% Cash in asset allocation

[pb4uski]

I don't disagree with what you said in terms of assessing portfolio performance but I do disagree in terms of assessing liquidity for funding living expenses.... which was the main point of this thread.

On your last post I agree... my benchmark is a mix of index funds that mimic my target AA and I compare the total return of that hypothetical portfolio with my actual portfolio returns. While those index funds probably carry a little cash for liquidity reasons so it had minimal impact on returns if I held managed funds that made a move to cash for tactical reasons then my returns would lag the benchmark.

One problem with looking through to the underlying fund liquidity is that it is typically only published at month or quarter ends and the percentage in cash may or may not be representative of the cash they carry over time so it is not a reliable. IOW, Loomis Sayle Bond's 16% might be a one-day thing and not indicative of the average cash they carried for the period as many funds window dress around reporting dates.

 

[RunningBum]

I don't necessarily disagree with marinauser either, but if you own AAPL do you count the cash they have? They reported having over $200B in cash, with a market cap of $639B. I only saw those numbers at a glance and I'm not sure both are true or if they are valued the same way because Yahoo finance says just $34.68B in cash, but in any case it's a fairly to very significant amount. But just like Apple has that cash available to work with and make money on in some form, so does a fund manager, and it's also not cash that you or I could get our hands on.

 

[DEC-1982]

Like pb4uski I would not consider funds' cash as cash in AA but apparently marinauser doesn't agree, and that's OK. I just checked Vanguard Total Stock Market Index and saw it had -0.3% in short term reserves. See attachment. That was a surprise. The Vanguard Total Bond Market Index shows 0.7% in short term reserves. For me, this combination is almost 0% cash for these mutual funds.

Maybe actively managed funds keep significantly more reserves for withdrawals and opportunities? Enough to make a significant difference as suggested by post #25?

 

[urn2bfree]

The comment about holding 30+ months cash during a downturn (and I know you didn't say that was you) doesn't make sense though. In a downturn you would be putting cash back into the market unless you thought it was still going lower. Most likely this is a factor of illogical thinking, that when the market is down you are afraid of it and won't buy low, instead waiting for it to get higher before getting back in. Not a strategy to replicate. .

I think the 30 months cash is not for holding in a downturn, it is for spending in a downturn to avoid selling at a loss. If normally you are living on dividends interest and selling as needed to create an income stream, in a bad market -when both bonds and stocks could be down- having a cash fund to weather the storm is putting cash back in to the market...either because you are not selling when you otherwise would be, or even allowing you to reinvest dividends and cap gains that you might otherwise take out. In fact one can think of cash as a bond with a maturity of zero. It is a way to smooth volatility.



Sent from my iPad using Early Retirement Forum

 

[audreyh1]

Cash provides diversification in a portfolio. It behaves independently of other asset classes. When I researched asset allocation the cases I studied showed that a small cash allocation improved the risk-adjusted return of a stock and bond portfolio. This is why I hold cash as part of my AA. If you look at balanced portfolios offered by investment companies there is usually a % allocated to cash.

I keep cash for any other purpose separate from my portfolio.

 

[mathjak107]

the reality is the true benefit of cash is protecting you if you are spending down only until the first up cycle .

after your first up cycle even spending down in good or bad markets does not matter much .

the extra gains without bonds and cash in an up market cushions you spending down in a bear market .


volatility is another story , not many of us want the volatility of 100% equity's but functionality wise cash buffers don't add much after your first decent up tick .

 

[Moneygrubber]

I keep about 10% in cash, sleep well money, dont care about loss of return at this point.


Sent from my iPad using Early Retirement Forum