opinions on new way of viewing cash allocation?

[joesxm3]

With things looking like they may get worse based on today's FOMC press conference comments, I decided to look at things based on allocating four year's worth of expenses into a "cash reserve" bucket.

What I was trying to come to grip with was a realistic view of how much "dry powder" I had on hand to deploy if the market takes a large dip from here. I think that lumping all my cash together was giving an unrealistic view since I could not deploy it all unless I was willing to sell equities to fund living expenses.

Thinking as I type, I probably should also include projected taxes on ROTH conversions as cutting into my "dry powder" stash.

So, basically, I took my total portfolio value and subtracted the four years of expenses to give my "investable portfolio". When I calculate things like my percentage of equities, it would be percentage of the investable portfolio.

Thinking about it this way, my current 30% equities looks more like 35% and my huge pile of dry powder cash is quite a bit less than I had been picturing it as.

Do you think this way of looking at things makes sense?

 

[RobbieB]

I can't make sense of anything you said.

 

[joesxm3]

Maybe saying it differently will help.

If you are keeping several years expenses in cash to avoid having to sell equities to pay living expenses, does it make sense to exclude that money from what you consider to be your investment portfolio?

Excluding the segregated living expenses will increase the nominal percentage of each of your allocations. For example, assume you have $1,000,000 and thought you were 60% equities because you had $600,000 of stock. If you carve off $200,000 for living expenses, you now are 75% equities rather than 60%.

I suppose this is just semantics and maybe a variation on the question of whether to include the present value of future pension income in your fixed income allocation percentage.

 

[RobbieB]

Well some people do the triple state AA; Equities/bonds/cash.

I've been funding off of equities since I retired. No pension and survivor SS (less than half) of when I claim.

Yeah, I don't like to sell equites when the price is low either and haven't had to yet. But the times they are a changing.

 

[Aerides]

If you have an amount money targeted for potential investments, yes, for the purposes of putting stuff in buckets or columns, that's different than money specifically earmarked for expenses. Whatever you want to call each is up to you.

I think that's what you're asking?

 

[joesxm3]

If you have an amount money targeted for potential investments, yes, for the purposes of putting stuff in buckets or columns, that's different than money specifically earmarked for expenses. Whatever you want to call each is up to you.

I think that's what you're asking?

That is more or less what I was thinking.

I guess the confusion might be due to apples versus oranges thinking.

When you say you have a 60/30/10 equity/bond/cash allocation, that is more for the purpose of the retirement calculator.

When I was thinking about splitting my cash into "expenses" and "investment", maybe the cash I plan to invest might be better thought of as the not-yet-deployed portion of the equity allocation.

 

[Dash man]

Our keeping at least five years in safe investments is because we wanted to be ready for a tough equity market. We will use dividends from the equities and interest from bonds and CDs, and principal from maturing bonds and CDs to fund our living expenses. If this lasts longer than five years, we’ll likely still be better off than many.

 

[USGrant1962]

...
If you are keeping several years expenses in cash to avoid having to sell equities to pay living expenses, does it make sense to exclude that money from what you consider to be your investment portfolio?
...

I don't think so. Your "several years expenses in cash" is just part of the fixed income portion in your AA. If you use your withdrawals to rebalance, when equities are down you will automatically take money from the FI side - and can choose to take that from your cash reserve if you wish. There is no advantage in separating your cash from your notional fixed income allocation.

Bigger picture, think about what happens when equities are no longer down - you presumably refill your cash bucket from where? Your portfolio, right? Your portfolio and any cash reserve are inseparable - other than mentally.

 

[Major Tom]

If you need to sell equities when they are low, I don't see that as too much of a problem. It's not as if you are selling a large fraction of them. I only sell around 2.5% of my equities each year. Over the long term, you'll be selling far more equities in up markets than down markets.

I do keep a year or two's worth of expenses in cash, but will most likely keep selling equities in down markets, to keep the cash kitty funded. I trust that it will all come out in the wash, so to speak or, as Mr Grainger used to say, "It will ride up with wear".

 

[W2R]

If you are keeping several years expenses in cash to avoid having to sell equities to pay living expenses, does it make sense to exclude that money from what you consider to be your investment portfolio?

I think that can make sense for some of us.

Most of my cash is at Vanguard, and I consider it to be part of my portfolio.

However, I also keep enough cash to cover about two years of living expenses in a bank, instead of at Vanguard. I know that's a lot of cash but I like having it handy, I can afford the lower returns on that much, and it's my money so why not. I do NOT consider this to be part of my portfolio.

The cash in the bank was originally earmarked for buying a new SUV (~7 years ago), but I decided not to do that. I left it in the bank, figuring I'd use it for expenses, but with SS and mini-pension it never gets spent. That's fine with me and I do regard it as "fair game" if there's anything I want to buy. I like knowing that it's there. If I ever decide to buy that new SUV, I'll spend it on that.

 

[audreyh1]

Our fixed income portion of our investment portfolio already covers X years of expenses.

We also have funds in a separate account for short term expenses. We add to this every year when we do our annual withdrawal from our investment portfolio.

 

[yakers]

I calculate my AA as stocks/bonds/cash, my cash I calculate in various locations, reported parts of managed funds like Wellsley & Wellington & others, the cash held in IRA, the cash in investment accounts at WF & VG and the funds in my TSP G Fund. Much but not all of these are easily convertable to investments (I can change out the G Fund to other funds like the C Fund (S&P500)) and in the IRA & VG investmment account. Also have ibond funds I regard as cash, can redeem the first batch this year if there was anything I want more than Ibonds right now (very happy with the $ I have there). So cash is not all paper under the matress but is still part of my AA and some will be redeployed to equities when I feel ready and I plan to move my AA from 56/27/17 (EOY 2021) more towards 60/40. No hurry, AA probably slipped below 56% equities and that is no issue right now. VERY slowley adding to equities.

 

[disneysteve]

Cash is part of our AA. No different than stocks and bonds. It all goes into the mix. It doesn’t matter what the intended purpose of the cash is. I wouldn’t artificially boost our stock allocation number by not counting our cash. That would make us seem much more aggressively positioned than we are.

 

[RetireBy90]

I do what I think you are talking about. I have a checking account with cash at Wells to fund living expenses and investments at Fido. When I re-balance it is my investments not counting checking account. The cash at Wells can be a year or several years, if I keep it constant refilling all the time to hit 3 year of expenses then it just becomes another bucket in the AA, and I must sell stocks to fill it again and keep AA in check.

 

[FLSUnFIRE]

Cash is cash. I wouldn't try to time the market (plenty of threads on that) but keeping "dry powder" with the intent to reinvest it when the market is at bottom is market timing (and if you can reliably do that you are already a trillionaire and just toying with us). If you are keeping 4 years cash due to uncertainty you are effectively increasing the cash/fixed income portion of your portfolio. 4 years at 4% is an additional 16% of fixed/cash so if the rest was 60/40 you would be ~44/56 and if so I would calculate your SWR through that lens.


Personally, with cash earning negative real returns* and little optimism inflation will decline quickly I have no desire to have anymore cash than I absolutely need! I am even buying some non-perishable/future needs now rather than wait.



*or maybe breaking even (if in iBonds/TIPS and your personal expense inflation rate is equal to the official numbers mine isn't, most of my expenses are going up much more than the official rates I'm hearing)

 

[pjigar]

Withdraw what you need regardless of the market. There are several studies which proves that keeping any kind (constant, refill at certain market limits, etc.) cash buffer is detrimental to the portfolio returns. Withdrawing in down market is painful. Many people keep cash to avoid this pain and sacrifice total returns. No pain, No gain. Pun intended.


PS: Keeping cash for market timing is a toss up.

 

[target2019]

With things looking like they may get worse based on today's FOMC press conference comments, I decided to look at things based on allocating four year's worth of expenses into a "cash reserve" bucket.

What I was trying to come to grip with was a realistic view of how much "dry powder" I had on hand to deploy if the market takes a large dip from here. I think that lumping all my cash together was giving an unrealistic view since I could not deploy it all unless I was willing to sell equities to fund living expenses.

Thinking as I type, I probably should also include projected taxes on ROTH conversions as cutting into my "dry powder" stash.

So, basically, I took my total portfolio value and subtracted the four years of expenses to give my "investable portfolio". When I calculate things like my percentage of equities, it would be percentage of the investable portfolio.

Thinking about it this way, my current 30% equities looks more like 35% and my huge pile of dry powder cash is quite a bit less than I had been picturing it as.

Do you think this way of looking at things makes sense?

It's truly your choice how you want to calculate these things.

We/I add up the amount of all cash at the end of each month and keep track. In our case it is currently 9.6 percent. What can be accessed today through ATM or bill pay is 2.5% - I label that uninvested cash.

But I don't have hard numbers, and just keep an eye on balances, as I do not want that last cash number to get larger.

Your view is to increase the percentage of equities on paper. Our view is to monitor a percentage of uninvested and invested cash. Both systems work. in my opinion.

 

[ERD50]

I didn't see this mentioned, but the whole question/statement is built on an (almost 100%) false premise...

.... all unless I was willing to sell equities to fund living expenses.
....
Thinking about it this way, my current 30% equities looks more like 35% ....

First off (and I think this was mentioned) , mainlining a set AA may mean selling equities from time to time, but most likely while they are high (to rebalance). So what are you trying to avoid? It's just a part of living off a portfolio (unless you decide to only take divs/interest, and never touch principal, which typically requires a bigger stash).

Secondly, with a 30/70 AA, you are extremely unlikely to ever need to sell stocks while they are down. When stocks are down, you draw from fixed to rebalance. Plus, you have divs covering at least some of your spending needs.

I think the whole thing is just complicating the view of living off a portfolio at a reasonably conservative WR. An added note, a 30/70 AA is below the point which had an increase in failures historically. A slightly higher AA has provided some boost to get through bad times. And since history tends to "rhyme" rather than repeat, I'd want to be a little further away from that edge, IMO a 45/55 is as low as one should go or they are moving away from one 'risk' (volatility) to another (failure!).

Here's an output from FIRECalc of the historical AA vs portfolio success.


-ERD50

 

[Gumby]

I consider all of my money to be my portfolio. Some of it is in stocks, some in bonds and some in cash.

 

[MarieIG]

A rose by any other name . . .

That said, I bucket up a storm, and do have "dry powder" and "operating cash" the latter of which includes money for taxes.

I am thinking of doing a larger Roth conversion this year, which would result in me paying more taxes out of one of my cash accounts.

 

[MichaelB]

A rose by any other name . . .

This ..

Asset allocation is a way to inform the level of risk in a portfolio. By withdrawing and segregating future expenses you automatically reduce the overall risk of the remaining portfolio, so even when equity allocation rises from 30% to 35%, the risk profile may not have changed at all. What matters it the total, overall risk you face.

Early into my retirement I kept some funds separate (future budgets and some select one time large expenses) but found it was too much work to be constantly reconciling and now just look at one total.

 

[Aerides]

That is more or less what I was thinking.

I guess the confusion might be due to apples versus oranges thinking.

When you say you have a 60/30/10 equity/bond/cash allocation, that is more for the purpose of the retirement calculator.

When I was thinking about splitting my cash into "expenses" and "investment", maybe the cash I plan to invest might be better thought of as the not-yet-deployed portion of the equity allocation.

Ah then no. If you have cash that is earmarked as "potential investment" then for your allocation, it's still cash. Allocations make calculators factor out expected growth and risk - and side-table-cash is still cash in that scenario. If you eventually move it from cash to equities, the then AA changes again. But cash is cash when it comes to calculators. They don't care about intra-cash buckets.

 

[joesxm3]

Thanks for taking the time to post all the interesting responses.

Taking everything into account, I decided to restore my spreadsheet from the day before and continue with the way I have been tracking things for years.

It is indeed just semantics and what tipped me to going back was that it seemed better to keep my percentages using the same calculation method for the purpose of comparing to past time periods.

I will still have to factor in the need to take living expenses out of the cash allocation, but should be able to do that on an ad hoc basis.

Thanks again for taking the time to respond.

 

[Gazingus]

If you need to sell equities when they are low, I don't see that as too much of a problem. It's not as if you are selling a large fraction of them. I only sell around 2.5% of my equities each year. Over the long term, you'll be selling far more equities in up markets than down markets.

I do keep a year or two's worth of expenses in cash, but will most likely keep selling equities in down markets, to keep the cash kitty funded. I trust that it will all come out in the wash, so to speak or, as Mr Grainger used to say, "It will ride up with wear".

Ditto

 

[RobbieB]

Haven't had to do that yet, but January will tell. The deed will be done, the amount yet to be determined.