Testing concept: Bullet Method


#1

Here to solicit feedback on a new concept I am testing out.
The formula is:
Incremental yield to pursue = 12% - (cash on hand)/ 600,000

Example 1: Cash on hand = 12,000.
Incremental yield to pursue = 12% - 12,000 / 600,000 = 12% -2% = 10%

Example 2: Cash on hand = 60,000
Incremental yield to pursue = 12% - 60,000 / 600,000 = 12% - 10% = 2%

In example 1, the bullet system is telling me to only deploy cash for a suitable investment I approve of with dividend yield of 10%==> ie save $$.

In example 2, the bullet system is telling me I have too much cash on hand, that 2% yield is good enough for me.

I plan to revisit 12% and 600,000 and whether to tweak them in my formula in 1 year. These are some arbitrary numbers I thought of, but eg I could replace 600,000 with something more concrete like 100 x average monthly expense, and then think about whether the 12% stays.


#2

I am not sure what you are really trying to achieve.

As a distribution hunter I try to keep my cash holdings minimal and keep on reinvesting because

  1. Less drag on the total portfolio returns.

  2. The trajectory of the holy grail compounded returns will reduce.

  3. I have no idea how to time the market.

To assign some arbitrary required % return inversely proportional to the cash balance doesn’t really fit in with my strategy.

Once I have around SGD 7,000 or so cash I will start looking around for the best offer Mr Market currently has. The 7,000 comes from the dealing costs, which OCBC fixes a minimum SGD 25. I don’t like paying the high costs. We need a bit more competition in SG… (My friend trades in the US and pays around USD 7 per trade)

There are a number of Warchest Waiters. I do wonder how effective that strategy has been. For example, due to random luck, I was down to almost zero cash at the begining of this year and it has been pretty good for REITS so far.


#3

Ya I think you got the crux of the point. Its really a heuristic mechanism for me.

Put it this way, it sucks when there’s a sale n you are broke (which is if you constantly invest free cash). On the other hand constantly hoarding cash to wait for the sale (which may not happen in the immediate short term), you just earning puny interest.

I am hoping this method will help steer me in the right balance.

The 12% was supposed to be a desired rate of return, which lowers whenever you accumulate more cash. If I accumulate too much cash, it should signal me to spend some of it to get better yields. But if I spend too much, it should also prompt me that I have been not saving for better returns.