Where to hold cash aka dry powder

[epower]

For those that follow a somewhat value investment strategy by buying businesses ‘on sale’ it means that in certain environments (such as now) a lot of quality business are trading at fair or above value price points in the market

Therefore my/your cash pile from regular deposits from dividends, wages, etc into a brokerage account pile up earning essentially nothing in interest

Researching strategies around this ‘time in the market, not timing the market’ and a host of research from various sources say to be fully invested as picking the bottom is inherently difficult to do

I can see the logic in this but part of me goes... ‘why should I buy a company at a high price/earnings multiple/low dividend yield only because I’ve got cash burning a hole in my pocket’?

Damned if I do and damned if I don’t. Earning 0.05% on call grinds my gears but so does paying more than I’d like to for a business

What’s your strategy for excess cash whilst waiting for purchases?

[Snoopy]

For those that follow a somewhat value investment strategy by buying businesses ‘on sale’ it means that in certain environments (such as now) a lot of quality business are trading at fair or above value price points in the market

Therefore my/your cash pile from regular deposits from dividends, wages, etc into a brokerage account pile up earning essentially nothing in interest

Researching strategies around this ‘time in the market, not timing the market’ and a host of research from various sources say to be fully invested as picking the bottom is inherently difficult to do

I can see the logic in this but part of me goes... ‘why should I buy a company at a high price/earnings multiple/low dividend yield only because I’ve got cash burning a hole in my pocket’?

Damned if I do and damned if I don’t. Earning 0.05% on call grinds my gears but so does paying more than I’d like to for a business

What’s your strategy for excess cash whilst waiting for purchases?


Depending on how much cash you have, it might pay to split it up into term deposits of a few months over different durations. But arrange the maturity dates so that you know you will have access to a certain amount of cash every month, should that investment opportunity arrive. That way you are at least getting a slightly better return than the 'call' interest rate. But you know that you have $x maturing every month for those investment opportunities.

Another thing you could do is think about doing those delayed home improvement projects that decrease your power bills. Decreasing a regular bill is equivalent to getting a term deposit return. Put in some double glazing for example, and strip back and insulate uninsulated walls. Your 'return' will then come from lower power bills, With the cash rate so low, you may find that all sorts of home projects that were marginally economical are now worth doing.

Nevertheless any return you might earn from having cash invested at 2-3% like the 'old days' would probably still be below whatever investment opportunity return that you decide to chase. So while earning just 0.05% may seem bad, while you have cash you have investment opportunity. And it is the investment opportunity that will drive your future returns, not the cash return you are or are not getting while you are waiting for that opportunity to present itself.

SNOOPY

[SBQ]

I'm quite certain i'm the black sheep here in this forum. While you are correct that consistently being able to time the market is near impossible, it does not mean you can try to get near it in 'dollar cost averaging'.

Over 2 or 3 years ago in the Newbie section of this forum another person (justakiwi?) asked the same very question epower is asking. How to invest the cash reserves. My response for very clear, hold on it for the next crash and in March 2020 we had just that!

You may also notice my rants during that time, getting my large sums of $ sent out of NZ. Prior to the AML law changes, sending a wire transfer would only take 1 afternoon and done at any BNZ branch. The reason I mention this is there's issue of "capital outflows". When countries restrict the movement of capital, generally that means they lose on on foreign investment. (meaning, where you hold your cash also does matter).

The FMA had some stupid reference that Kiwis having foreign bank accounts abroad need to be careful. What they fail to mention is NZ banks do not have 'depository insurance'. (i'm sure others here will fact check this). While in the US, they have FDIC / SPIC (for brokers). If there's any fear, cash sitting in a NZ bank account is more riskier.

I assume the question is, do you buy stocks now if you have the cash or not? Well since we had the crash last year, it's not likely there will be one for some years. My strategy is simple, buy on the next correction but i'm like 90% invested so that amount won't make a big dent on things.

[epower]

My strategy is simple, buy on the next correction but i'm like 90% invested so that amount won't make a big dent on things.

Where do you keep the cash in the meantime?

[justakiwi]

Don't think that was me as my "cash reserves" outside my emergency fund, are miniscule ;)

Having said that, even I have come to the conclusion that there is little point having too much money in the bank, given the fact that it's earning nothing. It blows my mind that IRD is still bothering to collect ridiculous amounts of withholding tax on deposit interest. Some of my very small account balances are earning me less than $1 interest but IRD are still wasting their time and money collecting and processing a few cents worth of tax.

For me, banks are now a place to hold my emergency fund, save a small amount for "fun money" and that's about it. Anything over and above that is now going into shares.

Those with large cash reserves obviously have more to consider. Out of curiosity, do banks ever "negotiate" a higher interest rate fro those with significant $s?




Over 2 or 3 years ago in the Newbie section of this forum another person (justakiwi?) asked the same very question epower is asking. How to invest the cash reserves. My response for very clear, hold on it for the next crash and in March 2020 we had just that!

[SBQ]

Where do you keep the cash in the meantime?

In a US brokerage account in joint ownership with a NON-NZ resident account.

@ justakiwi:


Those with large cash reserves obviously have more to consider. Out of curiosity, do banks ever "negotiate" a higher interest rate fro those with significant $s?

Yes most banks do for large term deposits rates but it's nothing to rave about because when interest rates so low, you might squeeze an extra 0.2% at best (others may experience better rates). But term deposits LOCK you in for that period and that's not how the share market operates. If you want to wait for the next stock market crash, you have to (as Warren Buffet says) have the elephant gun loaded. If your broker is half decent, you may be able to borrow funds on the margin and get your cash funds to account later (how competitive are NZ broker margin rates?).

Don't sweat it - if you've stayed with a plan to stay long and did not sell your shares over the Covid crisis - you would probably would of done better than most of the hyperactive traders that scalp profit.

[GTM 3442]

In a US brokerage account in joint ownership with a NON-NZ resident account.

Out of idle curiosity, do you think you could expand on the details of, and the reason behind, that arrangement?

[SBQ]

Out of idle curiosity, do you think you could expand on the details of, and the reason behind, that arrangement?

Well as my accountant implied, my arrangement is rather uncommon in NZ. Last year (Feb) when we informed her that we (my father & I) were moving most of our cash holdings to his brokerage account in America, she wanted to tick the right boxes. I recall sitting in her office after making those wire transfers that she advised me some paper trail 'of notification' should be done just in case IRD wanted to check things up..... when she explained it was quite common how the 'father' passes down the assets to the next generation to me, I had to correct her in saying, "NO NO. that's not how it's done". I had to re-iterate to her that it's the younger (myself) that is gifting all my cash holdings to my father (out from the father & son partnership business we operate in NZ). Since my father is a non-NZ resident, our accountant just wanted to be sure and contacted our lawyer. Over a year later and no reply on that issue so it seems drafting such paperwork may not be necessary.

The relationship between my father and myself is very close and I don't recommend it to anyone. No lawyer would recommend this approach due to issues like losing half if my father went into a new relationship with someone.

So why the move? Well over the years i've tried to be vocal on NZ's approach for taxing foreign shares under FIF (which we all know is essentially taxing paper gains). No person has been more critical about preserving compound gains than Warren Buffet and like fund managers that charge unreasonable fees ; IRD slaps on that 5% FDR (which is then taxed back at the high tax rate 39% because of the large sums involved). But don't take my word for it. I can see it with my own eyes by comparing how much retirement savings people in NZ have vs my middle class friends living in Canada. I can't believe my close friend's daughter is funding her college education with their RESP (reg. education savings plan) and unlike NZ, families in Canada plan for education over decades (sometimes at birth) and the gov't gives them tax free gains on those accounts. Not this Jacinda Ardern making 1st year post secondary education free kind a deal but a real plan. Canada has programs that incentivises low and middle income families to invest with gov't matching credits. This also applies to those with disabilities RDSP, and more commonly for the working class, RRSPs which is like the Kiwi Saver but entirely tax deferred (it's a 2 prong approach that with RRSPs, people contribute get a direct deduction of their taxable income - so if they contribute the maximum 18% of say on a $50K/year income, that contribution can bump them DOWN into a lower tax bracket and pay less tax on their most productive years). But getting back to the issue, it's clear those that invest living in US/Canada get far more of a nest egg than what KS would provide here for the same level of contribution. I've done the spreadsheet analysis and it's sad and no wonder so many of the rich in NZ buy more and more houses because there's no better game. While in Canada, owning multiple houses won't get you ahead vs owning stocks because there's so many taxes attached to having more than 1 house. The rates are surcharged 30% (equally applies to corporate or trusts holding the houses), Vacancy or Ghost home tax, high insurance premiums because you're renting out to tenants, and the worse of all, you can't sell a portion of a house and such large capital gains will get hit with the highest income tax bracket. Oh I almost forgot to mention, Canada's Tax Free Savings Account (TFSA) introduced over 10 years ago allows anyone to contribute $5,000 ($6,000 now) each year and all the gains are 100% tax free. When you withdraw, the gains are locked in so you can re-contribute in later years.

So just like my father, there will be a day when my family will make the move over and declare non-residency in NZ. Then the gains in our portfolio would be withdrawn in a more tax efficient way. (if you didn't get the drift, the primary motive is taxes). I'm not all against paying taxes, I just don't believe in NZ's view of how the wealthy (who own mostly houses) get away paying minimal taxes vs the middle class in NZ, get shafted with Kiwi Saver. Will future NZ gov'ts change? I dunno and i'm not going to bet on it. We had a golden moment last year with COVID and as I mentioned before, if your elephant gun isn't loaded, you can't take advantage of any market crash or correction.

[Norwest]

Yes most banks do for large term deposits rates but it's nothing to rave about because when interest rates so low, you might squeeze an extra 0.2% at best (others may experience better rates).


I've got +0.3% carded rates recently.

[BIRMANBOY]

Is there anyway we could convince you to make the move sooner??? Then we wont get bored to death by your all too frequent posts about how much better the financial system is in Canada. Here is a thought for you..its irrelevant to 99% of us here because we have to live and transact our financial lives in New Zealand. So save yourself the angst and ignominy of having to live and suffer in New Zealand and us from the whingeing...please. Have a nice day now.

So just like my father, there will be a day when my family will make the move over and declare non-residency in NZ. Then the gains in our portfolio would be withdrawn in a more tax efficient way. (if you didn't get the drift, the primary motive is taxes). I'm not all against paying taxes, I just don't believe in NZ's view of how the wealthy (who own mostly houses) get away paying minimal taxes vs the middle class in NZ, get shafted with Kiwi Saver. Will future NZ gov'ts change? I dunno and i'm not going to bet on it. We had a golden moment last year with COVID and as I mentioned before, if your elephant gun isn't loaded, you can't take advantage of any market crash or correction.

[SBQ]

Is there anyway we could convince you to make the move sooner??? Then we wont get bored to death by your all too frequent posts about how much better the financial system is in Canada. Here is a thought for you..its irrelevant to 99% of us here because we have to live and transact our financial lives in New Zealand. So save yourself the angst and ignominy of having to live and suffer in New Zealand and us from the whingeing...please. Have a nice day now.

Whoa there dude! calm down. GTM 3442 was asking and I gave him a response. Canada could be any country and just because they seem to be doing more for the working class, why has NZ not followed in the same manner? After all NZ copied Canada's GST system. Perhaps you don't speak for the Labour Party despite how most people in NZ want a change (all those that voted for Labour) and are sick of only the rich get rich and the working class falling behind.

Why not bring some meaningful discussions to the thread, instead of saying "oh that guy just says the same thing to the problems we have in NZ... don't listen to him". I get that, and perhaps it's much easier to tell those to leave because "that's not how NZ works". Don't blame me, why do 20% of NZ ex-pats live abroad? Why does Australia have a difficult relationship with NZ because their immigration policies allow open migration between both countries? If people are looking for change in NZ, (as they voted for), you're not going to get it by telling those like myself to leave ASAP.

[GTM 3442]

SBQ - I just thought I might learn something about the benefit of operating a joint US brokerage account where the parties have different tax residencies.

However it seems that it's more or less a one-off based on your and your father's specific, individual circumstances and intentions, rather than something which might be useful in more "generic" circumstances.

Thanks though - there were a couple of useful things in there.

[Snow Leopard]

Whoa there dude! calm down. GTM 3442 was asking and I gave him a response. Canada could be any country and just because they seem to be doing more for the working class, why has NZ not followed in the same manner? After all NZ copied Canada's GST system. Perhaps you don't speak for the Labour Party despite how most people in NZ want a change (all those that voted for Labour) and are sick of only the rich get rich and the working class falling behind.

Why not bring some meaningful discussions to the thread, instead of saying "oh that guy just says the same thing to the problems we have in NZ... don't listen to him". I get that, and perhaps it's much easier to tell those to leave because "that's not how NZ works". Don't blame me, why do 20% of NZ ex-pats live abroad? Why does Australia have a difficult relationship with NZ because their immigration policies allow open migration between both countries? If people are looking for change in NZ, (as they voted for), you're not going to get it by telling those like myself to leave ASAP.

https://i.imgflip.com/35ewlu.jpg

[kiora]

;);););):D

[SBQ]

SBQ - I just thought I might learn something about the benefit of operating a joint US brokerage account where the parties have different tax residencies.

However it seems that it's more or less a one-off based on your and your father's specific, individual circumstances and intentions, rather than something which might be useful in more "generic" circumstances.

Thanks though - there were a couple of useful things in there.

I wish it was more a level playing field here in NZ and as you may already know, the issue lies entirely on where your reside. Like most OECD nations, NZ taxes individuals on a 'world wide basis' and along comes with foreign asset declarations. On another NZ based forum I hear of those moving to NZ and can not get their head around the FIF regime (too late when they've already moved over) and for many, if they would of known before, they would not of made the move. Even a co-worker where my wife works at in public health (moved to NZ from the US) was entirely unaware of FIF and she is planning to move back to the US just because of this. Of course if you have nothing to begin with then there's no issue at all in making the move. But when you see stats like almost 20% NZ ex-pats living abroad, there is a clear understanding why.

Another thing you may not be aware of. The US has estate death taxes and that equally applies to non-US alien account holders. I recall 30% is the take on the entire portfolio balance if I recall correctly so it's very risky to have a sole account / always best in JWROS. For the US resident, I think $11M threshold before you pay the death tax ; but that does NOT apply to foreign account holders.

I'm sorry if I came across as being so negative about NZ's investment environment but I can understand how to some, it may be quite offensive. It may be that finance is not a well discussed topic at the dinner tables in NZ and of what they don't know, then there should be no criticism.

[GTM 3442]

Some people come across as positive, some people come across as negative.

You learn to look for the pearls between the lines.

And, reading between the lines of your anecdotes, there seem to be a lot of new arrivals unaware of New Zealand's Transitional Tax arrangements.

Personally, I would rather be saddled with New Zealand's FIF than Canada's NRWT!

Hoever, based on your description of the US inheritance tax, and assuming that neither you nor your father are US tax residents,it would probably be prudent for you to never ride in the same car, train, bus, or plane. ;)

[epower]

Gosh that went on quite a tangent.

I’ll look to put in an on call savings account in my ASB fast saver and put a bit in NZB (nz bond fund) which is through smart shares. I’m investing through sharesies and it’s returned 2% or so, with 0.5% broker fees as long as I keep it there 6 months I break even

[audiav]

SBQ you give an interesting perspective on how other countries structure their personal finance rules & regs. You reminded me that the UK has ISAs (tax free savings) which i think are super useful to encourage saving. As GTM 3442 says, reading between the lines of your commentary made
me think about how I could better structure my own finances.

[Snoopy]

I’ll look to put in an on call savings account in my ASB fast saver and put a bit in NZB (nz bond fund) which is through smart shares. I’m investing through sharesies and it’s returned 2% or so, with 0.5% broker fees as long as I keep it there 6 months I break even


I would stay well clear of any bond fund as a place to park cash with interest rates this low if I was you. If this is the fund you are talking about

https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzbondtrust

it has a three year time frame focus. Any investment in medium dated bonds at this point in the interest rate cycle is subject to significant capital risk. The diversification in the portfolio won't save you because all bonds of similar duration face the same capital risk from rising interest rates.

If you want to use a Smartshares fund to park your cash use this one

https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzcashtrust

SNOOPY

(Who speaks from experience when, some 20 years ago, I moved from an overseas share fund to an overseas bond fund to keep my capital 'safe'. The ensuing bond crash of the time meant it was a few years before I got my capital back!)

[epower]

I would stay well clear of any bond fund as a place to park cash with interest rates this low if I was you. If this is the fund you are talking about

https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzbondtrust

it has a three year time frame focus. Any investment in medium dated bonds at this point in the interest rate cycle is subject to significant capital risk. The diversification in the portfolio won't save you because all bonds of similar duration face the same capital risk from rising interest rates.

If you want to use a Smartshares fund to park your cash use this one

https://smartshares.co.nz/types-of-funds/bonds-and-cash/nzcashtrust

SNOOPY

(Who speaks from experience when, some 20 years ago, I moved from an overseas share fund to an overseas bond fund to keep my capital 'safe'. The ensuing bond crash of the time meant it was a few years before I got my capital back!)

Ok thanks Snoopy for the heads up learnt something new there, much appreciated