Replies to post #33756 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

RE: CASH

Hi Adam

Indeed - cash stuffed into a mattress is a loss maker. It difficult however to define the border between 'cash' and 'investing'. One investor for instance might consider gold to be an investment whilst another might consider it to be cash.

A 5 year ladder in treasury's has cash like risk when each rung is held until maturity, endures 2.5 year volatility (average duration), but rewards the average of all the purchases of 5 year duration yields. Historically such a 5 year ladder has yielded very similar rewards to 50% in each of short duration and long duration (20+ year) treasury barbell. Split a treasury barbell equally with some gold and stocks and you have a Permanent Portfolio (25% in each of stocks, gold, LT and ST).

I guess its all semantics - where 'cash' could potentially be anything that likely preserves real (after inflation) purchase power (or hopefully better) at times that AIM calls upon that purchase power.

If 'cash' is earning near similar amounts to stocks then the amounts individually allocated to stocks and cash becomes somewhat irrelevant except for how much might be needed to correctly rebalance (trade). More generally however cash doesn't earn as much as stocks. Typically a 5 year treasury ladder averages 2% real (after inflation) gains whilst stocks average 4% real gains. A 50/50 split of the two reasonably yields 3% real excluding any rebalance/trading benefits. Adjusting that to 60/40 stock/cash or even 40/60 stock/cash can mean relatively small differences to that of had 50/50 stock/cash been selected. Generally in the very broad sense, rebalance benefit adds around 0.5% each year on average to total gains, hence a 50/50 stock/cash blend can achieve 3.5% real type averages and be pretty close to the average for all-stock type gains - but as I outlined in my previous posting often most investors don't achieve that all-stock average but hit a lower average overall (peak to trough type trade actions). Cost averaging DOWN (AIM) is also an ongoing activity and over time can yield better than fair value to fair value gains, and even extend up to trough to peak type gains over the longer term.

Best. Clive.