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I have a question relating to how much cash you suggest an investor to hold.
Let me explain. I am 53 years of age and plan to work for 5 more years before retiring. My employer provides me with rent free housing. I have no debt and hold $3.5 million dollars in Australian equities, term deposits and cash. My wife and I save about $160,000 per year from wages and investment returns.
Of the assets we own, we hold 14 per cent in cash in case we get a major pull back (eg: Mr Un and The Donald start fighting) in which I would buy equities at a cheap price.
I sometimes hear fund managers saying they hold 10, 20 and up to 40 per cent cash in the current market. What do you think is a sensible percentage of cash to hold?
A: Thanks for the question.
I think you need to break down holding cash into two reasons:
There is no “sensible” percentage for the latter. This will depend on your view on markets and how defensive or aggressive you wish to position. You also may wish to hold cash if you assess that better opportunities to invest in growth assets may exist down the track. Most fund managers who quote holding 20% to 40% in cash are in this category – they are positioning defensively. I would place absolutely no credence on this – apart from being in the category of market intelligence.
Having enough cash on hand to meet liquidity requirements, such as paying pensions, taxes or other expenses, is a different matter. Trustees wanting to act prudentially will ensure that they have sufficient cash on hand to meet their expected liabilities and are not forced to sell assets. What is “sensible”? Again, there is no prescription, but I would say 12 to 24 months of expected outgoings in cash or maturing term deposits.
I hope this helps.
