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Cash as part of your allocation
Old 11-28-2014, 09:43 AM   #1
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Cash as part of your allocation

My situation:
- Married, 55 years old, hoping to retire comfortably in 5-7 years. Not really early.
- All of our retirement savings are in tax deferred accounts with Vanguard. Mostly in a 401K accounts with limited fund selections.
- Paid off house, no debt.
- 80/20 stocks to bond allocation during the years we have been accumulating money for retirement.
- I don't claim to be extremely knowledgeable about investing. We have kept costs down, and we have for the most part stayed invested.
- A confession: I did flinch a little bit in 2008, and adjusted our allocation down to 60/40 as the market fell, and moved it back to 80/20 on the way back up.
- We have both been diligent about saving and living a comfortable LBYM lifestyle.

Investment goals:
We want our account to continue growing, so we plan to continue owning equities. As we get closer to retirement, we also want to be a little more protective of the money we have accumulated. The obvious answer is to change our allocation. We are now at 70/30, and I'm considering more changes.

My question:
I continue to read here and other sources that bond mutual funds are risky at this time, because interest rates are extremely low, and they will eventually have to go up. This doesn't make me want to reallocate into more bonds.
I'm considering moving some of our money into cash as a way to reallocate our accounts into a slightly safer position. I was wondering if others have strategies for doing this.
One strategy that I thought of: If I'm up for the year, move that amount into cash, and if I'm down for the year move that amount from cash to stocks.

Has anyone tried something like this? Is this a silly waste of time? Do you have better recommendations?

Thanks in advance for your comments.


JP
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Old 11-28-2014, 10:22 AM   #2
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I keep about one year's worth of cash in the bank it amounts to a couple of % of my portfolio.

As far as bond funds go you might think about shortening their duration if you are worried about interest rates, but if you are going to be holding the funds for time periods at least as long as the duration any fall in price will be balanced by greater income distributions.
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Old 11-28-2014, 10:39 AM   #3
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I've been thinking a lot recently about our AA which is 65/35. Considering moving to 50/50. I have similar concerns (worries) about bonds going forward in moving that 15% out of equities.

Right now in bonds I've got about 56% of it in intermediate bonds (DODIX, ER=0.43%, effective duration = 4.2 years). When the longer dated rates go up they might go up very gradually. That would allow them to basically keep an edge over cash. The spread between 5yr Treasuries and 3 month Treasuries is 1.5% which implies one is being paid to extend out maturities. After writing this down, I'm almost convincing myself it is safe.

If I adjust my AA in the next few months, I'm thinking I'll just keep my bond allocations the same. About half to intermediates, a quarter to short term investment grade, the rest to Ibonds (old high yields). Only a smidgen to cash.

Here is a Vanguard discussion of AA that I think is useful. Some comments about cash on page 4:
https://personal.vanguard.com/pdf/s705.pdf
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Old 11-28-2014, 10:43 AM   #4
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My (homemade, written) financial plan specifies that 5.5% of my portfolio is cash. With the market booming as it has been, for me this is 5 years' expenses in cash. When I rebalance, at least once each year, the cash balance in my portfolio returns to that much.
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Old 11-28-2014, 10:54 AM   #5
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One approach would be to dedicate new money to fixed income so between now and when you retire your AA gradually drifts from the current 80/20 to your new target AA.

If your 401ks offer a stable value fund, that would be a good place to add to your fixed income allocation that has no interest rate risk. Otherwise, look at the low to mid duration fixed income alternatives.
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Old 11-28-2014, 11:04 AM   #6
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When you feel an impending problem or crash and you're under stress, it's good idea to take a few profit off the table and move to cash. That's what I did. But I'm retired.
For conservative investor, 100- your age = your % in equity. Some say, 110- your age, you decide.
I have been reading a lot of a correction, but nobody knows exactly when?
I don't put tax deferred or IRA money in Bond funds. If I want risk I go equity, which pays more. That's just me!
There is nothing wrong with having some in CASH, specially as a realized gain. You certainly don't want to sell equities during a correction and lose money.
I will "rebalance" if I am you, to a certain comfort level you can take. Just call Vanguard, and say You want to move a % to money market for a while. That's as easy as that. Then watch the market till next year. You can always move back gradually.
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Old 11-28-2014, 11:14 AM   #7
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Originally Posted by pb4uski View Post
If your 401ks offer a stable value fund, that would be a good place to add to your fixed income allocation that has no interest rate risk. Otherwise, look at the low to mid duration fixed income alternatives.
Yes, a stable value fund is a nice alternative to a CD or a very short duration bond.
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Old 11-28-2014, 11:58 AM   #8
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Quote:
Originally Posted by W2R View Post
My (homemade, written) financial plan specifies that 5.5% of my portfolio is cash. With the market booming as it has been, for me this is 5 years' expenses in cash. When I rebalance, at least once each year, the cash balance in my portfolio returns to that much.
Short term bonds would not put you in the poor house. Duration 2 years so plenty of time for this to work to your advantage. Seems to me cash should only be maybe 1 year of expenses at most.

But I understand that this can be an emotional decision and sleeping well is important.
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Old 11-28-2014, 12:01 PM   #9
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Short term bonds would not put you in the poor house. Duration 2 years so plenty of time for this to work to your advantage. Seems to me cash should only be maybe 1 year of expenses at most.

But I understand that this can be an emotional decision and sleeping well is important.
During the 2008-2009 crash with everything going down the toilet, seemed like everyone here was OH so wise with 10-15 years' cash balance. Now, seems like some have shifted to essentially no cash at all. I just don't like my AA on a roller coaster like that because to me, that is reminiscent of market timing. Call it "emotional" if you prefer, but I think maintaining a steady 5.5% cash allocation despite market conditions is a perfectly logical decision.
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Old 11-28-2014, 12:16 PM   #10
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FYI:
I have very limited choices in my Vanguard 401K.

Value Fund: Windsor (aggressive value fund)

Bond Funds:
Metropolitan West Total Return Bond I (MWTIX)
Wellington: 40% bonds.
Many Target Dated Retirement funds:

My 30% is mostly in Wellington, with some in a Target Retirement fund.

I haven't looked favorably at the MUTIX fund, but it might be a decent choice for another 10% allocation into bonds, and a better choice than sitting on cash at this point. Any thoughts on this? This fund has returned 4-5% over the last 5 years.

JP
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Old 11-28-2014, 12:18 PM   #11
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Quote:
Originally Posted by W2R View Post
During the 2008-2009 crash with everything going down the toilet, seemed like everyone here was OH so wise with 10-15 years' cash balance. Now, seems like everyone is OH so wise with essentially no cash at all. I just don't like my AA on a roller coaster like that. Call it "emotional" if you prefer, but I think it is a perfectly logical decision.
I hope I did not offend you on this W2R . We are all emotional creatures and rational too. Unfortunately with myself the emotional/rational ratio is time varying as you alluded to above. I know you have a good conservative plan.

I do keep 2008-2009 firmly in mind. I was very upset (emotional) during the market downturn but did not sell. 55% equities was suppose to be conservative ... I thought.

I have a plan to move my short term investment grade bonds to short term Treasuries. I'm experienced at executing plans like this and will not hesitate if the time comes. Would not recommend this to anyone else but I mention this because it is the context for my comment about keeping very little cash. So this is a highly personal decision. I admit I'm taking a bit more risk with my approach. But it should work in even the most sharp declines.
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Old 11-28-2014, 12:32 PM   #12
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As of today, my target allocation is 13% in cash and another 39% in bonds with the rest in equities.

The chicken money will help me sleep when the market goes south.
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Old 11-28-2014, 12:38 PM   #13
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My mom used to say to us kids, "If your friends jumped over a cliff, would you jump over a cliff, too?" I thought of her as I read the responses. Just because people here have some cash does not mean it is the prudent thing to do. They could be suffering from the same delusions that you are.

If you can find CDs paying more than the yield on your bond funds, then it is probably prudent to put some money into those CDs. But if your cash is paying 0.9% or less, then I don't think so. If you are worried about rising interest rates and losses in your bond funds, another possibility is to shorten the duration of your bond funds on average by moving some into short-term bond funds. But some folks do not even advocate that: http://www.rickferri.com/blog/invest...rm-bond-funds/

Some pundits have written that cash is a drag on returns. For instance,
https://www.kitces.com/blog/research...-market-timer/

But you can do anything want to.
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Old 11-28-2014, 12:42 PM   #14
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Quote:
Originally Posted by W2R View Post
During the 2008-2009 crash with everything going down the toilet, seemed like everyone here was OH so wise with 10-15 years' cash balance. Now, seems like some have shifted to essentially no cash at all. I just don't like my AA on a roller coaster like that because to me, that is reminiscent of market timing. Call it "emotional" if you prefer, but I think maintaining a steady 5.5% cash allocation despite market conditions is a perfectly logical decision.
Made me look. From an October 2008 post:

Quote:
Originally Posted by REWahoo View Post
I've learned having 5+ years in cash is a wonderful thing, but it doesn't guarantee a good night's sleep.
I've learned waiting to age 66 or 70 to start SS benefits is great in theory, but not necessarily the best option.
I've learned if you are retired and living entirely off your portfolio a very conservative 45/55 asset allocation can still be a Fruit-of-the-Loom staining level of risk.
I still have the same 45/55 AA, but I now have a bit more in cash as a result of taking advantage of last December's 3% PenFed CD offer.
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Old 11-28-2014, 01:18 PM   #15
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My mom used to say to us kids, "If your friends jumped over a cliff, would you jump over a cliff, too?" I thought of her as I read the responses. Just because people here have some cash does not mean it is the prudent thing to do. They could be suffering from the same delusions that you are.

If you can find CDs paying more than the yield on your bond funds, then it is probably prudent to put some money into those CDs. But if your cash is paying 0.9% or less, then I don't think so. If you are worried about rising interest rates and losses in your bond funds, another possibility is to shorten the duration of your bond funds on average by moving some into short-term bond funds. But some folks do not even advocate that: The Risk Of Short-Term Bond Funds

Some pundits have written that cash is a drag on returns. For instance,
https://www.kitces.com/blog/research...-market-timer/

But you can do anything want to.
That Rick Ferri article ends by saying:
Quote:
The moral of the story is not to let the fear of rising rates stop you from investing properly. By all means buy a short-term bond fund if you have short-term liabilities. If your liabilities are long-term, stay in an intermediate-term bond fund for the duration. It pays to do so.
The money I have in short term investment grade bonds (duration=2 years) is 2 years worth of spending. I figure it is like a stepping stone to my cash needs, like water dribbling down from some overflowing buckets (the intermediate bonds and equities). The true cash is only a few months worth.
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Old 11-28-2014, 02:33 PM   #16
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This is a bucket one question. I am planning on keeping 7 years cash. Some keep 2-3 years but I don't make fun of someone with 10 years cash. Bears can be long what ever makes you sleep best at night.
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Old 11-28-2014, 02:57 PM   #17
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Originally Posted by W2R View Post
During the 2008-2009 crash with everything going down the toilet, seemed like everyone here was OH so wise with 10-15 years' cash balance. Now, seems like some have shifted to essentially no cash at all. I just don't like my AA on a roller coaster like that because to me, that is reminiscent of market timing. Call it "emotional" if you prefer, but I think maintaining a steady 5.5% cash allocation despite market conditions is a perfectly logical decision.
I'm with you W2R ! I have 5 years in Cash and ST Bonds ... most of that Cash (including those awesome 5 year 3% PenFed CDs that were offered this time last year).
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Old 11-28-2014, 04:06 PM   #18
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I'm with you W2R ! I have 5 years in Cash and ST Bonds ... most of that Cash (including those awesome 5 year 3% PenFed CDs that were offered this time last year).
The CD's are a good riskless (almost riskless) way to go. But 5 year CD's are not cash. I think to be cash it has to have a very short term Treasury like 3 months, money market account, bank savings account, etc.
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Old 11-29-2014, 12:18 PM   #19
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If your 401ks offer a stable value fund, that would be a good place to add to your fixed income allocation that has no interest rate risk. Otherwise, look at the low to mid duration fixed income alternatives.
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Yes, a stable value fund is a nice alternative to a CD or a very short duration bond.
Good advice. Well, I'm biased since I switched my domestic and international bond allocation to the 401k stable value fund for now.
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Old 11-29-2014, 01:29 PM   #20
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I have 15% of my investment assets in cash and no bond. On the other hand, not all equities are over-valued. International equities seem to be under-valued.
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