What’s an investor to do when holding too much cash?

I’d have to say that when I was an investment advisor at Tangerine Investments it was one of the most common queries. Investors were holding too much cash for a myriad of reasons. What’s an investor to do when holding too much cash? I received this question again, from a reader this week. So, how do we put that cash to work?

Cash is not King. It’s certainly useful for our emergency fund when we need a guaranteed rate of return. I had discussed that in my recent review of EQ Bank. The current rate for their high interest savings account is 1.7%. That’s a top rate these days in a low yield environment. But that 1.7% will not provide any long term growth above inflation – what we would call a ‘real return’.

And certainly cash can be an important part of the overall investment mix. We discovered that in the recent ‘COVID correction’. Stocks and bonds were both failing in March.

But most importantly we need those stocks for long term growth. The stocks will do the trick over most periods, but at times they might need a little help.

That chart is from this Bank on Wheels post. Gold and Treasuries came to the rescue in the worst days for stocks in that period. That post is a must read for every investor.

How do you get that cash into the stock markets?

The question will come down to …

• Invest all of the funds at once
• Dollar cost average back into the markets

Of course ‘dollar cost average’ means investing the monies over time. You might invest the monies every two weeks and do so over an extended period such as 18 months, two years or more.

Market history says go all in, don’t dollar cost average.

The following is borrowed form a recent Globe and Mail article …

In one study, U.S. money management firm Fisher Investments compared the lump-sum and gradual investing strategies over 20-year periods beginning in 1926 and ending in 2009. The lump-sum investor was assumed to have put the entire sum into the U.S. market at the start of the 20-year period, while the gradual investor deployed the money in stages over the first 12 months, following a process known as dollar-cost averaging (DCA).

Result: Lump-sum investing produced higher returns than DCA in 69 per cent of the 20-year periods examined.

In another study, Vanguard Group compared lump-sum investing with DCA over rolling 10-year periods from 1926 through 2011. The first period examined was the 10 years from January, 1926, through December, 1935, the second was from February, 1926, through January, 1936, and so on until the 10 years ending in December, 2011.

Assuming a 60-40 portfolio of stocks and bonds, the lump-sum strategy produced better returns two-thirds of the time compared with investing the money equally over the first 12 months. The study also examined the effect of lengthening the DCA period to 36 months from 12. In that case, the lump-sum approach produced higher 10-year returns 90 per cent of the time.

Assuming a 60-40 portfolio of stocks and bonds, the lump-sum strategy produced better returns two-thirds of the time compared with investing the money equally over the first 12 months. The study also examined the effect of lengthening the DCA period to 36 months from 12. In that case, the lump-sum approach produced higher 10-year returns 90 per cent of the time. 

You risk tolerance should trump market history.

While that math may say go all in, that may not match your risk tolerance level. You may not be prepared to watch your new investment (all of your monies) go down in value by 20%, 30%, 50% or more. You may need to introduce those monies to the markets (and risk) in stages. And of course you can lower the risk level of your portfolio by including bonds. The more bonds the lower the risk level (typically).

This recent post on the Justwealth Portfolios demonstrated the performance of various portfolios in the recent correction.

Here’s an example of dollar cost averaging.

If you have $100,000 that you want to invest you might spread that over 18 months as an example. That would mean investing 39 amounts of $2564.

• Week 1 you invest $2564
• Week 3 you invest $2564
• Week 5 you invest $2564
• etc. etc. etc.

And of course you’ll have portfolio income available to reinvest as well. And you may choose to be more cautious and spread that money over a longer period such as 2, 3 ,4 years or more.

Set up a win-win?

Why the potential for a win – win? Let’s say you start investing and the markets keep going up. No worries you’re making more money as the markets go up.

If the markets start to correct you can take advantage of lower prices; you’ll be able to buy more shares. Remember, lower prices are great in the accumulation stage. But of course we will need the market and stocks to eventually cooperate and go up in price.

• Markets go up – win.
• Markets go down – win.

As always, ensure that you’re investing within your risk tolerance level. But the key is to ensure your putting your monies to work, don’t suffer from investor paralysis.

To manage risks you may look to a Balanced ETF Portfolio.

If you want a managed portfolio with a risk management assessment you might look to the Canadian Robo Advisors. Advice is available at the Robo’s, and that is by way of real humans. 🙂

Weekend Reads.

On My Own Advisor Mark delivered his August Dividend report. Mark continues the march to financial independence with a very smart and consistent approach to investing and wealth creation.

Want to test your knowledge of RESPs? Here’s an RESP quiz and some great info from eastsleepbreathfi.

Matthew at All About The Dividends admits that ” By not having a clear strategy my portfolio ballooned to over 40 stocks and ETFs”. Here is his revamped portfolio.

On lowestrates.ca and on the insurance front Ellen Roseman – Insurance won’t cover reduced value after a crash – unless you ask or sue. That’s a very interesting read and premise. Your car’s value (even if fixed in full) can be reduced in value after a crash. Insurance will typically not cover that depreciation.

On Findependencehub Jonathan Chevreau looks at Michael Cohen’s Trump book – Disloyal.

On MillionDollarJourney the best free chequing accounts in Canada.

This week in my MoneySense column I looked at an advisor behaving badly, BP calls for peak oil, and I suggest that “we’ll all be working for Amazon one day“.

And on this site I looked at a new retirement funding ETF – Vanguard’s VRIF. That offering is creating quite the stir in quick order. Can you do better? Have a read.

Thanks for reading. We’ll see you in the comment section. Don’t forget to follow this blog.

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Cut The Crap Investing readers can sign up with Questrade (Canada’s top-ranked discount brokerage) through this partnership link. You can buy ETFs for free, even the one ticket family.

And you might make your cash work a lot harder at EQ Bank.

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