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Percentage of club value to hold as cash
We rarely have more than 1% in cash. Occasionally, we will have more if we can't agree on an investment one month. If we don't have a new investment in mind, we add to whichever current holding has the best prospects and isn't overweight in our portfolio. We usually hold between 1x and 1.5x stocks, where x are the number of members in the club. We also try to keep transaction costs below 1%
 
Ira Smilovitz
 
In a message dated 3/26/2012 4:45:27 P.M. Eastern Daylight Time, carsch2@cox.net writes:
The Investment Club I belong to is concerned about the
amount of cash we have on hand.  We presently have about 12%
of our money in cash.  At the moment we have not decided on
another new investment.  We could, of course, add to
positions we already hold  My question is:  What is an
average percentage for a club to hold as cash?  Thanks for
some answers!
We don't keep any investment cash on hand.  I place $15 a month into a separate Bivio account to pay for miscellaneous expenses and two subscriptions which the club pays for.  We buy a new stock or build up an existing stock in our portfolio each month.
John Rice

 

From: "IraS1@aol.com" <IraS1@aol.com>
To: club_cafe@bivio.com
Sent: Mon, March 26, 2012 1:51:06 PM
Subject: Re: [club_cafe] Percentage of club value to hold as cash

We rarely have more than 1% in cash. Occasionally, we will have more if we can't agree on an investment one month. If we don't have a new investment in mind, we add to whichever current holding has the best prospects and isn't overweight in our portfolio. We usually hold between 1x and 1.5x stocks, where x are the number of members in the club. We also try to keep transaction costs below 1%
 
Ira Smilovitz
 
In a message dated 3/26/2012 4:45:27 P.M. Eastern Daylight Time, carsch2@cox.net writes:
The Investment Club I belong to is concerned about the
amount of cash we have on hand.  We presently have about 12%
of our money in cash.  At the moment we have not decided on
another new investment.  We could, of course, add to
positions we already hold  My question is:  What is an
average percentage for a club to hold as cash?  Thanks for
some answers!
Carole,
From a different perspective...
My club "grew up" in NAICland where we were taught to keep every dime invested at all times. After the recession caught us with our perverbial pants down, we recognized the importance of cash, as a whole. George Nicolson, the founder of NAIC/Better Investing, wrote in the 1984 Investment Club Manual, the following:

" ... at the time that a downward adjustment in stock prices occurs, you will have perhaps 50-80% of your funds in cash and short-term bonds and will then be able to make sizeable purchases ..."


We've had a sizeable upturn in the market this past few months, and having cash on hand has allowed us to take advantage of good quality stocks that were on sale. Our economy has not yet recovered, and with global financial issues looming and our own unemployment and housing issues still unresolved, the market has not stabilized. Look how many huge corporations are still stashing cash! Our club has been utilizing stop loss orders on those we hold long, and we've been using our side cash to secure put options - which allows us to make great income as we try to pick up stock at discounted prices.
I now believe that having a reasonable amount of cash on the sidelines in the club (or our personal portfolios, for that matter) is akin to having a 4-6 month stash of cash for emergency purposes in our lives. I don't think 12% is a bad number at all.
Lynn Ostrem
Crow River Investment Club
> George Nicolson, the founder of NAIC/Better Investing, wrote in the 1984 Investment Club Manual, the following:
> " ... at the time that a downward adjustment in stock prices occurs,
> you will have perhaps 50-80% of your funds in cash and short-term
> bonds and will then be able to make sizeable purchases ..."
 
However, read in context, it's pretty clear to me that Nicholson was NOT suggesting having 50-80% of your entire investment assets in cash or short-term bonds.  He suggested that a well established club might want to allocate perhaps 25% of the club assets to be managed as a "Balanced Fund".  It was only within this Balanced part of the portfolio where perhaps 50-80% of funds might end up in cash and short-term bonds under appropriate market conditions.
 
Still, this does imply as much as 12% to 20% (25% of 50-80%) of total portfolio assets in "cash", under appropriate market conditions in well established clubs.
 
-Jim Thomas
Thanks for the clarification, Jim.
Further, let me say that ANY percentage of cash in a club should be there by design, not accident. Nor should it sit there because no one is taking the time to study new stocks. But I am not opposed to my club stashing cash over a several month period if it means we are biding our time, waiting for what we want. This is another area where a cookie cutter, hard and fast rule does not apply.
Lynn O.
My clubs generally have held little cash, although we might wait a couple of months to either allow the pool to grow to a sufficient level for purchase power, or because we didn't have a good candidate presented to us.  Since we only make buy decisions at the monthly meeting, we've felt that was sufficient to provide capital for buying opportunities.  I see some wisdom for having extra money when those buying opportunities arise, but it is difficult to let cash sit idle for very long.  So, a steady pool of 12% seems high to me - for a club.

By contrast, I carry quite a bit of cash in my personal account so that I can pounce when opportunities arise (like last summer).  I do this because I don't have a much left over each month for additional funding of my personal accounts.  (Perhaps I'm skating on thin ice, but this cash also serves double-duty as my emergency fund.)

Roy Chastain


"Little by little, I am learning the art of being quite content with doing very little slowly."  

Lionel Hardcastle in "As Time Goes By"

So, the purpose of having cash on hand is to jump on some stocks during a recession or some event that triggers a major drop in the market. My club has one stock with a -6% AIRR and the rest are from 5% up to 431% AIRR.  Whether the market is up or down we make investments monthly.  The cash makes no money.  It seems to me that it is better for us to invest our money than to let it sit in a low interest bearing account.
 
John Rice
Good point, John.
For my group, we have several stocks we are intersted in...provided we can get the prices we desire. We have 5 members contributing $50 per month, totaling $250 in monthly dues. In February, we sold one covered call on a stock we own, and we used our cash supply to secure puts on 2 stocks we would like to own. That cash netted us an immediate $411, or 4.31% for the month. That's a comparative annualized return of over 50%. Our puts expired this month, so we did not get the stocks on which we sold those puts. Oh darn. We get to keep the money and try again this month! Not a bad problem to have. Eventually we will get stocks put to us, and when we do, they will be at a very good price. Point being: Our cash is far from dead money. In fact, we're making better returns on our conservative options than we are on capital gains.
Have a great week!
Lynn O.


Dear Lynn,

Thank you for sharing what your club is doing. I think there are some very interesting ways you can use options to generate some income on cash if you don't think stocks you like are at an attractive purchase point.

I hope you will share more of your club experiences with this group going forward.

Laurie Frederiksen
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On Mon, Mar 26, 2012 at 9:15 PM, Lynn Ostrem wrote:
Good point, John.
For my group, we have several stocks we are intersted in...provided we can get the prices we desire. We have 5 members contributing $50 per month, totaling $250 in monthly dues. In February, we sold one covered call on a stock we own, and we used our cash supply to secure puts on 2 stocks we would like to own. That cash netted us an immediate $411, or 4.31% for the month. That's a comparative annualized return of over 50%. Our puts expired this month, so we did not get the stocks on which we sold those puts. Oh darn. We get to keep the money and try again this month! Not a bad problem to have. Eventually we will get stocks put to us, and when we do, they will be at a very good price. Point being: Our cash is far from dead money. In fact, we're making better returns on our conservative options than we are on capital gains.
Have a great week!
Lynn O.



Jim Thomas, shouldn't your sentence say
 Still, this does imply as much as 12% to 20% ( 50-80% of
 25%) of total portfolio assets in "cash", under appropriate
 market conditions in well established clubs.
Linda Lee,

Are you asking if "(25% of 50-80%)" and "(50-80% of 25%)"
both mean the same thing (between 12% and 20%)?

I believe they do, since 0.25 times 0.80 and 0.80 times 0.25
are both equal to 0.20.

-Jim Thomas
You're right. I forgot about the commutative property.  It's been awhile since I've had  arithmetic. I was just translating words to equations.

From: Jim Thomas <jimt075@comcast.net>
To: club_cafe@bivio.com
Sent: Saturday, April 14, 2012 6:31 PM
Subject: [club_cafe] Re: Percentage of club value to hold as cash

Linda Lee,

Are you asking if "(25% of 50-80%)" and "(50-80% of 25%)"
both mean the same thing (between 12% and 20%)?

I believe they do, since 0.25 times 0.80 and 0.80 times 0.25
are both equal to 0.20.

-Jim Thomas