traineeinvestor
Thinks s/he gets paid by the post
I plan on keeping at least two years worth of living costs in cash or near cash at all times. Anything above that is a war chest for any opportunities the market throws my way.
foxfirev5 said:I carry 5 years expenses in cash, CD's and stable value funds. I know it's a portfolio drag but I also have never lost sleep through the various downturns going back to '87. Sticking to 45/40/15 AA.
Depends on how much floor income you have from pensions/annuities/Soc Sec to begin with. If you have enough floor income to cover your projected annual spending, arguably you don't need any more than a typical emergency fund, standard recommendation used to be 3-6 months (longer for some since the 2008 meltdown?).
If your income comes entirely from your portfolio, 3 years seems to be a common recommendation from many sources, to avoid selling assets at/near a bottom. OTOH, while I'm not a proponent of the Lucia's (3) Buckets of Money approach, IIRC their short term bucket is 5-7 years. You can Google and read up on that if you like.
And if you're income sources are mixed, presumably something in between...
I wonder if there is some kind of analysis of the ideal amount of cash to hold? Even if your cash holdings are low enough that you have to occasionally sell at, or near, a bottom, the benefit of having that extra money in equities during up markets would be of benefit.
Until recently, I was holding about 4 years of living expenses in cash, but have now moved to having just 2 years in cash. With dividends, I can go for about 2 1/2 years before having to sell equities. My thinking is that I am not trying to completely avoid ever having to sell in a down market. I'd just like to steer clear of having to do it most of the time.
I scanned the paper. On a gut level, it's hard (for me) to accept the paper's conclusion. Even though the paper is obviously soundly done, on an emotional level I'm not sure I would or could be without a substantial cash reserve cushion. Maybe it comes down to that: one's comfort level or peace of mind.
I'll study the paper more closely, but it may still all come down to that peace-of-mind consideration.
Alex in Virginia
I carry 5 years expenses in cash, CD's and stable value funds. I know it's a portfolio drag but I also have never lost sleep through the various downturns going back to '87. Sticking to 45/40/15 AA.
Seems excessive.It would then seem that a 6-year cushion against being forced to sell stocks before the market has recovered is a reasonably good bet. Yes?
In theory if you did this you would have sold equities at a loss.Seems excessive. If you wait until the market recovers fully, you might as well have stayed in for the duration.
This is true, in my case I can go 10 yrs. because a pension, SS, 1/2 my dividends and interest provide over 80% of my income leaving only 20% to be replaced by cash.At the risk of repeating, I take it you have little or no floor income from pensions, annuities and/or Soc Security...makes a difference WRT the size of a cushion.
You're right, I didn't think that through very well did I. Post above edited, thanks.In theory if you did this you would have sold equities at a loss.
Originally Posted by Alex in Virginia
It would then seem that a 6-year cushion against being forced to sell stocks before the market has recovered is a reasonably good bet. Yes?
Seems excessive.
At the risk of repeating, I take it you have little or no floor income from pensions, annuities and/or Soc Security...makes a difference WRT the size of a cushion.
If the stock allocation in the portfolio is modest enough, I'm not convinced that any cushion at all is needed. Take a $1,000,000 portfolio evenly divided between stocks and bonds. After a 50% market drop in stocks, the portfolio would be $500,000 bonds and $250,000 stocks. This would trigger a rebalancing to get back to 50/50 stocks and bonds, resulting in selling $125,000 in bonds to purchase the same amount in stocks. That's a large enough net purchase of stocks that it would most likely exceed any sales required to fund retirement expenses. So a properly managed balanced portfolio would be a net purchaser of stocks during even severe bear markets and not need a cash cushion.
Of course all this changes if you are expecting a financial Armageddon where both stocks and bonds get hammered equally.
I think the buffer strategy in that paper was kind of strange, as we noted in the other thread:
"If the investment portfolio goes up the second year after going down the first year, the retiree takes the annual withdrawal from the investment portfolio, and also liquidates enough of the investment portfolio to bring the cash position back up to its original value."
So there is a big market crash, you live off your buffer for the year, and then the market goes back up a little without being close to fully recovered. You're supposed to take your yearly expenses plus at least another year to fill your cash buffer. I'd rather wait for a better recovery. That might make the buffer look a little better. And better than a constant portfolio percentage (other than 0%).
If the stock allocation in the portfolio is modest enough, I'm not convinced that any cushion at all is needed. Take a $1,000,000 portfolio evenly divided between stocks and bonds. After a 50% market drop in stocks, the portfolio would be $500,000 bonds and $250,000 stocks. This would trigger a rebalancing to get back to 50/50 stocks and bonds, resulting in selling $125,000 in bonds to purchase the same amount in stocks. That's a large enough net purchase of stocks that it would most likely exceed any sales required to fund retirement expenses. So a properly managed balanced portfolio would be a net purchaser of stocks during even severe bear markets and not need a cash cushion.
Of course all this changes if you are expecting a financial Armageddon where both stocks and bonds get hammered equally.
I think that any buffer strategy has to deal with the question "When do I refill the buffer?".
If I've got a three year buffer and I've used it up, but stocks have more-or-less recovered, do I jump in and sell enough stocks to refill my 3 year buffer? If not, what rule am I going to use?
I've never been able to figure out a rule that look substantially better than just regular rebalancing.
It's very possible your corporate bond funds fell signficantly in 2008. You would have to share the names of the funds for us to judge the length and severity of the downturn in your bond investments. However, the following chart comparing VBTLX (total bond index) and VTSAX (total stock market index) fails to support your (apparent) contention that a properly diversified balanced portfolio would have done worse in 2008 than a similar portfolio with a big cash cushion. In particular, you would not have been selling VBTLX at a loss. VBTLX started 2008 with a NAV well above its average NAV from 2006 and 2007 and stayed at or above this average except for a minor dip in October and November. If you had withdrawn enough on the first of each month to pay for that month's living expenses, you would have been selling VBTLX at or above its average NAV every single month of 2008 except for October and November. That hardly constitutes the catastrophic fire sale of depreciated assets that you seem to fear.As I recall my Corporate bond funds fell in 2008 and without cash I would have sold at a loss. Just curious, are you retired?
$100K liquid helps me sleep at night.
As mentioned a few times before in other threads, I have nearly 100% of my investments in CDs, munis or equivalent. I only started to buy deferred annuities in the last few months. I will learn more about equities when I FIRE.
It's very possible your corporate bond funds fell signficantly in 2008. You would have to share the names of the funds for us to judge the length and severity of the downturn in your bond investments.
However, the following chart comparing VBTLX (total bond index) and VTSAX (total stock market index) fails to support your (apparent) contention that a properly diversified balanced portfolio would have done worse in 2008 than a similar portfolio with a big cash cushion.
That hardly constitutes the catastrophic fire sale of depreciated assets that you seem to fear.
That and my Teddy bear.There is no doubt that having a multi-year cash cushion is psychologically comforting.
Congratulations! Good Luck.I will be retiring next month.
I admit that having a pension that pays the majority of our month-to-month expenses may make me more willing than most to forego a cash cushion.
I admit that having a pension that pays the majority of our month-to-month expenses may make me more willing than most to forego a cash cushion.