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Cash strategies don't work?
Old 06-06-2012, 07:26 AM   #1
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Cash strategies don't work?

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.
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Old 06-06-2012, 08:52 AM   #2
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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"...
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Old 06-06-2012, 08:57 AM   #3
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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.
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Old 06-06-2012, 09:22 AM   #4
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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.
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Old 06-06-2012, 09:32 AM   #5
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We had a thread about the underlying paper in this link.
Is this the one? JFP article: withdrawals with a cash buffer

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.
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Old 06-06-2012, 09:52 AM   #6
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Originally Posted by MichaelB
Is this the one? JFP article: withdrawals with a cash buffer

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.
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Old 06-06-2012, 09:52 AM   #7
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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.
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Old 06-06-2012, 10:33 AM   #8
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If you are going to post a thread like this, at least come up with a ctachy title. Maybe something like "Buckets Suck It."
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Old 06-06-2012, 10:52 AM   #9
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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.
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Old 06-06-2012, 12:24 PM   #10
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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.
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Old 06-07-2012, 05:01 AM   #11
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Originally Posted by rescueme View Post

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.
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Old 06-07-2012, 05:33 AM   #12
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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".
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Old 06-07-2012, 05:51 AM   #13
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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.
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Old 06-07-2012, 06:50 AM   #14
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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.
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Old 06-07-2012, 07:10 AM   #15
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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.
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Old 06-07-2012, 10:42 AM   #16
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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
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Old 06-07-2012, 10:57 AM   #17
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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.
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Old 06-07-2012, 03:10 PM   #18
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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".
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Old 06-07-2012, 03:15 PM   #19
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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%.
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Old 06-07-2012, 04:01 PM   #20
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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
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