Emergency and convenience cash.

I blogged about how we should always have a war chest to take advantage of opportunities in the stock market because what is worse than seeing the prices of our investments plunging? Not being able to increase the size of our investments at those lower prices (assuming, of course, that they are still good investments)!

So, I always say that there is nothing wrong with keeping a sizeable portion of our portfolio in cash. Cash isn't only the money we have in savings accounts or fixed deposits (which is my preferred way to keep my emergency fund and some of my money in my war chest). 

Money in the CPF-OA (up to a cap) and SRS account is cash that can be used for investments too.

Anyway, before I ramble on, this blog post is not going to look at cash in our portfolio. Huh?

This blog post is about emergency and convenience cash that I keep near me and I am not referring to the cash in my wallet. 

So, what is this emergency or convenience cash? It is cash that I keep at home and in my car.

I keep quite a bit of cash at home. This is handy if I have to pay for some repair that must be done by an electrician, air con technician or plumber, for examples. 

It is also handy when I order home deliveries for the family or decide to walk to the neighbourhood zhi char for dinner once in a while. Sometimes, I would ask friends (when I was staying out) or family to help me run errands and, of course, I had to pay them.

Keeping some cash at home is especially important if we do not have an ATM a stone's throw away from our home. Anyway, I really hate to queue at ATMs to withdraw money. I find it a time waster. 

OK, to be honest, it is not so much the time wasting but what I do to waste time. I don't mind watching anime for a few hours at a stretch. That is a more enjoyable way to waste time for me.

Amount of hard cash at home? Usually a couple of thousand dollars.

My money pouch at home.

Although it is quite rare but I have left home without my wallet before. The cash I keep in my car although not a lot is really handy then.

I would also make sure that the cash in the car is mostly coins and small notes. This takes into consideration how some places might not have change for bigger notes which happened often enough to leave an impression on me.

Amount of hard cash in the car? Usually not more than $50.00.

In an increasingly cashless society, I could be an odd ball, or do you do what I do too? I might lose out on some interest income but having some emergency and convenience cash works for me.

Related posts:
1. A special chest for emergency funds.
2. Why a meaningful emergency fund is important.
3. Emergency fund: How much is enough?

A war chest called "SRS".

I have blogged about the advantages of having an SRS account before. Basically, if we are paying income tax, we should think of contributing to our SRS account. It is quite simple.

Now, I am holding a fair bit of cash in my SRS account. Excluding what I will be contributing by the end of this year, the cash portion of my SRS account is about $60,000 now.

Some might wonder why I am not putting the money to work. Even putting the money in a fixed deposit might get me $300 a year in interest income.



http://www.ecitizen.gov.sg/Topics/Pages/Tax-free-investments-with-the-SRS-scheme.aspx

Well, I really want to keep the liquidity on hand to take advantage of any deep correction in the stock market which could happen anytime. Could something like this happen in the next 5 years? It could, couldn't it?

So, over a 5 year period, I would "lose" $1,500 for holding on to cash in my SRS account. Can I afford this? I think so. For me, this is the cost of holding on to liquidity.

However, the cost of not having liquidity could be higher since I could potentially make much more money by deploying the cash during a deep correction in the stock market.

The cash portion in my SRS account now forms one of my 4 war chests. The other 3 war chests are money in my savings accounts, money in my CPF-OA and money in my CPF-SA.

Related posts:
1. SRS: A brief analysis.
2. SRS, CPF-OA, CPF-SA. (Note publishing date.)
3. CPF or SGS.
4. Don't see money, won't spend money.

$15,000 passive income. To pursue or be pursued?

Regular readers know that I would never tell people what to do. I am not qualified to and neither am I allowed to. Partly for the same reasons, I have declined invitations by a few readers to conduct talks for private groups or to have courses for the public.

Of course, we know that there are many investment courses out there and, recently, there has been discussion as to whether the authorities should step in to regulate these.

R Sivanithy says it well in a column in The Business Times recently that we "should always be leery of claims of fantastic performance that come with profit guarantees and no risk. After all, there are no free lunches in the cut throat world of finance - unless of course, one happens to be in the business of conducting "get rich quick" seminars."

So, when someone who is receiving about $15,000 in annual passive income from his investments in stocks and REITs asked me what he should buy next, I was ready to side step the question in my usual style but I decided to ask what percentage of his portfolio was in cash. He said about 3%.

Pause.


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The pause should be longer but I think you get the idea.

There is nothing wrong with keeping more cash even though cash is an asset that earns practically nothing in a savings account. Well, some banks offer 0.4% to 0.88% per annum now and although Garfield would say, "big, fat, hairy deal", having cash provides us with a peace of mind. The low returns for holding cash is the price we must pay for now. It is like having insurance and insurance cost money or don't we believe in insurance?

In an article I read some time ago, it was revealed that the UHNW rich in America (those with investable assets of $15m) would only feel rich if they had at least a million dollars or two in cash. That means a minimum cash position equivalent of 6.6% to 13.3% of their total wealth.

Remember, however, we could do quite a lot with a million dollars or two. If our 6.6% to 13.3% is ten or twenty thousand dollars, can it make a big difference?

In the pursuit of passive income, it makes sense to do a bit less pursuing and, instead, be pursued.

Related posts:
1. If we want peace, be prepared for war.
2. Be a real estate owner the easy way (4).
3. STE's story: The Millionaire Next Door.
... it is revealed that most high income earners are not wealthy. They make a lot of money but they don't keep much of it.

Inflation: What to do?

Know anyone who stayed 100% in cash?

"For the individual, staying in cash has proven to be painful even if he is spared market volatility. Thanks to inflation, $1 million in 2008 would have shrunk to $854,000 in 2013." Patrick Brenner, Schroder.

Staying 100% in cash today is still a bad idea. Inflation is not going to let up and this is something I blog about quite a bit. See: Inflation is not going away.

If you are a squirrel and save a lot, good for you but don't stop there. See: Double whammy.

So, what do we have to do to protect our wealth from being eroded by inflation? Quite simply, invest for returns higher than the inflation rate.

Don't dump money into bonds. See: Beating the Street with value deals.

Don't dump money into fancy (and misleading) products. See: Inflation adjusted retirement income plan.

Saving money is crucial, of course, but a necessary second step is investing and these might provide food for thought:

1. Grow your wealth and beat inflation.
2. Motivations and methods in investing.
3. Warren Buffett, the greatest money maker.

A capital question: how much to have or how much to use?

I remember reading a book titled "The Swiss Family Robinson" in my school going days.  It was one of many classics such as "Black Beauty" and "Call of the Wild".  

It is very strange but most people who are younger than me by just, say, 6 or 7 years have never read these books before.  Classics, they are.  Anyway, I digress.

The book in question is about how a family got shipwrecked on an island and had to to use whatever was available there to build a life for themselves and over time, they did quite well.  Very resourceful family.  The father would praise his children if they came up with a good idea by saying: "That's a capital idea!".  

I have yet to come across anyone in real life who would use the word "capital" in the same way.  It might be a very English or a very archaic usage since the book was written in the 19th century.  

Now, that brings me to the topic of this post: capital.  Specifically, capital for investing in the stock market.

Now to do my impression of Forrest Gump: 

"My mama told me that I must pick the right people when I want to talk about stocks which are undervalued as not everyone has the ability to buy."  

Very true but it is hard to identify the "right" people, you might agree.

So, there is an advantage about sharing ideas in a blog.  Visitors who come to my blog are probably interested in investing and making money in the stock market and probably have the means to do so.  

I hope I am right and not being delusional on this point though.

I like the saying that we can bring a horse to water but we cannot make it drink and I've had more than my fair share of horses which do not drink.  Maybe, they were actually camels and my ageing eyes mistook them for horses. 

I digress again.

Back to the topic.  

Now, having some capital is one thing, a question often asked is how much do we need to have exactly before we start investing in the stock market? I have been asked this a few times before.  

A hairstylist asked me if S$10k was enough.  The concept of "enough" is relative like so many things in life.  Very few things in life are absolutes.  However, the question of whether something is "enough" is a very prominent one in life.  

How much to have?

I will use a real life example which happened to someone I know as an illustration.  He had only $5k in savings and went into the market in 2008.  Even with the market running up in the last one year or so, his initial investment is still worth less than $5k today but having used up all of his capital in 2008, he could only watch silently as the market recovered.  Well, he wasn't very silent about it but you get the point.

Then, am I suggesting that if we had only $5k in capital, we should not participate in the market, that we should have more capital before buying shares?  

No. Spare cash that is not needed in the near future or is not part of an emergency fund (e.g. 6 months worth of expenses to be put aside in case of unemployment), should be made to work harder for us.

It is, quite simply, a question of proportion.  Of course, with only $5k, the choices are more limited but the idea is the same as for someone with $50k or $500k.  

Don't plonk all of it down at the same time on one counter or a few for that matter. Always hedge since nothing is ever for sure.  

The question is how much to use for each trade, 10%, 20% or 30%.  

This is up to the individual.  The idea is to reduce risk and taking small steps reduces the probability of a fall.

There is nothing wrong with a $1k value for each transaction and in the process incurring a 3% cost (based on a minimum of $28 brokerage fee per transaction plus other costs) if you were to make more than 10% per annum on that decision.  Nothing wrong at all.  

Rome was not built in a day.  

Wealth building takes time, realistically.  More haste, less speed.

Over time, as our capital grows due to increased savings through employment, capital gains from investments, dividends from investments or some other means, we should not forget this very simple concept.  

"How much to use?" is very often a more pertinent question than "how much to have?".  If you think about it, it applies to other aspects of life as well.

Related post:
Excuse me, are you an investor?

Bungee jumping, anyone?

Under normal circumstances, if we were given a choice to stay safely on land or to jump off a bridge, I think we would choose to stay on land. If we were guaranteed safety if we were to jump off a bridge and collect an experience of a lifetime, would we do it? Many still wouldn't or else bungee jumping would become a very common pastime.

Last night, I had dinner with a few friends and as usual, we talked about investments as well. We all have friends who are very risk averse and would rather leave their money in the banks and collect 0.125% interest p.a. Some are "smarter" and leave their money in one year fixed deposits and collect 0.7% interest p.a. Now, we are talking about people with excess cash, beyond what they need in the event of unemployment over a period of 6 months. They are safely on land or so they think.

The threat of wealth erosion by inflation is very real and leaving our hard earned money in bank accounts to collect <1% p.a. isn't the wisest thing to do. The Monetary Authority of Singapore lifted its 2010 inflation forecast to between 2.5 and 3.5% on 19 Nov 2009. Land we were standing on which seemed firm just now might quickly become quicksand. Jim Rogers says that the worst thing to be in now is cash. It's perhaps an exaggeration but I think we get the idea.

There are many financial instruments which would "guarantee" higher returns but few would provide the liquidity which the stock market has. All financial instruments carry an element of risk to varying degrees. Make no mistake, the stock market has plenty of risks but it also has ample rewards for those who are equipped properly to traverse the difficult terrain. Having the right skills and, dare I say, right companions would make the journey a smoother one. Ultimately, do our due diligence and make our own decisions. We have no one to blame for our failures but ourselves.

There are many reasons why people would not venture into the stock market. Fear of losing money is probably the main reason. Not everyone has the mental strength to overcome this fear to move their money out of their "risk free" savings accounts into the stock market. We have friends who say they "cannot lose a single cent" and that they "would lose sleep at night if they have money in the stock market". It would be better to leave them be. Till this day, I have not had the good fortune of knowing anyone who had only made money in the stock market and did not lose a single cent. People who ask for 100% safety for their money (in nominal value) would have to settle for <1% annual yield.
Things Singaporean: SRS, CPF-OA and CPF-SA.