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Old 09-15-2008, 02:27 AM   #21
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Originally Posted by audreyh1 View Post
I honestly don't think I could rebalance my investment portfolio if I included my short term fund. It would wreak havoc on my spreadsheet. The short term fund fluctuates too much during the drawdown.

My investment portfolio allocation target is 7% cash, 35% short-term to med-term bonds, and 58% equities. The role of the cash in the portfolio is to rebalance against bonds and equities. Of course, it also gives me additional cushion against prolonged losses in the other asset classes above and beyond my short-term funds, but is that is not the primary role.


If that pov of your portfolio works for you, fantastic! It's all about what you're comfortable and successful with.

My current AA is about 52/44/4. Despite withdrawals for living expenses, the cash allocation tends to slowly grow since interest + dividends exceeds cash withdrawals. I'm not seeing the fluctuation in cash that you mentioned you see from drawdowns. In fact, compared to the fluctuations in the equity portion this past year, fluctuations in the cash portion, even considering drawdown, are nothing.

I also don't think I'm as methodical in rebalancing as you are. I have a target that I'm, for better or for worse, comfortable with. I tweak from time to time to keep things in the ballpark of the target. That's it.

BTW, I'm exaggerating when I say ALL our assets are included in my one portfolio view of things....... DW, bless her heart, takes care of the day to day household expenses and has typically 3 or 4 months cash in the checkbook for that purpose. Every once in a while she gives me a little kick in the butt and I ET some money from the brokerage account to that checking acct. We have a rough budget so these little reminders aren't actually a surprise.

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Old 09-15-2008, 08:49 AM   #22
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I look at it similarly to Audrey - IRAs (no cash) and Taxable accounts.

How do people compute their cash needs?
1. Total Cash Needs - Estimated Dividends = net cash needed
2 Dividends re invested and not used to determine cash balance required

Currently, I have 2+ years of est. cash needs in a MM acct.

I will use #1 in the future - when I begin to receive SS @62

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Old 09-15-2008, 09:20 AM   #23
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Originally Posted by walkinwood View Post
I have a question for those who use a cash cushion. Is that cash considered part of your asset allocation? Or do treat it separately.
We keep two years' expenses in cash-- a year in a money market and another year in a CD ladder that we run out as far as we can. (A five-year ladder would be great but the yield curve is more like three years right now.) Two years' expenses works out to... eight percent. So our ER portfolio is 92% equities and 8% cash.

We've been moving out of mutual funds for the last few years and taking the cash from that. Now we'll keep selling off individual stocks to replenish the money market. In a few years we'll have to start selling off ETF shares to replenish it. In a prolonged bear market we'd spend the maturing CDs, then break the rest of the CDs, and finally start moving into the equities.

We've left the ETF dividends to reinvest (which Fidelity does at no charge). Maybe a decade or so down the road we'll be able to just live off the dividends-- especially as empty nesters-- but for now the reinvesting is working fine.

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Old 09-15-2008, 09:25 AM   #24
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A side note: some people consider short term federal bonds to be "near cash" depending on the context. I have about 6 years in cash but maybe a third of that is in such short term federal bonds (Vgd short term federal). For me, the real but very slight risk is worth the extra yield compared to MMF and CDs.
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Old 09-15-2008, 09:35 AM   #25
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Agreed Rich. And taking that farther....... there is a grey area between true cash and true fixed investments in this context. For example, if you have several years of so-called "cash" set aside, I'd think of a CD that matures within a few months as being "as good as cash." Not only will it mature before you need it, it's also available as cash for a modest penalty.

Folks keeping several years of "cash" in a MM at 2.5% or so are really paying dearly in opportunity costs......
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Old 09-15-2008, 09:43 AM   #26
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I definitely consider my CD ladder to be "as good as cash." They mature far sooner than I would need the money. They are all FDIC insured.
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
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Old 09-15-2008, 01:30 PM   #27
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Originally Posted by walkinwood View Post

I hear a lot of people on the board say that they have a cash cushion of x number of years spending. The purpose being to draw down on the cushion instead of selling equities in down years.

I have a question for those who use a cash cushion. Is that cash considered part of your asset allocation? Or do treat it separately.

To be clear, let me give an example. If you have $1M, a cash cushion of 100K, 450K in bonds and 450K in equities, would you say you have an asset allocation of 50/50 (equities/bonds) or would you say 45/55 (Equities/Bonds+cash)?


If stocks increased 10% so you owned $495,000 of stock would you
a) sell 30k and put 15k into bonds and 15k into cash

b) sell 45k and add it to cash (450-450-145)

c) something else

Next case-

Market drops 20%, so the 450k in equites is now $360,000. What do you do?
a) use 90k in cash to buy more equites
b) draw down the cash to live off of
c) sell bonds to buy more stocks
d) something else

Regardless of how you answered the first question, the second question answers whether or not the cash is part of your allocation.

If you did c) in second case- the answer is NO, if you did a) the answer is clearly YES. If you did B I would argue NO as well.

I do not consider my cash part of my allocation because I don't plan to buy more stocks if market goes down with that cash.
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Old 09-15-2008, 02:18 PM   #28
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Thanks all for sharing your practices.

I'll consider my cash cushion is part of my asset allocation and balance accordingly. The simplicity works for me.
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Old 09-15-2008, 06:38 PM   #29
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Originally Posted by youbet View Post
This implies you currently have 50 years of expenses in your portfolio assuming your portfolio keeps up with inflation. Yet, you're still working. I assume there's some reward for this such as medical benefits or pension.

100% agree with counting all cash in calculating overall portfolio performance. Otherwise, you're just fooling yourself.
If I keep working 'til 55 (18 months) I get a non-COLA pension of $65k/yr plus health insurance until I'm 70. If I stop working I lose health benefits altogether and don't get my pension until I'm 62 so continuing to work 'til 55 is worth an awful lot of peace of mind.

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