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My plans for managing cash in my TD account

Recently I had to change my thinking about how I wanted to manage cash in my TD account and potentially in my all accounts. The question was, do I want to use all my cash (be always 100% invested) or keep some cash on side for potential purchases if an opportunity shows up.

During my investing/trading career I always was 100% invested and whenever I contributed some cash into my account I invested it immediately. The result was that fees and commissions almost killed me down, since I was depositing small amounts of cash. Sometimes I deposited $50 or 100 dollars and invested that cash immediately. If you invest $50 and you pay $9.95 commission you are down 20% right away and you have to make 40% just to break even.

So I changed my cash strategy and I decided that I would only invest into commission free mutual funds. Another problem rose. Many mutual funds required large initial investment, their return was mediocre and in many occasions their expense ratios were way above 1.0, some even exceeded 2.0. But I wanted dividend paying stocks and not mutual funds, many of them paying no dividend or very little. More on top of that if I wanted to sell a portion of my mutual funds holdings and buy a dividend paying stock I had to wait at least 180 day to avoid a redemption fee. Gosh, I didn’t like this either.

So I changed my strategy once again. This time I decided that I would invest min 800 dollars lot into dividend paying stocks or use that amount for options trading. This strategy worked and I was saving cash and using margin to boost my portfolio. But then a great opportunity to buy a great dividend paying stock showed up right after I purchased a stock and suddenly I had no cash. Next I came across a great put selling trade with great premium and great profit potential and I had no cash. Next time the whole market went down and I had no cash for my maintenance and I started receiving margin calls.

Although I saw great results in building my portfolio fast, I wasn’t satisfied with lack of money to invest when a great opportunity presented itself.

There were a few people who inspired me to change my thinking about cash in my account. It was a manager of my 401k account who once held a training in our company and he said that he was always saving some amount of cash in his own 401k for new opportunities and if they arrived he just moved a portion from his cash equivalent into that new investment. Another investor inspiring me was Teddi Knight who explained on her web her investing strategy. I realized that this is what I wanted, what I liked. Holding enough cash will provide me with peace of mind.

With enough cash, I will be able to buy any dividend stock at the best price for me, at the time I want to buy and not at the time I have money available.

With enough money in my account I can be selling cash covered puts anytime I want and as many contracts as I want and that cash will serve as a collateral.

The third person was Dividend Mantra and his article Holding Vs. Deploying Cash who actually made me think about my cash strategy deeper and write it down.

So what I want to do with my cash in my TD account? My plan is to raise cash to 30% of my entire portfolio. I do not have such cash available yet, so I need to save. I also want to invest into dividend paying stocks, sell covered calls and puts. Well, these two things do not go together. So I needed a strategy of how and when to build the cash reserve and when to invest.

Since I wanted to be buying stocks when the market and stocks are falling I decided that the best way to build a cash reserve would be when the market is growing and invest when the market and stocks are falling. That makes sense, doesn’t it? Look at the chart below. When do you want to be buying stocks?

When to buy stocks?

I want to be buying any time the stock pulls down. Apparently many retail investors are buying at the stock’s high and then panicking when the stock pulls down and they happen to sell when the stock is down. Believe me, they do it, because I was doing it as well. Many times I bought a stock which turned down either right away after I purchased it (as if the Mr. Market was laughing at me) and then, since I was using a stop loss order I got stopped out on its way down. Don’t get fooled about the uptrend shown on that chart. It can be easily a multi-year chart. So where do you want to be buying? At the green arrows or the red ones?

Personally, I want to be buying at the green arrows.

A great example can be a stock (ETF) I want to add to my portfolio SDY. See the chart below.

Buying stocks - SDY example

  1. I noticed SDY stock at this point, when I decided to add it to my portfolio. However, at this point I saw SDY on its way up. Would you buy at this point? If I bought at this point, I would see some growth.
  2. Buying at the point #2 would also be buying too high in my opinion. No stock rises continuously up. After some growth, it always pull back or goes sideway. And that was what I was waiting for. If I bought at the point #1 or #2 the next pull back would keep me locked at loss. Once I heard do not buy at prices where retail investors are buying, buy where pros are buying.
  3. At the point #3 (actually the day before) the price dropped low enough for me to open a buy order. But, the problem was that I didn’t have free cash in my account. This is the example why I decided to keep 30% cash in my account. The first black line indicates where my buy order would be (if the stock rises at or above this line I would buy)… if I had free cash.
  4. I still was willing to buy at this point and I finally had enough cash to buy. The price however gapped up too much, so the order didn’t fill. I will be waiting for another opportunity.

This is an example of why I believe it is worth waiting for your price. In a very long investment horizon this may not seem significant, but I believe, buying at retreats will save you cash and allow you buying more shares in the first place.

I read a few web sites and most of the value and dividend investors like to wait for sell off to buy cheap stocks. There is another web site I like to watch. It is a CNN Money Fear & Greed Index. Waiting for the sell off? Then lets wait for the market and investors being moved by fear to start buying. As of this writing the market is in greed mood.

Fear & Greed

The chart above shows the index at 80 level indicating extreme greed and extreme optimism. Although I do not take it as a dogma I do not want to be buying stocks at this point unless they show correction, drop in price, consolidation or any similar price action which will be favorable to add more shares. As long as the index starts dropping, it will be time to look for buying opportunities. During these levels or rising I want to be saving cash, write covered calls or sell puts.

Happy trading!





4 responses to “My plans for managing cash in my TD account”

  1. admin says:

    Dan I have the exact same experience. When the prices went down I lacked free cash to be buying. Now when the prices are climbing in most of the stocks I have in my watch list, I am not buying but waiting for them to ease or drop, which will always happen. No stock goes up as a straight line, it is always choppy, creating higher highs and lower highs during uptrend and I want to be buying more share during new higher lows rather than higher highs. During downtrend I am waiting for lower lows to add more shares.

  2. Dan Mac says:

    This is something I’ve been thinking about lately as well. Currently I will put cash to work as soon as I have enough to make a purchase large enough where commissions aren’t material. So I try to buy when I have around $1,000 saved up. Usually I feel I’ve been able to find some stocks on my list of companies I’m interested in that are trading at what I consider to be a fair value.

    However, lately with the Fiscal Cliff talks threatening to send the stock market in a downward spiral I found myself wondering if I shouldn’t have some cash on hand in order to take advantage of opportunities where I could get some absolutely great bargains.

    I still don’t know the answer for me yet but I think either way as long as we are investing towards are goals we are doing good and making progress!

  3. admin says:

    Marvin, I agree as well. It sound natural to me instead of buying no matter what I would like to wait a bit and buy later on a dip. It doesn’t have to be a lower price than today’s as the stock may never reach it, but a price from a pull back, which can be higher than today’s low price (higher low, indicating nice uptrend), but better than buying at higher high.

  4. I like this idea a lot! You will find that you are able to obtain more “bargain basement” prices this way!

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