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Old 04-23-2011, 08:43 AM   #21
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I do think of it as kind of a low pass filter.
Cash is the capacitor.

If I have around 3 years minimum expenses in cash then I can stand to have a high percentage of whats left in a diversified set of worldwide equities (and maybe a bit in commodities). Why? Because major dips usually substantially recover within 3 years. So, you can ride this out by drawing down cash and refusing to sell equities when they are weak.

If this puts my cash&bond allocation below the popular levels then so be it.
At least that's how Im feeling today.
(I wont have to actually make my allocation until later this year when I take my lump sum.)

If your retirement horizon is >30 years then it seems a long term investment view is appropriate. This tends to favor a high allocation to equities.
Exactly, the RC circuit is a nice way to think of the return from a portfolio flowing into a cash account to provide annual income. If that flow stops then you deplete the cash and hope that you have enough to keep you going until the flow starts again. If you don't then you have to spend your principal, ie reduce the magnitude of the driving voltage and you won't be able to sustain quite the same output after that.
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Old 04-23-2011, 08:49 AM   #22
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I guess the root question here is whether I think of my finances using an analogy. My answer would be "No."
+1. I consider personal finance/investing a basic 'science' in itself - unlike any other science in that psychology (the individual investor/self and all other investors/the market at large) plays a significant role. In fact, the overreactions of herd investors present all the opportunities IMO - that's where my biggest wins have always come from.

I don't need an analogy, but most if not all would probably break down where human nature enters into personal finance and especially investing...
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Old 04-23-2011, 09:17 AM   #23
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Exactly, the RC circuit is a nice way to think of the return from a portfolio flowing into a cash account to provide annual income. If that flow stops then you deplete the cash and hope that you have enough to keep you going until the flow starts again. If you don't then you have to spend your principal, ie reduce the magnitude of the driving voltage and you won't be able to sustain quite the same output after that.
Similar to a rechargeable battery. I would prefer one with a lot of Ampere Hours.
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Old 04-23-2011, 10:46 AM   #24
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My career was in digital so none of that analog stuff for me . Maybe you should consider digital filters? Or just avoid analogies entirely.

Our shortest length bonds are VFSUX short term investment grade with duration = 2 years. So having cash around equivalent to maybe 6 months of spending seems good enough. The worst years for the VFSUX was 2008 at -1.1% and 1994 was about 0.0% return. I also have a plan to switch to VFISX short term treasuries should VFSUX performance start to lag VFISX -- but this is a minor improvement.
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Old 04-23-2011, 10:59 AM   #25
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My career was in digital so none of that analog stuff for me . Maybe you should consider digital filters? Or just avoid analogies entirely.
.
I think it's useful to make analogies. Many people would be helped by obvious ones like a couple of connected water tanks holding different amounts of water. These visually illustrate the parameters involved in taking income from your investments without the need to resort to the mathematics even thought it's simple differential equations. The RC circuit is just another way of looking at it.
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Old 04-23-2011, 11:56 AM   #26
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I think it's useful to make analogies. Many people would be helped by obvious ones like a couple of connected water tanks holding different amounts of water. These visually illustrate the parameters involved in taking income from your investments without the need to resort to the mathematics even thought it's simple differential equations. The RC circuit is just another way of looking at it.
Hi Nun, I don't mean to be too hard on you about analogies. The problem with cash right now is it has negative real returns unless you are talking about something like reward checking accounts which we have (only up to 25k at the 2.0% rate). I'm inclined to minimize this bucket right now. When rates get back to normal historical real returns I'll revisit this and maybe set up more maturing CD's for the "cash".

My own investment strategies are filtered through about 60 years of monthly backtest data to make sure they worked in a variety of market environments.
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Old 04-23-2011, 01:26 PM   #27
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Hi Nun, I don't mean to be too hard on you about analogies. The problem with cash right now is it has negative real returns unless you are talking about something like reward checking accounts which we have (only up to 25k at the 2.0% rate). I'm inclined to minimize this bucket right now. When rates get back to normal historical real returns I'll revisit this and maybe set up more maturing CD's for the "cash".

My own investment strategies are filtered through about 60 years of monthly backtest data to make sure they worked in a variety of market environments.
No problem at all. I'm not making any judgements about whether it's good to be in cash right now, just offering what I've found to be a useful way to think about the interaction between investment accounts and how a cash or short term account can be used to buffer market fluctuations.
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