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Warren Buffet is keeping $128 billion that can be deployed when stock market goes down. Should a middle class person hold little more of their investments as cash? Suppose if the person is responsible (no debt other than home) and with 3 month of expenses as cash. Should that person start thinking about holding 6 month or 1 year cash as cushion and deploy that cash to market when market goes down per his/her feeling?

There are saying such as 'cash is trash' and counter one is 'cash is king'.

Added point is that this middle class person is expecting a down turn in the market.

By middle class, I mean the person has no bad debt, has few months of cash and few years of stocks to cover expenses in case of job loss. and He/She is looking to maximize his/her return.

By no bad debt, I mean no credit card loan outstanding or any other debt other than home loan.

When asset allocation goes from 80/20 (stock v/s non stocks) to 85/15 with stock market rise, at that time I do not wish to sell the stocks (as taxes will kick in), but simply stop( or decrease) putting additional money to stocks side and it automatically increase the other side of the equation( for me there is no bond, but plain cash equivalent money market/savings).

As an further example, if one feels the stock market is at all time high, one should decrease the monthly buy in to S&P500 mutual funds or what ever fund one is buying every month to do $ cost averaging, suppose if (I use to buy $600 ( other than 401k) and adds $500 to cash for total $1100, then I will suggest only investing $400 per month to stocks and $700 to cash till he or she feels that market is in correctly priced with discipline*) times the factor one uses. For some this factor can be 0.25 or for some 25 or any value in between.

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    #1 How secure is your job? #2 Where does the extra 3 to 9 months of cash come from? – RonJohn Nov 5 at 14:51
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    I don't feel confident enough to post a full answer. The common advice for most people is dollar-cost-averaging (en.wikipedia.org/wiki/Dollar_cost_averaging). The wikipedia article addresses a criticism of DCA which I think is relevant to your question - If you have a lump sum, you can buy a lot more in a down market with that lump than you can with your periodic contribution. – Freiheit Nov 5 at 15:05
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    @RonJohn Or you have your assets elsewhere and are considering returning them to cash? – Mars Nov 6 at 0:54
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    @RonJohn Haha, sorry, I wasn't aiming to be fancy. I just meant that assuming OP is beyond Middle Class is a bit of a leap. I wasn't implying that it was a wise thing to do – Mars Nov 6 at 2:03
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    @Andrew I've literally never heard of "middle class" meaning "don't have loads of money to spare, but you're also not living week-to-week on your paycheck". But this is not the place to enumerate the definitions I have heard of. It's also besides the point. – Lightness Races with Monica Nov 6 at 17:01
32

I'd first suggest you read another question here, Is it true that, “just ten trading days represent 63 per cent of the returns of the past 50 years”?. Then, I'd suggest you consider two questions. How would you react if the market continued up? Another 30-50% from here. Or, if you are correct, how will you know when to get back in?

What you propose sounds a bit like market timing, which is a proven way to under-perform.

An alternative, and way to avoid the 'timing' label is asset allocation. One decides on the mix, say 75/25 stock/bond (note, those more sophisticated than I claim to use far more asset classes, but of course, my 'stocks' is a catchall for any equities, you can choose foreign/domestic, different cap, etc. And bond to me means any bonds, cash, CDs, etc). As the market rises, you might see the mix looks like 80/20, and that's the time to sell enough to get back to 75/25. On a huge drop, a bit of that cash buys more shares. Decide on an algorithm (set of rules) and stick with it.

I've said, Personal Finance is just that, personal, and there is no "one size fits all" plan that's perfect. I'll disclose. Until we retired, I was happy to be fully invested. 100% in a near-zero cost S&P. This was 2012, and I realized a crash would be bad, so by the end of '13, we decided a mix of 75/25 was probably good for us. With spending at 5% or so of retirement assets, the '25' meant 5 years worth of spending money, 5 years to recover from any downturn. Now, to your concern of the recession coming soon. The yield curve inversion was a strong sign, and enough for me to recently shift to 70/30. I'll pay attention, and possibly go 65/35, but that would be it. 7 years (for us, just sharing details) bridges the gap to (a) health insurance flipping from private to medicare (b) mortgage gone and (c) social security kicking in for the wife. This is all to say that any percents or ratios are moving targets, budgets change, as does income.

In the end, you need to have discipline and ask "how would I feel if this was the wrong decision?" I've listened to people say that my "100% invested" in stock was irresponsible, yet, they never seemed to come out ahead by trying to market time.

17

Absolutely. Everyone should have an "emergency fund" of some sort. Many advisors recommend holding 3 to 6 months of expenses in cash as an emergency fund. There are many reasons for this:

  • It reduces the amount of debt that you incur (and interest you pay) in the event of an emergency
  • Less shock on your budget
  • Peace of mind

You can choose to use a larger or smaller amount for your emergency fund based on several variables:

  • Stability of employment
  • Amount of discretionary spending in your budget
  • Amount of debt (some recommend that you keep a smaller emergency fund until debt is paid off)

In addition, if you have a fully-funded emergency fund and no debt, then keeping some of your investment portfolio in cash can be beneficial if you want to look for buying opportunities, but that cash incurs an opportunity cost in bear markets since it's not earning return that your other investments are. That's one of the reasons why timing the market is not a viable strategy.

As a side note, I would not necessarily take a major corporation's financial strategy (Berkshire Hathaway has the cash, not Warren Buffet personally) and apply it to personal finance.

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    I think you missed the point, I am asking, if one should increase the amount of cash and deploy it to market when market goes down. – Raj Nov 5 at 14:27
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    I said in my answer that it's an option, but there is an opportunity cost if the market goes up, and timing the market is incredibly hard. How do you know that the market won't go down more? – D Stanley Nov 5 at 14:29
7

Having more liquid cash would never really be considered a bad idea, but holding to buy into a low market has its risks. While it's definitely a strategy you could employ, the thing is that it would be trying to time the market, which is based on being lucky. No one knows if a recession is going to happen soon. If it was actually imminent, the market would have already reacted. There is a chance that money could sit and do nothing as the market continues to grow for many more years, missing out on potential gains and end up not being worth it.

Typically, the optimal strategy has been to dollar-cost average into index funds and just ride it out through the highs and the lows; it'll average out.

  • I seem to like your question. The news like cnbc.com/2019/11/04/… does make me think otherwise – Raj Nov 5 at 14:42
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    @Raj Articles titled "Stock market still impossible to predict" don't generate a lot of clicks. – Tashus Nov 6 at 15:04
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    @Raj There's a common saying in investing: "a broken clock is right twice a day". Everyone knows that a recession will come eventually. The questions is when, how long, how severe, how broad, etc. Some people predict downturns all the time and then they sometimes are right. – JimmyJames Nov 6 at 18:01
  • @jimmyjames I like the saying *** "a broken clock is right twice a day"*** – Raj Nov 8 at 16:30
3

People like Buffet don't do this because they're extremely wealthy, they do it (and became extremely wealthy) because they have experience, judgement, and a history of results which you don't have. It's not because you're middle-class, it's because you haven't already had the opportunity, determination, and outcomes to have received the experience of decades of hard-won results.

I mean, "buy on the dips" isn't a bad strategy and does require ready liquidity, but depending on how much you reserve and what kind of luck you have with judging what's a buyable dip, the opportunity cost of maintaining that cash reserve and leaving it un-invested might yield less performance than a conservative investment plan which leaves "timing the market" 100% off the table.

The other thing is, Buffet isn't going to deploy that cash into "the market" when it dips. He's going to deploy it into specific assets he's already watching for the chance to acquire it at a bargain price.

2

No.

Keep only the money you can afford to temporarily (as in for the next 20 years) go down in value in stocks.

Besides, if the market goes down, how do you know the downturn has ended? Downturns can be as large as 80%. If you don't know, then if you can't afford to lose the money right now, you can't afford to lose it when the market has gone down 30%.

The best return will be made by putting all you can afford into stocks. For someone not close to retirement age, this means all of the money, sans an emergency fund. How large the emergency fund will need to be is dependent on individual circumstances.

  • Don't understand your first (full) sentence. Even if the market goes down a lot - but hasn't hit rock bottom yet - and you invest, it goes down more, and then eventually goes back up, you've still made significant profits. – Andrew Nov 6 at 16:44
  • @Andrew By the time it goes back up, 80% of the companies you've invested in will have likely gone under. – Therac Nov 6 at 20:05
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    @Therac - to clarify, are you saying that 80% of companies are wiped out of existence in each recession? If not, can you clarify your comment? – JTP - Apologise to Monica Nov 6 at 20:34
  • @JTP It could be 99% or it could be 20%, depends on your portfolio. The point is that a rising tide doesn't lift all boats; it only lifts the boats that are still in one piece. The market can go down, break your boats, and go back up for new ones. – Therac Nov 6 at 20:40
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    @Therac: That's a matter of investing in individual stocks vs index-following funds.... and completely tangential to this question. – Ben Voigt Nov 7 at 17:02
0

No. Emergency funds have been discussed in other answers--but note that an emergency fund is based on spending, not on assets. A rich person could live on their money longer than an average person and thus should have a lower percent of their money in an emergency fund.

Furthermore, the more you have in stocks the better your overall return. A rich person can afford a bigger hit percentagewise and thus doesn't need to play it as safe as a middle class person.

Berkshire Hathaway's huge pile of cash is a separate issue--Buffet only buys what he considers value. He's got the skill to do that sort of thing, the average person doesn't.

0

There are two separate issues here: emergency ("rainy-day") funds, and cash as an investment. The pots may overlap a bit.

On the former front, the less wealthy one is, the greater the percentage of one's wealth should be for emergency (or unexpected contingency) use. It doesn't have to be cash, but some of it does, and the liquidity of the rest has to be high. Shares in large blue-chip companies don't cost much to sell and you'll have cash to spend within days, although it's a risk that events may require you to sell into a really bad bear market. Ditto large investment trusts (closed-end market-traded, NB not open-ended funds!). A property is illiquid, and shares in a small company will have a large bid-offer spread even if you don't own a sufficient percentage of its stock to be illiquid. Such may be good long term investments, but you can't rely on selling them to get cash in mere days.

Today, cash as an investment is a guaranteed-lose investment. Interest rates are less than inflation. However, that's a small loss per annum. It also offers a future probable opportunity, that of being able to jump in and buy a market crash or correction. Especially so, if like Warren Buffet, you might be looking to make huge loans or to buy whole companies in a market where liquidity has dried up and interest rates have sky-rocketed (like during the last financial crisis). If the end of the world proves not to be nigh, you win handsomely when some sort of "normal" is re-established. If not, you still have your personal rainy-day fund, sufficient to save your physical skin from anything short of WW3.

0

No.

1) Buffett likely doesn't have cash, he likely has cash or cash equivalents. The slight difference being that he likely won't be exposed to inflation. I would assume that most of it is in government bonds with differing maturities.

2) Buffett doesn't think that there are good enough buying opportunities in the market right now (for over a hundred billion dollars). You can still invest in companies with a market cap of $10 Billion or even $1 Billon.
Also you could just buy an index fund since nothing in your question indicates that you're looking to buy individual stocks. A well diversified index fund (S&P 500 for example) is likely a far better investment than having cash lying around. As the accepted answer says you shouldn't try to time the market. Having cash in case the market drops is obviously trying to time the market.

3) It seems like a practice in futility to pick and choose parts of an investment strategy from a legendary investor without also practicing everything else they do with the same expertise. So until you get to be as good as Buffett at evaluating whether or not a stock is a good buy, I don't see how blindly following his practice on having cash lying around is a good idea.

  • good points , yes it may look like I am trying to time the market, but one feels the stock market is at all time high one should decrease the monthly buy in to S&P500 mutula funds or what ever fund one is buying every month, suppose if I use to buy $600 ( other than 401k) and adds $500 to cash, then I will suggest only investing $400 per month to stocks and $700 to cash till he or she feels that market is in correctly priced. Certainly discipline is needed – Raj Nov 7 at 16:45
  • You're still trying to time the market which is proven not to work (until you're at Buffet/Graham levels of expertise). – xyious Nov 7 at 16:56
  • Also, considering the stock market increases on average almost 10% annually, which theoretically means that the stock market should be "near record highs" a majority of the time. – xyious Nov 7 at 16:57
  • yes and no, a car has Transmission gear and right gear is the key along with consistent $ cost averaging with some tuning – Raj Nov 7 at 17:08

protected by JTP - Apologise to Monica Nov 6 at 17:32

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