Anyone in All Cash?

[ziggy29]

The way I see it is that there are two camps; the doom and gloom camp that thinks that all this deficit spending and national debt will bankrupt our economy and the other side that acts like this is a somewhat normal business cycle that will correct itself eventually. The market cannot price both predictions into itself.....

Well, I think this is also evidenced by the coexistence of both strong inflationary AND deflationary pressures in the economy. All the money being printed and all the increasing public debts suggest inflation, but persistent unemployment and lack of consumer demand for discretionary "stuff" is deflationary.

At this point no one really knows which economic force will win, but at this point I think deflation is the more pressing concern because it would increase the debt in real terms even more rapidly -- and because it points to continued distress in the demand (and employment) aspects of the economy.

 

[REWahoo]

... my interest to go "all cash" is prompted by all the bad news I read and hear about the future of the U.S. & world economy.

Here is an interesting perspective on that very subject from a new book "SONIC BOOM: Globalization at Mach Speed":

...just as favorable economic and social trends are likely to resume, many problems that have characterized recent decades are likely to get worse, too. Job instability, economic insecurity, a sense of turmoil, the fear that even when things seem good a hammer is about to fall—these are also part of the larger trend. As world economies become ever more linked by computers, job stress will become a 24/7 affair. Frequent shakeups in industries will cause increasing uncertainty. The horizon has never been brighter, but we may not feel particularly happy about it.

 

[calmloki]

Saw Network from 1976 the other day.
1976
Howard Beale: I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's work, banks are going bust, shopkeepers keep a gun under the counter. Punks are running wild in the street and there's nobody anywhere who seems to know what to do, and there's no end to it. We know the air is unfit to breathe and our food is unfit to eat, and we sit watching our TV's while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be. We know things are bad - worse than bad. They're crazy. It's like everything everywhere is going crazy, so we don't go out anymore. We sit in the house, and slowly the world we are living in is getting smaller, and all we say is, 'Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials and I won't say anything. Just leave us alone.' Well, I'm not gonna leave you alone. I want you to get mad! I don't want you to protest. I don't want you to riot - I don't want you to write to your congressman because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first you've got to get mad.
Howard Beale: [shouting] You've got to say, 'I'm a HUMAN BEING, Goddamnit! My life has VALUE!' So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell,
[shouting]

Diana Christensen: [flipping through the newspaper] You know, Barbara, the Arabs have decided to jack up the price of oil another 20%... uh, the CIA has been caught opening Senator Humphrey's mail... there's a civil war in Angola... another one in Beirut... the, uh, New York City's still facing default... they finally caught up with Patricia Hearst...

34 years ago

still alive.

 

[FIREd]

The way I see it is that there are two camps; the doom and gloom camp that thinks that all this deficit spending and national debt will bankrupt our economy and the other side that acts like this is a somewhat normal business cycle that will correct itself eventually. The market cannot price both predictions into itself.....

I think it depends on which camp ends up being right.

When the market crashed last year, the market seemed to be caught completely off guard evidenced the fact that it fell so far, so quickly.

I'm sure that in time, things will be fine but at 51 with hopes for an early retirement, I'm not sure I can wait that long. If only my crystal ball were not on the fritz!

I believe that the truth probably lies somewhere between the 2 extremes. I believe that the US will end up looking more and more like Western Europe, i.e. slower growth, higher systemic unemployment and, on average, what feels like a stagnant or slightly lower standard of living. When I was growing up in Europe, I always felt like life was one long endless recession. Seen from an economist's perspective and based on the traditional definition of a recession, it certainly wasn't the case. But for a lot of people that's how it felt. When unemployment permanently hangs around 10%, losing your job becomes somewhat of a personal tragedy. It can take years before you can find another one (even in "good" times). So people tend to be very cautious. They watch their spending and don't take risks (like investing in the stock market or quit a job to start their own company). Not the end of the world, certainly, but probably not "back to business as usual" either. I am far more worried about the future in Europe personally. European countries will have to clamp down on government spending to rein in their already large deficits. However, government spending represents an important part of the economy in many, less liberal European economies. So, cuts in government spending will be felt very strongly there and it could have a destabilizing effect.

 

[Jay_Gatsby]

I thought that we have too much in cash (~26%).

Shrug. Much of that cash was accumulated before the March 2009 crash. If I had invested it before that date, I would have lost a substantial amount. That said, I should have invested it between March 2009 and September 2009. Had I done so, I would be up ~60%+

Live and learn. These days, I'm dribbling in money every week when there are pullbacks.

 

[Dave J]

I guess I'm one of the rare ones on here who posts that is in all cash.
( I feel there are many like me, just not participating in this forum and thread).
I 80% retired 10 years ago at 47, and 100 % retired a year ago at 56.
I was probably 85% stocks until 1997 then started ramping down stocks and increasing cash to 90% cash in 2001 and went all cash about 2005.
I have my dollars split between 15% I-Bonds, 10% cash value in a 401k, and the balance in different CD's at PenFed, two other local credit unions, and two different local banks.Since going all cash,I have been able to average 5.25% return until the last 6 months when my I-Bonds had a 6 month 0% return, and will return to about a 4.80% return in April.It will continue to go lower as my higher % CD's mature and I replace them with lower ones.I do believe in the next year or two rates will increase a lot from current(as will inflation)
I have been able to keep all my dollar amounts under the amount covered by CUNA or FDIC insurance.
We will have on IRA at PenFed that goes over the 250k level for about a year and a half until some 6.25% CD's mature and I will transfer some of it.
My SO has a small pension that started 2 years ago.
We have always lived below our means, so we are still able to save some each year, and SS doesn't start for another 5 to 10 years.It helped a lot we were debt free at 38 years old including home.We were able to enjoy some of the stock market gains, and we were able to lock in most of those gains(not all).
I had read some articles in the middle 90's that told of the risk if you retired and had a big market downturn early in your retirement followed by flat markets for a few years. My gut told me to do it, and I missed almost all of the big losses some experienced.
I know I'm am taking a risk in all cash,but our lifestyle and reserves make it seem to work for us.I have tried to look at all the angles for us, and this seems to work. I sleep very well at night.

YMMV from me.

 

[haha]

Live and learn.

Actually, when it comes to the stock market few of us will even live long enough to learn anything of value. Mostly what we "learn" is what happened last time around, and like generals fighting the last war, we mistakenly apply the lesson to current but necessarily different conditions. From about 1995 to 1999 it was very smart to learn to buy the dips. From Late 2007 through February of 2009 it was a really bad idea to buy the dips. Sure, they were dips, just the wrong dips. Smart investors buy the right dips.

The way many people feel and post about recent history is very much conditioned on what is happening at the time they post or comment. " Oh, if I had only loaded up last March" will be posted when the market has been going up strongly. If it starts going down, like recently (prior to the last few days) we post about all the risk out there and how the end is near.

I believe that reality is that the situation is always ambiguous and unless we are willing to make hard and fast and unvarying rules which few of us are emotionally able to do, we will always be blown around by whatever is going on at the time that we are making decisions.

Ha

 

[Onward]

I believe that reality is that the situation is always ambiguous and unless we are willing to make hard and fast and unvarying rules which few of us are emotionally able to do, we will always be blown around by whatever is going on at the time that we are making decisions.

Agree 100%.

 

[Lsbcal]

I think that I will take the suggestion to read "Four Pillars" as my interest to go "all cash" is prompted by all the bad news I read and hear about the future of the U.S. & world economy. As "Novaman" expressed, the markets seem to be gyrating based on market manipulation by the various federal stimulus programs rather than normal corporate growth. Seem like our society is going through a fundamental shift in it's desire to consume and that it could forever change the growth track of companies. I know the experts of the world suggest ignoring the "noise" of the media but for the life of me, I don't see a way out of all this deficit spending, debt and unfunded liability mess other than masssive growth in the private sector. Yet, consumers, the private sector, don't seem to be reacting accordingly.
That said, and based on reading the replies to my OP, I guess cash would only make things worse. I feel like my options are cash or roll the dice that things will return to the way they use to be. BTW - I'm currently 60/40 (stocks/bonds) at 51 Years old. -Cataman

Instead of Bernstein's Four Pillars you might want to first read Bernstein's more recent book The Investor's Manifesto. See this link (posts on Feb 16th) for more info on the book: http://www.early-retirement.org/forums/f29/what-have-you-read-recently-43066-18.html

 

[rockyj]

Currently about 10% cash and 90% equities. I view my pension which starts in 2 1/2 years as a fixed income stream. Hence don't think I need a fixed income allocation. What does the board think of this idea? Haven't read much in the literature about this idea.

I agree with you. If your pension covers all your income needs then 90% equities is probably quite reasonable if you are happy enough with the swings in the market.

I agree in general with Alan, in that it depends on the proportion of your retirement income needs that you expect to be getting from your pension. If your pension is secure, COLA'd and has your expenses pretty well covered, than you can do whatever you want on the portfolio side with little repercussion for your lifestyle. Swing for the fences for your heirs, charities, whatever. But if you will be relying on your portfolio to generate a significant part of your necessary living expenses, I would think you might want to lessen the volatility on the investment mix. I think a good way to look at it is to determine what kind of income stream you will need your portfolio to kick off (after accounting for pension), and then adjusting your portfolio mix accordingly for your lifestyle and risk tolerance for that portion of your income. Also, if your pension is non-cola'd, then your portfolio will be called upon to carry a ever increasing portion of the burden going forward, and you'll need to think about how much growth you'd like versus how much volatility would be acceptable for that ever-growing need. Early in accumulation I too considered my pension as a "bond like" part of my portfolio, and put pretty much everything else into equities. But as I get closer to seriously considering an early retirement, I am better able to quantify the additional income I will *need* from the portfolio, over and above an early-out non-cola'd pension and, especially after the last couple of years of volatility in the market, I think a 90% equity allocation on the portfolio side is more risk than I'll want to carry once I'm ready to start withdrawals. Just another way of looking at it.

 

[floatingdoc]

I have elected a 100% cash portfolio after considering all the options. I will take my gauranteed current 3.5% yield knowing that inflation will likely result in a rise in interest rates which will only increase my yield and hurt equities. I can make up for any "market loss" by saving more. I plan to retire in 7 years with a portfolio close to 2 million. I am half way there now and plan to save north of 100k annually at 0 risk aside from "inflation".

 

[haha]

I have elected a 100% cash portfolio after considering all the options. I will take my gauranteed current 3.5% yield knowing that inflation will likely result in a rise in interest rates which will only increase my yield and hurt equities. I can make up for any "market loss" by saving more. I plan to retire in 7 years with a portfolio close to 2 million. I am half way there now and plan to save north of 100k annually at 0 risk aside from "inflation".

This is interesting, Where do you find a 3.5% yield on cash?

Ha

 

[floatingdoc]

igobanking.com 3.55% 5 year, break cd 6 month penalty when rates go up far enough
pen fed 3.50% 5 year

 

[Purron]

This is interesting, Where do you find a 3.5% yield on cash?

Ha

Here are a few I've found.

Federal TSP G Fund: 3.48%
Pentagon Federal Credit Union 5 year certificate: 3.5%
Apple Federal Credit Union 5 year certificate: 3.5%

 

[Alan]

igobanking.com 3.55% 5 year, break cd 6 month penalty when rates go up far enough
pen fed 3.50% 5 year

Do you have your $1M spread only between these 2 or do you have other banks you use others to avoid the risk as you are well over the FDIC limits?

 

[floatingdoc]

I have 9 cd's for 82k each (I am under 100k in each case). Each cd in wifes name with a different beneficiary. 4 different banks (penfed, ally, Igobanking.com, hudson city savings bank) yielding 3.50, 3.15, 3.40, 3.55. and 180K in an IRA plus 50k emergency in ally high yield savings.

This protects me from lawsuits (but not divorce) and keeps me under the old 100k limit.

first cd's to break when rates change are ally as they only have a 2 month penalty for early withdrawal, thus I think they price their cd a little lower than the competition knowing they can lure folks anyway

 

[Alan]

I have 9 cd's for 82k each (I am under 100k in each case). Each cd in wifes name with a different beneficiary. 4 different banks (penfed, ally, Igobanking.com, hudson city savings bank) yielding 3.50, 3.15, 3.40, 3.55. and 180K in an IRA plus 50k emergency in ally high yield savings.

This protects me from lawsuits (but not divorce) and keeps me under the old 100k limit.

first cd's to break when rates change are ally as they only have a 2 month penalty for early withdrawal, thus I think they price their cd a little lower than the competition knowing they can lure folks anyway

Pretty good - thanks for sharing the details. Excuse my ignorance, but if one has several CD's from the same bank in the same name are they each covered by the FDIC or does the FDIC limit cover the sum of all your CD's?

 

[Purron]

Pretty good - thanks for sharing the details. Excuse my ignorance, but if one has several CD's from the same bank in the same name are they each covered by the FDIC or does the FDIC limit cover the sum of all your CD's?

Here's a link to the FDIC site:

FDIC: Your Insured Deposits

They apply to limit to each "ownership category". Joint account with spouse gets $500,000 coverage ($250,000 each). Husband and wife can each have single accounts with $250,000 in total coverage. IRA accounts are insured seperate. Then you can have accounts joint with qualified family members to get even more coverage.

Floatingdoc's wise to keep under the old $100,000 limit with longer terms since there's no guarantee the $250,000 will remain.

 

[Alan]

Here's a link to the FDIC site:

FDIC: Your Insured Deposits

They apply to limit to each "ownership category". Joint account with spouse gets $500,000 coverage ($250,000 each). Husband and wife can each have single accounts with $250,000 in total coverage. IRA accounts are insured seperate. Then you can have accounts joint with qualified family members to get even more coverage.

Floatingdoc's wise to keep under the old $100,000 limit with longer terms since there's no guarantee the $250,000 will remain.

Thanks for the link and explanation. I know I'm probably still being dumb, but I'm not convinced that multiple CD's in my name are considered to be different ownership categories for each CD. If a bank went under and I had 5 CD's in my name each worth $100K would I be insured for $250K or $500K?

 

[Purron]

Thanks for the link and explanation. I know I'm probably still being dumb, but I'm not convinced that multiple CD's in my name are considered to be different ownership categories for each CD. If a bank went under and I had 5 CD's in my name each worth $100K would I be insured for $250K or $500K?

Your right. All CDs and accounts in your name only are grouped together and insured up to $250,000 (note: old limit of $100,000 is scheduled kick back in on 1-1-2014). However, all accounts joint with your spouse are grouped together and insured up to $500,000 ($250,000 each). Your wife's accounts are grouped together and insured up to $250,000. So, just between the two of you, your single and joint accounts will be insured up to $1,000,000 in the same bank. Any IRA accounts you have are insured seperate. You can also extend the coverage by having accounts joint with qualified relatives like children. Look at the example the FDIC gives here:

FDIC: Your Insured Deposits

 

[REWahoo]

Alan, in addition to the earlier link, here is an FDIC insurance coverage estimator that will let you run "what if" scenarios: http://www2.fdic.gov/edie/

 

[Alan]

Your right. All CDs and accounts in your name only are grouped together and insured up to $250,000 (note: old limit of $100,000 is scheduled kick back in on 1-1-2014). However, all accounts joint with your spouse are grouped together and insured up to $500,000 ($250,000 each). Your wife's accounts are grouped together and insured up to $250,000. So, just between the two of you, your single and joint accounts will be insured up to $1,000,000 in the same bank. Any IRA accounts you have are insured seperate. You can also extend the coverage by having accounts joint with qualified relatives like children. Look at the example the FDIC gives here:

FDIC: Your Insured Deposits

Alan, in addition to the earlier link, here is an FDIC insurance coverage estimator that will let you run "what if" scenarios: http://www2.fdic.gov/edie/

Excellent - thanks guys

 

[floatingdoc]

Your right. All CDs and accounts in your name only are grouped together and insured up to $250,000 (note: old limit of $100,000 is scheduled kick back in on 1-1-2014). However, all accounts joint with your spouse are grouped together and insured up to $500,000 ($250,000 each). Your wife's accounts are grouped together and insured up to $250,000. So, just between the two of you, your single and joint accounts will be insured up to $1,000,000 in the same bank. Any IRA accounts you have are insured seperate. You can also extend the coverage by having accounts joint with qualified relatives like children. Look at the example the FDIC gives here:

FDIC: Your Insured Deposits

I don't think it has to be "qualified relatives". What is "qualified". Really, if it is a different category of ownership such as in trust for (itf) or payable on death (POD) then it is insured

Wife POD husband
Wife POD brother
Wife POD sister in law
Wife POD brother in law etc.

As for me, I trust the payables (in my case, my sisters) so I am not worried.

 

[haha]

Thanks for the lists.

 

[smjsl]

Thank you floatingdoc for the info. I've heard about 4% 5-year CDs in other threads but can't find them (maybe penfed had them but no longer?). I've been looking at CD rates today and they are not looking good at all. igobanking dropped their rate compared to when you opened it. Looks like penfed still has theirs at 3.5% with 180-day-interest breakup fee - does anyone know how to join there easily?

Also, if someone knows of other good CDs / money-markets / etc, please post. I've been at Alliant for their 2% savings for a while now and almost hitting the FDIC insurance with them with my CD + savings account there. My CD is a POD account. I wonder if I drop POD from savings and just leave it without POD, I might effectively increase my coverage (where only savings account would now be up to 250k and CD would be insured separately due to POD). I am single and child-less, so can't do the spouse thing for increasing the FDIC limits. Do others have same understanding of POD-related coverage rules? (that's how I am reading http://www.fdic.gov/deposit/deposits/insured/faq.html but a confirmation is always nice )