Cash Ideas

John Rice on

I would like to hear from other clubs what they do with the cash in their account. We want to get more interest on our money. Our club is going to be talking about setting aside some of our contributions in order to go on a buying spree when there is a big market drop. I read in an earlier post that one club puts their cash into Schwab U.S. Dividend Equity ETF (SCHD). The problem is that this fund tracks the total return of the Dow Jones U.S. Dividend 100 index. The purpose of our cash is to buy when the market drops but I assume that this fund will drop as well as the market. Where do you park your money to invest in the future?

John Rice

ABODI Investment Club

JAYNE GILBERT on

We spend it!! We feel there are always good stocks regardless of the market. The old faithful ones in the Dow, blue chip, and ones with a low beta. We can always sell and buy something more exciting or with rising profits after the market drop.

We lean toward oil and gas related since we are in Texas.

Jayne

RICH Club

From: John Rice <rice.j1969@att.net>
To: The Cafe <club_cafe@bivio.com>
Sent: Saturday, April 5, 2014 12:06 PM
Subject: [club_cafe] Cash Ideas

I would like to hear from other clubs what they do with the cash in their account. We want to get more interest on our money. Our club is going to be talking about setting aside some of our contributions in order to go on a buying spree when there is a big market drop. I read in an earlier post that one club puts their cash into Schwab U.S. Dividend Equity ETF (SCHD). The problem is that this fund tracks the total return of the Dow Jones U.S. Dividend 100 index. The purpose of our cash is to buy when the market drops but I assume that this fund will drop as well as the market. Where do you park your money to invest in the future?

John Rice

ABODI Investment Club

Lynn Ostrem on

We agree with JAYNE. There's always something good to buy. But we sell put options to buy those stocks at an even better prices.

Lynn O

On Apr 5, 2014 12:06 PM, "John Rice" <rice.j1969@att.net> wrote:

I would like to hear from other clubs what they do with the cash in their account. We want to get more interest on our money. Our club is going to be talking about setting aside some of our contributions in order to go on a buying spree when there is a big market drop. I read in an earlier post that one club puts their cash into Schwab U.S. Dividend Equity ETF (SCHD). The problem is that this fund tracks the total return of the Dow Jones U.S. Dividend 100 index. The purpose of our cash is to buy when the market drops but I assume that this fund will drop as well as the market. Where do you park your money to invest in the future?

John Rice

ABODI Investment Club

Toucalit on

Hi John,

If the view is that the market is in for a big drop then Warren Buffett has the following insight:

"Our holdings, which I always believe to be on the conservative side compared to general portfolios, tend to be more conservative as the general market level rises. At all times, I attempt to have a portion of our portfolio in securities at least partially insulated from the behavior of the market and this portion should increase as the market rises." -Warren Buffett

Buffett Partnership, Ltd. July 22, 1961. page 1. <a href="http://www.newlowobserver.com" target="_blank">New Low Observer</a>

By Buffett's rational, when the market appears high investors should move to cash equivalents. A more specific strategy is outlined in the bio of Hetty Green titled The Richest Woman in America. Green, who preceded Buffett by many decades, is clear, cash is king if the market seems high.

Regards.

"Those who understand interest earn it, those who don't pay it"

On Apr 5, 2014, at 10:06 AM, John Rice <rice.j1969@att.net> wrote:

I would like to hear from other clubs what they do with the cash in their account. We want to get more interest on our money. Our club is going to be talking about setting aside some of our contributions in order to go on a buying spree when there is a big market drop. I read in an earlier post that one club puts their cash into Schwab U.S. Dividend Equity ETF (SCHD). The problem is that this fund tracks the total return of the Dow Jones U.S. Dividend 100 index. The purpose of our cash is to buy when the market drops but I assume that this fund will drop as well as the market. Where do you park your money to invest in the future?

John Rice
ABODI Investment Club

Realto Nosky on

John,

As is usually the case, there are trade-offs when deciding where to put one's money while awaiting a market pullback.

Stable, blue chip dividend paying companies are an option for yield, but these stocks are interest-rate sensitive, meaning they will usually drop when interest rates rise. Stable companies do not always indicate a stable stock price. This will also likely be the case with any dividend type index fund as well. Most stocks get hit when rates rise, but big dividend plays are especially vulnerable since their price is at least partially based on yield relative to current rates.

Also, one can be wrong regarding forecasted market direction. I personally was affected by this in 1999. The market seemed grossly overpriced, but kept going up for well over a year before the big "crash." I liquidated a large portion of my personal portfolio, only to miss another year of uptrend. The old adage, "I was not wrong, I was just early" did not dampen my frustration.

Because of these (and other issues not discussed), we simply choose to keep a portion of our capital in cash despite low yield. We actually keep an equal weighting of cash relative to our equity positions. For example, if we won five (5) stocks with $5,000 in each, we also keep $5,000 in cash (we keep equal weightings in each stock for diversification, rebalancing 2-4 times annually).

We decided to make this trade-off for multiple reasons. One, we have cash available for an unexpected departure of a partner (which we have luckily not experienced). It also serves two purposes in the event of a market pullback. First, it lowers the drop of the overall portfolio by providing some stability. Second, it provides the "dry powder" necessary to purchase stocks on a pullback. We have cash available to purchase on a pullback without the need to liquidate positions. We have that option as well, but will not necessarily need to exercise it. This will dampen returns a bit in an up market since we are not fully invested, but again, there is usually a trade-off in financial markets when deciding on a strategy. This has worked well for us. We formed in January 2012 and have outperformed the S&P 500 in 2012 and 2013.

Hope this helps.

Rick

On Saturday, April 5, 2014 4:01 PM, Toucalit <toucalit@newlowobserver.com> wrote: