Peter Thornhill 2019

No Bonds here either - I've gone commando this morning

I think my cash is somewhere around 10% but I don't overly bother about it to a large extent. Feel a better approach for me is to mentally budget on what I can do without.

 

However do be prepared for a dividend cut of up to 50% (or more) if a particularly nasty sharemarket event arises. And it may take quite awhile for dividends to recover. Be sure you not only have the intestinal fortitude to withstand such a devastating event but also have enough cash to cover any dividend shortfall during such a period. Of course we Investors can use common sense as well to adjust our spending accordingly in tougher times.

Us Income from Shares cohort like to say that it removes the focus from capital volatility but it’s still very difficult to see one’s capital fall 50% or more.

None of this is easy when the **** hits the fan. But for ME investing for income has been crucial in being able to stay the course when all hell breaks lose.

 

But isn’t that what happens every morning given the privacy of your balcony? Perhaps no privacy needed in a Canberra winter though as there would be nothing for the neighbours to see.

 

Well, could be worse. Ever spilt coffee? Certainly wakes one up quick time.

 

Well at your age all coffee cups should be labelled as below to avoid such unpleasant mishaps:

 

I’m have not been a fan of holding much in cash until now. I’m actually starting to build up a small cash holding. More for living expenses in dooms day event that working income disappears and market crash arrives.

I feel the market is currently in a holding pattern but there could be something nasty coming soon. While I don’t think the Aus market is over valued right now there is much economical / political turmoil local and international that could upset markets.

So a cash buffer could act as safety net when the doom arrives and even if we have a standard correction rather than the end of time it could be used to buy the dip.

 

Question: when we talk about cash holding for the purpose of safety net or as ammunition in a market down turn, if you said for example 10% in cash. Would that percentage be the same if you said your portfolio value is $1 mill or $10 mill? I mean if you had $100k in cash it doesn’t seem like holding to much cash even though it’s 10% of $1mill. Though if you have $1mill in cash in a $10mill portfolio it feels like a lot of cash to hold.

Thoughts.

 

It would depend somewhat on your purposes for holding cash.

If it is a safety net for an income investor the amount will be based more on a % (or multiple) of annual living expenses.

If it is a war chest for a market crash you are having a totally different discussion.

 

As a recent retiree our cash buffer is more about a time period rather than a percentage of assets. Currently it is a minimum of 10 years of compulsory draw down from our SMSF. ie 4% until 65 then 5% after that. It is a lot of cash! At 60yo this is a period of high risk for us though so we are holding more cash than ever.

 

We are doing both.

Enough cash in SMSF to pay next 3 years’ pension, assuming we don’t get any dividends or earn any interest. We most likely will/should; so this cash will stretch more than 3 years.

We have cash outside of Super, sitting in Offset accounts. This is in case we need some serious cash for whatever (eg heath issues, holiday, car, ...) and the interest charged will become tax deductible.

If the end-of-the-world happens and assets become really cheap, we might re-start our accumulation phase with some of this cash .

 

And if push comes to shove, you can realise some assets if essential.

 

Good point. I guess for me first and foremost it would be for annual living expenses in the event that income via work & investments was reduced significantly.

Then I guess it wouldnt be a bad idea to have some extra aside as the warchest. Putting some extra aside in the current market I feel is a not a bad idea. Could be a decent buy the dip opportunity coming up in the next 12 or so months.

Or not. Market could keep trotting along nicely. In that case I’ll just keep the cash aside as the safety net. Might get up to 5 years living expense max in cash holding.

I think 5 years is more than enough assuming that even in a major downturn the portfolio should still provide a decent chunk of the living expense. If you currently have expenses that are covered by investment income then you should only need say 50% of x amount of years in living expenses. Unless we expect the income from investment to drop by more than 50% in a down turn.

 

NEVER.

That would be a sin.

 

Still wearing my best bonds

 

Now I understand everyone’s fascination with Bonds.

 

Would be a nice accumulation opportunity.

However sometimes rather than a crash, markets can grind sideways for years until excessive valuation normalises. Perhaps reversion to the mean by a thousand cuts if such a saying exists.

 

Same here except rather than 10 years mandatory SMSF pension withdrawals it’s Cash for 10 years comfortable living expenses.

In Super even if we were forced to sell assets at a loss, given we don’t actually need most / all of this for living expenses I’ll simply reinvest it in own names. So in realty there’s no loss other than some small brokerage fees. The assets simply move outside of Super to continue on in joint personal names.

 

Then later you could sell those assets back to your SMSF (at market value).

Now you are back to where you were before plus have some cash to buy some good Shiraz, not the Aldi stuff you promote .

 

yes, We will review this every couple of years. Dividends will cover the compulsory withdrawals anyway if nothing bad happens but who knows! The most likely outcome is the cash will be reinvested into dividend paying assets but for now its term deposits.

 

Noted.
At the moment with us both still working FT we have $48K in cash only to covera full 12 months of living expenses in the event that both of lose our jobs or both become unwell (2 years if only one of us is affected) and the rest we are ploughing into LIC's and some dividend growth stocks mostly. We will up the cash component to 2 years living expenses once retired. Zero bonds.

We have started too late in life to ever fully retire on the dividends as per PT model, however we are giving it our very best shot.

All the children are now on board (makes me very happy) and are dedicating 20% of all their income to LIC's/VAS/dividend growth stocks - they are really heading for a hopeful future if they continue this in the long run. None have bonds.