Why are people still holding cash?

[Spanky]

Besides having enough cash for 6 months living, are there any other reasons to hold cash? Is it the worry of an imminent bear market? Is it to wait for the opportunity to buy when stocks become cheap? Is it for a major purchase on the horizon?

 

[Helen]

Besides having enough cash for 6 months living, are there any other reasons to hold cash? Is it the worry of an imminent  bear market? Is it to wait for the opportunity to buy when stocks become cheap? Is it for a major purchase on the horizon?

Well, it's quite possible that I don't know what I am doing, but I think we will see a major bear in the next 2 - 5 years. I do have some IRA money in a MM and I am using new money to pay off the mortgage. I have all my 401k in short term securities. I also have some old money in stocks and the Total Stock Market Index fund in a taxable account. A lot of my money is not in the stock market at this point.

I am not sure what I will do with the new money once my mortgage is paid off. I just don't see any good place to park the money right now. It feels like there is too much money chasing too few places to park it.

I think we will see a decrease in consumer spending when people stop pulling money out of the equity in their homes. I think that will happen when the mortgage rates go up.

The worse case for me is that I miss some percentage gains in the market if I'm wrong. I can afford to do that. Time will tell I guess.

-helen

 

[riskadverse]

Having made enough to retire prior to the last bear market, and keeping it through the last bear market (if it is over) makes me cautious enough to not to risk it right now.   The upside risk is missed opportunity, the downside risk is being forced out of retirement.   You can guess which way the scale tips for me.  I'm hoping that I can recognize a better opportunity, when it presents itself, than the current environment.  Maybe I'm too cautious, but the majority of my cow-orkers weren't and they now have 201K's.  They may end up catching up, (and they deserve to . . . after all they still are punching the timeclock),  but so far most of their catching up has been through contributions and lots of them even fail to recognize that.   

 

[cute fuzzy bunny]

Same reason why warren buffett is holding a lot of cash.

Cant find anything I want to buy thats a reasonable price. That leaves you either paying an unreasonable price for an asset or keepting the cash until you see something reasonable to buy. Warren does the latter. So do I.

 

[JPatrick]

Besides having enough cash for 6 months living, are there any other reasons to hold cash? Is it the worry of an imminent  bear market? Is it to wait for the opportunity to buy when stocks become cheap? Is it for a major purchase on the horizon?

Holding cash can be pretty painful if you are hoarding it in a 2-3% savings account or similar.  Remember the other "sort of cash" vehicles you can use.  Short term bond fund, a conservative high yield fund (like Vanguards) or something a bit more exciting like Fidelity capital and income.  For ultra safe a nice pile of I savings bonds are decent as well.

As far as why hold cash,,,you mentioned some pretty good ones in your post, except, I see no signs of a major bear market any time soon.  A good size dip may be on the way soon, but it is not the start of anything serious on the downside.  Just my 2 cents.

 

[BigMoneyJim]

FWIW, I have extraordinarily little cash. My paycheck contributions are going mostly into various equity funds with a small portion into bond funds. I struggle between set-it-and-forget-it and listening to some of the people around here. So far passive ignorant investing is winning.

However I don't have any cash cushion at all at the moment and I'm hoping to move out of state soon, so I cut back my 401(k) contributions and may put $5k -$10k from my IRA in a MM fund in case I have to tap it if I start the move and something happens with the new job. I have under $100k in my accounts so this is not a trivial amount for me.

Then again I don't expect to retire for 20 years unless I'm lucky so I can ride a bear for quite a long time and keep feeding it a portion of my income. At this point I'd rather do that than to forecast the future even if everything is overvalued by most measures.

 

[OldAgePensioner]

riskaverse,
your typo (cow-orkers) caused me to laugh so hard I blew milk out my nose and I wasn't even drinking milk at the time. Thanks for that!

 

[HFWR]

Freudian slip brought on by recent topic?

 

[riskadverse]

It wasn't a typo -- I wish I could say it was original though. I used to read a system programmer's usenet group where it was the standard reference to our fellow employees. I still get a chuckle reading the word coworker in anybody's post, but I do put the hyphen in to help spread my amusement.

 

[OldAgePensioner]

Risk,
thanks. I just couldn't get a mental image of "orking" a cow! Still makes me chuckle.

I just retired and although I had one of the 6 offices, I could see hundreds of workers sitting in cubicles. So happy to be free.

 

[JPatrick]

Risk,
thanks. I just couldn't get a mental image of "orking" a cow!

Could that be how we get our fat-free milk?
Any dairy farmers on the net?

 

[Spanky]

Thanks for all the responses. It appears that the main motivation of holding cash is there is nothing cheap to buy.

 

[Mr._johngalt]

Thanks for all the responses. It appears that the main motivation of holding cash is there is nothing cheap to buy.

To paraphrase from 'The Graduate', one word......."Realestate"

JG

 

[laurence]

I thought it was, "plastics!".

 

[Mr._johngalt]

I thought it was, "plastics!".

Yep, well I changed it. Poetic license

JG

 

[cute fuzzy bunny]

riskaverse,
your typo (cow-orkers) caused me to laugh so hard I blew milk out my nose and I wasn't even drinking milk at the time. Thanks for that!

Theres that spontaneous milk out the nose thing again...

 

[retire@40]

Theres that spontaneous milk out the nose thing again...

God, I really hope it was milk.  All that talk of cows reminds me of the bull semen thread and is making me think really sick thoughts.  Can we talk about SWR again?  Nah, got the same pukey feeling.  How about baseball, ya baseball!!!

 

[laurence]

Aw jeez, I feel sick now, what a visual!

 

[grumpy]

The common wisdom that one needs to hold 6 months of living expenses in cash does not make sense for some people. We paid cash for our present home (let's not reopen that discussion) so we have a whole lot of equity there. Rather than tie up 6 months worth of cash in a low paying savings account or MM fund, I set up a no-cost home equity line of credit (HELOC). It's there to be drawn down if the stock market takes a plunge and I don't want to sell shares at reduced prices to fund living expenses. The only cash I hold is what would be needed to make the payments on the HELOC draw necessary to cover 6 months of living expenses. This lets me invest a larger amount for growth. Opinions?

Grumpy

 

[laurence]

As with any rule of thumb, the six month rule is a good starting point. But as you get more sophisticated, options open up. You have a pile of money in the house, that's your six months savings. Obviously there is a small increase in risk with your scenario, but you are sophisticated enough to comprehend and adjust for it. Seems like a no brainer to me. I have one set up, too.

 

[nuisance]

I've never put much stock in the 6-month rule. It strikes me as a very personal decision, that is hugely affected by your situation and risk tolerance. I've got almost no cash reserves, instead putting almost everything into my 401k. If I really need cash for a while, I can always borrow against that. I know that's a big no-no, but I don't expect ever to suddenly need an emergency fund either. I don't have any dependents. Just a fairly cheap college loan that needs to be paid every month, with basic living expenses, and a fiancee who would help me out financially if really needed. If I was the head of a single-income household with kids, I might plan more carefully.

Tim

 

[Nords]

The only cash I hold is what would be needed to make the payments on the HELOC draw necessary to cover 6 months of living expenses.  This lets me invest a larger amount for growth. Opinions?      Grumpy

HELOCs are great for this.

Most people stash six months' expenses without considering that they'd be doing considerable belt-tightening as the first month dragged into two, then three... so six months' cash may actually last quite a bit longer.

 

[BUM]

Besides all the excellent reasons for holding cash:
Warren Buffett thinking, ScareBears, bond worries, realestate (REIT) bubbles, 2 faced Saudi cartels, Euro/Yen shell games, etc.

Cash is king (for awhile). I move in a bit at a time when it makes sense (to me) to do so. The transition from accumulation phase to distribution phase is a slow one. These things must be done dellllllllicately. A screw up could mean back to work

In the meantime (since ER in Jan.) I've invested about 25% in equities and 25% in bonds. The cash is doing well thank you, in Vanguard both taxable and t/free money market accounts... and I feel so fresh THAT might answer to why people hold cash. You can feel it. Loan it. Collateralize it. Invest it. Hoard it. Spend it. Its about as nutty a feeling as gold bugs have about gold.

 

[Spanky]

Besides all the excellent reasons for holding cash:
Warren Buffett thinking, ScareBears, bond worries, realestate (REIT) bubbles, 2 faced Saudi cartels, Euro/Yen shell games, etc.

Does that mean that it is time to get rid of REIT fund holding?

Spanky

 

[uncledrz]

Read the HELOC documents and in many (I haven't seen all) there is an out for the bank. So in a dire emergency (yours or theirs) the funds might not be available, or at least might not be readily available. So some cash directly under your control is, IMHO, beneficial.