Going to 100% cash

[Dawg52]

I am with Dex on that one, though I won't probably go all cash myself because I am just an armchair economist who knows nothing (which doesn't prevent me from having an opinion). I don't want to go to extremes one way or the other. I have started to unwind my more speculative positions while I will probably hang on to my dividend payers.

Personally, I find this economy too unsettling. Governments around the world have thrown everything but the kitchen sink at this economy and yet it has barely moved the needle. And what's in the pipeline? Tax increases, more spending cuts by local and national governments, higher health care costs, etc... I can't see any of it adding up to sustainably higher economic growth any time soon personally.

I think that deleveraging in the public and private sectors will go on for years before we can find some solid footing. People brighter than me think that, in the next decade, stocks will return about 5% per year and bonds 4% per year. So when I see a zero-risk CD that pays 4-5%, I find it hard to pass up.

Pretty much sums up my thoughts. I won't unload all my stocks, but do have a couple I will dump if I ever achieve my target. But the rest are solid dividend payers that I plan to hang onto for the long run. And I can live just fine on a conservative portfolio so no need to take on additional risk.

 

[dex]

No they are not. Rebalancing your portfolio is not market timing if you are doing it based on regular intervals of %deviation rules.

Market timing means you change your allocation because you think the market (or a certain asset class) is about experience a major change in value in the near future.

Rebalancing is purely reactive. It makes no assumptions about the future. It is returning the portfolio back the the original AFTER the market has does something - some asset classes appreciated and others depreciated.

Asset allocation assumes that each asset class is volatile, that they are not perfectly correlated, and that therefore, over long periods of time, there is some advantage (mainly reduced volatility for the total portfolio) to occasionally rebalancing between asset classes. This is no more timing than "buy and hold" which assumes that over very long periods of time, some asset classes will outperform others.

Audrey

They are the same thing. The percentages for AA are only represent the commitment to those asset classes.

The underpinning concept of AA re balancing is that an asset class's price is high (assets not at pre-determined ratio) so the timing mechanism of AA tells the person to sell - the result - timing the market.

A person who uses moving averages as a market timing mechanism says 'my moving average rules tells me to re-balance my portfolio' (e.g. sell stocks)

A person who uses asset allocations as a market timing mechanism says 'my asset allocations rules tell me to re-balance my portfolio' (e.g. sell stocks)

 

[dex]

A couple of personal questions Dex. How old are you and do you have sufficient funds to retire while earning 1-2% in CDs?

I'm 55 and been ER for 4.5 yrs - no pension now or SS or 401K withdrawal.

I haven't used CD is decades. I use bond mutual funds.

The reasons I am still in the market is at age 50 there is a certainly a decent shot that I still have another 40 years maybe even longer. If I divide my assets and factor in a 2% income, I find myself in the uncomfortable position of steadily depleting my capital to fund my lifestyle.

While it is certainly doable if there is no inflation, I do expect inflation to return sometime in the next 10 to 20 years. (Now a year ago I expected it to return in 1-3 years so obviously things have changed.) In the event of inflation I don't have enough assets if I am stuck in low yielding investment like cash.

I am seeing the market look pretty cheap, not on absolute basis, but on a relative basis compared to other asset classes in particular bonds, and 0% cash.

As I said, cash is not a long term plan for me.
Everyone needs to factor compute their risk/reward ratio. At this moment I see 0% in cash better than my expectations for -X% in stocks.

I think you need to look at cash flow and asset allocation not just CD rates
Budget
- Pension
- SS
= Amount to be funded by investments

 

[brewer12345]

Wow, an amzing amount of negativity here and a love of cash/bonds. I do not think this is a great deal different than much of teh investing public, which is probably why we have a soft equity market, very low deposit/CD rates, and tons of money pouring into bond funds. Interesting.

ESRWannabe, I would just observe that while the high yield market can be a good source of returns, it is prone to depressingly frequent crashes (similar to teh equity market, not always at the same time). While I like the yield, I mostly am on the sidelines during "normality" and like to buy junk when that market gets wildly cheap (very high spreads). Not sure we are in wildly cheap territory now (by a long shot). I am actually thinking about unloading my remaining junk and either sitting in cash/high grade or pursuing other stuff (cheap, high quality equities, asset/commodity plays, merger arb funds, etc.).

 

[BigNick]

Personally, I find this economy too unsettling. Governments around the world have thrown everything but the kitchen sink at this economy and yet it has barely moved the needle. And what's in the pipeline? Tax increases, more spending cuts by local and national governments, higher health care costs, etc... I can't see any of it adding up to sustainably higher economic growth any time soon personally.

Or it could be what I call the "Flight Simulator effect".

Ever played MS Flight Simulator? I only did it a couple of times. The plane (everyone starts on a 747, of course) is incredibly slow. Pull the stick, nothing happens. Pull it harder, nothing happens. Hey, we're going to hit that mountain, pull it harder... nothing's working. This thing is stupid. Oh now, wait. It's going. The first pull is starting to kick in. Now the second pull. Help, we're going to be 300 miles off course. Now the third pull kicks in. You realise that the first pull was fine - you just needed to have faith in the laws of physics.

History shows that governments typically intervene in problems just when they are starting to solve themselves by the efforts of combined human ingenuity/stubbornness/whatever. It could be that we're set for a recovery and we just haven't felt the pull yet. If so, ;let's help that the stimuli stop before they're just fuelling inflation.

Or, we should maybe all just go to cash. But if we're all going to do that, I want to be first.

 

[FUEGO]

Plus, as I mentioned earlier, younger folks wishing for a prolonged weak period in equities are indirectly also wishing for a decrease in job security. Doesn't matter if the Dow drops to 5000 if you don't have a paycheck to buy cheap stocks with...

From a purely selfish standpoint, I think I would be ok with a prolonged recession with blips of growth - just enough recession to keep the gloom and doom firmly entrenched in our minds but not enough to tip us into a depression. And I'd like to keep my job (most of the time) and be able to buy stocks at 30-40% less than what they would be if we had a very solid economy with solid growth every year.

Periods of unemployment with the current generous 2 year government provided severance packages (aka unemployment) would be ok. And welcomed!

Of course I don't want all the currently ER'd folks to suffer through with their portfolios withering away. Just pointing out that those in the accumulation phase would benefit by depressed stock valuations. I'd rather retire into a market with the Dow around 10,000 instead of around 18000-20000. Just sayin'.

 

[dex]

U.S. Has `Realistic Possibility' of Stagnation, S&P's Wyss Says - Bloomberg

The U.S. has a “realistic possibility” of falling into a Japanese-style economic slump, said David Wyss, chief economist at Standard & Poor’s.

 

[ESRwannabe]

Wow, an amzing amount of negativity here and a love of cash/bonds. I do not think this is a great deal different than much of teh investing public, which is probably why we have a soft equity market, very low deposit/CD rates, and tons of money pouring into bond funds. Interesting.

ESRWannabe, I would just observe that while the high yield market can be a good source of returns, it is prone to depressingly frequent crashes (similar to teh equity market, not always at the same time). While I like the yield, I mostly am on the sidelines during "normality" and like to buy junk when that market gets wildly cheap (very high spreads). Not sure we are in wildly cheap territory now (by a long shot). I am actually thinking about unloading my remaining junk and either sitting in cash/high grade or pursuing other stuff (cheap, high quality equities, asset/commodity plays, merger arb funds, etc.).

Yeah, I agree, I don't think junk is wildly cheap, but it looks cheap enough, for me. Vanguard has misleading names on some of their funds. The high yield corp is BB and the high yield muni is A... When I looked into junk, I took off 2% from the yield to account for defaults, and it was still enough of a difference that I prefer it to investment grade corporates. I believe that BB has historically had 1.5% defaults and 40% recovery. So, I low balled things a good bit assuming 2% and 0% recovery.

I don't think we will have a huge depression. I don't think we will even have negative GDP. I just think the GDP will suck, yet still be positive. So, I don't think defaults will be higher than the historical average. I think it will just be an agonizing drawn out malaise, that will last for years.

I think emerging markets will continue doing well. I am guessing that they will start trading with each other more and more, and also build their own domestic demand up more and more. I think we will see the decoupling that people have talked about for years.

US companies that sell to Asia should do well, but I think I'll do better investing in their domestic companies. So, the Matthew's Asia fund is one option where I will be putting some more money. I'm also looking at tactical asset allocation funds like FPA Crescent. If you take a look at their prospectus, you could make the case that they run a hedge fund, given how broad it is. They can invest in pretty much anything, including shorting.

I don't have any predetermined asset allocation. I'm looking at things in regards to how much principal do I want to risk on a given option. I do have a lot in fixed income, which may seem strange for someone that is accumulating assets. The reason for that is the job market is precarious and I do not believe it will get better for a very long time. I feel the need to build up some non-work related income, at least for now.

 

[FIREd]

Or it could be what I call the "Flight Simulator effect".

Ever played MS Flight Simulator? I only did it a couple of times. The plane (everyone starts on a 747, of course) is incredibly slow. Pull the stick, nothing happens. Pull it harder, nothing happens. Hey, we're going to hit that mountain, pull it harder... nothing's working. This thing is stupid. Oh now, wait. It's going. The first pull is starting to kick in. Now the second pull. Help, we're going to be 300 miles off course. Now the third pull kicks in. You realise that the first pull was fine - you just needed to have faith in the laws of physics.

History shows that governments typically intervene in problems just when they are starting to solve themselves by the efforts of combined human ingenuity/stubbornness/whatever. It could be that we're set for a recovery and we just haven't felt the pull yet. If so, ;let's help that the stimuli stop before they're just fuelling inflation.

Or, we should maybe all just go to cash. But if we're all going to do that, I want to be first.

Funny you should mention MS flight simulator because it is my favorite game of all time. I have quite a nice flight simulator setup at home. As you can see, in addition to being an armchair economist, I am also an armchair pilot. I have a mixed record for both.

I understand what you are saying. There is always a delay in response to stimulus. In this case, the pilot pulled on the yoke. The response was slow but the 747's attitude did improve for a while. It looked like we would miss the mountain. Unfortunately the 747 has started to level off again and the yoke has broken off it seems... Got duck tape?

I am not all doom and gloom. I don't think this is the end of the world. The deleveraging has to run its course. Once we get rid of the dead weight, the 747 will get some lift again and we will clear off that mountain - be it with stained shorts.

 

[ERD50]

The underpinning concept of AA re balancing is that an asset class's price is high (assets not at pre-determined ratio) so the timing mechanism of AA tells the person to sell - the result - timing the market.

This stretch in terminology strikes me as a justification for your own market timing - 'everybody does it'.

But it's a stretch, just like it's a stretch to say that the thermostat on my furnace is a timing mechanism. Yes, it takes time for the house to cool down and time for the furnace to heat it up, and time for the heating season to roll around - time interacts with all things, but that is not its primary function.

Now, if one is rebalancing strictly because they feel that when their AA is out of whack by 10% (or whatever), that is a signal that the market has hit an inflection point, and they are acting on that belief, then I'd say you've got it right.

But I think for most, the primary reason for rebalancing is that they have chosen an AA that is aggressive enough to take advantage of expected long term returns of the stock market, and conservative enough to provide some cushion from that stock market volatility. To call them market timers because the market conditions change over time, and therefore trigger a rebalance is a very long stretch, IMO.

I'm glad I seem mostly immune to the fear/giddiness of the market gyrations. I guess seeing DCA and a bit of testosterone induced 'buy on the dips' work for me in the accumulation phase, avoiding 'buying high', and some rebalancing help a wee bit to survive the dips since I ER'd, has helped to inoculate me.

I got an AA and I'm stickin' to it (although I haven't even checked it for ~ 6 months).

-ERD50

 

[dex]

This stretch in terminology strikes me as a justification for your own market timing - 'everybody does it'.

I can tell you don't read my posts by that comment. Those that do; know 'everybody does it' is not something that concerns me at all.

 

[GusLevy]

Greetings. To the OP, since you are in the midst of and in the process of making a fairly aggressive short term trade with your portfolio have you considered the need to partially delta hedge the trade by going long out of the money calls on a liquid market index (i.e. SPY, QQQQ, etc.)? Seems to me that although your concern is a near term equity market sell-off that your true risk may in fact be a near term market rally which could leave you a prisoner on the sideline for awhile depending on the shape and tone of the rally.

I am approx 40% cash and 40% muni bonds myself so I certainly have similar near term equity market concerns as yourself...just not taking such an extreme position.

Good luck.

 

[audreyh1]

They are the same thing. The percentages for AA are only represent the commitment to those asset classes.

The underpinning concept of AA re balancing is that an asset class's price is high (assets not at pre-determined ratio) so the timing mechanism of AA tells the person to sell - the result - timing the market.

No, that is not market timing. Trimming an asset class because it has appreciated more than another class and bringing the two back into a desired ratio is NOT market timing. Reducing or eliminating your position in an asset class because you are sure it is going to perform poorly in the near future IS market timing.

Audrey

 

[clifp]

I'm 55 and been ER for 4.5 yrs - no pension now or SS or 401K withdrawal.

I haven't used CD is decades. I use bond mutual funds.



As I said, cash is not a long term plan for me.
Everyone needs to factor compute their risk/reward ratio. At this moment I see 0% in cash better than my expectations for -X% in stocks.

Bond funds? That is surprising.

I imagine you know most of this but there is pretty decent article in this weeks NY Times Overestimating the safety of bond funds.

It is this potential to see your bond fund go down in value, sometimes dramatically, that I think people have forgotten. The key to understanding the impact a change in interest will have on your bond fund is in finding out the duration of the bonds the fund tends to buy. In simple terms, duration turns out to be a measure of the fund’s (or an individual bond’s) sensitivity to a change in interest rates. For every 1 percentage point change in interest rates, the value of the fund will change by the amount of the duration. So if your fund holds bonds with an average duration of eight years, and interest rates go up by 1 percentage point, the value of your fund will drop by 8 percent.
Watching your monthly statement decline by 5, 10 or 15 percent is not what most people have in mind when investing in bond funds for safety. But it is a real possibility.

Interest rates can raise sharply. Back in 1994 interest rates on 10 Treasuries went from 5.5% to over 8% in about 9 months. This would mean a loss of 15% on the Vanguard Total Bond fund, about 18% for the Vanguard High Yield, and possibly as much as 40% for Vanguard Long Term bond fund.

You are right everyone needs to look at risk reward ratio.
I see Vanguard Total Bond paying 2.5% in interest if rates go down perhaps another 5% in capital appreciation. If we see hints of inflation, there is huge underlying fear about the massive government debts and it is easy to see 15-20% downside risk in bonds in the next couple of years.

The yield on the S&P and VTI is just under 2% so not much lower than bonds. I certainly see the possibility of the market retesting the March 2009 lows of SP 670 or an almost 40% drop if economy gets worse, but I also see the possibility of the market hitting a new high of 1560 or a gain of almost 50% if things improve in the next few years.

Now clearly a 40% drop is much worse than a 20% drop but a 50% gain is much much better than a 5% one. Since I focus on dividend stocks my yield is 3% or better than a bond market so it isn't costing my any current income to remain in the stock market.

I have little confidence in my ability to time the market in the short term, but I still have some testosterone, so I play with my AA and shifted from my default 75/25 position to 85/15. Again it isn't because I love the market's P/E at the current levels, it is just that I hate everything else more.

Like you I have no pension and social security remains a long ways off.

 

[brewer12345]

Yeah, I agree, I don't think junk is wildly cheap, but it looks cheap enough, for me. Vanguard has misleading names on some of their funds. The high yield corp is BB and the high yield muni is A... When I looked into junk, I took off 2% from the yield to account for defaults, and it was still enough of a difference that I prefer it to investment grade corporates. I believe that BB has historically had 1.5% defaults and 40% recovery. So, I low balled things a good bit assuming 2% and 0% recovery.

I don't think we will have a huge depression. I don't think we will even have negative GDP. I just think the GDP will suck, yet still be positive. So, I don't think defaults will be higher than the historical average. I think it will just be an agonizing drawn out malaise, that will last for years.

I think emerging markets will continue doing well. I am guessing that they will start trading with each other more and more, and also build their own domestic demand up more and more. I think we will see the decoupling that people have talked about for years.

US companies that sell to Asia should do well, but I think I'll do better investing in their domestic companies. So, the Matthew's Asia fund is one option where I will be putting some more money. I'm also looking at tactical asset allocation funds like FPA Crescent. If you take a look at their prospectus, you could make the case that they run a hedge fund, given how broad it is. They can invest in pretty much anything, including shorting.

I don't have any predetermined asset allocation. I'm looking at things in regards to how much principal do I want to risk on a given option. I do have a lot in fixed income, which may seem strange for someone that is accumulating assets. The reason for that is the job market is precarious and I do not believe it will get better for a very long time. I feel the need to build up some non-work related income, at least for now.

I agree with you on the tendency of the market to misprice BBs, but I also have a pretty fresh memory of buying a BB issue 15 months ago for 66 cents on the dollar. This bond trades around par now and did so 6 months before I bought it. Caveat emptor.

 

[freebird5825]

I can't speak for others who are staying in the market, but I don't see anything clearly enough to make any moves at all at the moment. But then I've never been able to see the future of the market and stopped trying to time it a couple of decades ago.

I never even bothered to try to time the market. Well, OK, I poured a little extra DCA into muni bond funds in 4Q08. So shoot me.

Sitting still on a 40/60 AA. Patience is a virtue I am learning to acquire.

 

[dex]

No, that is not market timing.

Yes, it is and it is OK.
You would think I was calling you a round heeled woman or something.

 

[MichaelB]

Wow, an amzing amount of negativity here and a love of cash/bonds. I do not think this is a great deal different than much of teh investing public, which is probably why we have a soft equity market, very low deposit/CD rates, and tons of money pouring into bond funds. Interesting.

Agree. Especially about the bonds.

There is a distinct possibility that the economy declines, employment does not improve and the US becomes financially impaired.

There is also the possibility that layoffs and job eliminations slow in the public sector while job creation continues in the private sector and the overall economy regains it’s slow but positive course.

I’m not sure what will happen, just that it can be either, the Fed still has a fair amount of ammo, and if IBM can borrow money at 1% they should do ok going forward.

International Business Machines Corp. raised $1.5 billion at the lowest interest rate on record as the credit rally that began in June extended into August on investor confidence the economy won’t slip back into recession.IBM's 1% Rate Sets New Low for Bonds as Rally Strengthens: Credit Markets - Bloomberg

 

[audreyh1]

Yes, it is and it is OK.
You would think I was calling you a round heeled woman or something.

No it is not. Rebalancing a portfolio because it is out of balance makes absolutely no predictions about the future. It is simply reacting to past market performance. It is only market timing when you are investing based on expectations of near-term future market performance. Rebalancing an AA portfolio does not do that.

The elimination of the need to market time (guess near future market behavior) is one of the things I really like about rebalancing. I don't have to think about the future at all.

Audrey

 

[dex]

Greetings. To the OP, since you are in the midst of and in the process of making a fairly aggressive short term trade with your portfolio have you considered the need to partially delta hedge the trade by going long out of the money calls on a liquid market index (i.e. SPY, QQQQ, etc.)? Seems to me that although your concern is a near term equity market sell-off that your true risk may in fact be a near term market rally which could leave you a prisoner on the sideline for awhile depending on the shape and tone of the rally.

I am approx 40% cash and 40% muni bonds myself so I certainly have similar near term equity market concerns as yourself...just not taking such an extreme position.

Good luck.

As of today, I'm in 58% cash and 42% mutual funds - 63% of that in Stock Funds.
I understand your hedge idea. I guess I just want to keep it simple. Once in cash, I might even consider a very small short.

I'm OK with missing some upside. I do not see that I will be missing a long term (8-12 months) up move.

 

[audreyh1]

But I think for most, the primary reason for rebalancing is that they have chosen an AA that is aggressive enough to take advantage of expected long term returns of the stock market, and conservative enough to provide some cushion from that stock market volatility. To call them market timers because the market conditions change over time, and therefore trigger a rebalance is a very long stretch, IMO.

Obviously, I would go further and say that there is not any kind of logic stretch that could call this market timing.

Audrey

 

[haha]

Yes, it is...

No it is not.

OK guys, what I really need to know is how many angels will fit on the head of a pin?

Ha

 

[audreyh1]

OK guys, what I really need to know is how many angels will fit on the head of a pin?

Ha

Have no idea. Do angels really exist?

Oh wait - I married one, so they must exist. And he is much bigger than a pin. So the answer must be 1! (or maybe it's 0 )

It all depends on what your definition of "fit" is!

Audrey

 

[RunningBum]

Maybe one of you needs to start a poll on whether AA is market timing. My vote is No, btw.

I will say that I like this thread (at least the original post) a lot better than when someone posts "I went all cash 6 months ago" because they rarely post that when it was a bad call. Dex is putting it out there up front.

 

[SunsetSail]

It seems like much disagreement on this thread is lack of a common definitions. If 'market timing' means trying to purchase low/sell high based on predictions of the movement of the market, then AA is not market timing because the point of AA is to remove the prediction factor from the equation. If 'market timing' means trying to achieve higher returns by purchasing low/selling high, then AA is market timing because this is the goal albeit without making predictions.

It also seems like there is disagreement about how to evaluate risk. Dex appears to value principal preservation (from the statement about sleeping better at night) so an all cash position faces an inflation erosion risk/opportunity cost as opposed to a potentially large drop of value overnight. As someone that isn't FIREd yet, I tend to discount that risk and inflate the risk of being out of the market for dividend yield/capital appreciation.

My question to Dex is: You appear to base your decision (at least in part) on a broad market technical analysis. Do you not apply this same type analysis to actual holdings because you only invest in funds (I think you mentioned this)? I am getting at whether you consider this a sky is falling scenario for all equities vs a general market decline that will pull down virtually all broad holdings although individual companies may prosper. I am also curious as to whether you apply this reasoning to foreign equities. Are ADRs included in your technical analysis? Would this not show the whole picture because they trade on other non-US exchanges as well?