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Old 03-25-2014, 06:57 PM   #21
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Originally Posted by rayvt View Post
By seeking the comfort of a large cash holding, they are actually putting themselves into the position they wanted to avoid --- having no cash and all stocks several years into a bear market.
Since we're guessing about what others want:
I think many would prefer exactly that: to be spending cash and not selling shares as the market goes down and thereby be out of cash (but owning more shares than if they hadn't been spending cash) several years into a bear market. Especially since most bear markets only last a few years.

From a strict computational standpoint, I agree it's probably best to not keep cash in a distinct bucket and to just mechanically rebalance when needed (which would result is proportionately less selling of stocks when their price goes down, just not as much as a "spend only cash when the market is down" approach). But, I do understand the appeal of the cash "cushion", and if it helps people (psychologically) devote a higher share to equities then I think they probably come out ahead.
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Old 03-25-2014, 07:25 PM   #22
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Yes. But good luck on selling that idea to people who are so scared that they insist on keeping 5-7 years of living expenses in cash.

Try offering this strategy to them: "Start out with X years of expenses in cash, and then as the market takes a prolonged nosedive shift your investments toward 100% stocks." After they've finished beating you with a broom, inform them that that's _exactly_ what they'll be doing with their emotionally comfortable cash-bucket strategy.

By seeking the comfort of a large cash holding, they are actually putting themselves into the position they wanted to avoid --- having no cash and all stocks several years into a bear market.

first off they are starting from very low levels , remember you go in at retirement at 30-35% equities ... increasing 1% a year would still leave many at death with smaller equities positions than most here.

if you live long enough you max out at 70% equities as part of the rising glide path approach. in fact it is this method i have chosen to follow myself.
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Old 03-26-2014, 07:40 AM   #23
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Do you keep the 5% in cash or do you invest it in CDs or other short term instruments?
CDs, IBonds I consider cash.
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Old 03-26-2014, 07:43 AM   #24
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Audrey, are you saying you have 2 years cash AND 5% cash allocation as well?
Yes, I have 2 years cash outside my retirement portfolio set aside for my short-term spending needs and 5% allocated to cash as an asset class within the portfolio.
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Old 03-26-2014, 07:50 AM   #25
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first off they are starting from very low levels , remember you go in at retirement at 30-35% equities ... increasing 1% a year would still leave many at death with smaller equities positions than most here.

if you live long enough you max out at 70% equities as part of the rising glide path approach. in fact it is this method i have chosen to follow myself.
Yep - the transition is very gradual over 3 decades, and you spend down your fixed income during the equity bear markets. And 70% equities is the long term target. Sure, still, some folks won't be comfortable with this approach.
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Old 03-26-2014, 08:26 AM   #26
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If cash is held in a I-bond/CD ladder, I am just not seeing the downside to having several years of cash in one's portfolio and reducing long term bond exposure.

70% stock 30% bond portfolio. Even long term bonds are only going to pay you 5% if you are lucky.

Having 70% stock 20% cash (invested in, say 5 year penfed CDs), and 10% long term bonds would give you almost the same rate of return with almost zero interest rate risk.
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Old 03-26-2014, 09:15 AM   #27
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I agree with Fermion. I ditched my bonds last January and moved it into mostly PenFed CDs. So by the definition used here, I have a good chunk in cash, more than 5%.
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Old 03-26-2014, 09:24 AM   #28
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CDs, IBonds I consider cash.
Thanks for the response. This leads me to one more question: how much of your 5% cash allocation do you actually keep in cash?

I'm wondering how aggressively you invest your cash, especially since you already have a sizable amount outside of your portfolio.

This is similar to what I do, except the cash outside my portfolio is my emergency cash, and it's much less than two years. I'm still accumulating, but I can see following your model where instead of emergency cash I'll keep x number of years in cash outside of the portfolio. Within the portfolio, my FI of the portfolio is PenFed CDs and Wellesley. I don't differentiate cash in the FI part of my AA.
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Old 03-26-2014, 09:39 AM   #29
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Thanks for the response. This leads me to one more question: how much of your 5% cash allocation do you actually keep in cash?

I'm wondering how aggressively you invest your cash, especially since you already have a sizable amount outside of your portfolio.

This is similar to what I do, except the cash outside my portfolio is my emergency cash, and it's much less than two years. I'm still accumulating, but I can see following your model where instead of emergency cash I'll keep x number of years in cash outside of the portfolio. Within the portfolio, my FI of the portfolio is PenFed CDs and Wellesley. I don't differentiate cash in the FI part of my AA.
I don't consider cash to be something I should "invest aggressively". To qualify as cash, it has to a) have no interest rate risk and b) no credit risk. In other words, unlike bonds, the value does not fluctuate with changes in interest rates nor with changes in credit conditions. Then it's behaving like the asset class I label as "cash". CDs match that definition as do IBonds and money market and stable value funds and any high-yield FDIC insured savings account. I treat cash as a separate asset class than bonds because they behave differently depending on market conditions - that's why cash can be a useful diversifier. Off the top of my head maybe 3% of my portfolio is in a money market fund. It would be better to have most of it in a high-yield FDIC insured savings account even though that complicates things a bit and introduces some latency. I might still make that change. I don't consider money market funds that "safe" if there ends up being another financial crisis.
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Old 03-26-2014, 09:48 AM   #30
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Thanks for the response. This leads me to one more question: how much of your 5% cash allocation do you actually keep in cash?

I'm wondering how aggressively you invest your cash, especially since you already have a sizable amount outside of your portfolio.

This is similar to what I do, except the cash outside my portfolio is my emergency cash, and it's much less than two years. I'm still accumulating, but I can see following your model where instead of emergency cash I'll keep x number of years in cash outside of the portfolio. Within the portfolio, my FI of the portfolio is PenFed CDs and Wellesley. I don't differentiate cash in the FI part of my AA.
During accumulation, I only had 6 months emergency money, and otherwise was invested almost 100% in stocks. I figured time was on my side. When my net worth grew enough, I paid off my house as a way of reducing my emergency needs.

The two years spending money set aside I only started as I retired. I don't think it makes sense when you are working and drawing a salary.
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Old 03-26-2014, 10:31 AM   #31
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I don't consider cash to be something I should "invest aggressively". To qualify as cash, it has to a) have no interest rate risk and b) no credit risk. In other words, unlike bonds, the value does not fluctuate with changes in interest rates nor with changes in credit conditions. Then it's behaving like the asset class I label as "cash". CDs match that definition as do IBonds and money market and stable value funds and any high-yield FDIC insured savings account. I treat cash as a separate asset class than bonds because they behave differently depending on market conditions - that's why cash can be a useful diversifier. Off the top of my head maybe 3% of my portfolio is in a money market fund. It would be better to have most of it in a high-yield FDIC insured savings account even though that complicates things a bit and introduces some latency. I might still make that change. I don't consider money market funds that "safe" if there ends up being another financial crisis.
Aggressively was a poor word choice. What I really meant was how much extra work do you do with this part of your portfolio to get extra yield?

I get lazy when it comes to cash and end up having more in a money market fund than I should. I think that's easy to do with cash. I try to keep it in CDs and high-yield accounts, but usually that's more work. Most of my money is at Vanguard, which means I have to move money around (more latency and accounts to track). I almost missed the 3% PenFed CDs because of this, transferring funds at the end of January. I consider Vanguard's MM fund better than average. From what I read about MM funds in 2008, they were pretty careful to minimize the risk of breaking the buck. Of course, that's not guarantee that it can't happen.

I'm always curious about cash in the AA and how it's managed. This is one of the areas of my AA that I don't think I manage particularly well. But FI/cash has always been a problem for me, since I prefer to hold more equities.
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Old 03-26-2014, 10:36 AM   #32
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During accumulation, I only had 6 months emergency money, and otherwise was invested almost 100% in stocks. I figured time was on my side. When my net worth grew enough, I paid off my house as a way of reducing my emergency needs.

The two years spending money set aside I only started as I retired. I don't think it makes sense when you are working and drawing a salary.
I was invested around 90% in 2008. I was able to ride out, buying more while everything was dropping. I think I hit around 95% before it was over. My biggest regret at the time is that I didn't have more cash available, since I went into the crash with high equity exposure. This is why I wouldn't consider 100% or the 90% I had before. I'm about 75% (80% with Wellesley included) and will probably stay at this level for a long time.

I probably have less emergency money than 6 months, probably around 3-4 months. Both my Wife and I have stable jobs in high demand fields, so there's less worry about long-term unemployment. And if it really gets that bad, we'll cut the budget significantly and can always draw from our portfolio.
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