When Cash is King

[Chuckanut]

An article by Wiliam Berstein in today's email from Humble Dollar:

https://humbledollar.com/2021/11/wh..._medium=email&utm_campaign=another-ses-test_7

No surprises here. Don't take foolish risks to preserve your capital. We are not yet in a market crash scenario and I hope we don't get there. Putting one's money at risk to get a bit more return may not be wise.
I want this much risk <---> for this much return <-------->. Not this much risk <--------> for this much return <-->.

“Where can I go for yield?” goes the cry heard throughout the land. Nowhere, of course. As put by money manager Raymond DeVoe Jr., “More money has been lost reaching for yield than at the point of a gun.”

Still, I have a more optimistic take. My contention: The safe assets in your portfolio have the potential to be its highest returning components.

During a market panic, writes Josephson, “There are many casualties, cruel transfers of individual fortunes. Yet he who possesses even a modicum of unimpaired capital is as one who watches the sand run down in an hourglass, while fully aware that he may, at the given moment, turn the glass over and begin the process anew.”

This point cannot be emphasized enough: If you have enough cash to pay your living expenses for many, many years, you’ll have no trouble holding onto your stocks for the long run and so reaping their rewards, and likely have some boodle left over to buy more during the inevitable fire-sales.

 

[teetee]

At the time like this, would it be a better strategy to slow down the investment contributions and place more income in cash to get ready for the fire sale buy? It sounds to me like a market timing which statistically has been said not better than keeping putting the money into the market.

 

[Midpack]

I thought this was the best quote. Knowing what to do, and having the courage to do it come what may, are two different acts - the latter is the rarer trait.

The political economy of this upward redistribution of wealth is well beyond the scope of this essay. But for ordinary investors, the moral is clear: To prosper, one needs industrial quantities of patience, cash and courage—in that order.

 

[SnowballCamper]

To prosper, one needs industrial quantities of patience, cash and courage—in that order.

Or, just decide on an asset allocation that includes some quantity of bonds and/or cash-like assets that are uncorrelated with stock returns. Then there is generally just one thing to do when Mr. Market has driven your investments out of whack, rebalance. The act of rebalancing is to sell appreciated or stable assets and buy undervalued assets. I don't think industrial quantities are needed, just the knowledge that average is good enough. Maybe for some people that amounts to industrial quantities...but I think "industrial" is a bit of an exaggeration. The amount needed is enough to overcome the transaction costs...surely not a high barrier nowadays.

(oh, and thanks to midpack for quoting me in the other thread on SS!)

 

[ut2sua]

Below quote from the article is my favorite. This is why many have a balance of stock/bond/cash portfolio
"...the most spectacular returns are often earned in the first few days or weeks following a market bottom. She also has a large balanced portfolio, with a large amount of stocks that have benefited from high long-term returns, and also enough cash to sleep like a baby when things look the worst."

 

[jasonfreedom]

Are we heading toward a correction, or is inflation turning toward hyper-inflation?

Not trying to time the market, but if inflation is on the rise, then holding cash might work against us.

I wasn't investing during the 70s stagflation, so I am not sure what is riskier - holding cash, or holding onto positions (say that S&P 500 index fund).

Thoughts?

 

[mrfeh]

Are we heading toward a correction, or is inflation turning toward hyper-inflation?

Not trying to time the market, but if inflation is on the rise, then holding cash might work against us.

I wasn't investing during the 70s stagflation, so I am not sure what is riskier - holding cash, or holding onto positions (say that S&P 500 index fund).

Thoughts?

Nobody knows. Which is why you should pick an asset allocation and stick with it:

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

We hold as little cash as possible.

 

[freedom2022]

With inflation over 5%, bonds will produce negative yield also.
High yield bonds are risky especially in market crash situation.
Do we just accept a few percent negative yield is better than over - 5%?
Any thought? Thanks in advance.

 

[mrfeh]

With inflation over 5%, bonds will produce negative yield also.
High yield bonds are risky especially in market crash situation.
Do we just accept a few percent negative yield is better than over - 5%?
Any thought? Thanks in advance.

Yes.

-2 is better than -4

 

[razztazz]

Are we heading toward a correction, or is inflation turning toward hyper-inflation?

Not trying to time the market, but if inflation is on the rise, then holding cash might work against us.

I wasn't investing during the 70s stagflation, so I am not sure what is riskier - holding cash, or holding onto positions (say that S&P 500 index fund).

Thoughts?

Did some back checking about 6 months ago when the I-word was starting to be sold. Asked myself "What were money market funds paying during the height of inflation? The answer was less than 1% behind the inflation rate. Stocks did much worse for almost 2 decades. Bonds? We know that story. Cash didn't do that bad by comparison in a manner of speaking. Like where else would you go? Real estate and gold? Commodities in general? They have their problems and do you want to be 70% in losers and 30% in RE/Gold? You have to guess. And there's a great piece I read that talked about how Gold was good anti-inflation but only because we came off the gold standard right about the time Inflation kicked in and that it probably wouldn't do as well today. I cannot comment as I don't do commodities, but that's another "Beware" sign.

The Early Retirement Now guy showed how having money in cash instead of bonds would have seen you through a 1966 retirement start better than bonds. (If you have the time to plow through his immense amount of stuff) And we know stocks were no good. I wouldn't sell cash too short. No, you won't get rich (Like you might with RE or gold), and losing some money is still losing money. But it's better than losing more money, and during times of stress which are limited by their nature, that's all you need to stay in the game.

Someone I'm pretty sure on this forum years ago when discussing inflation, said a MMF was the next best thing to overnight money during rising interest rates.

 

[Jerry1]

For purposes of this discussion, can we define cash as any very liquid short term instrument. For example, a treasury bond under one year duration? Or, are we talking cash, as in a savings account or bills under the mattress.

I can’t see holding a ton of cash, but I can see holding a very short term bond fund or a money market fund. The return wouldn’t be much different than a savings account, but the mechanism for holding it would be easier.

 

[kevink]

There are a lot of common misconceptions about cash and they get expressed with great frequency in these forums (just have a look at recent the "Anyone else 100% stocks?" thread). I have to admit I shared a lot of these views before reading this post on Portfolio Charts:

https://portfoliocharts.com/2017/05/12/understanding-cash-will-make-you-a-better-and-happier-investor/

As razztazz mentioned above ERN at Early Retirement Now has also shown how cash has historically been one of the better assets in keeping up with inflation. And it seems to me one take-away from both Dr. Bernstein's post and the Portfolio Charts piece is that far from just viewing cash as dead weight to be mentally compartmentalized as a "rainy day" fund that's in addition to your "real" portfolio it deserves to be integrated into one's overall allocation.

 

[RetiredHappy]

We have $200K in TIP currently because we believe it is a safe place to hedge against inflation. We have another $100K in cash for RMD and to cover expenses to make up for the shortfall after SS and annuities. My husband is fairly conservative and has 40% in fixed income in his IRA. My IRA has been converted to annuities. Taxable accounts are all 80-20 in AA.

We are certainly nervous about a stock market crash but we remain invested in total market as well as select sectors.

 

[NW-Bound]

I don't know about cash being king, but have gained enough from the market since Covid started (who would have known!), so have decided to reduce my stock AA. It used to be 75-80%, but may be below 60% when I have to sell more shares due to covered calls getting assigned.

My cash position is 7-figure, and rising.

 

[ut2sua]

Are we heading toward a correction, or is inflation turning toward hyper-inflation?

Not trying to time the market, but if inflation is on the rise, then holding cash might work against us.

I wasn't investing during the 70s stagflation, so I am not sure what is riskier - holding cash, or holding onto positions (say that S&P 500 index fund).

Thoughts?

This advice is so valuable but is hard to follow: ignore market (or headline) noise (inflation/correction/bull/bear etc.)
This is what you don't want to hear, but it is true: there is risk (and reward) in holding anything (stock/bond/cash/gold/real estate).
So... hold more stock if you don't need the $ for a long time (contributing period - Retirement is several years away); hold more cash/bond if you need the $ in shorter time (in retirement or close to RE).

 

[Chuckanut]

For purposes of this discussion, can we define cash as any very liquid short term instrument. For example, a treasury bond under one year duration? Or, are we talking cash, as in a savings account or bills under the mattress.

For me, any very highly rated bond type vehicle of less than one year is a cash equivalent. That is because my modest pension and my SS check can pay my bills while I wait for the bond/note to mature. If I did not have these backstops, my time period would be smaller, 3-6 months perhaps.

 

[youbet]

For me, any very highly rated bond type vehicle of less than one year is a cash equivalent. That is because my modest pension and my SS check can pay my bills while I wait for the bond/note to mature. If I did not have these backstops, my time period would be smaller, 3-6 months perhaps.

Just curious, are you saying that a less than one year bond maturity is "cash" for you because of your "backstops" but might be a fixed investment for someone without your backstops? That is, the same financial instrument can be defined as cash or as a fixed investment depending on who owns it?

Interesting. I never thought of it that way. I guess looking at it with your definition a long term bond might be considered "cash" if the owner has enough "backstops."

 

[Chuckanut]

Just curious, are you saying that a less than one year bond maturity is "cash" for you because of your "backstops" but might be a fixed investment for someone without your backstops?

What I am saying is even if a 1 year note loses some value because of an interest rate hike, my SS and pension allow me to sit on it until maturity and then collect the full amount. I should add they would also be laddered. In practical purposes, for me, it is like cash. I suppose if I was very wealthy laddered bonds in the 2-5 year range might serve the same purpose.

I no longer have long term bonds except for what is in my Wellesley fund which is a small part of my investments. I am trusting their management to not let me get toasted if interest rates start a sustained climb.

What works for me may not work for another. YMMV.

 

[youbet]

What I am saying is even if a 1 year note loses some value because of an interest rate hike, my SS and pension allow me to sit on it until maturity and then collect the full amount. I should add they would also be laddered. In practical purposes, for me, it is like cash.

Totally get that and totally agree. But it seemed that you weren't just using (in your situation) short term bonds "like cash," but were actually renaming them "cash" in the economist sense of the word.

I suppose if I was very wealthy laddered bonds in the 2-5 year range might serve the same purpose.

Sure. If you have enough true cash you could have all 30 year bonds and get by OK. But let's not rename 30 year bonds as "cash" based on the holder's total financial situation. Semantics, semantics........

I no longer have long term bonds except for what is in my Wellesley fund which is a small part of my investments. I am trusting their management to not let me get toasted if interest rates start a sustained climb.

That pretty much describes my situation as well. Again, my comments weren't directed at your method at all. Your method is my method regarding liquidity management. I was talking about actually referring to short or medium term bonds/bond funds as "cash."

What works for me may not work for another. YMMV.

Of course.

 

[Palmtree]

FWIW, I consider anything in a MMA or a short term (1 year or less) bond to be counted as cash in my account. Some may even include their I-bonds too.

 

[jazz4cash]

Cash is not king in my world. It doesn’t need to be king to be useful. I’ll bet there are nearly as many definitions of cash as there are posters on this forum and that’s OK. Just understand your needs and select an AA that satisfies those needs. The data in the linked Portfolio Charts piece are so old….I don’t think the idea that 3 mo Tbills compare well to inflation reflect ZIRP. Many people that are hunkered down in cash probably don’t use 3mo tbills and some are actually doing better right now even with a hi yield fdic savings account.

 

[Chuckanut]

Totally get that and totally agree. But it seemed that you weren't just using (in your situation) short term bonds "like cash," but were actually renaming them "cash" in the economist sense of the word.

I believe I called them 'cash equivalents'.

 

[NW-Bound]

For purposes of this discussion, can we define cash as any very liquid short term instrument. For example, a treasury bond under one year duration? Or, are we talking cash, as in a savings account or bills under the mattress.

I can’t see holding a ton of cash, but I can see holding a very short term bond fund or a money market fund. The return wouldn’t be much different than a savings account, but the mechanism for holding it would be easier.

FWIW, I consider anything in a MMA or a short term (1 year or less) bond to be counted as cash in my account. Some may even include their I-bonds too.

Anything that does not drop big in value when the interest rate goes up, I consider it cash equivalent.

It does not have to have 0% interest, in order to be called cash. Heck, all of my cash equivalents earn me some interest. I bonds and 401k Stable Value have earned me more interests than BND the last couple of years.

The real stinker is TSTXX (Black Rock Liquidity T-Fund), which used to earn 1% or so, but now has the disgusting yield of 0.02%. It's still OK, because the fund is considered stable enough to be called "cash" for the purpose of selling cash-covered put options, which I have used to generate 5 to 10% depending on how active I want to be. It's a lot more income than a junk bond, and at a risk that I can understand better.

PS. I am not an expert, but believe that it's the SEC that allows a fund to be "cash equivalent" or not for the purpose of backing up a stock put option. It is not the prerogative of the brokerage. You cannot use an asset like a bond fund to back a cash-covered put, for example.

 

[youbet]

When I was growing up back in "Da Hood," my dad had a pool cue he called "Cash." And he paid for a lot of groceries with "Cash."

 

[youbet]

I believe I called them 'cash equivalents'.

Same thing........