While there are plenty of discussions about asset classes like equities, bonds, commodities or even cryptocurrency, there is not much ink being spilt on cash which is the asset class almost all of us have. This article attempts to articulate the essential points of managing cash in Singapore.
The most critical point about having cash is that it does not do very much for you.
Placing your money into an ordinary savings account generates an interest rate of only 0.05% a year (DBS savings deposit rates taken on 10th March 2021). Crediting your salaries and linking your credit card to a particular savings scheme such as DBS Multiplier, UOB One, or OCBC360 account can increase the deposit interest rates by up to 3%, but you do so at the expense of your autonomy.
That said, expending too much effort to game this system is not a good idea, given that the inflation rate at the time of writing is about 2.4%.
Nevertheless, you might wish to hold cash for the following reasons :
1) It is the best way to deal with emergencies
The best reason to hold onto cash is due to emergencies. If you leave the bulk of your assets in equities, it may take about 2-3 days to recover your monies. It is always prudent to hold about 3-6 months worth of living expenses in liquid cash to deal with emergencies such as the sudden hospitalisation of an elderly parent.
Emergencies can also be drawn down for the stupidest of reasons. I once bought some stocks for my SRS account and mistakenly toggled the buy settings to deduct from my cash savings instead.
Thankfully, I have a cash buffer and do not need to reverse the transaction. Because of my cash buffer, I could afford to buy the stock twice – once for my SRS and once for my ordinary CDP account.
2) It leads to increased lifetime satisfaction
Research done by Sonia Lyubomirsky of the University of California found that when surveying UK bank customers, having a bank account balance from £1 to £1,000 results in a 10% increase in life satisfaction. And having £1,000 to £10,000 resulted in about a further 3.5% increase.
If we translate this to local terms, most Singapore bank customers can deposit up to $20,000 SGD in their bank accounts and experience a boost to personal happiness. Beyond $20,000 SGD, further increases result in diminishing returns.
3) Provides the capacity to participate in rights issues
REITs investors should be familiar with rights issues where the REIT manager will offer additional units of the REIT at a slightly discounted price. A majority of rights issues will result in a dilution for investors who refuse to participate in them. Investors who sell their rights would often end up selling them at a lousy price. So investors are better off exercising their rights, receiving their new shares and then selling them at a better price later.
Figuring out how much cash to reserve for rights issues is more art than science but reserving about 25% of your most significant REIT position for future rights issues may not be a bad idea.
4) Act as a buffer against a margin call
Leveraged investors run the risk of margin calls when there is a liquidity crunch. In March 2020, highly leveraged REIT investors were advised to flee the markets at the pandemic’s beginning. This created drawdowns that led to margin calls which affected investors who are conservative leverages. In such a case, the broker will threaten to liquidate the investor’s holdings if they cannot meet their margin calls.
In rare events like this, cash is king and supporting the margin call can prevent a rout from happening. The degree of cash to conserve in this case depends on how extreme the leverage is, and it is far better to maintain a lower leverage multiplier than to reserve emergency cash expressly for this event. i.e. a REIT portfolio leveraged below x1.25 should be able to survive another 2020 pandemic crash, but no degree of leverage can endure a drawdown like the recession in 2008.
It’s always a good idea to have some cash
For most readers, replenishing a pool of cash requires specifically allocating salary into a deposit account. Dividends investors feel less pain as the steady trickle of dividend pay-outs can be used to automatically buffer your cash reserves sometimes as often as four times a year if you have the correct REIT portfolio.
All you need is to manage your expenses carefully and patiently manage your time to make it happen.