This probably deserves its own thread, but once an AA is established ( based on long term wants and needs) it is very unwise to shift based on "market conditions". Reacting to market conditions usually results in one possibly making moves that doesn't allow an investor to reach log term goals.
Anybody doing five years of cash the rest in stocks or anything like that?
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This probably deserves its own thread, but once an AA is established ( based on long term wants and needs) it is very unwise to shift based on "market conditions". Reacting to market conditions usually results in one possibly making moves that doesn't allow an investor to reach log term goals.
The answer will vary depending on tax brackets and such, but I backtested a 5 year cash cushion that would be used in market downturns and replenished in upturns. Up to 25 years duration, it offered some downside protection. After that, having so much out of the market overwhelmed any benefit and it was worse on the average, maximum and minimum cases.
In spite of the math saying I shouldn't need to, I do keep 2 years expenses in cash, 5 years in bonds and the rest in stocks. As I near SS age, I can draw down the amounts and keep the same "years" of reserve.
In spite of the math saying I shouldn't need to, I do keep 2 years expenses in cash, 5 years in bonds and the rest in stocks. As I near SS age, I can draw down the amounts and keep the same "years" of reserve.
FANOFJESUS
Thinks s/he gets paid by the post
I should have said to keep 5 years of needs in cash not wants. No travel, ect.
This may or may not be relevant to the OP's question but given the current unprecedented low interest rate environment I think there's a good argument to be made for having safe cash - in the form of 1-3 year CD's, iBonds, T-bills or Treasury MM accounts in lieu of short or intermediate-term bonds. This post on why even ST Treasury ETFs and funds aren't worth it is a good one:
https://seekingalpha.com/article/4376259-short-term-treasury-etfs-no-longer-make-investment-sense
Former WSJ finance columnist Jonathan Clements has been writing about this situation frequently this year and I find his argument that high-quality (Treasury only) short-duration bonds or MM funds for ballast (and not return) are the best option in the world that the Fed has made quite compelling.
https://seekingalpha.com/article/4376259-short-term-treasury-etfs-no-longer-make-investment-sense
Former WSJ finance columnist Jonathan Clements has been writing about this situation frequently this year and I find his argument that high-quality (Treasury only) short-duration bonds or MM funds for ballast (and not return) are the best option in the world that the Fed has made quite compelling.
Chuckanut
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I guess the issue is what percentage of the portfolio is the 5 years of cash? If it's or 20 percent or less, then I would be OK with that. If it was 50 percent or more, I think the long term loss of growth would be a significant negative for most of us. In between? That's up to you and your risk tolerance.
I do recall reading an article many years ago that favored a stock/cash ratio of 80%/20%. No bonds. Cash meant Federally insured deposit accounts of some type. Stocks were a US Total Market Index funds, though I think one could slip in an international index in to the stock's 80%.
I do recall reading an article many years ago that favored a stock/cash ratio of 80%/20%. No bonds. Cash meant Federally insured deposit accounts of some type. Stocks were a US Total Market Index funds, though I think one could slip in an international index in to the stock's 80%.
Chuckanut
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I tend to agree. I have ditched all my bond funds except for a short-term fund and whatever bonds are in Vanguard Wellesley (which is 65% of that fund).
+1.
While I'm an indexer at heart, I decided some time ago to make a large exception for Wellesley. In a sense I view paying the .16% ER for W Admiral Shares as a cheapskate's way of hiring an FA, except that I'm benefitting from the expertise of a really broad and deep bench at Wellington Management.
With Wellesley for nearly half of my total portfolio I figure I have all of the intermediate-term bond and value equity exposure I could want and then some, so the other half of my allocation is plain vanilla U.S.Total Stock/Total International (60% total) and the rest in Treasury MM and iBonds. I look forward to the day when I feel comfortable getting back into short/intermediate Treasuries but it doesn't look like that'll happen in the next few years.
I kind of wish I had a real investor's nerves of steel. Clements keeps it simple: barely over 20% (but more than 5 year's living expense) in short-term Treasuries and everything else in equities:
https://humbledollar.com/money-guide/my-story-how-i-position-my-portfolio/
We have a lot of cash both in tax deferred and taxable accounts. We are living on it until we can collect SS at age 70. No monthly pensions.
It is part of our AA. We have some I bonds and bond funds as well. And then, of course, stock mutual funds and ETFs. But we have more in cash and bonds than stock funds.
Basically we retired this year- January- (well- I actually left my job in 2018, but hubby in January, 2020) and moved out of state and with the COVID and the election we have been sitting on the sidelines for the most part instead of investing.
It is part of our AA. We have some I bonds and bond funds as well. And then, of course, stock mutual funds and ETFs. But we have more in cash and bonds than stock funds.
Basically we retired this year- January- (well- I actually left my job in 2018, but hubby in January, 2020) and moved out of state and with the COVID and the election we have been sitting on the sidelines for the most part instead of investing.
We bought 5 CDs(1 maturing each year) when I retired, to meet our expenses over and above SS the first 5 years. In year 6 we have lifetime annuities beginning, so between SS and the annuities all of our expenses will be covered. The goal was to make it so that we would not have to withdraw from our investment portfolio for living expenses for at least the first 10 years of retirement. This plan relieved my anxieties about portfolio returns - and freed me up to enjoy retirement knowing that our full living expenses are covered (no matter what the markets do).
mickeyd
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I hope that this guy is not your FA.
FANOFJESUS
Thinks s/he gets paid by the post
No I was just looking at different investing ideas and I don't like bonds right now.
jollystomper
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This reminds me of the threads earlier this year, when the markets were down, of folks saying the heck with AA, I'm getting out of the market and into cash. On this site it really surprised me. So much for risk tolerance. I guess it is easy to have minimal cash when the markets are going up
.I know it's come up before. It's call tactical asset allocation.
https://www.thebalance.com/what-is-tactical-asset-allocation-2466851
That article definitely makes sense from a practical point of view. However, I think human nature and emotions usually take over and when stocks do go down significantly most don't increase their stock exposure ( which is where TAA makes sense and has its intent) but rather they decrease their stock holdings as they "wait for clarity" or "things to calm down".
Almost There 2021
Dryer sheet aficionado
I normally don't keep that much in cash but in lieu of the new administration I feel more comfortable having enough cash until I begin to get a better view of the business/investment policies. Presently I feel there has not been any transparency. Until then I will stay mostly on the sidelines.
This comment is not a "market" call. Only a "comfort" call.
This comment is not a "market" call. Only a "comfort" call.
jlcollinsnh proposed something similar here (in this case, it's 3 years in cash and the rest in stocks): https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/
You can read it, plus the comments, and evaluate the logic for yourself. I think it may help to provide a sounding board for your own thoughts, even if the proportions are a little bit different.
Personally, I'm not sold on that approach, but somebody in a different life stage may want to consider something like what you're proposing here, or what Jim Collins suggests in the link above.
You can read it, plus the comments, and evaluate the logic for yourself. I think it may help to provide a sounding board for your own thoughts, even if the proportions are a little bit different.
Personally, I'm not sold on that approach, but somebody in a different life stage may want to consider something like what you're proposing here, or what Jim Collins suggests in the link above.
BrianB
Recycles dryer sheets
Our plan is slowly moving that way. In January 2018 we were 80/15/5. Now we are 80/7/13.
Stock share prices have appreciated and kept that percentage flat. Maturing bonds & all dividends into cash have increased our cash level while reducing our bond level. Right now the only bonds and fixed income we own are in Wellesley, Puritan, and Fidelity FFNOX.
With a WR under 3.5% the cash is enough for four years. If the SHTF we can start our second SS, cut back, and make the cash last for 8-10 years. If I get run over by a beer truck then DW will have a long time before she has to make any moves with the portfolio.
Brian
Stock share prices have appreciated and kept that percentage flat. Maturing bonds & all dividends into cash have increased our cash level while reducing our bond level. Right now the only bonds and fixed income we own are in Wellesley, Puritan, and Fidelity FFNOX.
With a WR under 3.5% the cash is enough for four years. If the SHTF we can start our second SS, cut back, and make the cash last for 8-10 years. If I get run over by a beer truck then DW will have a long time before she has to make any moves with the portfolio.
Brian
That's a great article. I remember reading it years ago. I have to laugh at the commentators who try to rebut the strategy with references to "too much debt" and how the market is "overvalued". Been hearing comments like that literally since 1988. The bottom line is that is you have a 40,30, 20 or maybe even 15 year time horizon the stock market , with all the volatility, is the best liquid asset class to invest in.
24601NoMore
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We were sitting on more than 5 years of expenses in "cash" (CDs, MMs and traditional Savings/Checking) back in March and were pretty darn glad that we were. And while the market HAS come back since then, it's come back under pretty unusual circumstances including unprecedented Fed pumping and spending that will likely cripple our country's economy for decades to come. That obviously doesn't always happen, and most of the time, does not happen. History is full of 10+ year periods of stocks being underwater or at best flat. That's something to be cognizant of when determining how much cash you want to hold, and how much risk you ultimately want to take with equities.
My ER strategy has been < 30% stocks..probably 25+% bonds. Rest in cash. Of course, I also am not wanting to leave big piles of $$ to my heirs, either. The $s we saved are for US to live off of. If there's $$ left at the end, we have a number of charities in addition to family in mind..but that's not what drives the portfolio and Asset Allocation decisions, either. In our case, it's all about minimizing risk while having "enough" - not just driving the number up as high as we can get it..because as we all saw in Mar/Apr of this year, stocks "take the stairs up, and the elevator down". And when the elevator heads south - it can do so very, very quickly. (Hopefully most here remember the multiple days per week of "circuit breakers" kicking in on 1,000 - 1,500 - 2,000 point drops back in ~April-May). And we are currently in a VERY over-priced market relative to historical averages. Whether that is justified or not is a subject for other threads
Perhaps the most valuable lesson I learned pre-ER is determining what YOU think of as "enough". If "enough" means funding your current expenses plus reasonable inflation, that's a good goal IMHO and what we chose to focus on. Of course to others, "enough" includes all sorts of fancy and opulent spending like first-class air travel, frequent trips to exotic locations, etc. Only you can determine the answer to what is "enough". But once "enough" is achieved, it makes sense to reduce risk, also.
Rick Ferri wrote an excellent paper some time back that said the "sweet spot" for those in ER is something like 35% equities, though YMMV based on personal willingness to take risk. Wise words, IMHO.
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RetireAge50
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We are keeping enough in cash (CD’s, stable value) to get us through until SS and pensions arrive. All of our expenses from now until death are covered by pensions, SS, and this “gap” cash.
Our AA is now 76% stocks and 24% cash. Later I expect it to go to 100% stocks.
Our AA is now 76% stocks and 24% cash. Later I expect it to go to 100% stocks.
Thanks FREE866! Two thoughts on the matter:
1. Arguably, those commentators may be right in the long term, at least if you view things through the lens of the Austrian School of economic theory. The 80s were an unusual economic time, with high interest rates and enormous growth stemming in large part from deregulation and tremendous government spending. Some argue that a fair amount of this growth comes from foolish and unsustainable federal policies.
Nobody who makes this argument could possibly know when the current debt-funded economic system will collapse under under the weight of a lack of investor confidence, but their point is that the current system is not sustainable indefinitely. And I think that's true, just like anything else under the sun--nothing lasts forever.
Now, the current system might continue to do well until 2050 or beyond. Who knows?! And, of course, nobody knows who will win and who will lose in the next economic system, either. Probably the best/most balanced summary that I've seen is here: https://www.lynalden.com/fraying-petrodollar-system/
2. It's said often that stocks are the best investment vehicle, but that's not necessarily accurate. I may be quibbling over a few tenths of a percent, but I've seen data on REITs going back as far as the mid 1990s (alas, I can't remember where). And depending on the start and end dates, REITs sometimes even outperform the S&P 500 over long periods!
And the correlation between stocks and real estate is moderate (~0.60, if memory serves), making REITs a solid, high-yield diversification tool.
I've spent some time looking into REITs in anticipation of putting some of my own money in one. For some reason, people seem to think they are riskier than stocks, but I can't figure out why that would be. They're less tax efficient because of federal regulations about dividends, but that would hardly matter in a tax-sheltered account like a 401k or an IRA. Maybe people are still shell-shocked from 2008 ¯\_(ツ)_/¯
Anyway, Paul Merriman writes about REITs in a pretty matter-of-fact manner for MarketWatch: https://paulmerriman.com/10-things-need-know-reits/
interesting...is there a REIT ETF?
just looked at a couple publicly traded ones...vornado and jbgs..theyve really gotten slammed this year though...
Yes. Had to look it up, because all I could remember was the Vanguard mutual fund ticker, VGSLX. The ETF equivalent is VNQ; ER of 0.12%. Fidelity is FREL; it's got an even lower expense ratio of 0.08%.
I should note here that I am still far from retirement--even ER--so I am worried about setting up a well-diversified asset allocation that I can stick with for the next 20+ years. I'm also worried more about growth & accumulation than about capital preservation, so if any particular asset class takes a beating next month, it doesn't bother me. In fact, I'll buy more
Regarding REITs, YMMV depending on where you're at in life. A retiree, or near-retiree, would be wise to be cautious with making REIT investments; maybe 5% or so if anything.
I'm personally considering a slightly larger proportion, because bonds are likely to be a huge drag on my portfolio for the foreseeable future.
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