Short-term cash substitutes - Aussie Stock Forums

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  1. #1

    Default Short-term cash substitutes

    Hi all,

    I'm not looking for advice here, just ideas.

    Where else can you park cash for the short to medium term?

    Any investor needs a certain amount of cash, ready to cover contingencies and also as dry powder to be fired away if and when some particularly tempting bargain comes along on the stock market. So you:

    1: hold some cash in a cash management account or similar.

    2: You might hold some term deposits as well: higher interest and still covered by the Commonwealth guarantee, but tied up for some length of time and not paying as much as most of us would like.

    3: Or you might venture out of the actual banks (or "ADIs" as the jargon terms them) into the shadowy world of non-bank mortgage funds. Better interest than any bank deposit, but no government guarantee.

    4: Your more substantial holdings probably go into bonds, for a higher return than you can get from a bank account. These can be any desired combination of fixed interest, floating rate, or inflation-linked bonds, at any of a wide range of security levels.

    Now the question. I've been pondering how to park cash for a while now. Is there anywhere other than the obvious places I've just mentioned? Let's set some ground rules. The ideal cash-like investment should be:

    1: Non-volatile. If we want something that goes up and down a lot, then we just buy the right sort of shares! Basically, a good cash substitute has a known and fairly stable price expectation.

    2: Liquid. You should be ablle to move cash into it and back out again without a lot of trouble, and without paying too much by way of brokerage, buy-sell spreads, or similar. This probably rules most bonds out, and makes term deposits awkward too.

    3: Reasonably safe. No-one expects any investment to be 100% safe, and a certain amount of risk is acceptable (after all, this is never going to be a huge part of any overall portfolio), but some caution is appropriate.

    4: Non-correlated with other major risks. A security which depends for its backing on the same basic underlying factor that backs large parts of your main portfolio is not a good idea. For example, if you hold a lot of bank shares, own a house, have bank hybrids for income security, and park your spare cash in a non-bank mortgage lender, everything you own goes pfft! if there is a housing crash! You own lots of different assets, but they are subject to the same risk factor. That's one example. Another might be (for a different portfolio) exposure to a China slowdown, or a European banking crisis or the price of oil. But because everything is exposed to something, this isn't a case of finding an investment that is not exposed (there is no such thing), it's a case of finding investments which are exposed to different risks, not the same ones you are already most vulnerable to.

    Impossible? Perhaps not. I've thought of a couple of possbilities:

    1: ASX tradable bonds. There aren't too many of these, but there are one or two about. In theory, one could buy and sell these for pretty much the same price and only be out some brokerage. In practice, there are risks, of course.

    2: ASX tradable commodities. These pay no interest, but something in the commodity space might be worth holding. Gold is one example. (I'm not a gold fan, but I'm trying to think outside the square here, so no idea should be ruled completely out.)

    3: One of the various ETFs (exchange tradable funds). A bond fund (there are several) could be bought and sold on-market in any desired quantity, pretty much whenever wanted. But my guess is that costs would eat up any advantage.

    4: there must be other ways!

    To repeat, I'm not looking for actual investment advice here, I'm just trying to list and think about as many alternatives to cash as we can find. For my own part, I'll look into anything promising and make my own decision later. Either way, I reckon the discussion might be interesting.

  2. #2

    Default Re: Short-term cash substitutes

    It's good that you've identified the third kind of risk in 'investing', aside from idiosyncratic (single asset) risk and secondary (sector) risk there is also systematic risk!

    You said you were looking for non-volatile assets with "fairly stable price expectation" but bond funds are tricky, as they often tend to 'match a maturity' rather than simply holding the bonds.

    Same problem with gold, right?

    It doesn't seem to me like any tradeable products really match your ground rules. You would probably find something like the "ladder" concept more interesting.

    I did a quick google and came up with a "local" link:

    Otherwise, something like this might be up your alley (I love the idea, discovered it from someones post on this forum):
    Disclosure: Long cash, gold, stocks.

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