 3 portfolio is $106,673.85
> Investor 4 portfolio is $110,930.64
> Investor 4 is 3.99% higher than Investor 3.
> ...


Investor 3 is better.

Because on June 3, 2020, the investor 4's strategy will consist of going back to 20% cash because QQQ has recovered, no? Otherwise, when does he go back to 20% cash? And as he sells to get back to 80% QQQ + 20% cash, what happens to the performance of investor 4 by the end of year 2020? Pretty sure his balance will be below investor 3 if you continue running your scenarios moving forward.


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## newfoundlander61 (Feb 6, 2011)

I aways have cash for vacations; car repairs and the odd larger purchase when necessary. About 10% is what I keep to access when needed.


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