what percentage cash?

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what percentage cash?

Postby feh » Sat Jan 26, 2013 9:41 am

What percentage of your investment accounts are in cash? I'm not referring to cash holdings in a fund/ETF, nor emergency funds. I mean cash with which you could buy an asset.

I can think of a couple reasons to have cash on hand:
    would make rebalancing easier
    buying on the dips (after a Really Bad Day)

Are there others?
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Re: what percentage cash?

Postby livesoft » Sat Jan 26, 2013 9:44 am

0%

Rebalancing is easy by exchanging a bond fund to an equity fund or vice versa. No cash is needed.

Buying on RBDs is easy, too: Exchange from a bond fund to an equity fund. If you use ETFs, sell bond fund ETF shares and buy stock ETF shares.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: what percentage cash?

Postby jimkinny » Sat Jan 26, 2013 9:52 am

Until recently I have had little or no cash as an investment because I was working. If my portfolio went down it did not matter in the sense of a need to withdraw from it.

I do have some I bonds that I could take to a bank (or used to be able to take to bank, I do not know if this is possible still).

I have about 3-4% in cash now. Part of the reason for this is being retired and the need to withdraw from my portfolio but also the lost income is not that great due to low bond yields.

jim
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Re: what percentage cash?

Postby feh » Sat Jan 26, 2013 10:03 am

livesoft wrote:0%

Rebalancing is easy by exchanging a bond fund to an equity fund or vice versa. No cash is needed.

Buying on RBDs is easy, too: Exchange from a bond fund to an equity fund. If you use ETFs, sell bond fund ETF shares and buy stock ETF shares.


This isn't always possible. There may not be decent funds of a particular asset type available in an account. Or perhaps one account is all equities and another is all bonds and you can't transfer between them.
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Re: what percentage cash?

Postby livesoft » Sat Jan 26, 2013 10:08 am

feh wrote:This isn't always possible. There may not be decent funds of a particular asset type available in an account. Or perhaps one account is all equities and another is all bonds and you can't transfer between them.

I just don't understand. Tell me this: You have a fund that has a NAV of $1.00 sitting somewhere. Let that fund be a bond fund of short-duration like 1 day, so that the NAV does not change. Say it pays a 0.01% interest rate, too. What is the difference between that fund and bond fund with NAV of $10.18 that pays 2.3% with a duration of 4 years?

Thus your "isn't always possible" seems like it would apply to cash, too. That is, the issues you listed are not related to cash vs bonds.

Also, I gave an example of transferring ETF shares between 2 different accounts each held at a different broker in about 1 second in this post: viewtopic.php?p=1488409#p1488409

There is also this Wiki article link: Placing Cash Needs in a Tax-Advantaged Account
So if you have a "Cash Needs", you can engineer your portfolio to not have cash, yet still find a way to do what you wanted to do.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: what percentage cash?

Postby allsop » Sat Jan 26, 2013 10:45 am

feh wrote:What percentage of your investment accounts are in cash? I'm not referring to cash holdings in a fund/ETF, nor emergency funds. I mean cash with which you could buy an asset.

I can think of a couple reasons to have cash on hand:
    would make rebalancing easier
    buying on the dips (after a Really Bad Day)

Are there others?


I live in an EU member state where the real after-tax return on the insured CD's I have is over 1%.

Most of our FI is in taxable accounts, but then the taxation is quite different than in USA, even for pension savings.
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Re: what percentage cash?

Postby dbr » Sat Jan 26, 2013 10:46 am

livesoft wrote:0%

Rebalancing is easy by exchanging a bond fund to an equity fund or vice versa. No cash is needed.

Buying on RBDs is easy, too: Exchange from a bond fund to an equity fund. If you use ETFs, sell bond fund ETF shares and buy stock ETF shares.


Yes, there is no need for cash.
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Re: what percentage cash?

Postby sscritic » Sat Jan 26, 2013 11:05 am

Yes, there is no need for cash if you define the problem to exclude cash. I have a checking account. It has cash in it. Next week I will either buy a new big TV during the Super Bowl specials or I will send it to Vanguard. According to the OP this is not cash. It might be part of my emergency fund (but I don't have one, I just have money that I use to meet my needs*) so it isn't cash or it isn't in an investment account so it isn't cash.

* My four year old granddaughter understands this point. My house is very cold. I try to keep the furnace from running. I was using Face Time with my daughter and telling her about my feet being cold. My daughter told me to turn on the furnace. The four year old asked why I didn't turn on the furnace. I said to save money. The four year old responded, "But Grandpa, that's what money is for, to buy things." She is four, and she gets it. Money is money; you use it to buy things. Cash is money. I have some.
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Re: what percentage cash?

Postby feh » Sat Jan 26, 2013 11:10 am

Ok, either I'm missing something fundamental, or I've done a poor job of explaining the scenario. Let's use an example:

I have a taxable account comprised of a single equity fund, and an IRA that is comprised of a single bond fund. No cash in either account. I want a 50/50 AA.

On Feb 1, both accounts are worth $1000. On Aug 1, taxable is worth $1050 and IRA is worth $950. I want to rebalance.

I can sell $50 worth in the taxable account, but I have no cash int he IRA to buy $50 worth of bonds. I can buy the bonds in the taxable account, but then I have bonds in taxable, which is not ideal.

If I had some cash sitting in the bond fund, I could have bought the $50 of bunds from within that account.

If I'm missing something, please explain. Thanks!
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Re: what percentage cash?

Postby allsop » Sat Jan 26, 2013 11:24 am

One of the Bogleheads "commandments" is to keep taxes as low as possible, and the general advice is thus to keep fixed income in tax deferred accounts.

When the assumptions for the general advice fails (changing tax laws, current bond conditions, etc) one has to question the relevance of the advice today, not to mention for Bogleheads not living in USA.

TheFinanceBuff have an interesting blog on this subject: http://thefinancebuff.com/tax-efficienc ... olute.html
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Re: what percentage cash?

Postby KyleAAA » Sat Jan 26, 2013 12:11 pm

I don't keep any cash in my retirement portfolio, but I do keep a decent chunk on the side for when shorter-term opportunities arise. I've bought and sold plenty of websites over the years when the opportunity presented itself, for example. I don't really consider it to be part of my portfolio, though. So to answer your question, 0%. Cash in the context of a portfolio is just a drag on returns.
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Re: what percentage cash?

Postby feh » Sat Jan 26, 2013 12:34 pm

allsop wrote:One of the Bogleheads "commandments" is to keep taxes as low as possible, and the general advice is thus to keep fixed income in tax deferred accounts.

When the assumptions for the general advice fails (changing tax laws, current bond conditions, etc) one has to question the relevance of the advice today, not to mention for Bogleheads not living in USA.

TheFinanceBuff have an interesting blog on this subject: http://thefinancebuff.com/tax-efficienc ... olute.html


Very interesting article. Thank you for providing the link.

Given current yields and expected stock market returns, it seems equities should be in tax-advantaged accounts as of today, the exact opposite of what is usually recommended.

At the same time, the difference isn't very large, which means I shouldn't jump through hoops to keep a specific asset class restricted to tax-advantaged accounts.
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Re: what percentage cash?

Postby House Blend » Sat Jan 26, 2013 12:36 pm

feh wrote:I can sell $50 worth in the taxable account, but I have no cash int he IRA to buy $50 worth of bonds. I can buy the bonds in the taxable account, but then I have bonds in taxable, which is not ideal.

If I'm missing something, please explain. Thanks!


What you are missing is that asset allocation, particularly the equity:fixed income ratio is paramount. If 50:50 is the "correct" allocation for you, then you adapt your accounts to that. If one of the accounts holds $2500 and the other account holds $7500, one of the two accounts is going to be holding stocks and bonds whether it is "ideal" or not.
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Re: what percentage cash?

Postby livesoft » Sat Jan 26, 2013 12:42 pm

feh wrote:If I'm missing something, please explain. Thanks!

You are missing that fixed income includes cash, CD, bonds.

If you didn't count cash as fixed income, then your $1000:$950 allocation is not 50:50, it is roughly 51:49.
If you did count cash as part of fixed income, then your $1000:$1050 is 49:51 and when it went to $1050:$1000, you would still not be able to make it 50:50 with the cash in the IRA.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: what percentage cash?

Postby feh » Sat Jan 26, 2013 12:43 pm

House Blend wrote:
What you are missing is that asset allocation, particularly the equity:fixed income ratio is paramount. If 50:50 is the "correct" allocation for you, then you adapt your accounts to that. If one of the accounts holds $2500 and the other account holds $7500, one of the two accounts is going to be holding stocks and bonds whether it is "ideal" or not.


Thanks. I was wondering if their wasn't an "ideal" solution. It appears there isn't.
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Re: what percentage cash?

Postby feh » Sat Jan 26, 2013 12:48 pm

livesoft wrote:
feh wrote:If I'm missing something, please explain. Thanks!

You are missing that fixed income includes cash, CD, bonds.

If you didn't count cash as fixed income, then your $1000:$950 allocation is not 50:50, it is roughly 51:49.
If you did count cash as part of fixed income, then your $1000:$1050 is 49:51 and when it went to $1050:$1000, you would still not be able to make it 50:50 with the cash in the IRA.


I can accept this explanation. Is this how most folks here define things? When somebody says "60/40 AA", do they really mean "60/40 equities/bonds" or do they mean "60/40 equities/fixed income"?

I have not been considering cash as a component of the denominator.
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Re: what percentage cash?

Postby dbr » Sat Jan 26, 2013 12:53 pm

feh wrote:I can accept this explanation. Is this how most folks here define things? When somebody says "60/40 AA", do they really mean "60/40 equities/bonds" or do they mean "60/40 equities/fixed income"?

I have not been considering cash as a component of the denominator.


There are people who decide to distinguish cash from other kinds of low risk investments.

I certainly don't.
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Re: what percentage cash?

Postby Aptenodytes » Sat Jan 26, 2013 1:02 pm

livesoft wrote:0%

Rebalancing is easy by exchanging a bond fund to an equity fund or vice versa. No cash is needed.

Buying on RBDs is easy, too: Exchange from a bond fund to an equity fund. If you use ETFs, sell bond fund ETF shares and buy stock ETF shares.

+1
Might need cash in retirement but not while accumulating, unless you count the trivial case where money needs to spend a day in a money market fund on either side of a brokerage transaction.
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Re: what percentage cash?

Postby allsop » Sat Jan 26, 2013 1:03 pm

feh wrote:
livesoft wrote:
feh wrote:If I'm missing something, please explain. Thanks!

You are missing that fixed income includes cash, CD, bonds.

If you didn't count cash as fixed income, then your $1000:$950 allocation is not 50:50, it is roughly 51:49.
If you did count cash as part of fixed income, then your $1000:$1050 is 49:51 and when it went to $1050:$1000, you would still not be able to make it 50:50 with the cash in the IRA.


I can accept this explanation. Is this how most folks here define things? When somebody says "60/40 AA", do they really mean "60/40 equities/bonds" or do they mean "60/40 equities/fixed income"?

I have not been considering cash as a component of the denominator.


Generally, cash is included in fixed income if it is explicitly hold, and I write "explicitly hold" as equity funds have some cash that most ignore in their asset allocation. For those holding index funds, that are large, the cash portion is fairly low (1% or even less).
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