Why the mountain of cash?!

We’ve been mentioning for quite some time now that we were looking to increase our cash position.

For several months now there has been an itch to ultimately get up to a six figure cash position, which will obviously take some time.

The purpose of today’s post is to go over some of the reasons why we feel good about moving towards holding six figures in cash and what we feel the pros and cons are of doing so.

First off though, let’s take a look at where we’re at currently:

Obviously these numbers are in constant flux, our stock holdings move by the thousands per day and pay checks, mortgages etc. are regularly coming and going from our cash position so this is all ballpark.

The current allocation breaks down into holding roughly 20.7% cash and 79.3% in equities.
We mentioned on our Instagram that 25% is the allocation we would like to see for cash.

Some feedback we have gotten through our Instagram page has been along the lines of “You’re both early 30’s, why such a large allocation to cash?”. Which is a fair enough point, so to break down the answer let’s hop into the advantages we see to upping our cash position.

ADVANTAGES

1. Bonds aren’t cutting it

The first point is fairly straight forward, your typical bond yields right now are extremely low – depending on the exact type of bonds you’re targeting chances are you’re getting in the range of 2.0 – 2.75% return on your money.

While this may seem “good” in comparison to a high yield savings account (and it is) you’re also opening yourself up to some volatility of the market and while it may be minor volatility its still enough to tip the scales towards pure cash/CD holdings for the purposes that we’re looking to use it for.

2. Liquidity/Options

The next advantage to pure cash is that it is there and ready to be used on a moments notice. We want to have the flexibility to be able to use the cash for whatever we deem necessary at the time.

We don’t have any set plan for this cash, we’re always browsing vacant lot prices across Canada as well as housing markets to potentially find ourselves our first rental property. We’re also open to putting money towards furthering our own happiness and with the addition of our new son we definitely want to give him great new experiences across our beautiful country (and beyond) so some of this cash may end up going towards a camper van or RV of some kind if ever there is a deal just too good to pass up.

The nice thing about having cash on hand is that as selfish as it sounds you’re prepared and able to take advantage of hard times and buy things on sale.

3. It gets us to our end goal

Ever notice how when you make a decision or verbalize an idea, that your body or subconscious will usually give you a “gut feeling” as to whether it is a good one or bad one?

For us we visualized what the future would look like being fully invested (minus emergency funds) vs. holding 25% cash or greater. We looked at where we’d be at different milestones:

500k mark: 125k cash 375k invested. We like it.
1MM mark: 250k cash 750k invested. We approve.
1.2MM mark: 300k cash 900k invested. -> This is likely around our retirement

Every number along that path just felt “right” when visualizing what our lives would be in those moments, much more so than having a few months in savings and throwing everything else into the market, we don’t want to be THAT bullish on the stock market to a point where we’re hinging everything we have on it. The added sleep well at night fund on the sidelines should make for a much more enjoyable lifestyle.

DISADVANTAGES

1. “Cash is trash”

The only real disadvantage we could come up with is the return on investment with cold hard cash. Obviously if stashed under your pillow cash has a return of 0%, or negative 2-3% if you account for inflation.

We won’t compare this to the market as this cash position is more in place of bond holdings than equities so really we’re looking at getting anywhere from 0.5% to about 1.75% in the form of GIC’s as opposed to about a 1-1.5% higher in a bond ETF. Again the trade off is having zero volatility in our pile.

Our belief is that this “loss” or drag on our account can be offset by the purchases we make when the market has larger dips like the ones seen over the past couple months now and the natural slowing of purchases the higher and higher the markets get as the rise in share price will do most of the heavy lifting.

REBALANCING

So how do you go about rebalancing then? Great question!

We intend to do rebalancing every 1-3 months but it will depend on volatility.

If/when there’s another sharp waterfall style drop the way we had this spring in the markets then we would surely begin to rebalance at that point and same thing on the way up.

The intent isn’t so much about doing a lot of buying and selling of shares we’re hoping the way it plays out is that when things are going sky high then the cash we earn mainly heads straight to savings and only a fraction goes into new shares, then as the market pulls back new pay checks are sent directly to our brokerage accounts with only a fraction going to savings. Only in extreme market moves will it call for us to actually take a large chunk of savings and move it over or an even unlikelier event to sell off some shares and rebalance it into savings.

We know some of you out there have been doing methods similar to this so we’d like to ask you how it’s going for you? How did you fare when the markets tanked were you able to pull the trigger and dump money into the markets or did you hold off? Would you recommend this method of investing to others?

Let us know in the comments below or over on Instagram @FindependenceCanada

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Thanks,

FIC.

Disclaimer: Please remember to do your own research and consult an investing professional before making any personal finance moves as there is always risk involved.