Cash Heavy.. What would you do?

[bradaz2488]

Hello,

Looking for some advice. I'm 50 and ER'ed last May. I recently rolled over my ex-megacorp 401K to a IRA and now siting on a lot of cash that I need to put to work at some point. Right now I'm 45% equities, 5% bond and 50% cash across all my tax-deferred and taxable accounts. The cash bucket is 30% in tax-differed and 20% taxable accounts. Like others I'm concern that the markets are a little over heated and a 10-15% pullback would not be a big surprise, but I have never been good at timing the markets ... Also, I know I need to move money into Bonds at some point, but based on my understanding there is concern that Bonds still have a long way to fall if interest rates continue to rise. With the concern of Bonds & low yield on CD's it seems the only game in town for yield is equities. My retirement plan assumes a 6% average annual return on my investment accounts and I want to use low fee Index & ETF funds vs. the manage funds I had to use in my Megacorp 401K. My tax-deferred account is with Fidelity and my taxable account is with Charles Schwab. My "desired" AA is 65% equities, 20% Bonds and 15% Cash... FIRECal showed 100% success rate with this AA.

What I would like feedback on is:
1) How would you put this cash back to work? All in at once, dollar cost averaging or buying on dips?
2) Would you treat the tax-deferred account different then the taxable account? Example: Go all in with the tax-differed and do Dollar cost averaging with the taxable. The thinking here is I would not be taking money from the tax-deferred accounts for some time (around age 67)
3) Given the yield concerns on Bond yields would you increase the % in equities until Bonds looked more again or just leave it in cash?
4) Any recommendations on Index & ETF funds at Fidelity or Schwab?

Thinking about all of this is making my head spin so any feedback would be much appreciated.

 

[brewer12345]

I'd DCA to your desired AA over the next year.

 

[pb4uski]

I think that first you need to decide the allocation of that target AA across taxable and tax deferred accounts for tax efficiency and your liquidity needs.

IOW, putting aside the frothy equity markets and interest rate movements, what is the end result you are trying to achieve by asset class and across accounts. Typically, your bonds would be held in tax-deferred accounts, and equities (especially international equities) in taxable accounts.

As brewer suggests, you can mitigate the frothy equity markets by dollar-cost averaging (or value averaging) or buying on dips or both. You can mitigate interest rate risk by buying either CDs or low duration bonds, bond funds or target maturity bond EYFs for your fixed income allocation.

 

[MasterBlaster]

Also, I know I need to move money into Bonds at some point, but based on my understanding there is concern that Bonds still have a long way to fall if interest rates continue to rise. With the concern of Bonds & low yield on CD's it seems the only game in town for yield is equities.

Even though bonds may lose money over the long haul they provide a very important function. Bonds provide a counterweight to equity fluctuation.Should equities flop, bonds will likely rally. The last thing you want is a big equity haircut early in your retirement that you can never recover from due to your yeqarly required expenses.

Start thinking that bonds are there to help you from disaster. Also, when bonds fall, equities will likely rally much more than the bonds lose. You should still be way ahead.

- Bonds just may be your best friend

 

[IlliniProgrammer]

Even though bonds may lose money over the long haul they provide a very important function. Bonds provide a counterweight to equity fluctuation.Should equities flop, bonds will likely rally. The last thing you want is a big equity haircut early in your retirement that you can never recover from due to your yeqarly required expenses.

Start thinking that bonds are there to help you from disaster. Also, when bonds fall, equities will likely rally much more than the bonds lose. You should still be way ahead.

- Bonds just may be your best friend

I think there are going to be a lot of very unhappy people in fixed rate bonds when rates start to rise.

I'd consider looking at a mix of fixed rate bonds and floating rate bonds rather than fixed rates.

I'd consider Series I savings bonds and annuities too- any kind of fixed income product that gives you an early withdrawal option if rates go up.

 

[ERhoosier]

I'm no FA, but I would DCA into your chosen equity funds and generally stay SHORT TERM with your bond allocation. But I was just looking at I-Bonds today, and for 1st time in about 3yrs the fixed interest portion is positive (only 0.2%, but beats zero ) with current total interest of 1.38%. Not bad for safe, often tax-deferred income plus inflation kicker if rates rise a lot. You can only buy $10k/yr, but still worth considering for a a portion of your taxable bond allocation.

FWIW- I'm not a fan of longer term bond funds in this rising rate environment as the risk of significant loss of principle is very real. My 2 muni bond CEF's are down >20% YTD. That kind of 'stabilization' in my portfolio I can do without.

 

[AndrewJackson]

I'd DCA to your desired AA over the next year.

I have been wondering the same thing. I currently have about .75 years income in cash (inheritance) that could be invested right now. I am thinking I should just hold my nose, and hope the market slides as I add contributions.

 

[Animorph]

My best answer is you should have planned ahead for your transfer and not got stuck in this position. A transfer in kind is a good option if available.

As far as your bond allocation, cash is not that far off from bonds right now. Substitute cash for bonds until bonds start yielding something worthwhile.

Some of the cash has to go into equities. Was it in equities prior to the rollover? If so, target fund prices on the date those equities were sold. For example, if the equities in your 401k were liquidated on 10/2/2013, look up the price of any equities or equity fund you want to buy now on that date. Make sure it's a dividend adjusted price if any dividends have been issued between then and now. As soon as you can beat that price, including any transaction costs, buy the new equities or fund. Then it's just like you sold the old equities and bought the new equities on the same day, a simple transfer. Sometimes easier to do when the dates are closer together! With luck, you can buy some equities right now.

If you have a profit on some of your buys (lower price now than before) you can put that toward higher current prices on other equities. So you can still keep the total cost the same and buy some equities now that are currently higher in price than they were.

The main problem with this is if the equities just keep going up in price. Nice problem to have, except in your case. That's where you should probably have a backup DCA plan. If you haven't bought 25% of the total amount of equities within 3 months of waiting for lower prices, for example, you might go ahead and buy the rest of that 25% even at the higher prices.

 

[galeno]

Non-USA stocks look good (cheap) to me. Especially EM stocks.

 

[RunningBum]

You didn't DCA out, and I wouldn't DCA back in. I would get back to the desired 65% equities right away. Had you not rolled over the IRA you'd still be there anyway. Even if this was new money I'm in favor of getting to your AA right away rather than DCA'ing in, and this isn't new money, it's from stocks (my assumption) you were forced to sell so why not put it right back into stocks?

I don't have too much opinion on bonds vs. cash, so I don't see a problem with holding cash over bonds if you wish.

 

[frayne]

Agree 100% with RunningBum about getting back into equities at one time. Not a bond guy at the moment and hate having a bunch of cash in a MM fund losing value due to inflation. The yields aren't the best but at least I'm earning some interest and have FDIC safety by going the CD ladder route.

 

[kaneohe]

I agree w/ animorph that ideally when you did the rollover, you just maintain
the same AA before and after (assuming it was where you wanted it to start with). That would avoid getting into any market timing dilemnas . You didn't say how recently the rollover was made but perhaps if it was very recent and the markets didn't change that much, you could still do it.......looks like the market was up about 10% in the last 2 mos.

If the referenced quote here was referring to the fixed income part of the rollover (on 2nd reading of OP, sounds like not)

Sounds to me that this is saying: because bond yields might go up and values might go down (10%?), maybe I should put the money in equities (and subject it to a possible 50% ? risk).

I think the second part is more reasonable: Should I just leave it in cash (and earn 0%) rather than in bonds (and lose 2%?). You can get close to 1% in a few savings/m.mkt accounts) and 2% in CDs.

 

[RE2Boys]

That which was equities in your 401k needs to put back into equities in your new TIRA ASAP unless your looking at changing your overall asset allocation. This would just put you back to where you were.

 

[Jager]

Although establishing and maintaining a set AA is the prevailing wisdom, I think there are times not to jump into a market. A very good case can be made right now for avoiding equities and bonds.

I'd sit tight for awhile.

 

[FinanceDude]

I think a retracement of the indexes are long overdue. I would do as Brewer suggests and DCA over the next 12 months..........that way you catch any dips and still keep money working for you in the event the indexes continue to defy gravity and go up...........

 

[calmloki]

Doncha just hate those first-world problems? Too much cash, what to do what to do? We're looking at making another property loan and may finance a short term construction loan. Gotta be something better than the 0.85% our cash is currently earning.

 

[clifp]

So you need to move 20% from cash into equities. I'd suggest buying 1% a week for the next 20 weeks. Perhaps 1/2 international and 1/2 domestic. Schwab has low cost and no commission broad market ETFs that make it pretty easy to do.

Fidelity may also the same thing.

You may want to look at opening up a PenFed account probably better as an IRA. They have 3-7 year CD that are all paying 2%. Not great but better than most bonds with no interest rate risk.

 

[RunningBum]

Doncha just hate those first-world problems? Too much cash, what to do what to do?

That's usually reserved for trivial complaints, and the OP wasn't complaining about anything, just asking for advice, so that comment seems pretty unwarranted. And pretty much anything on this forum is a first world problem, isn't it?

 

[jetpack]

I'm in the same boat as you bradaz2488.. Way too much cash right now, from roll over and some gains. I'm currently looking a few different online advisors, and comparing their custom recommendations for me. (personalcapital, futureadvisor, vanguard, trowe price) .. They all seem to recommend some balance of their favorite mutual funds.. It seems however, that for a larger portfolio (over $1mm or $2mm) that individual stocks would be lower in fees... however, non of these funds recommend that.

 

[NW-Bound]

I would DCA into the market. Whether the market goes up or down, I can console myself that I only make 1/2 of an error. Psychology is important, and you don't want to hate yourself for doing the "wrong" thing.

+1 on Schwab having several ETFs with no trading cost for people having an account with them. The expense ratio of these ETFs is also very low, sometimes beating Vanguard. For example, Schwab Small Cap ETF SCHA expense ratio is 0.08%, while Vanguard's Small Cap VB expense ratio is 0.10%.

 

[NW-Bound]

That's usually reserved for trivial complaints, and the OP wasn't complaining about anything, just asking for advice, so that comment seems pretty unwarranted. And pretty much anything on this forum is a first world problem, isn't it?

Calmloki was just joking, as he himself has too much cash that he does not know what to do with.

I also have some stinkin' cash that earns barely enough to keep up with inflation if even that, so have been thinking about getting back into bonds. EM sovereign bonds, anyone? I thought I read somewhere that EM country governments have lower debt loads than developed countries, hence the default risk is not as high as people would fear.

 

[galeno]

From Jan 2006-Oct 2012 30% of port was in intermediate bonds. We sold them and put the proceeds into 5% div stocks and 25% laddered CDs.

Our div stocks have gained over 30%. So it was a good move. We are slowly moving back into intermediate bonds and will complete the transition over the next 4 years.

I also have some stinkin' cash that earns barely enough to keep up with inflation if even that, so have been thinking about getting back into bonds. EM sovereign bonds, anyone? I thought I read somewhere that EM country governments have lower debt loads than developed countries, hence the default risk is not as high as people would fear.

 

[bradaz2488]

Thanks for all of the feedback. The 401K to IRA transfer date was on Nov 19th so I have not been siting on the 401K cash that long. Here is what I'm considering based on the feedback. Any additional feedback is welcomes ...

1) For the Fidelity IRA account I will put 50% of the cash balance to work right away into stocks/bonds funds and then DCA the remaining 50%. I will double down on a 3-5% dips in S&P/DOW.

2) For the Schwab account I will DCA all the cash into stock funds (no bonds in taxable account). I will double down on a 3-5% dips in S&P/DOW.

3) Since the short term future yields on Bonds is "fuzzy" I think I'll keep my Bond/Cash AA to 10% Bonds (intermediate?) and 25% cash for now. I will move more cash into bonds (intermediate and/or short) later in 2014/2015 if it make sense to do so at that time.

More questions for you all:
1) Should I DCA over 12 or 18 months?
2) Does the doubling down on 3-5% dips make sense?
2) Any feedback on the Fidelity Index funds below and % exposure I should have:
FUSVX U.S. Large CAP
FSEVX U.S. Mid CAP
FSSVX U.S Small CAP
FSIVX International large CAP
FPMAX Emerging markets.
3) Any feedback on the Schwab ETF funds below and % exposure I should have:
SCHX U.S Large CAP
SCHM U.S Mid CAP
SCHA U.S Small CAP
SCHF International large CAP
SCHE Emerging markets.
4) Bond funds are very confusing to me and I'm still educating myself. Sounds like Intermediate Bond funds is the way to go right now and then possible move into short term Bond funds in 2014 pending how interest rate go. Sounds like I should stay away from long term bond funds? Any guidance on Bond fund types and/or specific funds would be much appreciated.

My goal is to be at my desired AA (65% stock, 20% bonds and 15% cash) after I finish my DCA timeline ends.

Thanks again for all the feedback...

 

[kaneohe]

It's not clear to me if you were at your target AA just before the rollover, but if you were and since the rollover is so recent, it looks to me that the S&P500 is only up 1.5% or so since then so you could just go to your target AA if you wanted.