Is Cash A Safety Net Or A Silent Drag

Cash is the one asset everybody thinks they understand and it’s also the one most people never size on purpose. We sit down as skeptics and ask a simple question with expensive consequences: how much cash should you hold in a portfolio, and when should that number change? Steve Davenport argues that raising cash can be a rational planning move, especially when you’re funding a known near term purchase like a home or car and you want to protect that money from the whims of the market.

Then we get into the classic investing debate: staying invested vs “timing,” and why a small cash slice can be a practical buffer for retirees. We talk through the logic of keeping roughly 2% to 4% in cash to support a 4% style withdrawal plan without being forced to sell equities after a drop. Clem Miller shares a personal story about Treasury bonds losing value when rates move, which shaped his skepticism about bonds and pushed him toward a cash and stocks approach.

From there, we explore what cash is really for: optionality when good opportunities show up, and a way to dampen volatility when you still own risky names like AI stocks. Clem also lays out the kind of stock signals he watches, including short interest, forward PEG ratios, and Sharpe ratio, while Steve flags a detail many investors miss: money market sweep accounts can carry meaningful fees, so “safe cash” can still be quietly expensive.

We close with a broader takeaway: don’t build your portfolio to look like a Wall Street template or an institutional pension plan. Build it to serve your life, your taxes, and your comfort with risk. If this helped you think more clearly about cash allocation, money market funds, retirement planning, and portfolio risk management, subscribe, share the show, and leave a review, and tell us what percentage of cash you keep right now.

Straight Talk for All - Nonsense for None

Please check out our other podcasts:

https://skepticsguidetoinvesting.buzzsprout.com

Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.

Transcript

Welcome And The Cash Question

Steve Davenport 0:00 Clem Miller 0:02

Welcome everybody to Skeptic's Guide to Investing. I'm here with Steve Davenport and myself, Clem Miller. And , and so he we're gonna talk today about an issue that often doesn't get a lot of attention, , which is how much cash should you hold in a portfolio? Uh when should you hold more? When should you hold less? Uh Steve. Yes, what's your view on this?

Steve Davenport 0:30

Well, Clem, this is kind of one of the classic arguments about whether you stay invested or you try to time the market. Um, and I don't think of it as timing the market as much as it is using the money money to satisfy your plans. So when I look at buying a house, buying a car, something that's gonna involve

Setting Cash Aside For Big Purchases

Steve Davenport 0:54

a lot of my capital, I like to unionize those decisions once I've made the decision. So if I've decided in six months I'm gonna buy the you know 2027 um um Lexus H IV or whatever the electronic vehicle is from Lexus, then I want to say, okay, I think it comes out in September, October. I want to put the money aside and make sure it's there and not expose it to the whims of the market. So I think there is raising cash for a purpose, and then I think there's raising cash when we want to immunize ourselves or make ourselves less risky. And so some people will look at this and say, Steve, you really you do that with your bonds, you don't do that with cash. But I think when rates are moving up and down and we're not sure where the Fed is going, I think there are people that will look at this and say, hey, how how do we how do we figure out that that cash value is going to be there when I need it in three, four, or five months? And I think there are people who sell a home and then are waiting, and they might want to say, put that money into cash or something very short term, and then allow that to sit there for a year or so before they move to a new area. And I think those instances of cash are really a different decision than the classic. The classic allocation is 2% to 3%, 2% to 4% in cash. And why that's there, if we think about a person who's retired, and this retiree is taking out 4% from his portfolio, his portfolio

The 2% To 4% Cash Buffer

Steve Davenport 2:50

is paying him about 2.5 to 3%. And in doing that, the market goes down suddenly, and he's got all of his equities are down 10, 20, maybe 30 percent. So the question is his portfolio is still producing cash, and he can take that money out. Um, it might be a smaller amount because it's a smaller portfolio, but he's established a pattern. He's taking out 4% plus some number every year for inflation. And so I think what that cash does is it provides a place for you to access the monies that you need for your annual 4% in a way that's not going to affect the makeup of the portfolio. And so, in my mind, having two to four percent there allows you about two or three years before you would have to sell anything in the portfolio if you were trying to get your four percent out of your portfolio. So I believe it's there as you know to cover any unintended fees or events, and also um to make up the ground when the market is in turmoil and you want to take something out, but you don't want to take it out by selling one of the main principles in your portfolio, which would be let's say 60, 60% equity, 35, 36% fixed income, and 4% cash. I think that you wouldn't want to sell the equities that are down a lot. You wouldn't want to sell the fixed income because you don't know what rates are doing, and then you could use the cash to supplement your 4% withdrawal rate. So that's how I think about cash. But I think that other people can be more aggressive, and you might talk about what you do with cash, which I think is an interesting mix. I think that bonds would normally make up most of what you consider to be cash, but I mean you you handle it differently, Clem. Tell us what you do.

Clem Miller 5:02

So I'll tell you a story. Uh, so long time ago, a relative, okay, won't say who, okay, had a portfolio. Uh and this relative passed away, and the money was handled by another relative.

A Treasury Bond Lesson On Rate Risk

Clem Miller 5:26

Uh you know, I was quite young at the time and naive, okay, about money, right? At that point. Uh maybe not that naive, but somewhat naive. And I saw that the money was put into treasury bonds, right? And no doubt the relative who managed the money thought, well, you know, I'm protecting the capital because it's , you know, treasuries have no credit risk. So they probably were only thinking about credit risk. But in the meantime, rates moved against that portfolio. And so that portfolio of treasury bonds actually lost a lot of money. So I have that fortunately that was not, well, I guess in the at the end of the day, it may have been part of that might have ended up being my money, right? But I was , you know, I was that event seared a belief in my mind that bonds are dangerous, right? Okay, , because rates can move against you. So I as a result of that, I'm very reluctant to hold bonds in my portfolio. Uh I'd rather hold because it's a rate bet, right? And who can predict that? I mean, I'm not sure.

Steve Davenport 6:48

Well, yeah, you're also taking only one dimension of the risk, right? Right, right. I mean, statistically, if you believe you don't know where rates are going, then you're neutral and it could go the other way, and you could have made money in that trade, right? It could have. Right. I'm just saying though, like tell me your buttons.

Clem Miller 7:08

You understand being in the middle. So dollar just holding cash provides more stability than holding bonds.

Steve Davenport 7:20

Hold stability is yes, yeah.

Clem Miller 7:22

Holding stocks generally provides more return than holding bonds. And so I like to see you know a combination of cash and stocks and not um and not put bonds into that equation. So that's but you you're right that I'm using cash where other people might use bonds.

Steve Davenport 7:47

Correct. And you're also not gaining much against inflation, right? You're probably underperforming inflation versus bonds, you probably outperform inflation. Well, I don't know. Do you agree with that?

Clem Miller 8:00

Not necessarily, okay, because because cash is paying you know quite a bit now. It's not like it's zero. It's not like under the mattress, right?

Steve Davenport 8:09

It's it's like I was zero for about 12 years, Corinth. Right. Well, I'm you're you're getting very you're forgetting the things that are favorable.

Clem Miller 8:19

Maybe my maybe my opinion would change a little bit if it went back to that. But but but let me let me say this that cash also provides a and this is why Warren Buffett has often held a lot of cash. Uh you can you have that cash available for when there's a good opportunity. And and right now, when I look at the market and I try

Cash For Opportunity And Lower Volatility

Clem Miller 8:48

to apply my various criteria, honestly, I don't see that many I don't see that many opportunities out there. You know, sure. I like to see short in short interest being quite low for the stocks I buy. Short interest has gone up for a lot of stocks. So there's a lot of people betting against um, especially like AI stocks now that you know that they wouldn't have bet on um bet against previously. So I don't like seeing stocks with high short interest. You know, I've I've adjusted a little bit to these higher levels, but I'm not you know, I'm not going to routinely accept you know two and three percent short interest. No, no way I'm am I gonna do that. Peg ratios, for forward peg ratios. I like to see low forward pegs. Some of these high flyers have, you know, the the pegs have gone up, and others are like incredibly low. And then you have to wonder well, you know, are analysts actually, you know, correct about their projections going forward, right? Like you know, Micron and Sand disk have these like incredibly low forward peg ratios. We know that those can't possibly be true, those low forward peg ratios, , because the the earnings projections can't be that good.

Steve Davenport 10:10

Uh in reality, they can't play out the way the the analyst typically haven't in the past, so as an indicator, they're not likely to.

Clem Miller 10:18

Right. I'm not saying they aren't bad stocks, it's just that I don't think they're as cheap as everybody as everybody might think they are. Um so so you know, I look for opportunities to buy stocks, short, low short interest, low forward peg, maybe some good um sharp ratios, right? I've been looking at good sharp ratios. You know, I it not high return is not sufficient. You know, I want to see high return that isn't volatile, right? So I want to see which is what a high sharp ratio gives you. So I like to see high sharp, I like to see low short interest, I like to see low forward peg. Um, you know, preferably um, you know, preferably beta that isn't too high. But on the other hand, if I've got a lot of cash, beta is less less important in the calculation.

Steve Davenport 11:13

Yeah, I mean, as part of your, you know, when cash was actually paying zero and the Fed was not paying anyone for holding, that was a period where I think you could have argued that look, these , you know, these rates are so low here that um it doesn't make sense for me to take duration risk and get nothing. And then so I think for people to understand that part of the argument is that when you're sure that it can only go one way, meaning the market's at about zero on the Fed you know short-term rate, then therefore, you know, medium-term bonds are at 2% or whatever, they don't even cover inflation, which is at two and a half or three. So, and they know that hey, if I leave myself, you know, at a short duration place, then when rates go up, I can refinance and get the higher rates. Since it can't go below zero, the feeling was you know, you you really can't lose too much money, but you're also taking a risk, right? There's a risk that um this this goes on for a long period of time, and not earning anything um is certainly harder on you than um exposing yourself to to some of the other risk, right?

Clem Miller 12:40

Now, you know, I feel you know I've got a lot of cash now. I got I think still over 50% cash in the portfolio, waiting for these good opportunities. But I also feel like with that much cash, that you know, if there's a sudden crash, you know, and these things happen suddenly, right?

Steve Davenport 13:02

Yeah, that's what I would might disagree with you a little bit, because one day settlement means that you could you could hold it in something that's not cash that is paying you a little bit more. Yeah, that would, and you could sell it that day and you would invest the next day, or you could have a margin account in which you could invest right away.

Clem Miller 13:23

But but one day settlement also means that other people can get out faster too. So so so so volatility can go up. Um but you ever had a time where you didn't have a day to think about it?

Steve Davenport 13:39

A day to think about the the the decision to put your cash to work. Have I ever had a day a situation where it you needed to be in cash because you're you know you wanted to invest that moment and not wait a day to invest the next day and have sell something to do the investment. No, I take my time, okay. Right. So that's what I mean.

Clem Miller 14:04

It's not really No, but I'm what I'm more concerned about is making sure that I don't suffer on the downside too much. Okay.

Steve Davenport 14:13

So that's getting out of stocks that are risky.

Clem Miller 14:19

Uh yeah. So, you know, we're talking about the cash being able to deploy. Right now, I right now I've got a lot of cash, but I also have a lot of quote risky quote unquote stocks. Um, you know, regardless of my criteria, I still have you know quite a few AI stocks and this kind of thing that that can that can fall, right? And do fall and are volatile. And we've seen a lot of volatility um in stocks. And so my cash my cash holdings dampen that volatility. And if we do see a significant crash, um, you know, crash may not be the right word, but if we see a correction , you know, of if we see 15, 20, 25%, something like that, you remember it, it takes, you know, the way math works is you need a bigger return to offset um to offset a downturn. So it's not you don't need 10% up to offset 10%. You need what 15% or something up to offset a 10% down. So so I I would rather not have, I mean, I if if the market goes down 20%, I'd rather be down 10 than be down 20. Okay or down you know eight rather than be down twenty. Um and I'm willing to give up a little bit of the upside if the market goes up like 20%. I'd rather go up like 15%, right? I mean, what's what what's the big deal, right? So I want to have I want to have growth in the portfolio, but I don't want to have that, I don't want to have that big downside risk. I mean, if I were a lot younger than I am now, maybe I wouldn't um well just lose some put options. Yeah, just looking back, yeah, just looking back, , you know, I didn't I never when I was younger held any cash, right? It was all I I had it all in stocks, right? Uh I didn't have anything in bonds. Uh I held it all in stocks. And um, you know, motivated by that story I told you, right? I didn't want to have bonds. I wanted to have it in stocks, and and that worked out real well. Um you know, before you know retirement and everything. And and now, you know, I'm more careful. Uh, you know, I know a lot of people who are retired like don't even want to touch high flyer stocks. I will touch high flyer stocks, but it's not like it's you know 100% of my portfolio, it's some small percentage of my portfolio. So I I still think I do well on the upside, but I'm I'm I feel right now when there's a lot of uncertainty about where stocks are, , I feel like I'm pretty well protected on the downside.

Steve Davenport 17:15

Yeah, could you tell me what what do you what do you make on your cash? Like what what type of investments do you use as cash?

Clem Miller 17:24

Well, it's a it's a you know, it's a money market fund that's that's maintained by my broker. Okay. Okay. So it's like a it's like a sweep account kind of money market, right?

Money Market Yields And Hidden Fees

Steve Davenport 17:40

You know what the fees are on?

Clem Miller 17:43

Uh I think it's like near zero. I think I don't pay anything really on that, okay, given how much I have there.

Steve Davenport 17:51

I don't think I've got to. You should check it out because I looked at the Schwab money markets. Yeah. And there were like 38 basis points. Yeah. And there were funds that you could buy that were, you know, five and ten basis points. But the standard, if you just leave it in cash with them, is is somewhere around 38, , which I thought was high for cash. So I think it's you know, I think that people can have it accredited back. There's all kinds of ways that cash is handled, but I also think that it's always good to be a little skeptical and to check out what are the fees associated with your cash and other things, because I agree that right now it could be paying you pretty well, but there are times when obviously it wasn't paying anybody anything. And I would say it was the disappointing parts of this being in this business was nobody was saying, hey, you shouldn't own bonds, even though we knew theoretically our clients weren't earning anything. So I thought our job was to protect our clients and tell them, you know, when things are not good for them. And I think that that was one time that everybody kind of was silent. And by silent, they were implying that it was okay to be in these holdings that you know they're they they weren't keeping up with inflation, which is what their purpose was, right? The purpose of these bonds is to at least keep up with inflation so that you don't use purchasing power, but we all lost purchasing power for years with those low rates, right?

Clem Miller 19:34

Yeah. Well, when you I mean, hopefully your stock part of the portfolio made up for that.

Steve Davenport 19:40

Uh right, but I'm saying you could have had the the bond part of the portfolio or the fixed part of your portfolio, you know, not earning zero. Yeah. Um and telling people they still needed to have it was a little bit um misleading in my mind because they didn't usually you don't usually encourage people to have investments that aren't going to keep up with inflation, do you? Oh, of course not. Yeah, but yeah, we did as an industry not put up your hand and say, get out of these. These are these are not paying what they should pay you. Uh I think all of these just left things alone.

Clem Miller 20:21

I just do not like the idea of I mean taking a rate bet on bonds. Uh I just I I just I just don't like that. I mean, you know, I also think back to um you know some of my experiences with emerging markets in the past. And in some countries, emerging markets, maybe even some

Bonds, Inflation, And Financial Repression

Clem Miller 20:45

developed markets, the bond markets, you know, there's this thing called financial repression. And the bond markets would be used to to basically serve as a transfer mechanism from private investors to governments. Um and where it would be the government that would get the benefit and it would be you know transferred essentially from private people to the government. And I don't want to be the I don't want to be the funder of the government, right? I don't want to be the person who's oppressed by my government in terms of in terms of receiving lower rates than I should because of financial repression. I'd rather sort of stay away from that and and be invested in be invested in stocks and in cash. Nobody's nobody's oppressing my cash.

Steve Davenport 21:46

Okay.

Clem Miller 22:00

But but financial oppression is you know is is something else. Financial oppression is it's not taxes. Financial oppression is is like forcing, I mean, in in the real definition, it's like forcing people to pay your bonds, right? To buy your bonds, , to buy below market bonds, forcing your people to do that. Nobody's being forced to buy bonds. Uh, but this sort of impression out there that one should buy bonds and hold it as part of a portfolio sounds to me like it's um it's kind of a voluntary financial repression.

Steve Davenport 22:41

I think you you bring up a good point, which I I think we should I think the bond discussion and how bonds work and how bonds are used in your portfolio, and the question of munis and non-munis, and who's got risk and who doesn't, and what the different I think that's a whole separate discussion. So I'm gonna say we should probably just stick to cash or no cash. And I think we both agree that cash can be useful as a tool when you need to minimize your risk. I I agree with, I'm not sure I agree with it becoming 50% of my portfolio. I think you're taking more of a decision in your active

Rules For Putting Cash Back In

Steve Davenport 23:23

management than I am. Yeah. I'm using more of you know individual names and some um some ETFs and some vehicles, but I guess I'd say that the fixed income and how we use fixed income is probably a discussion for another day. Um I think that you know cash can make you feel good, cash can make you more comfortable, cash can make you sleep better. So in my mind, you know, I'm I'm not gonna worry about when I put my cash back. A lot of people say, well, if you take it out and put it into cash, what's the discipline that's gonna get you to put it back? Well, my discipline is I'm probably gonna use it for something outside the portfolio, so that's not really an issue of why I raised cash. If I do raise cash from an investment perspective, I usually have a time frame that I assign to put it back in an event that I think, if it goes negatively, could lead me to put it back at a time when the markets are lowered. If that moment doesn't happen, I will put the money back. Uh it's it's simply a question of this absolute determination that timing or taking money and putting it into cash is not a good idea. I disagree with that. I think that you have to be always managing your overall plan with your life as well as your portfolio, which means there's going to be times when you're going to want to unionize that purchase or that event in your life or medical costs or whatever it is. And that's, you know, that's a natural use of cash.

Clem Miller 25:06

Yeah, but even even apart from you know life needs, , you know, if I look at my stocks and I see a stock that's gone up more than 10% in a day, you know, I just have to question whether that's going to continue to go up, right? And so I will sell it or sell.

Steve Davenport 25:23

I mean, I've I'm looking at three names now that are down more than 40% in my portfolio. I want to harvest them and take losses. Yeah. Because I want to capture that loss and then um, you know, we will reinvest in 31 days, , maybe in the same name, maybe a different name. But yes, I think there are active parts of investing that you have to participate in, which it's getting a name that's gone up too much, trimming it, or trimming it back to the size it was the day before the game. I mean, there's there's a lot of ways that you can make your portfolio less risky. And I think that especially in the in the you know non-taxable IRA parts, you should be thinking about if I want to get less risky, I'm in an IRA, I don't have to pay taxes, let's get less risky. Um, and I think that getting less risky is part of um just like deciding to go from 70% to 80% allocation to equities. It's a decision you make and you have good reasons when you make it. So why why question yourself you know too much when in reality it creates a level of comfort that you really can live with? And that's ultimately what I think we need our portfolios to be. Do you have anything else to add?

Clem Miller 26:51

Uh no, I would I would just say that, you know, as time has gone on, I've become much more, I've been become much less of a fan of asset allocation than I I know I used to do asset allocation, but I I've become much less of a fan of asset allocation than I used to be. And I'm more interested in individual stocks and cash and you know, as I was last year in gold. Um, but um, you know, that's what I'm looking at. I don't feel the need necessarily to have an emerging market equity

Ignore Templates And Build Your Plan

Clem Miller 27:34

allocation, for example, or an international developed equity allocation, or you know, any bonds at all. I just don't feel I I have the the the I don't I don't I don't feel like I need to live by some kind of template that was designed by Wall Street, right?

Steve Davenport 27:52

I just but I think that what is for institu I think that there's a lot of people who make the simplifying assumption that what's good for institutions is good for individuals. Right. That's why this whole argument about alternatives is well, if the sophisticated investors are using them, you're a wealthy individual, you're sophisticated, you should use them. Right. I think I think that's completely you know foreign and not not really true for most people. Most people believe they understand these investments. To push them into investments they don't understand is not giving them something wonderful, it's creating a sense of doubt.

Clem Miller 28:34

And they're putting more, and you can't don't put that much emphasis on institutions having greater knowledge than you do, , or or greater information. They may have more information, but they don't necessarily know exactly they may not know what they're doing. I wouldn't assume you that they know what they're doing.

Steve Davenport 28:54

Uh I'm not gonna say that. I'm gonna say the person has different needs. That institution is doing it for whatever their purpose of their investment committee told them to do. Yeah, you're doing what you need to do for your personal family and extended friends and charities. You do what's good for you, you be you, you don't be IBM pension plan, you don't be, you know, the the teachers, the TI of Cref. T.I. of Kreft can be TI of Kref. You just be you.

Clem Miller 29:29

I I you know I perfectly 1000% agree with you on this, Steve. You gotta you gotta have your own tailored investment plan that you feel comfortable with, right? That that isn't you know some template that somebody is pushing on you. Um it's gotta be it's gotta be tailored, gotta be customized to your own to your own needs. Don't let let somebody tell you, oh, this is customized. No.

Steve Davenport 29:57

I've seen advisors, you know, proposing to senior citizens in retirement 25 mutual funds as an allocation. Yeah, 25? Clint. I mean, I you know, with a lot of asset classes, I don't think we need 25. So when I see that, I ask the question are there higher fees in these? Are there 12 B1 fees in these? Right. And I sit there and I say, this isn't designed for this person. This is designed to look like whatever they're recommending. Right. Um, their manager said was conservative growth and income, or what I think that people need to start to take more control and be more engaged in what's involved with their money, because ultimately it's to serve them. And ultimately we need to we need to be careful of letting others inside and telling us that what we're doing is too simple or wrong. Right.

Clem Miller 30:56

Steve, I think this is a perfect perfect thing that we should talk about in a future episode. Uh the the you know whether asset allocation makes sense, right?

Steve Davenport 31:11

Well, the other thing that I'm starting to look at is the use of annuities and the annuities in in in IRAs because of the you know limits on you know required minimum distributions and all the ways that annuities aren't included as an asset because they're considered a future payment. And so, therefore, a person who is gonna have an RD on a $2 million IRA, he buys a million or half a million of annuities, he's only gonna have an RD on a million and a half. So there are ways that some of these other vehicles can be used, but I think that you know,

Future Topics And Listener Requests

Steve Davenport 31:53

what's the person's social security? What of the per does the person have a pension, or do they have a partial pension from two or three places? Those things all factor into how much bonds you should own. I mean, I look at my Social Security and my pensions as bonds in my portfolio. One of them has a you know an adjustment, but I I think this is a good topic. So let's just call call it a day on cash. Is there anything else you need to say about cash? No, no, all right. All right, everybody, thanks for listening, and we appreciate what you do and following us. So please um give us a like, give us a subscribe, and share us with a friend or even an enemy. Um, we just want to be shared. So thanks everybody and have a good week.