Keeping Investment Cash Available

[RAchip]

VGPMM? Do you mean VMMXX... Vanguard Prime Money Market fund?

And the yield is 2.11%.... the minimum investment for Admiral shares that yield 2.17% is $5,000,000... or are you a high roller with over $5,000,000?

Yes, I keep well over $5mm in cash now that rates are going up so much.

 

[audreyh1]

Because bond funds will still be holding bonds purchased at higher prices before rates increased and the prices one pays for your slice of those bonds won’t be fully reflected in the price of the bond fund.

Those bonds purchased at higher prices will already be discounted for current rates. These funds are marked to market daily.

Bond funds are just fine, especially if you are a perpetual bond holder and want to maintain a constant duration.

I've kept my intermediate and short-term bond funds - most still show a capital gain because I've held them for a long time! And I just keep rebalancing with stock funds. With my cash allocation I've used various CDs and iBonds.

 

[copyright1997reloaded]

Sigh.

In a lot of these threads we seem to cover the same ground. One of my favorites is the thought process that once "you have made it" that it is safe to simply cash out of the market and keep the funds in money market/savings/CD's, that is it is not necessary to risk it in the market.

Firecalc and history has shown that this thinking is suspect. Equity price risk is NOT the only risk for your financial future. All one has to do is to look at Venezuela, Argentina, or quite a few other countries to see that inflation and currency devaluation is a KILLER of those who save.

Now, you might be saying "it won't happen here". Maybe you are correct. But then again, the USA has tons of debt and super-tons of unfunded, ever growing cost programs.

We've been lucky so far in that we've had a 20+ year bond market bull rally, where interest rates have declined, which has greatly relieved the 'stress' of government deficits. If/when that turns around, the portion of the federal budget that will be required to pay interest on accumulated debt will increase dramatically.

So, just for grins and giggles, let's assume our politicians are faced with a choice: 1) dramatically tighten government spending; 2) dramatically increase taxes; 3) 'print' money (actually, just magically create it via the Federal Reserve/Treasury as most 'money' is digits in an account). Which of those three choices will be made? My bet is that they will talk about 1 & 2 and do 'something', but in reality #3 will be chosen. When that happens (a bit at a time), the inflation flood gates would open and savers will be the ones dramatically impacted.

 

[Badger]

Sigh.

So, just for grins and giggles, let's assume our politicians are faced with a choice: 1) dramatically tighten government spending; 2) dramatically increase taxes; 3) 'print' money (actually, just magically create it via the Federal Reserve/Treasury as most 'money' is digits in an account). Which of those three choices will be made? My bet is that they will talk about 1 & 2 and do 'something', but in reality #3 will be chosen. When that happens (a bit at a time), the inflation flood gates would open and savers will be the ones dramatically impacted.

Just curious. How do you think this scenario would affect the stock market or bond market? Wouldn't most people cut back on buying (cars, houses, dining, electronics, etc.) and wouldn't this affect the economy. Wouldn't inflation affect everyone and not just those that are cash heavy.




Cheers!

 

[corn18]

I don't recommend taking everything off the table and going to all cash when you have won the game. But I do like going from 80/20 to 50/50 for those that are concerned. No real reason to drop much below 30/70, though.

 

[pb4uski]

Interesting that according to the chart that 55/45 is about the same risk as 0/100 but the return is ~2.5% higher... I wonder what the measurement of "risk" is... not sure what 11% risk means.

 

[Fedup]

I’m ok with 7% return. Isn’t that the average anyway. I did run FIRECALC with 25% stock, and got 0 failed cycles. Maybe a bit smaller estate, but not significantly less.

 

[corn18]

Interesting that according to the chart that 55/45 is about the same risk as 0/100 but the return is ~2.5% higher... I wonder what the measurement of "risk" is... not sure what 111% risk means.

Risk is standard deviation.

 

[OldShooter]

... I wonder what the measurement of "risk" is... not sure what 111% risk means.

The graph is what is called the "efficient frontier." It documents past relationships between return and price volatility, with volatility expressed as standard deviation and called "risk." It comes from Harry Markowitz' "Modern Portfolio Theory" first described in his PhD these in about 1951.

The problems with the graph IMO are twofold. First, people think that it is some kind of forecast. It is not. Second, while volatility is risky for people who must sell regardless of market condtions, it is a complete don't care for long term investors. For them risk is Enron, Worldcom, Sears Holdings, Theranos, etc. MPT does not consider the latter kind of risk.

The problem with using standard deviation is that it is based on a normal aka Gaussian distribution of samples. Market prices are anything but Gaussian. The distribution is skewed, asymmetric, not centered on zero, has fat tails, and, most importantly, the samples are not independent. Any advocate of momentum investing will tell you that they are not independent.

I am not a fan of the efficient frontier notion, except as just another partially flawed way to look at the unpredictable animal that is the market. YMMV, however. (Markowitz argues that the fact that the market is not Gaussian is an unimportant factor. And, to be fair, he is the guy with the Nobel. )

 

[corn18]

The graph is what is called the "efficient frontier." It documents past relationships between return and price volatility, with volatility expressed as standard deviation and called "risk." It comes from Harry Markowitz' "Modern Portfolio Theory" first described in his PhD these in about 1951.

The problems with the graph IMO are twofold. First, people think that it is some kind of forecast. It is not. Second, while volatility is risky for people who must sell regardless of market condtions, it is a complete don't care for long term investors. For them risk is Enron, Worldcom, Sears Holdings, Theranos, etc. MPT does not consider the latter kind of risk.

The problem with using standard deviation is that it is based on a normal aka Gaussian distribution of samples. Market prices are anything but Gaussian. The distribution is skewed, asymmetric, not centered on zero, has fat tails, and, most importantly, the samples are not independent. Any advocate of momentum investing will tell you that they are not independent.

I am not a fan of the efficient frontier notion, except as just another partially flawed way to look at the unpredictable animal that is the market. YMMV, however. (Markowitz argues that the fact that the market is not Gaussian is an unimportant factor. And, to be fair, he is the guy with the Nobel. )

I don't know the first thing about all that, but I can understand that if you want more return, you have to take on risk and I can understand risk = volatility. That's why I picked 60/40. Not because I understand all of the intricacies of all the gobbledegook that gets spewed on many fora, but because I can live with some volatility with a reasonable shot at some return. Everything else is just noise to me. And I never try to debunk anyone else's theories or push them towards what I do. I do for me.

 

[copyright1997reloaded]

Just curious. How do you think this scenario would affect the stock market or bond market? Wouldn't most people cut back on buying (cars, houses, dining, electronics, etc.) and wouldn't this affect the economy. Wouldn't inflation affect everyone and not just those that are cash heavy.




Cheers!

With runaway or high inflation, bond holders (except perhaps for inflation adjusted bond holders) would get crushed. For equities, I think (which is another way of saying I don't know) we could divide into 'need' vs 'want'. The 'need' category are things required to survive: Food, Fuel, .. The means of production of these items (land, cattle, ...) would likely do well (in the sense the value of them would keep up with inflation). The 'wants' (ie. things we don't need to survive) not as well (but better than fixed instruments).

Look, I am not saying that this is going to happen. What I am saying is that such an event could occur (at least partially), and those who go all fixed 'for safety' are betting on it NOT occurring, with no recourse or hedge if it did.

 

[Fedup]

I don't know the first thing about all that, but I can understand that if you want more return, you have to take on risk and I can understand risk = volatility. That's why I picked 60/40. Not because I understand all of the intricacies of all the gobbledegook that gets spewed on many fora, but because I can live with some volatility with a reasonable shot at some return. Everything else is just noise to me. And I never try to debunk anyone else's theories or push them towards what I do. I do for me.

I took an investment 101 class as part of IEOR Master program at an Ivy League school in NYC, I still don’t understand a thing. The efficiency frontier chart is all I remember from that class. Plus a lot of math that had to use for proofs.

 

[audreyh1]

Interesting that according to the chart that 55/45 is about the same risk as 0/100 but the return is ~2.5% higher... I wonder what the measurement of "risk" is... not sure what 11% risk means.

Standard deviation of the portfolio annual volatility.

Just 1 standard dev. right? I think we’ve seen worse than that in the 2000s. Some people like to look at the actual historical annual drops for each allocation.

 

[audreyh1]

I don't know the first thing about all that, but I can understand that if you want more return, you have to take on risk and I can understand risk = volatility. That's why I picked 60/40. Not because I understand all of the intricacies of all the gobbledegook that gets spewed on many fora, but because I can live with some volatility with a reasonable shot at some return. Everything else is just noise to me. And I never try to debunk anyone else's theories or push them towards what I do. I do for me.

And Firecalc does concur with the efficient frontier graph in that the survival characteristics of the 100% bond allocation is worse than 80% bonds.

Although the 100% stocks allocation doesn’t survive as well as the 80% stocks. But I don’t think the difference is as large as the 100% vs 80% bonds cases.

With Firecalc, portfolio survival characteristics are highest in the range from 30% to 80% equities (from 40% to 80% even better). After that you decide what average annual gain versus annual volatility you think you can live with.

 

[audreyh1]

With runaway or high inflation, bond holders (except perhaps for inflation adjusted bond holders) would get crushed. For equities, I think (which is another way of saying I don't know) we could divide into 'need' vs 'want'. The 'need' category are things required to survive: Food, Fuel, .. The means of production of these items (land, cattle, ...) would likely do well (in the sense the value of them would keep up with inflation). The 'wants' (ie. things we don't need to survive) not as well (but better than fixed instruments).

Look, I am not saying that this is going to happen. What I am saying is that such an event could occur (at least partially), and those who go all fixed 'for safety' are betting on it NOT occurring, with no recourse or hedge if it did.

Equities were crushed in the 1970s too.

 

[copyright1997reloaded]

Equities were crushed in the 1970s too.

Equities did worst when inflation spiked, not when it peaked. Inflation doubled between 1972 to 1973 (to 6 percent) and then continued to jump to 11 percent in 1974. The S&P fell by 40%. But inflation topped out around 13.5 percent in 79-80, but by then the market had recovered. So yes, inflation provides a shock to expected (real) returns which results in lower equity prices.

But, as I mentioned in the wants vs needs, there can be relative winners. In the 70's, the relative winners were things like food, gold, metals mining, oil, natural gas, tobacco. Some relative losers were airlines, automobiles, banking, electric utilities, retail, trucking companies. There is a distinct patten here. The producers of raw inputs benefited, while the consumers (of those raw inputs) were squeezed.

From a market cap perspective, small caps out performed large caps, and growth companies outperformed value in the 70's.

Overall inflation is not a good thing, and you can put me in the (lonely) camp of those who think that the Federal reserve targeting 2% (vs zero) inflation is not a good thing.

But, I'd rather 'gamble' that I can hedge (at least somewhat) inflation via an reasonable equity allocation vs an all fixed 'safe' allocation that some people here espouse. It is not 'safe' in the long run if inflation becomes problematic.

 

[Jeb-NY]

I have been building a CD ladder this year as a place to stash extra cash that I have been pulling from the stock market to keep my allocations that I set up when I took ER 13 years ago (just turned 70 and started SS). I have been happy with the ride at 50:40:10 AA. Since I didn't really want more bonds, a CD ladder seemed like a good place to park funds (so technically I'm a bit behind my 40% bonds). My plans are if/when the market dips enough I will use the CD ladder to buy back in to keep my 50% AA if needed I can use it to fund RMD along with bonds to keep from selling depressed stock funds.

I don't worry about AA to much but when it gets 5% or more out of wack I try to pull it back in. Plus I have been taking RMD from stock funds as long as I'm out of balance. I also keep about a years worth of expenses in cash/MM on hand for emergencies. So with the CDs and cash/MM I guess I'm in the heavy cash camp right now myself, but not my long term plan.

 

[TwoByFour]

Standard deviation of the portfolio annual volatility.

That is only true for a single asset portfolio. Otherwise the risk is the square root of the variance, where the latter is the weighted sum of the variances of the individual assets plus the co-variances between the assets. This is important because portfolio risk can be minimized by minimizing the co-variances. The latter can be done with perfectly uncorrelated assets, which is the holy grail of investing and where a lot of energy is spent - trying to find asset classes that are minimally correlated.