Cash strategies don't work?

[donheff]

This is an interesting article describing studies that indicate that cash bucket strategies are ineffective. To detailed to summarize but the essentials are that the cash drags the portfolio performance more than simply putting the whole shebang in an AA and rebalancing to withdraw. I don't know exactly hwat my strategy is. I have several years expenses in the TSP G Fund which is as safe as cash but is mid term government securities. It is just part of my bond holdings but I guess I have to consider how much of my bonds should be in the government bucket vs total bond funds.

 

[rescueme]

I read the article and still was struck that the same theme is revisited, time after time; that is you can do better with your money than keeping it in cash (regardless of your personal situation).

OK, I agree. But let me see an article that reflects on the value of peace of mind that cash brings to those that are retired, and have no retirement income (at the present time, as we are currently living) and will greatly reducing their cash holdings as time goes on, and pensions, SS, etc. come "on-line" (as in our case) and have already met their retirement income goal without having to maximize their (alternate) cash return.

Sure, we could probably do better with our 5+ years of current required income (including taxes due) in cash, but than again it represents a very small position of our total retirement portfolio. So why take the risk if we don't need to?

As in all things in (retirement) life, "it all depends"...

 

[Animorph]

I do have a cash bucket, but with a target of 0%, so hopefully no drag. The rest of the portfolio is all diversified equities. I raise cash whenever the portfolio is doing better than planned, so drag there is not so much of a concern and hopefully ends up as selling high. I reinvest if there is a bear market or worse, in equal amounts on the way down, minus a few months of living expenses. So that's my buy low. If I don't get a chance to buy, this is my normal retirement spending withdrawal for a few years, so the cash doesn't hang around too long. If I don't get a chance to raise cash I just sell to raise what I need for expenses.

I think this strategy, which I have never seen described anywhere, has been a plus over the last few years. I started retirement with "just in case" cash in 2007, reinvested it during the downturn, raised cash again at the recent peak, and have started reinvesting it again. Just missed reaching a reinvestment trigger last week, but I'm sure it will come. I'll probably limit the amount of cash I raise to a few years if the world economies start looking better, but these days this is one way to make sure equities are sold at the planned for prices and the retirement plan stays on track even with the wild market swings.

 

[Animorph]

We had a thread about the underlying paper in this link. One of the weird things they did was to simply use all cash for expenses in a down market and all equities plus refill any spent cash in an up market. So you might spend the cash as the market went down, but as soon as the market turned up you would sell enough equities to refill all the cash. That could be still well within a severe market dip, with equities still below prices where you had been spending just cash on the way down. Too simplistic a scheme to work very well.

They did find that even a one year cash buffer was worse than no cash buffer, though it was less worse than a larger buffer.

I never liked a continuous cash buffer. They make sense if you think short-term, it's your money for expenses for the next few years. But if you keep rebalancing it, rather than actually spending it down in falling markets, you end up with a constant cash allocation over a 30 year retirement period. The returns on that never seemed worth it. And that's why I don't have a bond allocation as well. Though a dynamically allocated bond allocation (such as over-balancing) might be interesting.

 

[MichaelB]

We had a thread about the underlying paper in this link.

Is this the one? http://www.early-retirement.org/forums/f28/jfp-article-withdrawals-with-a-cash-buffer-61392.html

In that thread Audrey made a good point about reviewing strategies yearly vs one strategy forever. A question in my mind is not if this tactic is more successful but does it reduce the risk of the most dire failures. I would give up some upside potential if the benefit were less likelihood of total portfolio failure.

 

[Mulligan]

Is this the one? http://www.early-retirement.org/forums/f28/jfp-article-withdrawals-with-a-cash-buffer-61392.html

In that thread Audrey made a good point about reviewing strategies yearly vs one strategy forever. A question in my mind is not if this tactic is more successful but does it reduce the risk of the most dire failures. I would give up some upside potential if the benefit were less likelihood of total portfolio failure.

That is my way of thinking. I do work PT to make enough to max the Roth deduction which I put in an equity mutual fund, but the majority goes to I Bonds and Cds. I am drawing a cola pension that is already tied strongly to the stock market. I don't want to double down in that area too much. Plus, I have enough monthly income where I don't need or have to worry about taking the additional risk.

 

[Lsbcal]

Our strategy:
(1) First select AA, stocks & fixed income (FI)
(2) From FI, slice off the smallest piece possible for cash holdings.
Right now that might be what we get in a rewards checking account.
Example: we get 2% yield on up to $10k.
(3) From the remaining FI, buy some short term bonds. Maybe 2 years of spending worth that will be continuously refreshed from the longer term FI stash and equity rebalancing into FI (when equities go up).
(4) Longer term FI stash is in intermediate bond funds with low ER's.

Just watching how well Wellington fund does reminds me that those intermediate bonds have a real purpose.

That article in the OP is no surprise. Real returns on cash are generally inferior to bonds -- that's what they mean by term risk premium. Also we've had about 4 decades of declining rates that goosed bond returns. If rates start going up we should not be surprised to see articles extolling the virtues of cash again.

 

[brewer12345]

If you are going to post a thread like this, at least come up with a ctachy title. Maybe something like "Buckets Suck It."

 

[jclarksnakes]

Cash is a depreciating asset. At least as long as we have inflation rather than deflation it is a depreciating asset. I hate having too much of my portfolio depreciating.

 

[Animorph]

Cash is a depreciating asset. At least as long as we have inflation rather than deflation it is a depreciating asset. I hate having too much of my portfolio depreciating.

Yeah, I couldn't stand it and put most of my longer-term cash in a GNMA fund, which is still a meager return. Shorter term I put it in TLT, long duration Treasurys. That's been up over 15% in a few months, definitely better than cash and opposite to stocks.

 

[clifp]

Sure, we could probably do better with our 5+ years of current required income (including taxes due) in cash, but than again it represents a very small position of our total retirement portfolio. So why take the risk if we don't need to?

As in all things in (retirement) life, "it all depends"...

I'm not a big fan of buckets,but I did set up a CD ladder which would cover roughly 1/3-1/2 of my yearly expense, in case my dividend and interest takes a hit like it did back 2008/9.

Since I think most people are looking at 30 or 40 year retirement, your 5+ years is 12-20% that is pretty hefty amount of your assets to put aside earning 0%. If it works for you and the piece of mind is important great, but I don't think it is good general approach for somebody with a tighter retirement budget.

 

[rescueme]

Since I think most people are looking at 30 or 40 year retirement, your 5+ years is 12-20% that is pretty hefty amount of your assets to put aside earning 0%.

It's much, much less than even 12% ... Like I said before, "it all depends".

 

[Spanky]

That is my way of thinking. I do work PT to make enough to max the Roth deduction which I put in an equity mutual fund, but the majority goes to I Bonds and Cds. I am drawing a cola pension that is already tied strongly to the stock market. I don't want to double down in that area too much. Plus, I have enough monthly income where I don't need or have to worry about taking the additional risk.

That seems counter-intuitive. If one has a guaranteed stream of income that will support all future expenses, there's more reason to take on more risk.

 

[pb4uski]

That seems counter-intuitive. If one has a guaranteed stream of income that will support all future expenses, there's more reason to take on more risk.

There are two sides to that argument. The one you make that if you have cola'd income streams cover your living expenses that you can take on more risk and if things work out you will be richer and if they don't you will still be ok.

The counterargument is if there is no need to take on more risk why do it?

To me in that situation it is mostly personal preference, what makes it most easy to sleep well at night and your degree on interest in leaving money to your heirs.

 

[nun]

I go with "moderation in all things". I like to have a years worth of living expenses in cash. it's mostly so i can easily pay amy big bills and just live day to day. With my short term bond allocation it forms a buffer against market downturns.

 

[Mulligan]

There are two sides to that argument. The one you make that if you have cola'd income streams cover your living expenses that you can take on more risk and if things work out you will be richer and if they don't you will still be ok.

The counterargument is if there is no need to take on more risk why do it?

To me in that situation it is mostly personal preference, what makes it most easy to sleep well at night and your degree on interest in leaving money to your heirs.

Pb4, that is my line of thinking. In my mind, increased risk doesn't necessarily guarantee increased performance, especially since my monthly
pension income is generated from 65% in equities already. I fully realize if my retirement was built on a 401k, I could not have this strategy. So I will just plod along with my savings and dream of 6% CD days gone by

 

[samclem]

That's been up over 15% in a few months, definitely better than cash and opposite to stocks.

Be careful out there . . . an increase in interest rates would drive down stock prices and will do even worse things to the value of long-term Treasuries (so it will move in the same direction as stocks: down). The cash "cushion" you had formerly counted on to help dampen the swings in your portfolio is now a volatile asset. That's okay as long as it was your intent.

 

[Animorph]

Be careful out there . . . an increase in interest rates would drive down stock prices and will do even worse things to the value of long-term Treasuries (so it will move in the same direction as stocks: down). The cash "cushion" you had formerly counted on to help dampen the swings in your portfolio is now a volatile asset. That's okay as long as it was your intent.

Just a short-term , ah "bet".

 

[Animorph]

My 80-something Mom lives off her annuities and SS just fine. She keeps a substantial portfolio of all equities for all her long-term savings. Basically trying to grow it for her kids. As one of those kids, I can agree with that 100%.

 

[pb4uski]

My 80-something Mom lives off her annuities and SS just fine. She keeps a substantial portfolio of all equities for all her long-term savings. Basically trying to grow it for her kids. As one of those kids, I can agree with that 100%.

+1 except Mom is not totally in equities.

Whenever we go out Mom typically insists on paying for the meal (and I know she can well afford it, as could I). For years I protested but then it dawned on me that when Mom pays not only do I get a good, free meal but I also get satisfaction that my siblings are also "paying" for my meal

 

[Free To Canoe]

I do have a cash bucket, but with a target of 0%, so hopefully no drag. The rest of the portfolio is all diversified equities. I raise cash whenever the portfolio is doing better than planned, so drag there is not so much of a concern and hopefully ends up as selling high. I reinvest if there is a bear market or worse, in equal amounts on the way down, minus a few months of living expenses. So that's my buy low. If I don't get a chance to buy, this is my normal retirement spending withdrawal for a few years, so the cash doesn't hang around too long. If I don't get a chance to raise cash I just sell to raise what I need for expenses.

I think this strategy, which I have never seen described anywhere, has been a plus over the last few years. I started retirement with "just in case" cash in 2007, reinvested it during the downturn, raised cash again at the recent peak, and have started reinvesting it again. Just missed reaching a reinvestment trigger last week, but I'm sure it will come. I'll probably limit the amount of cash I raise to a few years if the world economies start looking better, but these days this is one way to make sure equities are sold at the planned for prices and the retirement plan stays on track even with the wild market swings.

I would like to hear more about your system if you feel so inclined. How do you determine the reinvestment triggers?

 

[Lsbcal]

I would like to hear more about your system if you feel so inclined. How do you determine the reinvestment triggers?

Not that I'm trying to discourage the answering of this question directly, but if you look up rebalancing strategies there are a gazillion of them. That is because it's all about timing strategies and most of these have not been studied in any great depth, IMO.

My own is to select the max equity exposure and then when it hits 1% above that, sell 1%. Do this check and possible sell at the end of each month. Might result in several small incremental sells. Is designed to be a mechanical strategy as opposed to a "hunch" strategy.

 

[audreyh1]

Articles that focus on maximizing long-term return ignore the main reason for a cash bucket - shorter term peace of mind. It's volatility of many asset classes (stocks AND bonds) that makes life rough for the retiree, and having some strategies to shield oneself from big market swings can really help deal with living off investments and helps tune out the market noise.

Cash as an asset class also has a place in an asset allocation if you are using the "efficient frontier" curve to choose your risk(volatility)/performance tradeoff and thus your AA. It sure comes in handy when you have a bad year across many asset classes like 2008 and need to rebalance your portfolio.

Of course, I don't "count" my shorter term cash fund for living expenses as part of my total long-term portfolio, so frankly I don't care about any "performance drag". That is money to cover the next year or two's expenses. It's not there to boost long term performance. I keep them religiously segregated.

Audrey

 

[urn2bfree]

I do have a cash bucket, but with a target of 0%, so hopefully no drag. The rest of the portfolio is all diversified equities. I raise cash whenever the portfolio is doing better than planned, so drag there is not so much of a concern and hopefully ends up as selling high. I reinvest if there is a bear market or worse, in equal amounts on the way down, minus a few months of living expenses. So that's my buy low. If I don't get a chance to buy, this is my normal retirement spending withdrawal for a few years, so the cash doesn't hang around too long. If I don't get a chance to raise cash I just sell to raise what I need for expenses.

I think this strategy, which I have never seen described anywhere, has been a plus over the last few years. I started retirement with "just in case" cash in 2007, reinvested it during the downturn, raised cash again at the recent peak, and have started reinvesting it again. Just missed reaching a reinvestment trigger last week, but I'm sure it will come. I'll probably limit the amount of cash I raise to a few years if the world economies start looking better, but these days this is one way to make sure equities are sold at the planned for prices and the retirement plan stays on track even with the wild market swings.

This sounds like what is known as Value Cost Averaging.

 

[Animorph]

I would like to hear more about your system if you feel so inclined. How do you determine the reinvestment triggers?

I've discussed it a few times before, and I'm sure the long-time members are tired of seeing it again! And it is all mechanical in operation, no more timing involved than a triggered rebalance. Also, we are cash flow negative, even with DW working, so excess cash can be spent in a few years without touching equities. Something slightly different along the lines of over-rebalancing might work better than this during accumulation.

Raising cash:
I have a simple x% market return, x% inflation projection for my retirement portfolio. It assumes I sell enough equities each year to support my expenses. So if the portfolio is doing well and exceeds next year's sell point value, I'll sell immediately to lock in that cash for next year at the desired market return. I'll do that for a few years if the market keeps going up. If the market goes down, then I've got cash to live on for a while. My way of smoothing out the returns. All mechanical.

If I don't have any extra cash I sell equites as needed. I have a nominally all equity portfolio and no desire to hold cash or bonds long-term

Reinvesting cash:
If I have more than a year or so of cash, I'm happy to reinvest it if the market goes down more than 20%. I use (SPY + EFA)/2 with dividends reinvested as a market proxy for this number. I divide the cash into 5 equal amounts and reinvest one part each at -20%, -25%, -30%, -35%, and -40%. You never know how low it will go. I added a couple of steps during the last big market drop by adding HELOC money into the mix (now repaid and ready to go again). I was just about to transfer allocations from conservative funds into volatile funds, the last step I could take with no cash to reinvest, when the market finally turned back up. However, I did reserve enough cash for about 12 months of expenses so we could wait for the market to recover.

Even if you have to sell before a full recovery, you are taking out cash that was used to buy equities that were 40% down and have recovered, a net positive. The risk is of course that you sell equities at a 50% discount that you bought for a 40% discount, but that's still not too bad.

Again, absolutely mechanical, though exciting near the trigger points. I also like to work with ETF's when doing this so I can hit the triggers precisely intra-day. The last day of the 2009 drop included a 1% rise or so late in the day, IIRC, and I didn't place the MF buys because of that. And then I never had the chance because the market never reached that low again.


So, it's a way to ensure you sell equities at your targeted yearly prices to meet your retirement goals, even if you sell early sometimes. And a way to reinvest in a bear market sometimes. Otherwise, I just sell equities as needed during a hopefully boring average market. That hasn't happened very often so far.