So what's wrong with 500k in a sheltered 4+% money market?

[windsurf]

I have become so conservative. Yesterday's drop did not give me a gut twist becuase I knew that half my stash was safe. i love the rush when the market jumps 40, 60 or 100. But inflation is a slow burn or tightness, felt in the gut and low back I mediate it with the hope that high inflation will be offset by long term market gains in the other half of the nest egg. Is this sane, or just a reactionary position resulting from too many blows to the head?

 

[REWahoo]

I have become so conservative. Yesterday's drop did not give me a gut twist becuase I knew that half my stash was safe.... Is this sane, or just a reactionary position resulting from too many blows to the head?

 

[JohnEyles]

The principal doesn't grow with inflation, in fact it doesn't grow at all.
If inflation was zero, this would be a good way to get a safe 4% SWR.
(In fact, inflation could be 1% now, since 5% is readily available). But
if inflation was this low, I doubt such money-markets rates would still
be available.

 

[Bob_Smith]

Yesterday's drop did not give me a gut twist becuase I knew that half my stash was safe.

The market dropped yesterday? I didn't know that. I reconcile my statements once a month and have no idea what the market does in the meantime.

 

[LOL!]

Besides the inflation reason, here's another: Because you can get a safe 5.5% or more return on that money. That is probably costing you $5,000 a year and you wouldn't have any more risk.

If you don't think $5,000 a year is important, then I have a financial advisor I want you to start paying.

 

[riskadverse]

. . . That is probably costing you $5,000 a year and you wouldn't have any more risk.
. . .

Can you explain that more clearly? I'm having trouble understanding your statement.

 

[REWahoo]

I think what LOL! meant was that you could get an additional 1% or so on your $500,000 from CD's or the like at no risk (5.5% vs. your 4+%).

 

[justin]

Sure, here's another risk: Money market rates drop to ~1% over the next 6 months as the economy goes into a recession and the fed begins its rate cutting cycle (I think this is a low probability event in the timeframe I gave). You're now getting 1% on $500k. Inflation continues at 2+%, and you are losing 1+% in real terms. Even money markets are subject to interest rate risk.

 

[danm]

Nothing wrong with that - you sleep better, and since there's a good chance we'll be in a recession next year you may miss out on a bear market. Or some magical growth hormone may pop out of the woodwork somehow and you'll miss out on the next big bull market that propells the DOW to 30,000. My capital growing with inflation doesn't bother me much in a deflating market, for example, housing.

I sold my house last summer, when most thought it was a bad idea to sell. 'You won't keep up with the California market, you'll get priced out - at least buy a condo with part of it'. Well RE was looking very toppy, so I sold, and eventually put it into Treasuries. Meanwhile the value of the original asset has deflated 10%, and has further to go it looks. Also in the meantime, those treasuries have appreciated, I don't know, 10% in this last rally, so that house capital continues to increase for me once it moved it from the physical house.

Blah blah, my point is that if you feel more comfortable with it, worst is you miss out on a bull run, and you may miss out on a bear run. And inflation? Bah - LBYM means inflation doesn't effect you much anyhow. Capital preservation and growth is more important, in my small opinion.

 

[bosco]

And inflation? Bah - LBYM means inflation doesn't effect you much anyhow. Capital preservation and growth is more important, in my small opinion.

the Joe Dominquez school of thought. Mind over inflation.

'course he died living in a group house on $7,000 per year and rinsing out used glad bags.

I think your statement works over a 2-3 year period. 2-3 decades of inflation, however, can be a killer. The belt only tightens so far.

 

[mickeyd]

Is this sane, or just a reactionary position resulting from too many blows to the head?

You need to think long term, not day to day. Equities (stocks) over the long run should give you a total return of around 12%. With inflation currently about 3.5%, you will be in good shape if you can stop watching CNBC and listening to all of the noise that is a constant threat to financial sanity.

Go to your library and read several books on investing (A Random Walk Down Wall Street is a good beginning) so as to understand why it is important to maintain a strong equity position for the long term.

If you put that much into cash position, you will feel like you got a financial blow to the head. 8)

 

[FinanceDude]

I have become so conservative. Yesterday's drop did not give me a gut twist becuase I knew that half my stash was safe. i love the rush when the market jumps 40, 60 or 100. But inflation is a slow burn or tightness, felt in the gut and low back I mediate it with the hope that high inflation will be offset by long term market gains in the other half of the nest egg. Is this sane, or just a reactionary position resulting from too many blows to the head?

If a 160 point drop (1% or so) gives you a gutache, then I guess you need the security of a lot of safe cash.

You did mention that you are 50/50 equities/cash, so you're not THAT conservative........

 

[retire@40]

If a 160 point drop (1% or so) gives you a gutache, then I guess you need the security of a lot of safe cash.

He should feel a bit better today since we are up 80 points as I write this. The gutache is probably just minor indigestion now.

 

[JohnEyles]

Sure, here's another risk: Money market rates drop to ~1% over the next 6 months as the economy goes into a recession and the fed begins its rate cutting cycle (I think this is a low probability event in the timeframe I gave). You're now getting 1% on $500k. Inflation continues at 2+%, and you are losing 1+% in real terms.

This is the rationale behind investing in a Treasury Note (2-10 yr maturity), as opposed
to the 1/2 point or so higher yield of a 3- or 6-month Treasury Bill or good money
market account, right ? (For some of your fixed-income holdings, I mean).

 

[justin]

This is the rationale behind investing in a Treasury Note (2-10 yr maturity), as opposed
to the 1/2 point or so higher yield of a 3- or 6-month Treasury Bill or good money
market account, right ? (For some of your fixed-income holdings, I mean).

Among other things, yes.

 

[Bikerdude]

I Is this sane, or just a reactionary position resulting from too many blows to the head?

If you're currently retired and drawing on this money I would keep 6 months spending in the MM. I would then put enough for two years spending in laddered CD's 6 mo. to 2 yrs. The rest you could put in a combination of GNMA fund and a good low cost short term corporate bond fund. I think this mix would maximize your return with very little risk IMHO. If you don't need this money for living I would say you've taken a right hand from George Foreman in his prime.

 

[JohnEyles]

Among other things, yes.

What other things ?

 

[justin]

What other things ?

Well, an additional rationale to invest in a 2-10 year treasury note instead of a money market account is that it will generate interest free from state income taxation. However, the original poster stated the MM account was sheltered.

An additional reason to take the time certain investment (like a 2-10 yr treasury or similar maturity CD) would be to lock in a particular return for a given amount of time. For example, if you knew you were paying for a child's college education in 5 years, and were going to fund it with this pot of money you have today and needed a certain amount. You may not want to leave your returns on that money subject to the risk of a variable rate money market account.

 

[windsurf]

[biker Dude: If you don't need this money for living I would say you've taken a right hand from George Foreman in his prime.


Ouch. Guilty.

 

[mathjak107]

your guaranteed a loss between inflation and ultimately taxes when you pay them. you wanted no risk and practically are assured you will have one

 

[scrinch]

you wanted no risk and practically are assured you will have one

Risk and loss are two different things. You're saying that he is almost guaranteed a loss, not a risk. He may want to limit the risk level and is willing to take a small loss to avoid the chance of a big one. Risk is uncertainty in outcome...loss is decrease in principal (either nominal or real...however an individual chooses to look at it).

 

[mathjak107]

well the farther in time you go out with stocks and other mixed assets the smoother the return. like i always say i couldnt pull very many 15 year periods where the returns werent within 1% of each other . the returns always migrated towards the same 12-13% a year. thats almost guaranteed . of course the past dosnt mean it will continue but heck id take my chances getting 1/2 that before id chance a cd long term

 

[Bikerdude]

Ouch. Guilty.

Don't get me wrong I have no problem with a balanced portfolio. I have one myself. Each person has to deal with their own level of risk and how well they want to sleep. If you take on more risk than you can handle that sets you up to sell at a bad time (low). I was just trying to point out that you have other options for the fixed portion of a balanced portfolio. Good luck! And keep your left up.