Q&A: How much cash should you keep in your portfolio?

How much % cash (dry powder) do you leave in your portfolio? As a general rule, one should always save some dry powder for good buying opportunities. How much reserve do you usually keep in your portfolio?

I think there are two reasons to hold cash in an investment account:

1. To fund regular monthly/quarterly withdrawals (source of income).
2. If the alternative to cash is a bad bet.

For this discussion, let’s just focus on the second reason. I disagree with the idea that you should always save some dry powder. When good opportunities present themselves, there is no reason to pass them up in favor of some vaguely defined better opportunity that might come along someday.

It’s important to acknowledge that the best opportunities are almost never obvious in advance. If you lay in wait for an ideal circumstance where everything feels just perfect, you will be waiting for a very long time. Fortunately, we don’t have to find perfect investments – we just have to find investments that are superior to cash.

For example, let’s say that my asset allocation plan dedicates up to 20% of my portfolio to Continue reading

Q&A: What would you consider a good investment outcome?

At what percentage would you consider the investment a successful one and begin to look for an exit point? I am aware this hinges on a lot of variables but let’s just make an approximation.

When making an investment, I am looking for one of four possible outcomes:

• A small loss
• A small gain
• A medium gain
• A large gain

A successful outcome would be one of these results. To understand why these can all be considered successful, let’s turn your question around – what is a bad investment outcome? Continue reading

Q&A: I Have Too Much Cash but I Am Scared of the Market, What Should I Do?

I have too much cash but I am feeling scared to put it into the market, what should I do?

Here is my current portfolio breakdown:

• Cash 16.5%
• International Bonds 0.8%
• US Bonds 1.7%
• International Stocks 21.8%
• US Stocks 56.7%
• Alternatives 2.5%

I know I need to dump that cash somewhere as it is growing mold and inflation will eventually eat it. I am just not sure where I should be putting it. I know it is bad to time the market but I personally feel the market will be coming down soon, and I don’t want to throw it all in along with my other cash. But I don’t want it to sit either.
Where is best to put it for the time being? CDs suck, Savings suck. What is best?

Decision paralysis is usually the result of not having an adequate plan. Your asset allocation indicates the presence of a partial plan, but it’s missing an important piece.

The missing piece is the part that that protects you from being wrong, which is a perfectly natural consequence of making decisions in an uncertain environment. Every investor spends a lot of time being wrong because the future of complex systems like markets and economies is unknowable. Being wrong is OK – if you plan for it.

For example, let’s say you found something you’d like to invest in but were nervous about the overall valuation of the market Continue reading

Space Between the Notes


Debussy: Quartet in g minor Op. 10 – IV. Tres Modere by Budapest String Quartet on Grooveshark
Music is the space between the notes.
-Claude Debussy

It's About That Time by Miles Davis on Grooveshark
I always listen to what I can leave out.
-Miles Davis

 A lot of art, a lot of life, is made better by subtraction. The sparing use of musical notes or brush strokes or words in a sentence lends greater emphasis to those that remain. The space between the notes is like a showcase, almost a stage of its own.

A garden will have better results with fifteen carrots in a square foot than it will with fifty. Fifty looks more impressive when they first sprout, but they quickly crowd each other out. The patient use of space pays off when it counts.

Most people will get faster results by lifting weights two or three days per week instead of every day. It’s not the lifting of weights that makes you stronger – it’s recovering from lifting weights that makes you stronger. Without space to rest and repair, the workouts will weaken you over time.

In the course of managing an investment portfolio, it is easy to fall into the trap of wanting to always make things happen. Chase from one market to another. From one strategy to another. To keep adding new screens, more complex rules and metrics. These efforts seldom yield good results. The more effective course for most would be to do the opposite. Subtract. Continue reading

Q&A: What Portfolio Would Outperform the S&P 500 Over the Past Ten Years?

What Portfolio would outperform SP500 in the past 10 years? My wife has about $120K to invest in her IRA account. We’ve looked at various portfolios out there to either use or model after, but we’ve been disappointed to find that nearly all of them underperform the SP500. And when the market crashed in 2008, all the portfolios also crashed. It nearly seems like the portfolios are merely an underperforming version of the SP500? Can someone explain or point to portfolios that either performed better than SP500 or made it through much better during the crash of 2008?

Despite ubiquitous warnings that “past performance does not guarantee future results,” questions like yours are very common. It’s part of being human. We have an instinctive tendency to judge recent events as more valid than older events. This is known as “recency bias” and has been tripping up investors throughout history.

Finding a portfolio or strategy that would have beaten the market over the last ten years is pretty easy – off the top of my head, any combination of gold and emerging markets would have worked. They both outperformed the S&P 500 over the last decade pretty handily. Of course, this is information that would have been very useful to know ten years ago.

If you are looking at investing a lump sum today, it’s the next ten years you have to be concerned with and hindsight isn’t much help here. Rather than trying to predict an unknowable future, let’s focus on a couple of priorities that are achievable: Continue reading