That’s it; I’m going 30% cash… maybe 50%!
The market is too high.
It just recovered to drop even further!
Most stocks are overvalued;
Consumers debt levels are ridiculous;
It seems the same consumers are managing government debts because they keep borrowing more;
Pension plans are still underfunded after such an amazing bull market.
I’m going 30% cash and I’ll wait for the dip
That’s what many investors said, right? Some started in 2015. Others followed in 2016 and 2017. The “most courageous” waited until 2018 when the market started to become real shaky. They went 30-50% cash and waited.
How’s waiting in cash working for you?
You’ve probably figured by now that I’m not going cash. Not 50%, not 30%, not even 5%. I’m always 100% invested in equities (here’s my portfolio). But since so many investors think it’s the way to go, I wanted to see the impacts (both positives and negatives) of staying invested vs keeping 30% or 50% in cash to wait for the dip. I’ll use my personal situation to illustrate three possible scenarios:
#1 Staying invested all the time;
#2 Keeping 30% in cash;
#3 Keeping 50% in cash.
We will start the simulation on September 2017 as I received $108K as the commuted value of my pension plan (here’s the full story). The point is to show the real impact of not having all your money invested in the market. I’ll even give the “cash approach” a bonus. I’ll pretend I was smart enough to invest my cash amount on December 24th, 2018 to capture the absolute bottom. (If you know someone who put $100K in the market on Christmas’s Eve because “he/she knew”, please let me know.)
Comparison methodology
At the beginning of September, I received a hefty sum of money. I use my 7 dividend investing principles to build a plan and started investing. I took about 3 months to invest the full amount. The only reason why I didn’t do it faster was because I gave more time, attention and effort to my online business at that time than managing my portfolio. After quitting my job during that summer, I had to find a way to feed a family a five with my business.
For the sake of the simulation, I’ll assume I will simply keep the same portfolio, but reduce all positions by 30% or 50%. This way, I will avoid “cherry picking” a strong or very poor performer in my portfolio and skew results.
Since I can’t redo all my trades during this period, I’ll pretend that I’ll simply invest a smaller amount and make the exact same moves. Then, I’ll wait until the perfect timing to increase all my positions with the same proportions as they are in my portfolio.
On December 24th, 2018, I’ll look at each stock closing price and simulate a cash purchase for both scenarios. As the whole idea of keeping cash is to capture market drops, let’s imagine the best-case scenario; catching the absolute bottom as we were coming from the future (Yes, I’ve been watching Travelers on Netflix recently!). Don’t try this at home; catching the very bottom of a correction is for professionals only.
Scenario #1: My Portfolio as of March 1st including my results
Recently, I’ve published my February dividend income report including value of all my stocks as of March 1st. My portfolio is divided into two segments: Canadian and American holdings. Here are the results of both:
Canadian holdings:
| Company Name | Ticker | Market Value |
| Alimentation Couche-Tard | ATD.B.TO | $6,540.30
|
| Andrew Peller | ADW.A.TO | $5,478.00 |
| National Bank | NA.TO | $4,973.60 |
| Royal Bank | RY.TO | $6,220.20 |
| CAE | CAE.TO | $5,580.00 |
| Enbridge | ENB.TO | $7,964.67 |
| Fortis | FTS.TO | $4,690.62 |
| Intertape Polymer | ITP.TO | $5,430.00 |
| Lassonde Industries | LAS.A.TO | $3,622.50 |
| Magna International | MG.TO | $4,893.70 |
| Cash | $607.81 | |
| Total | $56,009.03 |
US holdings:
| Company Name | Ticker | Market Value |
| Apple | AAPL | $5,368.27 |
| BlackRock | BLK | $6,259.54 |
| Disney | DIS | $5,123.92 |
| Garrett Motion | GTX | $51.00 |
| Gentex | GNTX | $4,801.05 |
| Hasbro | HAS | $4,023.16 |
| Lazard | LAZ | $3,904.56 |
| Microsoft | MSFT | $6,718.20 |
| Resideo Tech | REZI | $129.52 |
| Starbucks | SBUX | $6,006.52 |
| Texas Instruments | TXN | $5,298.00 |
| United Parcel Services | UPS | $4,109.96 |
| Visa | V | $7,432.69 |
| Cash | $168.86 | |
| Total | $59,401.65 |
In September 2017, I had $108, 362.19 CAD. On March 1st, my account showed $56,009.03 in CAD and $59,401.65 in USD. I’ll use my brokerage account conversion rate for that day at 1.3218. Therefore, I now show $134,526.13 CAD for a total return of 24.14%. This is not annualized since Sept 2017, it’s total return.
I am writing this article as I go and I don’t know the results of the upcoming two simulations yet. At this point, all I can say is that I’m quite satisfied by my results and I think I did a very good move by staying 100% invested (here’s the full rationale behind it). Now let’s move on to scenario 2 and see what happens.
Scenario #2: Keep 30% in cash and invest it on December 24th
In this scenario, I have $32,508.66 sitting in cash. I’ll assume I was “smart enough” to invest it in a money market fund giving me 1.60% (this is what the Altamira Cash performer pays today). The money will then be invested for 15 months (roughly) at that rate and I’ll have $33,164.94 to invest in the market in December 2018.
Let’s imagine that I’m so great that I put all my trade in right before the market closes on December 24th. I’ve calculated the weight of each position to reinvest the same proportional amount. Here’s the total return performance of each of my holdings between Dec 24th, 2018 and March 1st 2019:
| Company Name | Ticker | Return | Total |
| Alimentation Couche-Tard | ATD.B.TO | 17.44% | $1,893.82 |
| Andrew Peller | ADW.A.TO | 6.30% | $1,435.75 |
| National Bank | NA.TO | 14.42% | $1,403.13 |
| Royal Bank | RY.TO | 15.82% | $1,776.28 |
| CAE | CAE.TO | 13.73% | $1,564.71 |
| Enbridge | ENB.TO | 26.39% | $2,482.02 |
| Fortis | FTS.TO | 9.27% | $1,263.73 |
| Intertape Polymer | ITP.TO | 9.86% | $1,470.83 |
| Lassonde Industries | LAS.A.TO | -7.49% | $826.27 |
| Magna International | MG.TO | 16.63% | $1,407.25 |
| Cash | $149.86 | ||
| $15,673.66 | |||
| Company Name | Ticker | Return | Total |
| Apple | AAPL | 19.68% | $2,093.85 |
| BlackRock | BLK | 22.67% | $2,502.48 |
| Disney | DIS | 13.61% | $1,897.18 |
| Garrett Motion | GTX | 35.76% | $22.56 |
| Gentex | GNTX | 6.35% | $1,664.04 |
| Hasbro | HAS | 13.60% | $1,489.48 |
| Lazard | LAZ | 15.35% | $1,467.84 |
| Microsoft | MSFT | 20.06% | $2,628.70 |
| Resideo Tech | REZI | 29.92% | $54.84 |
| Starbucks | SBUX | 17.60% | $2,302.08 |
| Texas Instruments | TXN | 22.53% | $2,115.65 |
| United Parcel Services | UPS | 25.84% | $1,685.57 |
| Visa | V | 23.00% | $2,979.49 |
| Cash | $55.03 | ||
| $22,958.82 |
Keep in mind I’ve used the same conversion rate (1.3218) and the US portfolio shows values converted in Canadian Dollar. Therefore, the $33,164.94CAD I invested on December 24th are now worth $38,632.48.
Now going back to September 2017, I had $108,362.19 CAD to invest. I kept $32,508.66 aside and invested the remaining ($76,123.53 CAD). This portion grew by 24.14% between September 2017 and March 2019. Therefore, the invested part of my portfolio would be worth $94,499.75 (76,123.53 * 1.24.14).
If I add both amounts ($38,632.48 + $94,499.75), I get $133,132.23. Therefore, if I had waited with 30% of my amount in cash until the market dropped by 20% form its peak, I would have underperformed my portfolio by $1,393.90 or 1%. In other words, waiting with 30% in cash in hand was useless and hurt my potential return.
Scenario #3: Keep 50% in cash and invest it on December 24th
Imagine now that I’m really nervous about the market and decide to wait for a major dip before fully committing to my investing strategy. At this point, I would have $55,274.89 waiting for Christmas (that’s a nice way to celebrate). I would have laughed at all poor investors who were 100% in the market during the drop.
Using the same table, my total account would show the amount of $64,387.46.
| Company Name | Ticker | Return | Total |
| Alimentation Couche-Tard | ATD.B.TO | 17.44% | $3,156.36 |
| Andrew Peller | ADW.A.TO | 6.30% | $2,392.92 |
| National Bank | NA.TO | 14.42% | $2,338.55 |
| Royal Bank | RY.TO | 15.82% | $2,960.47 |
| CAE | CAE.TO | 13.73% | $2,607.85 |
| Enbridge | ENB.TO | 26.39% | $4,136.70 |
| Fortis | FTS.TO | 9.27% | $2,106.22 |
| Intertape Polymer | ITP.TO | 9.86% | $2,451.39 |
| Lassonde Industries | LAS.A.TO | -7.49% | $1,377.12 |
| Magna International | MG.TO | 16.63% | $2,345.42 |
| Cash | $249.77 | ||
| $26,122.77 | |||
| Company Name | Ticker | Return | Total |
| Apple | AAPL | 19.68% | $3,489.75 |
| BlackRock | BLK | 22.67% | $4,170.80 |
| Disney | DIS | 13.61% | $3,161.97 |
| Garrett Motion | GTX | 35.76% | $37.61 |
| Gentex | GNTX | 6.35% | $2,773.40 |
| Hasbro | HAS | 13.60% | $2,482.47 |
| Lazard | LAZ | 15.35% | $2,446.41 |
| Microsoft | MSFT | 20.06% | $4,381.17 |
| Resideo Tech | REZI | 29.92% | $91.40 |
| Starbucks | SBUX | 17.60% | $3,836.80 |
| Texas Instruments | TXN | 22.53% | $3,526.09 |
| United Parcel Services | UPS | 25.84% | $2,809.28 |
| Visa | V | 23.00% | $4,965.81 |
| Cash | $91.72 | ||
| $38,264.69 |
Now, in September 2017, I would have invested only 50% of my money ($108, 362.19 / 2 = $54,181.10). This amount would have become $54,181.10 * 1.2414 = $67,260.42.
Both portfolios together would make $64,387.46 + $67,260.42 = $131,647.88. Shocker! Waiting with 50% in cash is even worst!!! Who’s laughing now?
In both cases, the cash option was just hurting my portfolio. While I may have felt “safer”, all it did was to take money away from me.
Additional comments
This example isn’t perfect and there are many flaws.
For one, nobody could say that I would pick December 24th as my entry date and that I would have performed the same trades. Simply imagine how the cash strategy would have given terrible results if I was too busy cooking lamb on Christmas Eve and I would have waited a few days to invest (the S&P 500 jumped by nearly 7% before January 1st and the TSX gained 4% for the same period). In this specific case, only a few days of difference and I would be talking about a $10,000 difference. When you compare investing strategies over short a period of time, timing could have a huge impact. In this case, it’s NOT playing in favor of cash holders.
Second, this is a “one shot” simulation. Results could have been completely different if I had used the 2008 crisis or any other bear markets. I used the most recent market correction because I had a real-life example to demonstrate. A lot of investors thought it would have been better for me to stay partially in cash instead of investing everything I got. I wanted to see what would have happened in all three cases. I’m well aware this is not enough to make an Harvard case study. Nevertheless, this is a real story with real numbers.
Third; since I’m Canadian, the currency factor has also an impact. The exchange rate wasn’t the same 15 months later than when I invested. This could have also affected the results in such a short period. Over the next 25 years, we won’t mind too much, but the dollar fluctuation has a great impact for this simulation.
Fourth, I might have picked a few different stocks in December 2018 than I did in 2017. Some companies had dropped significantly and might have offered a better entry point. I’ve already discussed which companies I would have selected based on the lessons I learned from 2018.
Final thought
As previously mentioned, I wrote this article as I was making all calculations. Therefore, I didn’t know when I wrote my introduction that having 30% or 50% in cash would have been a bad strategy. In fact, I thought that having 50% ready to invest at the market’s bottom would have generated a lot more money and beat my fully invested portfolio. Then again, only a few days before or after December 24th, and the results would have been even worse for all the cash lovers here.
The main reason why I decided to trust my investing principles and select dividend growers for my portfolio is to avoid dilemma. I wanted to minimize human bias and struggles. When is the right time to buy? When is the right time to sell? Is the market going up for the next 6 months, or down? By investing all my money at once in companies I trust to be solid, I got rid of my struggles.
I was also less emotionally involved as I had a plan (do you?). When I told my wife that we lost several thousand dollars during the fall of 2018, I wasn’t worried (she was!). I knew all my companies were showing a dividend growth profile at that time and that I would continue to get “pay raises” while the market was going nuts. Once again, the market proved me right; it always ended-up higher.
How I built my portfolio in 45 minutes
Not too long ago, I’ve explained how I built my portfolio using my principles and some investing tools. The original article can be found here and you can watch the webinar replay here (email required). In this webinar, I’ve discussed my strategy to find safe Canadian dividend growth stocks in this crazy market and we will look at sector allocation (get rid of energy?), currency factor (investing in US stocks?) and I’ll share a few of my favorite picks.
You can watch the webinar replay here
Let me know what you think!
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