My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.

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Too Much Cash Is A Problem

Contributed by mm | November 23, 2005 3:21 PM PST

So far I haven't regretted my recent sale of the house, but I need to deal with the consequences: the abundance of liquidity. Even after I purchased more than $70,000 stocks and funds since the beginning of November, I still have more than $200,000 sitting in my savings account. Plus, more cash is flowing in with my increased payroll and decreased cost of living. For the first time, too much cash is a problem for me.

At my current age, I'm all for getting fully invested. I'm embarking on a journey to build out my portfolio in the next 6 months to 12 months. As a start, let me share some of my belief and disbeliefs:

• Although I passed CFA Level I, I don't believe in Efficient Market Theory, and therefore do not believe in stuffs like efficient frontier.

• I believe in selecting good mutual funds -- I believe in good fund managers can do a better job than me in investing. It does not mean I will not pick up individual stocks -- I still intend to allocate about 25% of my portfolio for my own stock picking.

• I believe in, to some extent, market timing. This means on the mutual fund end, I will do some dollar cost averaging over a relatively long period of time.

• I believe in value-investing. I always believe at any point of time, there are certain stocks that are undervalued and they are opportunities for value investors -- the key is to find them and bet (big). To me, the most important thing about value investing is the margin of safety, so it means I have the patience to wait if there is no gold opportunity.

• I don't believe in buy and hold -- once value is unlocked, it is time to sell. Still, I will have the patience to wait if I cannot find good opportunity.

• I believe in risk management. It means I will consciously avoid having too much exposure on one single stock, and will avoid over-investing in particular market segments.

In the past, I put much of PFBlog focus on personal finance aspects like credit card, mortgage, banking, tax, etc. Now that with nearly $400,000 invested or ready-to-be-invested money, and $5,000-$10,000 coming every month, my focus will be graudally shifted to more effectively manage my portfolio. After all, a 0.1% improvement on my portfolio is worth $400, and it is more effective use of my time comparing to saving $10 here and there multiple times.

This Post Has Received 18 Comments. Share Your Opinions Too.

Bob Commented on November 23, 2005

Too much cash, heh, I wish I had that problem

fatboy Commented on November 23, 2005

MM, I'm glad you'll be discussing more about investing. I see you have stopped publishing your transactions on PFBlog since early this year. Hopefully, you can start again and keep us up to date. But if you could include more details about what helped you to make the decisions to invest, it will be really helpful. Personally, I find it self reassuring when discussing my picks in the open because it forces me to do better research. Although there's no guarantee the information I turned up is accurate.

JC Commented on November 24, 2005

Just a couple questions:

You don't believe in "efficient market theory". Which theory don't you believe in [weak, strong or semi-strong]?

You don't believe in buy-n-hold, you believe in active management and market timing... Wow, that's just breathtaking...

Why do you think your prognostications and trading skill will benefit your bottom line precisely? That would make an interesting blog topic...



MM Commented on November 24, 2005

JC: Actually I don't believe in any of these three forms. Still, I'm not a day trader -- my average holding period so far is more than 1 year and my appetite is mostly for blue chips. Speaking of market timing, isn't it helpful if you could foresee the next bubble?

JC Commented on November 24, 2005


So there's nothing to market efficiency at all? Hmm... ok, whatever floats your boat. FWIW, Malkiel himself doesn't support the strong form of EMH. He readily admits that there are inefficiencies in the market. However his point is that there is no way to consistently and profitably capitalize on those inefficiencies in a systematic way. That's why at the end of the day after all costs and taxes are factored in, long-term indexing wins.

Agreed, it would be extremely helpful if one could forsee the next bubble. That's just the trick! However I think the best way to profit from that foreknowledge is not to act on that info, but to start a newsletter!



BRAD BEITER Commented on November 24, 2005

Long time reader, first time poster!

I see you are heavy on liquid assets and you just sold your one real estate holding (your home). Have you considered purchasing an invetment property? With the amount of cash you have to invest, you could get a million dollar apartment building and have it managed for you....

Brad Beiter

Matt Harp Commented on November 25, 2005

The problem with market timing is that's impossible to get it consitently right. The late 90's is a perfect example. People started saying in 99 that the market was over-valued and headed for a crash. Yet between 99 and the the actual crash the Nasdaq doubled (or something close to it) which means that you would have lost quite a bit of money if you'd gotten out of stocks in 99 instead of just blissfully riding the wave. I believe you should get defensive at times as well as dollar-cost-average (even though I've read research that shows that dollar-cost-averaging it bad because the market always eventually goes up) you can't completely give in to market timing. That's the problem with the perma-bulls and perma-bears. They both end up right, but it sure will cost you a bundle of money to follow either religously. The more I read, the more indexing seems to make sense unless the last 100 years of history is useless which is not as far-fetched as it seems (IMHO)considering that the US probably isn't going to be the world's biggest economy at the end of the this century.

Wes Commented on November 25, 2005

Mutual Funds? I'm disappointed.

I hope that you will at least pick low cost fund like Vanguard.

One more note, don't let the money go to your head and don't take it too seriously.

Wes Commented on November 25, 2005

heh heh... my mentor, a great money economics author, and the guy where I get my investment philosophy from (but with ETF's)just posted a piece called "Too Much Capital".

Bernstein has a couple of great books, too.

MM Commented on November 25, 2005

Thank you for all comments. I realized that I should not use the phrase "marketing time" -- it is too often associated with traders. I'm more using it from a value investor's sense -- the league of value investors have proven (at least to me) that the school of thought can consistently beat the market by picking us the right stocks at the right price -- I'm not proclaiming I'm a good one, but at least I can try.

Anyway, a sampler of my current holdings, just shed some more light on what I believe:

Stocks: AIG, BAC, BRK.B, C, FDP, MO, PPD
Mutual Funds from 401(k): FOSFX, NIIVX, OAKBX (and some cash)

My fixed income exposure is mostly in savings bonds ... don't think bond funds making a lot of sense now with the flat term structure. Am I timing the market?

anon Commented on November 25, 2005

dollar cost averaging is a bogus strategy - it makes money when markets mean revert, and looses money when they trend. unless you have a view on the extent to which markets mean revert/trend, don't bother with it.

JC Commented on November 25, 2005

If you're staying on the sidelines because you think that a market is overvalued, then yes you're market timing. Certainly that's not as bad as day trading, but you're still market timing to a certain extent. Likewise, if you think that a market is overvalued and you sell, then you're still market timing. Or if you buy because you think it's undervalued, you're market timing.

Matt Harp is correct. What makes market timing so difficult is that you have to be correct TWICE.

Actually there's quite a bit of research to indicate that the odds strongly favor lump sum investing over dollar cost averaging. Michael S. Rozeff, "Lump-Sum Investing versus Dollar-Cost Averaging: Those who hesitate, lose," Journal of Portfolio Management, Winter 1994, pp. 45-50. et. al.

A better alternative that avoids these mistakes is to lump sum invest into a proper asset allocation with low-cost index funds. No need to overweight domestic markets if you share Matt Harps fears. Personally, I've got 1/3 US stock, 1/3 foreign stock, 1/3 reits, bonds, commmodities exposure. It's a portfolio designed for the long term. It works for me.

Happy investing,


YJM Commented on November 25, 2005

Congratulations on all of your success.

I first began reading your website about six months ago. I have enjoyed your many tips on the do and don'ts of personal finance.

Similar to your situation, I have recently began experiencing the 'problem' of having too much cash. Between a recent sale of condo and new promotion, I have found that I am saving WAY more than I ever have before.

I look forward to reading about your investing ideas in the future.

Good luck.

Seyi Commented on November 27, 2005


With all the excess cash you have try looking into GMAC Demand Notes @
The current interest rate is 5.15% and you have checking priviledges.

Joshua Ross Commented on November 29, 2005

Become a capitalist and instead of hoarding money, put people to work.

Little Money Commented on November 30, 2005

Congratulations on your Success!

I am pretty much a broke person living paycheck to paycheck who's trying to make that change of course. Not a very smart guy either but the more I research, the more Real Estate seems to come up as a good place to put that extra cash at hand! Some say safer that stocks and faster that saving accounts or any funds! I have seem to discover a gold blog and I'll be sure to keep on checking on your success and hopefully learn from it!

Venky Commented on December 10, 2005

I'd do the following in no particular order

1. Get a bunch of i-bonds yielding 6.73%
2. Buy Vanguard precious metal/mind fund at the end of January
3. Bug the vanguard total stock market index/extended market funds and DCA it every month
4. Buy TIPS in your 401k
5. Subscribe to Scheaffers options advisor and follow his recommendations both calls and puts
6. Buy couple of international funds both in developed and emerging markets.
7. Buy the XLE etf.
8. Buy the pimco total return fund.
9. buy the Exelcisior value and restructing fund
10. buy some emerging market debt
11. Buy the vanguard REIT fund and DCA into it

I think there is nothing much left :)

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