Where to put cash if you don't trust the market....

[HBH]

I retired about 5 years ago at 54.

My portfolio is about 42% fixed, 35% equity funds, and 23% cash in CD’s. In 2 years, I’ll be taking my SS income.

The fixed portion provides about 120% of my living expenses. It consists of AAA insured and AMT free 30 year municipal bonds (not funds) which return 5% and non-publicly traded reits, which return about 7.5%.

The equity portion is designed to help make up for inflation on itself and the fixed portion.

My issue is that the CD’s mature in about 4 months, and I’m not sure where to put the cash.

The reasonable place is to put it in equities to help with the inflation protection, but I’m quite skittish about the economy and believe that a recession MAY be around the corner.

The solution I’m thinking of is to put it in VWALX and then use the income from that to purchase additional equities over the coming years.

The 2 financial planners I’ve talked to over the last 5 years think my general investment strategy is poor, primarily because it doesn’t maximize my estate at the end, but that’s not my goal.

HBH

 

[brewer12345]

I guess I would be atad leery of inflation potentially eating away the value of your income stream. Maybe put some of the CD money into TIPS or other inflation-indexed bonds? Alternatively, there is a wide variety of "structured products" that trade on the American Exchange that might fit the bill. Stuff like: in 2 years, you get $10 per share cash plus any increase in a stock index abve a certain point.

 

[renferme]

Or you could put it in a Vanguard MM acct: VMMXX
then transfer to equities or mutual funds later.
Or you could just re-up with new CDs for > 5% for whatever term suits you.
Personally, I don't see too much wrong with you being 65% fixed and 35% equity,
as I'm pretty conservative myself. I'm 60 BTW. If you were still working, the 35% in equities would be too conservative, but you're retired!!
If you get > 5% from fixed and about 8 or 9% from your equities, but are spending only about 4% swr, you're doing good in my book - that's beating inflation is it not?
.

 

[Dawg52]

The 2 financial planners I’ve talked to over the last 5 years think my general investment strategy is poor, primarily because it doesn’t maximize my estate at the end, but that’s not my goal.

HBH

Fire the Financial Planners. Follow Brewer's advice and maybe add a little to equities as you suggested. You will be fine.

 

[brewer12345]

If you get > 5% from fixed and about 8 or 9% from your equities, but are spending only about 4% swr, you're doing good in my book - that's beating inflation is it not?
.

It is now. But, hypothetically, what if we enter an inflationary period like 1966 to 1982? That 5% wn't seem too special. However, TIPS would keep you level with inflation if that happened. If you are going to have a lot of fixed income, a dollop (5 to 10%) of commodities might be a very good idea.

 

[riskadverse]

... Alternatively, there is a wide variety of "structured products" that trade on the American Exchange that might fit the bill. Stuff like: in 2 years, you get $10 per share cash plus any increase in a stock index abve a certain point.

I periodically look at these products, which always sound good initially, but for some reason I always end up rejecting them. Brewer, are there any specific names you think might be the best of these products, that I might take a new look at?

 

[brewer12345]

I periodically look at these products, which always sound good initially, but for some reason I always end up rejecting them. Brewer, are there any specific names you think might be the best of these products, that I might take a new look at?

I'm not a huge fan of the in general. I only own one, basket Asian currency warrants, as a hedge. Most of the rest are either exposures I do no want or are easily duplicated elsewhere with a package of treasuries and options. But they do provide a handy place to go if you want to buy something that looks and smells like an equity indexed annuity without getting raped by a salesman.

 

[renferme]

It is now. But, hypothetically, what if we enter an inflationary period like 1966 to 1982? That 5% wn't seem too special. However, TIPS would keep you level with inflation if that happened. If you are going to have a lot of fixed income, a dollop (5 to 10%) of commodities might be a very good idea.

Of course it's now! Hypothetically, if we enter an inflationary period, he can easily move from MM to equities. TIPs don't pay enough.

 

[brewer12345]

Of course it's now! Hypothetically, if we enter an inflationary period, he can easily move from MM to equities. TIPs don't pay enough.

Yeah, and you can move the money from equities to MM right before a market crash! It will be great!

 

[renferme]

Yeah, and you can move the money from equities to MM right before a market crash! It will be great!

That's exactly what I did in 2000 and missed 95% of the crash !
.
If we enter an inflationary cycle, the Fed. will be letting us know by raising rates.
When that happens, MM rates will be going up and CDs up also. If in laddered CDs,
just keep renewing at the higher rate.

 

[winnie]

I'm not a huge fan of the in general. I only own one, basket Asian currency warrants, as a hedge. Most of the rest are either exposures I do no want or are easily duplicated elsewhere with a package of treasuries and options. But they do provide a handy place to go if you want to buy something that looks and smells like an equity indexed annuity without getting raped by a salesman.

Hi Brewer

How do you buy a basket of Asian currency warrants? I've been reading PIMCO and TROWE PRICE websites recently...experts with each firm believe that the dollar will depreciate relative to the Yen in coming years and I agree. So I've been wondering how to position myself to take advantage of that but don't quite know how, short of buying into vpacx or something like that.....I already own quite a bit of LSGLX (loomis sayles global bond) so could up my stake in that too, but your idea sounds much more targeted and hence intriguing.

Thanks for any help you can give
Winnie

 

[brewer12345]

If we enter an inflationary cycle, the Fed. will be letting us know by raising rates.

Generally the inflationary cat is out of the monetary bag by the time the Fed starts raising. So what did you do as the Fed raised rates recently? Buy more CDs? Worked OK this time, but you would have gotten destroyed in the '66 to '82 period. Not worth the risk, IMO.

 

[brewer12345]

Hi Brewer

How do you buy a basket of Asian currency warrants? I've been reading PIMCO and TROWE PRICE websites recently...experts with each firm believe that the dollar will depreciate relative to the Yen in coming years and I agree. So I've been wondering how to position myself to take advantage of that but don't quite know how, short of buying into vpacx or something like that.....I already own quite a bit of LSGLX (loomis sayles global bond) so could up my stake in that too, but your idea sounds much more targeted and hence intriguing.

Thanks for any help you can give
Winnie

This is the security own. But be careful: a little goes a long way due to its inherent leverage, and like all options/warrants it turns into a pumpkin at the expiry date (Feb. '08 in this case).

 

[winnie]

OK -- found them, thanks. Not quite what I was looking for....prefer something more long term since i'm not at all confident in calling the timing of currency shifts -- just think I can make an educated guess on their general direction over a longer period....

thanks
Winnie

 

[renferme]

Generally the inflationary cat is out of the monetary bag by the time the Fed starts raising. So what did you do as the Fed raised rates recently? Buy more CDs? Worked OK this time, but you would have gotten destroyed in the '66 to '82 period. Not worth the risk, IMO.

Brewer: I'm retired, so I keep a certain % in equities and a certain % in fixed income stuff. I don't have excess money laying around to buy more CDs; but as they mature, I decide at that time what to do with the money while still maintaining the proper ratio of stocks to non-stocks. In the 66 to 82 period, I was in college and the early (mostly non saving years) years of working.
During the big inflationary years (the 70's Jimmy Carter era), my Dad retired and had all of his money in CDs paying greater than 10% - that was a good deal for him.
When CD rates went down, he continued to invest in CD's - not a good deal for him, as he took home less money and inflation destroyed his buying power.
Fortunately, his life style was frugal and his Soc. Sec. plus a little CD money was enough for him and my mother.
I guess the point might be (if I haven't forgotten it by now), is that 5% from CDs and 8 or 9% from stocks might provide an overall rate of return of near 7%.
At a SWR of 4%, that allows for about a net increase in wealth of 3%.
When inflation increases, maybe MAYBE adjustments have to be made, but maybe not, as the SWR allows for living decently for 30 years or so. Some years, you may "lose" money as inflation cuts it away and other years you may "gain" money as stocks might do better than the "normal" 8 to 9%. And hopefully, FIRECALC is accurate when you plug in the numbers.

 

[brewer12345]

OK -- found them, thanks. Not quite what I was looking for....prefer something more long term since i'm not at all confident in calling the timing of currency shifts -- just think I can make an educated guess on their general direction over a longer period....

thanks
Winnie

OK, instead take a look at BEGBX. It is a non-USD bond fund.

 

[brewer12345]

Brewer: I'm retired, so I keep a certain % in equities and a certain % in fixed income stuff. I don't have excess money laying around to buy more CDs; but as they mature, I decide at that time what to do with the money while still maintaining the proper ratio of stocks to non-stocks. In the 66 to 82 period, I was in college and the early (mostly non saving years) years of working.
During the big inflationary years (the 70's Jimmy Carter era), my Dad retired and had all of his money in CDs paying greater than 10% - that was a good deal for him.
When CD rates went down, he continued to invest in CD's - not a good deal for him, as he took home less money and inflation destroyed his buying power.
Fortunately, his life style was frugal and his Soc. Sec. plus a little CD money was enough for him and my mother.
I guess the point might be (if I haven't forgotten it by now), is that 5% from CDs and 8 or 9% from stocks might provide an overall rate of return of near 7%.
At a SWR of 4%, that allows for about a net increase in wealth of 3%.
When inflation increases, maybe MAYBE adjustments have to be made, but maybe not, as the SWR allows for living decently for 30 years or so. Some years, you may "lose" money as inflation cuts it away and other years you may "gain" money as stocks might do better than the "normal" 8 to 9%. And hopefully, FIRECALC is accurate when you plug in the numbers.

I think you are fooling yourself. Inflation is a much bigger threat to retirement money than market crashes. But like they say, you can lead a horse to water...

 

[Rich_by_the_Bay]

How many years of expenses is it appropriate to inflation-proof with TIPS and the like, at least historically?

Wouldn't it depend on how much cushion you have in your nest egg?

 

[brewer12345]

How many years of expenses is it appropriate to inflation-proof with TIPS and the like, at least historically?

Wouldn't it depend on how much cushion you have in your nest egg?

I don't think of it in those terms. I think you want a portfolio that is protected in cases of high inflation, specifically that your portfolio's purchasing value is maintained and increased. As such, I think a 10% weighting to inflation-indexed bonds/CDs and a 5% allocation to commodities should be a floor.

 

[Nords]

How many years of expenses is it appropriate to inflation-proof with TIPS and the like, at least historically?

When I read Brewer's inflation comment, I took it to mean that decades of inflation erosion is a much bigger threat to portfolio survival than 40% volatility or a puny little 15-year bear market.

If inflation spikes like it did in the 1970s then I won't be buying CDs or TIPS or bonds. I'll be sniffing around for those single-digit P/Es and 40-cent dollar bills.

Besides with everything that's coupled to the ECI or the CPI these days, if inflation spikes the Fed is going to have a real powerful motivation to jump all over it. With all the analysis tools and data-collection systems I'm cautiously optimistic that between the Fed and Congress there'll be a bunch of people keeping inflation within tighter control than we've ever seen before.

 

[brewer12345]

If inflation spikes like it did in the 1970s then I won't be buying CDs or TIPS or bonds. I'll be sniffing around for those single-digit P/Es and 40-cent dollar bills.

That is, with whatever you have left to buy them with.

 

[winnie]

OK, instead take a look at BEGBX. It is a non-USD bond fund.

Thanks! Will do.
Winnie

 

[Nords]

That is, with whatever you have left to buy them with.

Yeah, with the cash allocation that will have magically blossomed from 5% of our portfolio to 10% just due to shrinkage!

 

[JohnEyles]

OK, instead take a look at BEGBX. It is a non-USD bond fund.

Forgive me, I've gotten a little lost in this thread - are you saying
"instead of LSGLX" ? I thought LSGLX was non-USD too.

 

[brewer12345]

Forgive me, I've gotten a little lost in this thread - are you saying
"instead of LSGLX" ? I thought LSGLX was non-USD too.

LSGLX is probably OK, but I like BEGBX and have looked at it carefully enough to be comfy with it.