Education Asset allocation: How much cash is too much?

Discussion in 'Share Investing Strategies, Theories & Education' started by Proper T, 1st Jan, 2020.

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  1. Proper T

    Proper T Member

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    Bit the bullet and sold an IP, keeping only one which has a reliable, long-term tenant and has seen good CG and CF. The first thing I did with the proceeds was top up my super. I then bought a mixture of VGS and VAS with a large chunk of the rest of the proceeds.

    Now, instead of holding over 90% of my net worth in property, it looks something like this:

    PPoR 50%
    ETF 17.5%
    Cash 12.5%
    IP 10%
    Super 10%

    The cash is sitting in online bank accounts, earning 2.2%. I run a small business but these days it’s a part-time affair and the income is small compared with the combined rental and (anticipated) dividend interest.

    Here’s my question. Would it be better to leave things as they are and wait for the next dip to top up the ETF balances or should I plough more of the cash into dividend-earning accounts rather than keep it in safe but low interest online accounts? I guess I am also asking whether people think 12.5% is too large a cash buffer. I need to allow for CGT payment at the end of this financial year (could extend the payment until March 2021) but apart from that I don’t foresee any major expenses that would eat into my capital.

    Looking forward to your comments and collective wisdom.
     
  2. kierank

    kierank Well-Known Member

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    The right answer is “It really depends ...”.

    When we were younger, still working, ... we used to hold a minimum of 5% cash.

    Now we are retired, we hold between 10% and 15%. We let it build up towards 15% if we feel the sh..t is going to hit the fan economically.
     
  3. ChrisP73

    ChrisP73 Well-Known Member

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    There are many answers to this question!

    This might give you something to think about.

    Good luck!
     
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  4. Proper T

    Proper T Member

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    Thanks for that!

    Hmm. Given the choice between Dumbarse, Know-nothing and Perfection, I'd probably have to opt for being a Know-nothing. My nest egg was basically hatched from bricks and mortar. Investing in the Sydney property market was approximately as easy as falling off a log. Skill had precious little to do with it. I'm hoping for a similar stroke of good fortune in the world of index funds. I'm slowly coming up with a strategy, I think, but I am the first to admit to gross ignorance about investing in anything other than property.
     
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  5. The Y-man

    The Y-man Moderator Staff Member

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    Is there a loan against the PPOR?

    The Y-man
     
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  6. Proper T

    Proper T Member

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    You’re thinking of migrating the cash buffer to a line of credit? Not an option as I have no debt. (I realise people make money from debt but I’m allergic to it.)
     
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  7. The Y-man

    The Y-man Moderator Staff Member

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    Supplementary question - what do you envisage needing the cash for?

    The Y-man
     
  8. Proper T

    Proper T Member

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    Emergencies, I guess. Or, in the event of a stock market collapse, money to live on until the tide turns.
     
  9. kierank

    kierank Well-Known Member

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    Like all allergies, they reduce one’s quality of life. I trust with time (and education) you will overcome your allergy ;).

    Would you consider the following:
    1. Take out a new I/O loan with Offset against IP for $x.
    2. Invest all of these funds in EFTs/LICs.
    3. Place your cash holdings in the Offset.
    The benefits of this approach are:
    1. Your cash holdings will effectively be “earning” you 3.25% to 3.75% (that is, the loan interest rate) after tax.
    2. You have increased your asset base and are letting compounding work its magic. For example, in 2019, VAS achieved 18.5% growth and 6.6% income. Nothing to be sneezed at. Who knows what will happen in 2020.
    The big question is how large should $x be? That depends on a lot of things (such as your risk profile, your tax rate, the equity in your properties, ...) but a couple of possibilities are:
    1. The same as your current cash holdings. This way the new loan will not incur any interest once you fully chock the Offset. Even if you withdraw money from the Offset later for whatever reason, the interest is tax deductible.
    2. Same as 1) above but borrow more and use the income from the EFT/LIC investment to pay some/all of the additional interest incurred.
    Not advice but something I would suggest you consider.
     
    Last edited: 1st Jan, 2020
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  10. Proper T

    Proper T Member

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    My allergy to debt is the only one I have. When I've taken out mortgages, I've paid them off as soon as I possibly could. It was always a great feeling to make that final payment. But thanks for the detailed explanation. I've only had a hazy understanding of the mechanics of borrowing to invest. I'll reconsider this as an option.
     
  11. kierank

    kierank Well-Known Member

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    IMHO, you need to overcome this allergy and the sooner the better.

    TBH, I am getting the impression that you have a FEAR of debt where:

    FEAR = False Expectations Appearing Real​

    By reading posts and asking questions on PC, I believe you will find the cure.

    I am the exact opposite.

    My preference is to never pay off loans. I would rather fully chock my loans (all I/O) via Offsets as this gives me far more control and flexibility.

    And I have been retired for nearly 10 years.

    I guessed this when I read your OP.

    Like I said above, keep reading posts and asking questions on PC.
     
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  12. Fargo

    Fargo Well-Known Member

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    It is a much better feeling knowing you a big pot of money to draw on if desired .You can have mortgages and not have debt ! You don't have to have loans drawn. It is kind of pointless owning property and not having some mortgaged because the value in property is having the ability to access funds whenever needed. You could have an LOC of 20% off assets, while investing another 12%, so that your buffering has more than doubled and in 2 or 4 years it may triple, then your buffering may grow exponentially giving you more and more money available for investing and drawing on. As asset value grow your LVR will fall automatically. It is a mugs game trying to time the market. If you are investing for dividends it doesnt matter if the share prices fall for awhile, it may help get better yields .
     
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  13. The Y-man

    The Y-man Moderator Staff Member

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    In addition to @Fargo above, could have set up mortgage with an offset, had the same effect as paying off the loan, still kept the access to the money if needed, and had less risk of getting the title stolen.

    The Y-man
     
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  14. Scott No Mates

    Scott No Mates Well-Known Member

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    @Proper T - one basic mistake, super is not a single investment but a portfolio of investments.

    In that 10% that you have allocated to super, you generally have a spread including 2-5% cash, 10-20% property, 50-60% Aust/int'l equities, 2-5% alternative investments. So the weightings across your portfolio will vary.
     
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