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Are CDs and Short Term Bonds Cash or Bonds ?
Old 01-24-2014, 10:10 AM   #1
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Are CDs and Short Term Bonds Cash or Bonds ?

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.
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Old 01-24-2014, 10:20 AM   #2
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I consider short-term bonds to be just that - bonds. I categorize CD's as cash. Others will likely have a different opinion...
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Old 01-24-2014, 10:37 AM   #3
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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
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Old 01-24-2014, 10:48 AM   #4
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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.
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Old 01-24-2014, 10:52 AM   #5
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+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
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Old 01-24-2014, 11:06 AM   #6
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CD is fixed income.
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Old 01-24-2014, 11:11 AM   #7
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Traditionally, bonds have greater than one year to maturity. Cash is one year or less.
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Old 01-24-2014, 11:14 AM   #8
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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 ....?
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Old 01-24-2014, 11:29 AM   #9
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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.
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Old 01-24-2014, 11:45 AM   #10
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So by this definition you'd classify a 5yr PenFed CD as ....?
If it has more than one year to maturity, it's bond.
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Old 01-24-2014, 11:54 AM   #11
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If it has more than one year to maturity, it's bond.
Can you provide a link to this definition?
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Old 01-24-2014, 11:58 AM   #12
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+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.
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Old 01-24-2014, 12:04 PM   #13
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Originally Posted by gcgang View Post
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.
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Old 01-24-2014, 12:51 PM   #14
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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.
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Old 01-24-2014, 12:54 PM   #15
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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.
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Old 01-24-2014, 12:55 PM   #16
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Does it really matter how you label things?

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Old 01-24-2014, 01:21 PM   #17
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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").
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Old 01-24-2014, 01:31 PM   #18
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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.
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Old 01-24-2014, 01:59 PM   #19
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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
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Old 01-24-2014, 02:17 PM   #20
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+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.
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