Question about Asset Allocation-Cash

[downrod]

I am wondering should I include cash and savings into my asset allocation, or just investments?

My investment asset allocation is
Stock-53%
Bond- 34%
Cash- 8%
Other- 5%

Overall Asset allocation (including savings) is
Stock-43%
Bond- 27%
Cash- 26%
Other- 4%

What I am trying to understand is, say I want my allocation to be 55% stock, am I 2% light or 12% light?

 

[joeea]

I am wondering should I include cash and savings into my asset allocation, or just investments?

My investment asset allocation is
Stock-53%
Bond- 34%
Cash- 8%
Other- 5%

Overall Asset allocation (including savings) is
Stock-43%
Bond- 27%
Cash- 26%
Other- 4%

What I am trying to understand is, say I want my allocation to be 55% stock, am I 2% light or 12% light?

You are 12% light. Mentally setting aside your cash for some reason doesn't change your actual portfolio.

But if you are happy with the way things are now, why change?

 

[pb4uski]

12% light

 

[downrod]

hmmm. Wasn't the answer that I was expecting. So when my Vanguard PAS said that based upon my age, my allocation should be 55% stock and 45% bonds, he thought that I should have no cash? He set up my Vanguard portfolio to match that 55/45 asset allocation, but the Vanguard portion is only approx half of my overall retirement savings

 

[SnowballCamper]

Did the Vanguard PAS know that your Vanguard portfolio is only half of your retirement savings? That would probably affect how s/he answers your questions.

I really like the idea of being fully invested (no or minimal cash) until its time to make withdrawals, and more heavily in stocks than the standard recommendation. Then have 2-3 years cash reserves so that you're buffered for the stock correction.

 

[kgtest]

Did the Vanguard PAS know that your Vanguard portfolio is only half of your retirement savings? That would probably affect how s/he answers your questions.

I really like the idea of being fully invested (no or minimal cash) until its time to make withdrawals, and more heavily in stocks than the standard recommendation. Then have 2-3 years cash reserves so that you're buffered for the stock correction.

SO that when the market corrects, and everyone sells in fear and panic, which they will eventually...you have the cash to hold you over until the assets recover close to highs, THEN you sell and replenish cash. Tada!

 

[downrod]

Did the Vanguard PAS know that your Vanguard portfolio is only half of your retirement savings? That would probably affect how s/he answers your questions.

I really like the idea of being fully invested (no or minimal cash) until its time to make withdrawals, and more heavily in stocks than the standard recommendation. Then have 2-3 years cash reserves so that you're buffered for the stock correction.

Yes the Vanguard PAS knew about my entire savings, but I dont see how he could have done things any different. You mention 2-3 years of cash as a buffer. Thats about where I am now. I am 3.5 yrs away from planned retirement

 

[Sunset]

in my mind: Bonds = cash (since the cash in invested in CDs)

 

[joeea]

So when my Vanguard PAS said that based upon my age, my allocation should be 55% stock and 45% bonds, he thought that I should have no cash? He set up my Vanguard portfolio to match that 55/45 asset allocation, but the Vanguard portion is only approx half of my overall retirement savings

If he knew that the Vanguard portion is only half of your retirement savings, and he knew what was contained in the other half, perhaps he took all of that into account when he proposed his 55%/45% allocation for the Vanguard portfolio.

You'll only know by asking him.

So are you pleased with the overall allocation of both halves? If so, no need to change anything.

 

[OldShooter]

I think of AA as allocation of investable assets into two piles: higher risk and lower risk. The higher risk assets for us now are equity mutual funds, though in the past we have had private placements, leveraged purchases of contracts-for-deed, etc. The lower risk assets are typically TIPS, CDs etc.

The idea of "cash" mystifies me because I know that virtually none of the "cash" tranches of people's AA are actually bank notes. It is always some kind of somewhat liquid debt, like t-bills, MM funds, etc. Never actually cash. So why would you call it something that it is not? Just based on the term of the loan?

 

[donheff]

I view my AA as everything that isn't in the checking account for the next couple of month's consumption. Cash (money market funds in our case) are part of the AA. I toss those in with bonds for a 60/40 AA but you could be more fine grained and describe it as 37% bonds and 3% cash or whatever.

 

[RunningBum]

Because a lot of people call it cash. I've got both CDs and MM funds. I see no need to say that I'm X% of one, y% of the other. I'm X+Y% cash.

 

[RunningBum]

And I would definitely count the cash in my AA. I have a goal of equities vs. non-equities, so my cash equivalents are lumped in with bonds for my AA balancing.

 

[gayl]

I think I'm doing it wrong too! I subtract my cash in USAA and only think about my allocation in Schwab when reviewing my allocation. FWIW I also subtract the amount allocated to paying off half S's student loans the day he graduates. He's only earning $22hr × 20hrs so that'll be enough of a hand up.

Basically (yes I'm doing a rough categorization):
Inc USAA:
Stocks & equity EFTs 76%
Cash, CDs, Bonds 24%

W/o USAA:
Stocks, equity ETFs 79%
Cash, CDs, Bonds 21%

 

[pb4uski]

I view my AA as everything that isn't in the checking account for the next couple of month's consumption. Cash (money market funds in our case) are part of the AA. I toss those in with bonds for a 60/40 AA but you could be more fine grained and describe it as 37% bonds and 3% cash or whatever.

+1 Our retirement savings are all financial assets other than a local credit union checking and savings account that we use to pay bills and do occasional ATM withdrawals. While that total varies it is usually $5-15k.

Our target AA of for our retirement savings is 60/35/5.... the 5% cash is in an online savings account that earns 1.9% and varies between 3-5% depending on when I last rebalanced. At one point I was 60/40, then 60/34/6 and then scaled back the cash to 60/35/5... I may scale back the cash again in the future.

Considering what we receive in taxable account dividends and capital gains distributions that 5% could last 2-3 years if we chose to not rebalance in a bad time.

A decent argument could be made that there is no need for a cash component, but I find it easier for me... the online savings account is the "gatekeeper" between the retirement portfolio and the local credit union accounts that we use to pay our bills. At 1.9% yield and only 3-5% of the portfolio, the cost is modest compared to the convenience and peace of mind it gives me. The inflows to the cash component are taxable account dividends and capital gains distributions and rebalang and the outflows are a monthly automated transfer to our spending accounts and occasional special transfers as needed.

 

[kgtest]

Reasons I thought I could potential NEED immediate cash but didn't:
New Washer
New Dryer
New kids bed
*Used 0% CC although we have cash in MM to pay for this stuff


Reasons I thought I need cash and DID:
New Tires
DW New Tires
Airline tix (need to use delta to get companion, pay immediately)
Taxes
Insurance
Bills

Things we THINK we will need cash for:
A new car in a couple years
A new air conditioner within the next 2 years
little extra for DW reduced paycheck (birth) but offset with less tax, but offset with higher Roth conversion *likely

We don't really plan more than 2 years out, and our cash is enough to last 1 year. Still accumulating and paying lots of expenses, daycare, mortgage income tax....

Our cash pile is .5%, we have some in MM and some in checking. We are 99.5% invested into equities via ETF and an Index and 3 individuals . This works for us and we sleep well. Planning is stressful with a small family, but we make it work.

 

[downrod]

Great information and thanks everyone for the replies! There is so much to learn from this site!

I have recently eliminated my PAS arrangement with Vanguard and I am self managing at this point. I want to make sure that my overall asset allocation is appropriate for my age and situation.

I am 61 yrs old and my wife is 54. Our plan is to retire in 3.5 years. No pensions.
Overall portfolio including cash - 1.3M

I am wondering what recommendations would be for an appropriate asset allocation and cash reserve bucket?

Thanks

 

[pb4uski]

A lot of it is a matter of personal preference.... the success rate between 40/60 and 80/20 are very similar.

 

[ESRwannabe]

downrod,

This is subjective, but in my opinion yes, you should include the cash.

I would also lump your 401k, Roth, taxable, etc all together and see what the entire portfolio looks like together.

 

[LOL!]

If one is retired, then I think that any cash should be part of your fixed income allocation which includes then bonds, savings accounts, cash, T-bills, etc.

I personally don't hold any cash if I can help it. I have some cash in my checking account which is enough to pay next week's bills. Otherwise, if I need money, then I am selling investments just-in-time to pay bills. That is, I am essentially living paycheck-to-paycheck where "paycheck" means selling shares of an equity or bond fund.

And if you are going to ask me, "What about an emergency fund?", then I will say I have credit cards and can get any needed cash in a couple days by selling shares. I don't have a job to lose, so I don't need an emergency fund in case I lose my job.

 

[Floridatennisplayer]

Yes, it is a part of your overall AA. You seek to only be looking at your Vanguard AA.

 

[jazz4cash]

in my mind: Bonds = cash (since the cash in invested in CDs)

That’s a bit too basic for me. My AA is stocks/ bonds/ cash. Bonds and cash are both fixed income but not equal because bond values fluctuate. In lieu of actual bonds or bond funds I use CDs with >2 yrs to maturity. Shorter term CDs and MM funds are “cash”. Current years expenses are carved out and not part of any portfolio.

EDIT: the downside of using CDs is that rebalancing is not so easy.

 

[audreyh1]

Everyone here does things slightly differently. I hold cash both inside my retirement fund as part of the assets allocation which I rebalance annually, and outside my retirement to fund near term spending. Think about how you would handle a 2008 type event. Go with what you would feel most comfortable with.

I was fortunate to make it through both 2000-2002 and 2008-2009 in decent financial shape without changing my investment strategy except for very minor tweaks afterwards. I feel like my approach is well seasoned for me and comfortable with it. We have lived 100% off our investments for 20 years, no pension and are still years away from SS and RMDs.

 

[Hermit]

If one is retired, then I think that any cash should be part of your fixed income allocation which includes then bonds, savings accounts, cash, T-bills, etc.

I personally don't hold any cash if I can help it. I have some cash in my checking account which is enough to pay next week's bills. Otherwise, if I need money, then I am selling investments just-in-time to pay bills. That is, I am essentially living paycheck-to-paycheck where "paycheck" means selling shares of an equity or bond fund.

And if you are going to ask me, "What about an emergency fund?", then I will say I have credit cards and can get any needed cash in a couple days by selling shares. I don't have a job to lose, so I don't need an emergency fund in case I lose my job.

I'm going to lose sleep tonight just thinking about running my life that way!

 

[street]

audreyh1 >>> if I may ask, has your portfolio grown over your retired years to date? You have weathered many storms while retired as a young person and seem to be doing great!