Are CDs and Short Term Bonds Cash or Bonds ?

[Live And Learn]

I'm looking at my asset allocation and was wondering how the people here categorized the following:

Short Term Bonds
PenFeb 5 year 3% CDs

If I count these as cash then my AA is 50 / 30 / 20. If I count them as Bonds it is 50 / 40 / 10. Big difference.

 

[REWahoo]

I consider short-term bonds to be just that - bonds. I categorize CD's as cash. Others will likely have a different opinion...

 

[eytonxav]

I consider short-term bonds to be just that - bonds. I categorize CD's as cash. Others will likely have a different opinion...

+1, a stable value fund is another one that might be difficult to place in a specific category

 

[W2R]

I consider short-term bonds to be just that - bonds. I categorize CD's as cash. Others will likely have a different opinion...

+2

Bonds are bonds, IMO.

 

[Alan]

+2

Bonds are bonds, IMO.

+3

An exception for me are the IBonds I own which I count as cash in my AA, since their principal is guaranteed by the US Treasury. YMMV

 

[Spanky]

CD is fixed income.

 

[gcgang]

Traditionally, bonds have greater than one year to maturity. Cash is one year or less.

 

[REWahoo]

Traditionally, bonds have greater than one year to maturity. Cash is one year or less.

So by this definition you'd classify a 5yr PenFed CD as ....?

 

[brewer12345]

I put CDs and I bonds in the cash bucket, all else in the bond bucket. But I roll them all up into one measure of fixed income for the sake of looking at AA. After all, cash is just extremely short duration fixed income.

 

[gcgang]

So by this definition you'd classify a 5yr PenFed CD as ....?

If it has more than one year to maturity, it's bond.

 

[REWahoo]

If it has more than one year to maturity, it's bond.

Can you provide a link to this definition?

 

[Live And Learn]

+3

An exception for me are the IBonds I own which I count as cash in my AA, since their principal is guaranteed by the US Treasury. YMMV

Yes, I count IBonds as cash also.

 

[Live And Learn]

Traditionally, bonds have greater than one year to maturity. Cash is one year or less.

Interesting - that would be the accounting definition of short-term vs long-term asset. To some degree I like it even if it is non-traditional because it is measurable and leaves no room to argue. However, this turns my I-Bonds which feel very much like cash, into Bonds and my short term bonds, which are clearly debt instruments, into cash.

 

[FIREd]

Does it really matter how you label things?

Your portfolio is what it is, whether you label it 50/30/20 or 50/40/10.

 

[Ready]

I prefer not to get caught up in definitions, but rather to focus on what the intended purpose is. If you have an AA strategy that includes keeping a portion of your investments in fixed income, you can select from CDs, bonds, money markets, or other similar types of investments. The purpose of the fixed income portion of your portfolio is to provide some stability against the volatility of the stock markets.

It could be argued that in today's bond environment, only very short term bonds may actually provide this stability, or at least the perception of it, since we have no idea how long interest rates will stay this low.

For purposes of AA strategy, I see no problems with substituting a 5 year CD in place of an intermediate term bond fund. The yield is currently higher and there is no real volatility since the principal is guaranteed. Intermediate and long term bond funds actually introduce enough volatility that it could be argued they are counter to the purpose of having fixed income in your portfolio.

 

[Major Tom]

Does it really matter how you label things?

David Byrne-Don't Fence Me In - YouTube

 

[Live And Learn]

Does it really matter how you label things?

Your portfolio is what it is, whether you label it 50/30/20 or 50/40/10.

For the modeling tools it actually makes quite a difference in success rates. Of course, one can say that if it means the difference between a success rate that I am comfortable with vs one I am not comfortable with then I probably should not ER (which would increase my OMY poll response to "too many years to count").

 

[FIREd]

For the modeling tools it actually makes quite a difference in success rates. Of course, one can say that if it means the difference between a success rate that I am comfortable with vs one I am not comfortable with then I probably should not ER (which would increase my OMY poll response to "too many years to count").

Personally, I think that CDs have cash-like characteristics (safe principal, FDIC-insured) and bond-like characteristics (they carry inflation risk, re-investment risk, etc...). For modeling purposes, I would label them 50% cash and 50% bonds.

 

[clifp]

I agree CD are cash. On the other hand for modeling purposes, the characteristic of my Penfed 5% CD that mature in 2021 are quite a bit different than having my money in money market.

I'd say the ability of somebody to withdraw 4% a year with a portfolio
That was 500K TSM
450K TBM
and 50K money market

is considerably lower than someone portfolio is
500K TSM
250K 10 year 5% Penfed CD
200K 3%-3.5% Penfed CD maturing between 2015 and 2018
50K in the money market

 

[nun]

+1, a stable value fund is another one that might be difficult to place in a specific category

I put stable value in with my bonds and just call them all "fixed income". I'd probably put the CD in fixed income too because one defining property of cash is liquidity and you don't have that with a CD.

 

[nun]

+1, a stable value fund is another one that might be difficult to place in a specific category

I put stable value in with my bonds and just call them all "fixed income". I'd probably put the CD in fixed income too because one defining property of cash is liquidity and you don't have that with a CD. Or you could consider it cash in a very restrictive savings account.......take your pick.

 

[ERhoosier]

CD is fixed income.

+1

Cash is cash. Your source of IMMEDIATE funds. CD's have restrictions (sometimes prohibition) against early withdrawals.

 

[gcgang]

Can you provide a link to this definition?

Schwab MoneyWise: Stocks, Bonds and Cash
It's just something I learned long ago, probably in an accounting class. The above link may satisfy you.

I agree that the whole classification thing is more art than science, and could make a case for including a CD ladder ALL as cash.

 

[REWahoo]

If it has more than one year to maturity, it's bond.

Can you provide a link to this definition?

Schwab MoneyWise: Stocks, Bonds and Cash
It's just something I learned long ago, probably in an accounting class. The above link may satisfy you.

I don't see any mention of "more than one year to maturity it's a bond" in the definitions of bonds or cash in your link. What I did see was a differentiation between "Cash" (checking and savings accounts) and "Cash Investments" (short-term CDs and T-bills, longer-term CDs, ultra-short bond funds and stable value funds) which I thought was interesting.

I agree that the whole classification thing is more art than science, and could make a case for including a CD ladder ALL as cash.

+1

 

[gcgang]

Cash Equivalents financial definition of Cash Equivalents. Cash Equivalents finance term by the Free Online Dictionary.

FASB evidently defines cash as less than 3 months maturity now.