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Old 01-14-2017, 03:14 PM   #41
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I think keeping cash around is just a mental crutch and a behavioral finance trap nowadays. You know that's the case when terms like "sleep at night" and "peace of mind" or even "piece of mind" are being used.

If you need money when stocks go down, then sell bonds. You are going to be selling bonds to rebalance anyways.

If you need money when bonds go down, then sell stocks. You are going to be selling bonds to rebalance anyways.

If both stocks and bonds go down, they are going down by different degrees anyways. Then you will come to the forum and see the thread where everybody is saying, "Oh, I'm so glad I have cash, but I am worried, so I am cutting back and not spending any of it. And I'm glad I got those gold coins in my safe deposit box, in the safe behind the painting of Uncle Waldo, and buried in the back yard at the base of the mulberry tree."

So we don't have any cash to speak of. OTOH, we have a little bit of money in a fully liquid TIAA traditional annuity paying 3% or so as part of our fixed income (bond) allocation. It's like a stable value fund paying 3% except it is guaranteed. Maybe I should bury it under the mulberry tree?

And finally, for all the folks who had "cash" during 2008-2009, did you really use it? Did you rebalance into stocks? What really happened back then?
What does this matter? Why is there something wrong with "keeping cash around"? As long as a retiree has enough invested in stocks and bonds that they are able to withdraw the annual income they need and the portfolio is highly likely to survive long term (so an appropriate AA in the portfolio they are withdrawing from), it doesn't matter if cash accumulates on the sidelines or if they set up a cash buffer separately from their retirement portfolio.

I think folks concerned about large amounts of cash (or short-term reserves) accumulating, are looking at how it lowers the long term performance of a retirees investments. But if a retiree already has plenty invested or has a large net worth, they may not be concerned about maximizing long term performance. They may be more concerned about sequence of return risks and volatility in the short term, and being able to sleep at night. It's just a different choice/perspective and no less valid.

FWIW - in 2008/2009 a good chunk of the bonds and cash in my retirement portfolio was reinvested in stocks via rebalancing. It was probably because I had more short-term reserves outside the portfolio that I was able to hold my nose and do it.
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Old 01-14-2017, 03:29 PM   #42
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At age 72 my AA sits at 45/45/10.


My cash reserves are split between Ally online, CD@ NFCU, VG STB fund. Most is @ Ally. I admit that I am currently stashing cash in anticipation of a future need within 2 years or so.


I do not like it one bit that I am receiving such a lousy yield on this part of my stash as I can easily recall when I received 5%+ not too many years ago on simple MMF deposits. When I currently receive a $1 in interest I can't help but calculate that it would be $5 a few years ago! (Rant Over)
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Old 01-14-2017, 03:49 PM   #43
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What I call cash is actually low-yield instruments like I-bonds and stable value funds in 401k. The yield is a bit less than that of bonds currently, but made up by having none of the volatility. The meager yield of bonds is not worth the trouble, to me.

Since moving my wife's 401k out to an IRA last year, I lost access to a stable value fund. I have been thinking about putting that portion into a short-term corporate bond fund, or some preferred stocks.
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Old 01-15-2017, 12:20 PM   #44
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What I call cash is actually low-yield instruments like I-bonds and stable value funds in 401k.
Same for us. Our "cash" is in a mix of PFCU CDs & FTABX (tax free muni bond fund). We keep 2-4 yrs of "cash" for reason #2 described above.
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Old 01-17-2017, 06:12 PM   #45
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I put some more money into the short-term bond index fund, but apparently the VG computer doesn't consider that short-term reserves, so I can't use their nice pie charts.

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Old 01-17-2017, 06:34 PM   #46
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Old 01-17-2017, 07:03 PM   #47
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Whats the difference between having most of investments in stocks and/or funds and a sizable amount in cash - vs all invested - with a set amount in stocks and set amount in bonds?
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Old 01-17-2017, 07:09 PM   #48
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Whats the difference between having most of investments in stocks and/or funds and a sizable amount in cash - vs all invested - with a set amount in stocks and set amount in bonds?
This interactive graphic shows one aspect of the difference.
https://personal.vanguard.com/us/ins...uth-about-risk
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Old 01-18-2017, 05:28 PM   #49
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This interactive graphic shows one aspect of the difference.
https://personal.vanguard.com/us/ins...uth-about-risk
Cool interactive graph!

What I found interesting is that, when moving the bond/cash allocation tab, there's not much difference in volatility; whereas, when you move the stock/bond allocation tab, volatility changes a lot.
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Old 01-18-2017, 06:52 PM   #50
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You can see how cash lowers bond volatility. Not as much as bonds lower stock volatility, of course.

But that graph is missing a key component. It doesn't show the long-term return. Usually when someone picks an AA they are trading off between volatility and long-term return, so you need to see both factors.
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Old 01-18-2017, 07:20 PM   #51
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You can see how cash lowers bond volatility. Not as much as bonds lower stock volatility, of course.

But that graph is missing a key component. It doesn't show the long-term return. Usually when someone picks an AA they are trading off between volatility and long-term return, so you need to see both factors.
There is a nice chart lower down on that page that shows this:





Also this chart of drawdowns of bonds and stocks vividly illustrates their relative volatility:



The later chart is from this blog: One of My Investing Pet Peeves
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Old 01-21-2017, 08:44 AM   #52
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What does this matter? Why is there something wrong with "keeping cash around"? As long as a retiree has enough invested in stocks and bonds that they are able to withdraw the annual income they need and the portfolio is highly likely to survive long term (so an appropriate AA in the portfolio they are withdrawing from), it doesn't matter if cash accumulates on the sidelines or if they set up a cash buffer separately from their retirement portfolio.
Here is a good read on "What does this matter?"
https://earlyretirementnow.com/2016/...ly-retirement/

I'll summarize for you:
Quote:
Conclusions:

Don’t get your hopes up too high! A cash cushion is no magic bullet against market fluctuations. I mean, come on, does anybody really believe that an equity portfolio will be down 60% but with a cash cushion of a few % you suddenly keep all your purchasing power? We didn’t and we confirmed our prior belief.

A constant cash cushion is a bad idea. It just creates opportunity cost. No surprise here!

Market timing works – to a degree! And it makes sense! By not selling equities when the market tanks you bet on long-term mean reversion. The market will always recover eventually.

Of course, the cash cushion will likely help if you find yourself right before the market tanks. But I was amazed that even in Dec-1997 and Dec-1998 when the S&P500 still had a very strong subsequent performance in the 1998 and 1999 calendar years, you beat the passive withdrawal strategy of a 100% equity portfolio. I was very surprised about this result! I learned something new and unexpected today!

Nothing is set in stone yet, but we might entertain keeping a bit of a cash reserve, come 2018! We will still do some more research on how robust these results are, but we may scale back our cash-aversion a bit.
It seems that the only way to make a portfolio survive a bad bear market is to drastically reduce spending from it. That means have some leeway in your budgets to reduce withdrawals from 3.5% every year to a bare bones level. What that level might be only you can decide, but maybe 2%?

And yes, I know the link was not testing a 60/40 portfolio (or a 50/50, or a …).

One will be better off over the long term in a [possibly short-term] bond fund.
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Old 01-21-2017, 09:29 AM   #53
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Here is a good read on "What does this matter?"
https://earlyretirementnow.com/2016/...ly-retirement/

I'll summarize for you:

It seems that the only way to make a portfolio survive a bad bear market is to drastically reduce spending from it. That means have some leeway in your budgets to reduce withdrawals from 3.5% every year to a bare bones level. What that level might be only you can decide, but maybe 2%?

And yes, I know the link was not testing a 60/40 portfolio (or a 50/50, or a …).
I can't really deal with the author's paper since he is trying to stay 100% invested in equities as a retiree and modeling a cash cushion along with that. I guess the author doesn't like the "drag" of bonds either.

The criticism of holding a big chunk of cash or short term reserves is always "opportunity cost".

But for those with a large investment portfolio, "opportunity cost" may no longer be a major consideration, especially if the focus is more on spending now and spending down. Once the retirement portfolio is large enough to support generous withdrawals and spending, and large enough to survive bad market runs even with diminished withdrawals for a while, what is the point of adding more to it? To have a larger amount when you are older and when you die?

People can speculate how other people might behave and spend once we enter a bear market, but they don't know. Someone who has set aside funds for a certain trip might go ahead and take it even if a bear market happens, or they might be scared out of spending. I've been through two severe bear markets since retiring in 1999 which is why I know my system works for me.

We are truly beating a dead horse here. I, personally, would like some folks to agree that opportunity cost (i.e. maximizing long term investment growth) is not always the number one consideration for someone already retired with a well funded retirement.

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It seems that the only way to make a portfolio survive a bad bear market is to drastically reduce spending from it. That means have some leeway in your budgets to reduce withdrawals from 3.5% every year to a bare bones level. What that level might be only you can decide, but maybe 2%?
Well, that's the point. Your withdrawals may drop because your portfolio dropped, but if you have short term reserves outside of your investment portfolio, then you don't have to cut spending drastically, at least for a while. You can gradually ramp down or supplement your spending from reserves, or whatever. You have some choices and time to make them.

If you've put every last penny into your retirement portfolio, and have no emergency buffer and/or have set aside funds for financing some short term plans that require funds, then yes, you do have to cut your spending drastically to ensure portfolio survival, [unless you are on the original Trinity study constant withdrawal method and are able to ignore your shrinking portfolio].

I certainly don't intend to reduce withdrawals from 3.5% to 2% when we hit another bear market. Why would I? My % remaining portfolio models show that I won't have to. I will stay with 3.5% or more as I age. My portfolio income will shrink in real terms, and that's when I can choose to draw on some of my short term reserves to help smooth out the income volatility. I have plenty of discretionary spending, but I don't envision super drastic cuts in spending even during a prolonged bear market.
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Old 01-21-2017, 09:44 AM   #54
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I have been holding ~ 4 years living expenses since I have not yet tapped into other income sources like SS and a small pension that DW gets at 65, and have been living off ira funds since our after tax holdings are small. I guess it really depends on your other income sources and how much your mandatory expenses are covered by other income sources. I will cut that down quite a bit as SS and pension kick in.
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Old 01-21-2017, 09:53 AM   #55
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I think the folks that hold little cash are the same ones that min-max RPGs. Yeah, this is geek humor for those that don't know what I'm talking about.

Agree with audrey that yep there's an opportunity cost with cash holdings, but that it's really irrelevant to most IMO when your invested port is big enough so that it doesn't matter.
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Old 01-21-2017, 11:18 AM   #56
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...
I certainly don't intend to reduce withdrawals from 3.5% to 2% when we hit another bear market. Why would I? My % remaining portfolio models show that I won't have to. I will stay with 3.5% or more as I age. My portfolio income will shrink in real terms, and that's when I can choose to draw on some of my short term reserves to help smooth out the income volatility. I have plenty of discretionary spending, but I don't envision super drastic cuts in spending even during a prolonged bear market.
This sounds good to me. But then see below ...

I ran a VPW simulation to show (to myself) that a buffer would help a lot in a downturn. This is just a back-of-the-envelope simulation on a $1M portfolio split 60/40. I modified VPW for 3.5% withdrawals. The start year 1968 is a particularly bad year because there were 2 recessions (1969 and 1973) during that time plus a lot of inflation in the 1970's.

Below is the simulation result. I think the age 65 to 75 are particularly interesting because active retirees might need more discretionary money then. Suppose this couple needed maybe $30k from the portfolio. You can see there are a lot of years (far right column Total Income) that were well below $30k. So this case would need a lot of buffer money. Also note that the portfolio was cut nearly in half (inflation adjusted balance column) by age 79.

Makes me think I should do more homework on this issue. Hopefully we will not see such a bad sequence.




I'd be interested in what other's think of this simulation.
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Old 01-21-2017, 11:35 AM   #57
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Originally Posted by audreyh1 View Post
......
The criticism of holding a big chunk of cash or short term reserves is always "opportunity cost"......

We are truly beating a dead horse here. I, personally, would like some folks to agree that opportunity cost (i.e. maximizing long term investment growth) is not always the number one consideration for someone already retired with a well funded retirement.
.......
I agree, as I will not need to sell if the market drops 50% or 95% (like in the Great Depression).

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We are secure with 4-5 yrs worth of cash earning 1% interest.
Obviously missing out on some gains, but sleep pretty easy.
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Old 01-21-2017, 11:43 AM   #58
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This sounds good to me. But then see below ...

I ran a VPW simulation to show (to myself) that a buffer would help a lot in a downturn. This is just a back-of-the-envelope simulation on a $1M portfolio split 60/40. I modified VPW for 3.5% withdrawals. The start year 1968 is a particularly bad year because there were 2 recessions (1969 and 1973) during that time plus a lot of inflation in the 1970's.

Below is the simulation result. I think the age 65 to 75 are particularly interesting because active retirees might need more discretionary money then. Suppose this couple needed maybe $30k from the portfolio. You can see there are a lot of years (far right column Total Income) that were well below $30k. So this case would need a lot of buffer money. Also note that the portfolio was cut nearly in half (inflation adjusted balance column) by age 79.

Makes me think I should do more homework on this issue. Hopefully we will not see such a bad sequence.




I'd be interested in what other's think of this simulation.
I quickly did the shortfall years, The blue ones in the far right (and it was approx adding).
So it was short by $139,000 , which would be covered by 4yrs worth of cash to make up the shortfall using the $30,000 per year spending.

This is without counting the approximate $13,5xx dollars surplus from the years prior to the blue years.

This seems to confirm for me having a stash of cash available to top up during down years is advisable.
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Old 01-21-2017, 11:59 AM   #59
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I quickly did the shortfall years, The blue ones in the far right (and it was approx adding).
So it was short by $139,000 , which would be covered by 4yrs worth of cash to make up the shortfall using the $30,000 per year spending.
...
My intuitive guess is that maybe 2 years of short term bonds (2 years duration) would suffice, and then dip into the intermediate bonds to fund spending until the hopeful reversion-to-the-mean occurs.

I personally do not rebalance when the markets go down. This is because I fear a scenario where we do not revert to the mean in equities for a few decades. When equities go down and one is spending from FI, rebalancing kind of takes place automatically i.e. equities are going down and so is FI hence less to rebalance anyway.
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Old 01-21-2017, 12:59 PM   #60
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"My target calls for 6% short-term reserves"
I think about it differently.

I want cash reserves for two reasons:
- some amount based on my annual spending, not on % portfolio, to draw from during recessions when the market prices are low. A typical bear market corrects pretty quickly, but recessions can drag on for 2-3 years. That cash will be in where I'm drawing my living expenses from (soon to be a SEPP program, so the cash is in my SEP-IRA)

- unbudgeted emergencies. I include known unknowns, like car repairs, in my budget and have a slush fund for the more uncertain ones like broken legs or hail storms chewing through my very high deductible. That cash needs to be readily accessible and already taxed so I'm not facing a double-whammy.

In neither case do I target having a specific %age of my portfolio in cash.

--
OTOH, If I had a few hundred million, I'd follow Mark Cuban's advice and keep it all in cash
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