Quick Question computing AA Percentages

[Shabby]

When my total investments look like this:
37% Equity
53% Bonds
10% Cash (2 Years of Spending Buffer)

Do I say I am in a 37/63 AA? (The % w/ cash included in Bonds)?
Or do I say I am in a 41/59 AA (The % w/o cash included at all)?

(See I bet you were nervous I was about to ask what AA I should have based in just my age and hair color. )

 

[REWahoo]

Do I say I am in a 37/63 AA? (The % w/ cash included in Bonds)?

+1

Or you could say 37/53/10 and we would understand. I'm currently at 41/46/13.

 

[nuisance]

I don't think the cash is part of your AA unless you're going to rebalance to keep it that way. In your example, let's say stocks have a great year and now you're 49/49/2. I assume you're going to sell some stocks and buy bonds to get back to your desired AA. But if you're not also going to cash out and get the cash back up to 10%, I wouldn't call that part of your AA. It's just a buffer (which you probably pick based on a dollar value rather than a percentage).

 

[jimbee]

I agree with REWahoo, I would personally call it a 37/63 AA, although 37/53/10 works too.

 

[W2R]

I agree with REWahoo, I would personally call it a 37/63 AA, although 37/53/10 works too.

+1

 

[steelyman]

Seems to me it would make sense to add the cash to the bond portion under the notion that it’s part of the “fixed income” part of your stash.

 

[Shabby]

Thanks! I like the 37/53/10 style.

 

[HI Bill]

37/53/10 is most specific, and it tells us your cash %. It's what I use because cash is part of my bucket approach.

 

[steelyman]

Probably the most interesting chunk is 37. That reflects how aggressive the portfolio is. The rest is your personal taste in breakdown. If the cash is a spending buffer, it could be moved out of a retirement plan, as you point out (41% in stocks).

 

[OldShooter]

The word "cash" gets thrown around a lot in these discussions without being defined. Literally, of course, it is banknotes but nobody here uses the word that way.

I just dumped a floating rate fund (SAMBX) that I considered to be "cash" but a majority might not agree with that. I just bought some TIPS with 1/15/21 maturity; I consider those to be close to "cash." I also put some of the proceeds into SWVXX, a money market fund that most would consider to be cash.

So, IMO to state an AA with a separate "cash" component really doesn't mean much until the poster defines what "cash" means in that portfolio.

FWIW, I don't separate out "cash" in my AA thinking because I can't draw a bright line that separates my fixed income holdings into the two piles. YMMV, of course.

 

[Dtail]

37/53/10 is most specific, and it tells us your cash %. It's what I use because cash is part of my bucket approach.

Same here. Cash is very important to my ACA MAGI.

 

[audreyh1]

I have an allocation to cash as part of my AA, but I usually report my stock%/fixed income% as I figure that's good enough for sharing on the internet.

 

[pb4uski]

I don't think the cash is part of your AA ....

Of course it is... cash is just another form of fixed income that is liquid and has low credit risk and low return.

 

[mrfeh]

37/63

Cash is part of fixed income.

 

[big-papa]

Whatever floats your boat. Most understand what you mean either way, though specifically calling out cash gives more information since, while both bonds and cash are "fixed" income, they're not the same. Of course that can be taken to extreme with something like TSM/SCV/EM/TBM/Cash

 

[nuisance]

Of course it is... cash is just another form of fixed income that is liquid and has low credit risk and low return.

Cash can be part of asset allocation, but only if you're going to rebalance to keep its percentage inline, just like you do for other assets. I read OP's post as saying they have 2 years of spending cash set aside, which means they don't intend to rebalance. In that case it's something like an emergency fund: not really part of your assets invested for retirement.

 

[pb4uski]

Nah... what is important is whether it is part of their retirement nestegg, which it is. The OP characterized it as two year spending buffer so it is clearly part of retirement nestegg. Whether OP intends to rebalance to a two year buffer or just use that in their first two years of retirement doesn't matter to whether the cash is included or not... both are sensible strategies.

 

[jimbee]

Nah... what is important is whether it is part of their retirement nestegg, which it is. The OP characterized it as two year spending buffer so it is clearly part of retirement nestegg. Whether OP intends to rebalance to a two year buffer or just use that in their first two years of retirement doesn't matter to whether the cash is included or not... both are sensible strategies.

Yep, this ^. If the cash buffer is maintained by rebalancing, he AA stays. If the cash buffer is depleted over time, the AA changes over time, following the depletion. I don't see how this is so difficult.

 

[steelyman]

If there’s a separate emergency fund then the additional cash would be considered part of the asset allocation. In Quicken terms, the difference is whether it belongs in a spending/savings account or under investments.

[ADDED] Referring to the cash as a “buffer” is what makes it a bit unclear I think. Also, if the cash is in a tax-favored (retirement) account, that would lean toward it being an investment.

 

[OldShooter]

Yep, this ^. If the cash buffer is maintained by rebalancing, he AA stays. If the cash buffer is depleted over time, the AA changes over time, following the depletion. I don't see how this is so difficult.

There is "Actual AA," which is like a business balance sheet. It is constantly changing as time moves forward, most notably in forum members' case by spending and by marking assets to market. It's just a calculation.

Then there is "Target AA" for those who have a target.

In our case, our fixed side is a sort of two-part bucket that contains a short-term low risk component that we draw on and a longer-term component that looks farther down the road. Once we have a rough idea of what we want (in $) on the fixed side we can calculate an AA and use the number as a sanity check on the plan. Hence, we really don't have a target AA.

 

[jimbee]

There is "Actual AA," which is like a business balance sheet. It is constantly changing as time moves forward, most notably in forum members' case by spending and by marking assets to market. It's just a calculation.

Then there is "Target AA" for those who have a target.

In our case, our fixed side is a sort of two-part bucket that contains a short-term low risk component that we draw on and a longer-term component that looks farther down the road. Once we have a rough idea of what we want (in $) on the fixed side we can calculate an AA and use the number as a sanity check on the plan. Hence, we really don't have a target AA.

My comment related to actual AA, but I take your point.

 

[nuisance]

There is "Actual AA," which is like a business balance sheet. It is constantly changing as time moves forward, most notably in forum members' case by spending and by marking assets to market. It's just a calculation.

Then there is "Target AA" for those who have a target.

I think that's where my confusion came in. I think of "AA" as "Target AA" but clearly most people don't see it that way. Thanks.

 

[sengsational]

My target cash % is a sawtooth wave with a period of 12 months. The target is the average. So that AA bucket has different rebalancing rules and acting on those rules is designed to be immune from the whims of Mr. Market.

 

[OldShooter]

I think that's where my confusion came in. I think of "AA" as "Target AA" but clearly most people don't see it that way. Thanks.

Yeah. I don't know that most people see it one way or the other but often people are unclear even in their own minds which they are talking about.

But it gets worse: Either flavor of AA is a number that attempts to represent volatility and risk. IMO H. L Menken's caveat applies: “For every complex problem, there is a solution that is simple, neat and wrong.”

For example, "50/50" can be half in a total world fund like VTWSX and half in TIPS. Or it can be junk and emerging market bonds on the fixed side and concentrated sector bets on the equity side. Are they the same volatility and risk? Of course not.

 

[pb4uski]

My target cash % is a sawtooth wave with a period of 12 months. The target is the average. So that AA bucket has different rebalancing rules and acting on those rules is designed to be immune from the whims of Mr. Market.

+1 I rebalance cash once a year to 5%... so assuming a "normal" year and a 3% WR, it would start the year at 5% and gradually decay to ~2% or so depending on what happens with stock and fixed income valuations and then return to 5% when I rebalance.