Cash cushion and Asset Allocation

[2B]

I definitely consider my CD ladder to be "as good as cash." They mature far sooner than I would need the money. They are all FDIC insured.

 

[jIMOh]

Hello,

I hear a lot of people on the board say that they have a cash cushion of x number of years spending. The purpose being to draw down on the cushion instead of selling equities in down years.

I have a question for those who use a cash cushion. Is that cash considered part of your asset allocation? Or do treat it separately.

To be clear, let me give an example. If you have $1M, a cash cushion of 100K, 450K in bonds and 450K in equities, would you say you have an asset allocation of 50/50 (equities/bonds) or would you say 45/55 (Equities/Bonds+cash)?

Thanks.

Depends-

If stocks increased 10% so you owned $495,000 of stock would you
a) sell 30k and put 15k into bonds and 15k into cash
(465-465-115k).

b) sell 45k and add it to cash (450-450-145)

c) something else

Next case-

Market drops 20%, so the 450k in equites is now $360,000. What do you do?
a) use 90k in cash to buy more equites
b) draw down the cash to live off of
c) sell bonds to buy more stocks
d) something else

Regardless of how you answered the first question, the second question answers whether or not the cash is part of your allocation.

If you did c) in second case- the answer is NO, if you did a) the answer is clearly YES. If you did B I would argue NO as well.

I do not consider my cash part of my allocation because I don't plan to buy more stocks if market goes down with that cash.

 

[walkinwood]

Thanks all for sharing your practices.

I'll consider my cash cushion is part of my asset allocation and balance accordingly. The simplicity works for me.

 

[Alan]

This implies you currently have 50 years of expenses in your portfolio assuming your portfolio keeps up with inflation. Yet, you're still working. I assume there's some reward for this such as medical benefits or pension.

100% agree with counting all cash in calculating overall portfolio performance. Otherwise, you're just fooling yourself.

If I keep working 'til 55 (18 months) I get a non-COLA pension of $65k/yr plus health insurance until I'm 70. If I stop working I lose health benefits altogether and don't get my pension until I'm 62 so continuing to work 'til 55 is worth an awful lot of peace of mind.