Cash buffer vs. rebalancing

[CRLLS]

I never quite bought into the "cash" bucket theory. 1st, it is off the table for any real gains. Then, in times of need, it depletes almost as much as the market downturns. Then when things start to get better, one must steal from the gains to replenish the cash bucket.

It seems that this study supports that concept. The hard part is when things do go south, can I, will I, be able to ride it out. I did during the 2008 correction. Now, in the start of my decumulation phase, I wonder how I'll hold out. Time will tell.

[Lsbcal]

Quote:

Originally Posted by TwoByFour I have a 60/40 AA also but the FI part is mostly a TIPS ladder with the rungs 1-year apart. I am never more than 1 year from getting full, inflation adjusted par value from any of those TIPS. Cash fills in for more immediate needs. Inflation scares me more than bear markets - loss due to inflation is permanent. Loss due to a bear has always recovered.

I'm just not so sure about your last sentence. I am 70 and a 10 year bear market would not be something I want to go through even if it recovers after that. Not saying this will happen, just that it could. The 2008-2009 bear market was more like a 1.5 year one. Now the 1930's were quite another animal.

So I consider the equities risky in any 10 year time frame. Good to have a plan B.

[RobbieB]

I love cash! More cash means more dough to blow -

[TwoByFour]

Quote:

Originally Posted by Lsbcal I'm just not so sure about your last sentence. I am 70 and a 10 year bear market would not be something I want to go through even if it recovers after that. Not saying this will happen, just that it could. The 2008-2009 bear market was more like a 1.5 year one. Now the 1930's were quite another animal. So I consider the equities risky in any 10 year time frame. Good to have a plan B.

None of us want to go through a 10 year bear. But I can weather it OK. Our withdrawal rate is about 3.4% and since our fixed income is all inflation tracking, we can live off nothing but FI for almost 12 years. We could not do that if a big chunk of our assets were cash. Inflation would whittle it down. That was my point.

[GravitySucks]

Quote:

Originally Posted by Closet_Gamer The simplicity of the 2.x% + 1% = 3.x% view had honestly not occurred to me. Kudos. How do you think about the occasional massive declines in dividends that accompany bears like the 2008 - 2009? S&P 500 yields dropped ~24% from 2008-2011, only fully recovering in 2012. Today they are 50% higher than they were in 2008. S&P 500 Dividend by Year During that same window the whole bond market got pushed lower for short period of time but then recovered. Using Vanguards whole market ETF as a proxy: https://finance.yahoo.com/quote/BND/ So over the medium term dividends obviously recovered plus a bunch, but during the crunch -- where the cash bucket theory would have bridged the pain and helped avoid selling shares at low prices to sustain income -- the dividend reduction was significant. Is the right solution during that window to sell bonds, and eat additional bond principle while waiting for the dividends to recover? Even more so if you have the courage to actively rebalance into equities at those lows.

Thanks for the dividend table. I remember dividend cuts happened, but rarely see it mentioned here and was to lazy to look for the info.
In the other side of the coin a good amount of my current budget items went for fire sale prices at the time. DW got a used Caddy she always wanted for 1/2 the 07 price. We stayed for 3 weeks in a nice ocean view studio motel for less than $750. That's less than current weekly rate.
So lower dividends, maybe lower expenses.

[OldShooter]

Quote:

Originally Posted by TwoByFour ... Inflation scares me more than bear markets - loss due to inflation is permanent. Loss due to a bear has always recovered.

+1

[Oz investor]

inflation is a major concern for me as well , hopefully i can keep ahead of inflation , but history suggests that will be a very hard task .

however a market dip is something i MIGHT be able to take advantage of .

as i was well aware of the dividends being reduced in harsh times , but runaway inflation would slash spending power

[rayvt]

Quote:

Originally Posted by mrfeh We hold SAMBX also. But be prepared for it to lose value in a recession; that's the trade off for higher dividends during good times.

My primary thought about SAMBX was that $100,000 minimum investment. Didn't bother to look further, but I suspect that there are other similar funds that have lower minimums.

I've always wondered about these high minimum funds----can you play a game by opening for $100K and then withdrawing $90K, if you only want to put $10K in it?

Both SAMBX and OOFAX have average credit quality of B.
B = Non-investment grade = junk bonds. Morningstar puts them in lower left quadrant, which is "low credit quality".

Seems to me that junk bond investments are more "investment" type investments than a safe harbor for your cash. Reaching for yield is risky.

[mrfeh]

Quote:

Originally Posted by rayvt My primary thought about SAMBX was that $100,000 minimum investment. Didn't bother to look further, but I suspect that there are other similar funds that have lower minimums. I've always wondered about these high minimum funds----can you play a game by opening for $100K and then withdrawing $90K, if you only want to put $10K in it? Both SAMBX and OOFAX have average credit quality of B. B = Non-investment grade = junk bonds. Morningstar puts them in lower left quadrant, which is "low credit quality". Seems to me that junk bond investments are more "investment" type investments than a safe harbor for your cash. Reaching for yield is risky.

We bought it 5 years ago when total bond was returning <2%. I was willing to take the risk, and it has worked out.

That said, it is less than 10% of our fixed income holdings. And now that dividends for total bond are improving, there's a good chance we'll dump SAMBX, especially if it looks like a recession is imminent.

[scrabbler1]

Quote:

Originally Posted by ERD50 I guess we can never know until we see a specific scenario, and then only in hind-sight. So sure, bond values may go down some, divs may go down some, but I still feel confident that the odds are that over a long retirement period, the many years of added gains from keeping the cash invested will outweigh any possible losses from a few years where we might pull a few % from principal at a sub-optimal time. No way to know for sure, but the 'keep it simple' in me says just pick an AA and stick with it and enjoy life. -ERD50

I agree. I hate the idea of tying up any significant blob of money in cash where it earns nearly nothing. The closest thing I have to cash in terms of stability and liquidity is the ~$40k I have in an intermediate-term muni bond fund which earns about 2.5%, mostly tax-free, and ha checkwriting privileges.

My ER portfolio generates a steady, reliable income stream consisting of 12 monthly payments (from a bond fund) and 4 quarterly payments (from a stock fund), enough to pay my bills with a reasonable cushion, or surplus, to cover any small, unforeseen expenses. Any remaining surpluses over time get reinvested somewhere.

[Willers]

So far (2 1/2 years into RE) we've kept about a year in true cash - MM's and no EWP CD's. We have another two years in sort-of cash - longer terms CD's and iBonds.

We aren't spending nearly what we though we would or the calcs say we can (40%/yr under) so we may let the cash drift up naturally.

I went through 2008/2009 with two incomes. They were both shaky, but we both made it. I understand the psychological benefit of cash in that circumstance. Not sure how I'll react in retirement, but I'll find out at some point...

[pb4uski]

Quote:

Originally Posted by scrabbler1 I agree. I hate the idea of tying up any significant blob of money in cash where it earns nearly nothing. ....

For many of us, our cash stash is in online savings accounts... mine currently earns 1.8% and my next cash-like item, VMMXX earns 2.1%. Mine is only semi significant... 5% after I have rebalanced and between 2-3% just before I rebalance.

If I could have earned 3.3% in bonds and earned 1.8% in cash the delta is 1.5%... but if my cash averages 3.5% of my portfolio the drag is .05%.

[OldShooter]

Quote:

Originally Posted by rayvt ... Both SAMBX and OOFAX have average credit quality of B. B = Non-investment grade = junk bonds. Morningstar puts them in lower left quadrant, which is "low credit quality". Seems to me that junk bond investments are more "investment" type investments than a safe harbor for your cash. Reaching for yield is risky.

@rayvt, you really can't stop with the Morningstar sheet when you are looking at these more sophisticated investments.

First, you said that OOSAX and SAMBX have similar yields. If so, where do you think the Oppenheimer guys are getting that extra 48 basis points? Guaranteed they are not falling out of the sky and the lead manager's dog is not bringing them home every evening. The difference can only come from making riskier/higher yielding investments. And 48bps is a big number in this low yield environment. Don't just stop with the simplistic Morningstar risk grid.

Said another way, both having "B" rated companies in their portfolios does not mean the portfolios have equal risk. Also, these floating rate funds do not usually even hold bonds. They hold bank loans that they have purchased. Where the borrower may and probably does have bonds rated as "junk," the bank loans are senior to the bonds. And, unlike bonds, the bank loans have a floating interest rate based on Prime or on the LIBOR. So interest rate risk is reduced. I'm not going to cover everything about the differences between thes funds and junk bond funds, but I think you get the idea that looking at the Morningstar sheet is not adequate due diligence.

I don't mean to imply that the higher return on this type of fund isn't risker than some of the "cash" alternatives, but you do have to understand that they are a different animal and that research is mandatory.

BTW, if you really want an E-ticket ride, there are leveraged floating rate funds too. Not for me, but they do have a market.

[rayvt]

Quote:

Originally Posted by OldShooter @rayvt, you really can't stop with the Morningstar sheet when you are looking at these more sophisticated investments.

Yup, I agree. That's why I said these are more "investment" investments than safe "dividend/interest" places to stash cash.

And too difficult for me. Stocks are hard enough, and stocks are much more transparent than bonds.

Back to the title of this thread......Rebalancing is far better than keeping a large cash buffer.

[nash031]

I typically keep very little cash, and that is usually only in my Roth IRA where I do some play time with individual stocks (currently AAPL and T).


That said, we may pull some equity out when we sell our house. I will likely keep that in cash (it'd be roughly 12% of our total portfolio) until the market heads south for a little bit, say 10-12% at least. I won't try to call the bottom. I'll just try to get a little bit of a discount from where we are. Of course there's no guarantee of that, either, so who the hell knows? I'd probably be better served just to DCA it all in over the course of a year or so.

[RobLJ]

I've got a chunk of money from stock rebalancing over the last year that, rather than adding to bond funds, I stashed in a money market fund (or CDs would also be fine). This is largely because I suspect the Fed will continue raising rates for a while, and 2% isn't too far below bond fund yields (not to mention overall bond fund returns as interest rates rise).



I would use it to buy stocks to rebalance rather than the bond funds after a 10-20% correction. I also have a small chunk in a floating-rate fund for smilar reasons (although the yield is twice as much as the MM).
The cash/MM/floating fund is more a function of where I think we are in the rate cycle. I don't mind being wrong on this; it won't kill me or the portfolio.




I still have about 4X the percentage of cash in bond funds, however.

Quote:

Originally Posted by googily There have been discussions lately about the low yields right now of bond funds and how the Vanguard prime money market is almost matching it for yield, with some people electing to move into VMMXX for the time being. Wondering about this in terms of this "cash bucket" discussion.

[pb4uski]

Quote:

Originally Posted by RobLJ I've got a chunk of money from stock rebalancing over the last year that, rather than adding to bond funds, I stashed in a money market fund (or CDs would also be fine). This is largely because I suspect the Fed will continue raising rates for a while, and 2% isn't too far below bond fund yields (not to mention overall bond fund returns as interest rates rise). I would use it to buy stocks to rebalance rather than the bond funds after a 10-20% correction. I also have a small chunk in a floating-rate fund for smilar reasons (although the yield is twice as much as the MM). The cash/MM/floating fund is more a function of where I think we are in the rate cycle. I don't mind being wrong on this; it won't kill me or the portfolio. I still have about 4X the percentage of cash in bond funds, however.

I'm in a similar spot other than the last two parts (the floating rate fund and a lot of bonds). A few months ago I sold most of my bonds and have the money parked temporarily in VMMXX at 2.1% or so but with no interest rate risk and negligible credit risk. CDs are sometimes tempting but the yield curve is so flat I'm undecided what terms to put the money and 2.1% isn't that much lower. Ditto here.... if I'm wrong it isn't a big deal.

[NoMoreJob]

I've been retired for quite a few years. I typically keep 2-3 years of spending needs in reserve. I don't do it because I think it helps my returns but because it helps me sleep at night. It also helps me with income planning for ACA purposes. I have a buffer that will not trigger additional income should a large unexpected medical or other expense arise. If the market tanks as it did in '08-'09 I live on the cash and rebalance fixed income to equities.

[sengsational]

Quote:

Originally Posted by pb4uski That was me. I was like a deer in the headlights.... parallelized by the uncertainty. I stood pat but I could not muster the courage to sell bonds and buy more stocks... if I had I would be much richer today. Back then I was working and had a secure job so the dough was rolling in every couple weeks. If it happens again, I'm not sure what I will have the courage to do.... I suspect that I would at least stand pat but possibly might buy more stocks. I know a couple people who were older and retired who bailed from stocks and never bought back in.

That 2008 reflection also describes me.

That's why I wonder if I'll have the guts to continue to rebalance to target when the next crash happens. My protection from having to liquidate equities comes in the form of a 401k guaranteed income fund, and it would last me a somewhat long bear market if I rebalanced, and a very long bear market if I didn't.

[RobLJ]

A few random thoughts:


1) The argument that a cash allocation hurts long-term returns does not persuade me, particularly. My goal is not necessarily to maximize long-term gains, so I can leave a huge chunk to the DSs or to charity.

2) This time it may be different. The valuation of US stocks is historically high. And that may work out--or it may turn out like 2001 tech valuations. We shall see.

Taking gains from yuge stock gains and sticking some of those gains in cash could--could, could--turn out in 2-3 years not to be such a sucker strategy. (Yes, yes, yes, market timing.)
And it's always like this ignores the fact that the same argument got blown up in the historic valuations in 2001 for tech/large cap growth stocks.

3) Bonds don't look that attractive, so rather than sticking reaped stock gains in bonds, using MM that are only a point or so less than bond funds while the Fed is tightening, doesn't seem like an idiot strategy. (For now, at least.)


In my case, DW is too young to draw from her retirement funds, so it's all on me for the next 3.5 years (and 6 years before I draw SS). So I've got 3.5 years of cash on my side, and the cash on her side is available for reallocation into stocks if the worst happens and the market does crash.

After she can draw from her retirement accounts and I'm taking SS, then I'll probably up my stock allocation and decrease cash.


So it's all pretty fine-grained based on one's peculiar situation, isn't it?



4. If the goal is to leave the maximum to heirs and charity and you won't run out of money--which is probably the case for many here--poo-pooing cash probably makes sense. That ain't me.