Where to keep cash?

[brewer12345]

I think you are right that some posters have good reasons to hold a lot of cash. I just think that some are doing themselves a disservice by doing this. They are lowering their long term portfolio return.

However, I really like to optimize things and have to remember not everyone is like that. And actually this just gives some money to the banks (or wherever that excess cash resides) to recycle to stronger investment uses. So it's probably a wash to society in the end. A comforting thought to me.

I like to optimize, too. I have some portfolio cash on hand (7% or so) simply because I am waiting on opportunities to put it to work.

I also keep an emergency fund equal to a year and a half of expenses. However, to minimize long term performance drag I have the bulk of my e fund in I bonds and CDs, with a relatively small amount in a savings account. I view the e fund as part of my fixed income allocation. Why do I keep this much in safe stuff? After getting my ass handed to me in the crash, I have developed a healthy interest in cutting off extreme tail events. So I keep a bigger than average e fund, have worked down concentrations in my portfolio, keep much closer track of allocations, and have done other things (healthy supply of emergency food and water on hand, have plenty of shotshells, thinking seriously about buying a generator, etc.). I still live my normal suburban salaryman life, but all of this stuff gives me comfort that things are mitigated somewhat even in very nasty downside scenarios. The world can be an uncertain place and we are largely on our own to deal with it.

 

[NW-Bound]

And guess what - 5% of my long-term retirement fund is in cash (including Ibonds) too. Why? Because when the market tanks, I use that cash to rebalance my portfolio and buy distressed assets. I don't consider it to be a "drag" when that happens!

I have always held a lot of cash, from 25% up to 50% or more, but I will have to dig out my records. The idea was that when the market tanked, I would go "all in".

Yeah right! I did buy, but not nearly as much as I should or could. I held quite a bit back, thinking that if all equities went to 0 (of course they wouldn't, but it surely felt like it as many stocks lost 80-90%!), the remaining cash is the minimum I would need to live out the rest of my life in tolerable misery. So, I bought, but was far from being "all in".

It ain't that easy when you were crouching in the fox hole. How everybody felt was all recorded in the threads in this forum. And it was not that long ago either. Interesting time!

You can redeem I-Bonds in small lumps, you don't have to redeem the whole bond. When I've redeemed bonds on-line, after selecting the bond I am asked to enter an amount.

Thanks for the info. I redeemed a chunk once some time in 2007, but somehow missed that option, and took the whole amount. Or could it be that it was a later added option?

 

[Lsbcal]

well, I have some of my short-term 1-3 years in cash, because I SPEND it. If I'm spending it anyway, I don't care about the return.

Once I pull money out of my retirement portfolio, I don't care about the long-term return.

My retirement portfolio is not optimized for long-term return either - otherwise I would be 100% equities. Instead, I balance short-term volatility potential with long-term return potential.

And guess what - 5% of my long-term retirement fund is in cash (including Ibonds) too. Why? Because when the market tanks, I use that cash to rebalance my portfolio and buy distressed assets. I don't consider it to be a "drag" when that happens!

I admit my post was a little provacative. No offense intended.

I like your comment about not being optimized for just LT returns because we have to remember bad things can happen to equities (like 2008). I'd add that many of us here being retired have to deal with withdrawals and portfolio redesign as we age. Actually I am balanced too and have a somewhat radical approach to dealing with market declines.

A while ago I decided that my best bet was to take the max equity allocation and stuff the rest in bonds i.e. no $'s laying around waiting for some opportunity which I'm personally not that great at predicting.

Our cash position is <2% of the portfolio. The OP was about the best place to keep cash. I'd contend that the first step is to minimize cash, but that is not everyone's cup of tea.

Looking at those graphs of past periods of cash returns (3 month Treasuries) we can see there have been historical periods of poor returns. The other take away from those graphs is that over long term periods one could get decent real returns. Also one would be protected from inflation as cash will not suffer a rate hike hit like bonds would.

 

[JOHNNIE36]

NW-Bound, you are right about the fees charged by BOA. I use their on-line bill pay and if I was to just setup Ally as an account and pay a "bill" to them and not call it a fund transfer, there is no fee just as any other bill pay. If you ask money to be transfered, they will charge you a fee.

 

[NW-Bound]

We somehow stumbled on the right way to do this, and did not have to pay any fees. As I handle all investments, I always set up the transfer link from the brokerage sides. And my wife set up the periodic account payments somehow, like you described.

Now to be fair, I'm just starting to learn about I Bonds, which might be the right answer. While they're bonds, there is some reason to claim that they could qualify under that "short-term" category.

I've probably overlooked IBonds too long...

Do I wish I would have thought about it 5 years ago, maybe...though MMFs provided decent (even stellar late 70's & 80's) returns for my entire investing life until 2009 or so.

In a nutshell, I bonds guarantee a fixed real return above the inflation rate. That fixed real return was as high as 3.6% in 2000, when the Treasury apparently could not attract enough investors who were chasing dot-com stocks. It was slowly lowered to zero where it is now, when people have no place to turn to even match inflation.

Because the I-bond was such a good deal, they have always limited what an investor could buy, and the demand for I-bond in recent years also caused the Treasury to lower the annual limit to a measly $5k/yr at one point.

I knew about that 3.6% real return offer in 2000, but did not appreciate that it was one heck of a deal. When I started to accumulate it, the guaranteed fixed rate was never more than 1.4%. Still, I have been getting nominal return of 3 to 4+% in the last few years, and that's still a lot better than anything else out there.

As other I-bond owners concurred with me, it is so hard to part with them now, as we cannot buy anything like it. I have almost 2.5X annual expense in it, and may keep it as a doomsday component of portfolio, meaning fund of last resort, because if inflation shoots up, my I-bond is guaranteed to beat it by 1.4%.

 

[KMyer]

Crazy places people are hiding their cash - Aug. 12, 2011

I just read this thread. I'm glad you are having some serious discussions because I mis-read the subject line and thought the discussions were going to be going in the direction of this article.

 

[JOHNNIE36]

In less than a month, I'll have that problem of what to do with cash. $75K CD coming due. Interest rates on CD's suck so I'm thinking about "psst-Wellesley" income fund. Maybe Fidelity Income fund. As I recall, last time I looked, those type funds were at 4% +/_ and I'm good for that. I know those funds are not FDIC but I think they are are as safe as you can get if you are in the "market".

 

[bUU]

Which income fund are you referring to?

 

[jimnjana]

I opened an AXP account in 2012 as well as a Navy FCU account and I've had a pen fed account for years. I used Pen Fed for 1,2, and 3 year CDs. I use the AXP as liquid reserves. I just started using the Navy FCU checking account for our rental properties. They offer a much better yield on checking accounts vs USAA. I used to be primarily a USAA customer, but since they ditched me on Home Owners Insurance, I'm slowly ditching them on all the financial products that I can get a better deal elsewhere.

 

[JOHNNIE36]

Which income fund are you referring to?

bicker, I'm thinking the Vanguard Wellesly Income fund VWINX is decent. If you have any suggestions that might be better for safety, let me know. All suggestions are appreciated.
Looking around at CD's, I can't believe they want to tie up your money for 5 years to get 2%.

 

[Marc]

bicker, I'm thinking the Vanguard Wellesly Income fund VWINX is decent. If you have any suggestions that might be better for safety, let me know. All suggestions are appreciated.
Looking around at CD's, I can't believe they want to tie up your money for 5 years to get 2%.

I thought your original post referenced a "Fidelity" fund? I have a related question:

When I turned 50 five years ago, I decided to change my 100% equity position by "slowly" adding bond funds. In the five years, I am now up to 20% bond split 45% Fidelty Total Bond, 40% Fidelity Bond Index, and 15% Fidelity Capital and Income (all in 403b with "K" class expenses). I have picked up the pace of transition as almost all new money goes into these bond funds and I transfer over another $30K for every $100K my portfolio increases.

All three funds are good funds with relatively low expenses. I am concerned about the "bond bubble" so I am trying to look for ways to decrease the average duration of my portfolio. I am looking at adding Fidelity Floating Rate High Income to my portfolio. My initial position will be around $50K or around 2.5% of my portfolio which isn't too large. However, when you add my FAGIX funds I get to around 7% junk. This would also amount to almost 25% of my bond allocation.

Is this too much junk? Are there other options to lower my duration? My goal is to get to 65% stocks, 30% bonds, 5% cash by time I turn 58 in three years so I do need to move a lot of money into bond funds.

thanks,

Marc

 

[JOHNNIE36]

Marc, my original post said "psst Wellesley" OR Fidelity Income Fund. I only said Fidelity because I was in that fund five years ago. Had a chance to get out of it and bought a brokerage CD and made some money on that transaction. I didn't know it at the time but brokerage CD's are bought and sold all the time at the brokerage houses. I got a bid on that CD and resold it and made a bunch and then transferred that to a local bank as an IRA CD. Now another CD is maturing. I'm screwed on rates and thinking about going back into the income funds, wherever they may look best.
I'm 76 years old and have to sleep good at night. No wild investments for me. It's all about safety.

 

[bUU]

bicker, I'm thinking the Vanguard Wellesly Income fund VWINX is decent. If you have any suggestions that might be better for safety, let me know.

There are lots of choices for better safety. VWINX has a beta of 0.27. An FDIC-ensured CD, for example, has a beta of effectively 0.00. Volatility means risk especially for something like an emergency fund. I don't know of any financial guru who suggests that that kind of volatility is acceptable for, specifically, emergency funds. It seems like a fine fund, but is a fund the right place for that specific part of your portfolio?

Looking around at CD's, I can't believe they want to tie up your money for 5 years to get 2%.

Me neither. My emergency fund is in a high-yield deposit account making 0.85%.

 

[GrayHare]

There's always the technique of overpaying taxes, and later filing an amended return. I believe the IRS still pays about 3% interest. (No, I would not do this intentionally.)

 

[samclem]

Looking around at CD's, I can't believe they want to tie up your money for 5 years to get 2%.

It helps to remember that your money isn't really tied up. The very low interest rates now (that we are complaining about in this context) means that the withdrawal penalties (e.g 60 days interest for Ally CDs) are not much of a penalty at all. If a "5 year" CD yields 2% and in a year the interest rates go up by even a little, just liquidate the CD and buy a new one at the higher rate.

From a saver's perspective, this is one (modest) silver lining to the low interest rates. The withdrawal penalties for breaking a CD are relatively meaningless. Be sure to check for the length of the interest penalty--some are long.

 

[obgyn65]

Yes. This is one of the reasons why I like CDs a lot.

It helps to remember that your money isn't really tied up. The very low interest rates now (that we are complaining about in this context) means that the withdrawal penalties (e.g 60 days interest for Ally CDs) are not much of a penalty at all. .

 

[JOHNNIE36]

And, if I'm not mistaken, the penalty for early withdrawal can be deducted on your income taxes.

 

[rbmrtn]

Check around there were several places that had a no penalty CD and others have a "raise your rate" CD where you can adjust your rate during the CDs lifetime. But their rates aren't much better than the online savings (1%), the online savings rate would go up if rates rise.

VWINX is good but it dropped -20% during 08-09. Safety and return in this environment are hard to find.

 

[SJ1_]

You can connect an Ally savings account to your local bank checking account and transfer funds in three business days. This can be setup and done all online.

that is what we do.

 

[audreyh1]

Thanks to all the informative responses on this thread, not only did I open one of the high-yield savings accounts to keep our near term cash for living expenses, but I also bought some IBonds in my retirement portfolio. I realized that as long as we were in a period of "financial repression" (i.e. short-term rates held below inflation), that I could use IBonds as part of the cash component of my portfolio (since they pay the inflation rate).

 

[smjsl]

I could use IBonds as part of the cash component of my portfolio (since they pay the inflation rate)

Well, only if you pay 0% tax on withdrawal... more generally, with I-bonds, you lose some percentage of purchasing power depending on your tax rate upon withdrawal and inflation rate til then.

 

[audreyh1]

Well, only if you pay 0% tax on withdrawal... more generally, with I-bonds, you lose some percentage of purchasing power depending on your tax rate upon withdrawal and inflation rate til then.

That's way better than my other cash holdings where I pay ordinary taxes on interest income every year.

 

[brewer12345]

Thanks to all the informative responses on this thread, not only did I open one of the high-yield savings accounts to keep our near term cash for living expenses, but I also bought some IBonds in my retirement portfolio. I realized that as long as we were in a period of "financial repression" (i.e. short-term rates held below inflation), that I could use IBonds as part of the cash component of my portfolio (since they pay the inflation rate).

You are buying I bonds for the exact same reason I am. As older, higher rate CDs roll over, I am putting as much of the proceeds as I can into I bonds.

 

[Midpack]

Thanks to all the informative responses on this thread, not only did I open one of the high-yield savings accounts to keep our near term cash for living expenses, but I also bought some IBonds in my retirement portfolio. I realized that as long as we were in a period of "financial repression" (i.e. short-term rates held below inflation), that I could use IBonds as part of the cash component of my portfolio (since they pay the inflation rate).

You are buying I bonds for the exact same reason I am. As older, higher rate CDs roll over, I am putting as much of the proceeds as I can into I bonds.

Me too. I bought $20K in iBonds (and will most likely continue annually) and moved all my remaining VG MMF into Ally savings - thanks largely to reading ER.org threads. Now I just have to decide whether or not to contribute $12K ($6K ea) to our TIRAs while we still can (DW has earned income), seems it may be a wash.

 

[audreyh1]

Me too. I bought $20K in iBonds (and will most likely continue annually) and moved all my remaining VG MMF into Ally savings - thanks largely to reading ER.org threads. Now I just have to decide whether or not to contribute $12K ($6K ea) to our TIRAs while we still can (DW has earned income), seems it may be a wash.

Yep! I also anticipate buying IBonds every year until short-term cash/CD rates start matching or besting inflation again. This could take several years......