Please define "cash"

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hacksaw2025
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Please define "cash"

Post by hacksaw2025 » Mon Oct 09, 2017 3:32 pm

<r>Hi Folks,<br/>
<br/>
I've been posting along here and have been very pleased with the feedback I've received with my questions thus far. So...I have another one for you!<br/>
My question...<br/>
What is meant by the term "cash" as it relates to one's portfolio asset allocation?<br/>
In other words, if one says their portfolio is 50% equity/40% bond/<B><s></s>10% cash<e></e></B>....what/where/how is that 10% invested? <br/>
What is cash??<br/>
1) green paper kept under the mattress or in a safe?<br/>
2) money in a local bank?<br/>
3) money market account?<br/>
4) short term bonds?<br/>
also, is an Emergency Fund considered cash? Or should this be completely separate from portfolio investments?<br/>
Thank you!<br/>
Hacksaw</r>

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Ice-9
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Re: Please define "cash"

Post by Ice-9 » Mon Oct 09, 2017 3:36 pm

I draw the line between cash and bonds as putting vehicles in the cash category when the principal is safe and not influenced by market (in nominal terms, anyway.)

1) green paper kept under the mattress or in a safe? CASH
2) money in a local bank? CASH
3) money market account? CASH
4) short term bonds? borderline, maybe 3 mos or less CASH, longer maybe BONDS
Last edited by Ice-9 on Mon Oct 09, 2017 3:38 pm, edited 2 times in total.

jebmke
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Re: Please define "cash"

Post by jebmke » Mon Oct 09, 2017 3:37 pm

My working definition is an account which has:
  • Effectively no default risk
  • Effectively no duration risk
  • Very high liquidity (can convert to food in 24-48 hours)
I suppose currency would be included but I rarely have more than $100.
When you discover that you are riding a dead horse, the best strategy is to dismount.

dbr
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Re: Please define "cash"

Post by dbr » Mon Oct 09, 2017 4:06 pm

One aspect that is required to be cash is that the value of the "investment" in nominal dollars is fixed. Things that have that property are currency, savings accounts, money market funds, CDs, etc. This does not count any interest that might be used. Some people would argue about CDs because there can be a market for trading at variable value. Other people would argue that a very short bond is close enough to being redeemed at a fixed dollar value to meet this requirement.

People would often demand that cash be liquid. This might rule out stable value funds, sometimes CDs, etc.

There can also be virtual cash contained in the ability of one to pay with credit. A lot of people have a larger credit card charge limit than they would ever hold in actual cash.

I think the discussion of what is cash is not very interesting because cash in the pure sense is not a useful asset to hold in the sense of asset allocation. If a person does have a reason to hold cash it is still sufficient to just consider this a form of fixed income for portfolio purposes.

goingup
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Re: Please define "cash"

Post by goingup » Mon Oct 09, 2017 4:26 pm

I'd say cash is MM funds, CDs and savings accounts. It isn't ST bonds, which are cash-like but not cash. I don't include checking because it's not part of my investable assets. No separate emergency fund because of a adequate taxable account.

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Sandtrap
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Re: Please define "cash"

Post by Sandtrap » Mon Oct 09, 2017 4:29 pm

For myself.
Cash = bank accounts, cd's, money market accounts, green stuff in my safe and my wallet. . . and DW's purse. :shock:

stan1
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Re: Please define "cash"

Post by stan1 » Mon Oct 09, 2017 4:47 pm

Bills and coins of course plus anything FDIC insured and money market mutual funds.

As far as asset allocation goes I just lump it in with bonds into "fixed income".

Stable value funds and TSP G Fund are probably on the boundary.

jebmke
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Re: Please define "cash"

Post by jebmke » Mon Oct 09, 2017 4:56 pm

stan1 wrote:
Mon Oct 09, 2017 4:47 pm
Bills and coins of course plus anything FDIC insured and money market mutual funds.

As far as asset allocation goes I just lump it in with bonds into "fixed income".

Stable value funds and TSP G Fund are probably on the boundary.
how about treasury bills and repos?
When you discover that you are riding a dead horse, the best strategy is to dismount.

stan1
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Re: Please define "cash"

Post by stan1 » Mon Oct 09, 2017 5:05 pm

jebmke wrote:
Mon Oct 09, 2017 4:56 pm
stan1 wrote:
Mon Oct 09, 2017 4:47 pm
Bills and coins of course plus anything FDIC insured and money market mutual funds.

As far as asset allocation goes I just lump it in with bonds into "fixed income".

Stable value funds and TSP G Fund are probably on the boundary.
how about treasury bills and repos?
Yep, definitely fixed income for t-bills, someone smarter than me will have to answer for repos.
Last edited by stan1 on Mon Oct 09, 2017 5:07 pm, edited 1 time in total.

alex_686
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Re: Please define "cash"

Post by alex_686 » Mon Oct 09, 2017 5:06 pm

Assets that are liquid and offer strong principle protection, even during times of crisis. Most of the time this captures savings, checking, and money market accounts (both at banks and and mutual funds - they are different beast even if the have the same name". Mutual funds count anything with a maturity of less than 1 year as cash. I don't count CDs with a maturity of over a year but people differed on this point.

alex_686
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Re: Please define "cash"

Post by alex_686 » Mon Oct 09, 2017 5:08 pm

stan1 wrote:
Mon Oct 09, 2017 5:05 pm
jebmke wrote:
Mon Oct 09, 2017 4:56 pm
how about treasury bills and repos?
Definitely fixed income :wink:
These are all short term instruments and would be counted as cash in a annual report. If you consider the above as fixed income I would recommend that you treat your checking account as a fixed income bond fund with a duration of 0. :wink:

stan1
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Re: Please define "cash"

Post by stan1 » Mon Oct 09, 2017 5:10 pm

alex_686 wrote:
Mon Oct 09, 2017 5:08 pm
stan1 wrote:
Mon Oct 09, 2017 5:05 pm
jebmke wrote:
Mon Oct 09, 2017 4:56 pm
how about treasury bills and repos?
Definitely fixed income :wink:
These are all short term instruments and would be counted as cash in a annual report. If you consider the above as fixed income I would recommend that you treat your checking account as a fixed income bond fund with a duration of 0. :wink:
You missed what I said above. I treat cash as fixed income for purposes of asset allocation rather than separate. No laws are being broken, YMMV.

Niemanterry
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Re: Please define "cash"

Post by Niemanterry » Mon Oct 09, 2017 5:16 pm

Bankers used to use the term “cash”for any accounts one could draw from a bank immediately. “Cash equivalents” were a cd, that could be drawn with some effort.

This was back in the Old Bob Cratchet days of accounting.

thangngo
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Re: Please define "cash"

Post by thangngo » Mon Oct 09, 2017 5:17 pm

hacksaw2025 wrote:
Mon Oct 09, 2017 3:32 pm
<r>Hi Folks,<br/>
<br/>
I've been posting along here and have been very pleased with the feedback I've received with my questions thus far. So...I have another one for you!<br/>
My question...<br/>
What is meant by the term "cash" as it relates to one's portfolio asset allocation?<br/>
In other words, if one says their portfolio is 50% equity/40% bond/<B><s></s>10% cash<e></e></B>....what/where/how is that 10% invested? <br/>
What is cash??<br/>
1) green paper kept under the mattress or in a safe?<br/>
2) money in a local bank?<br/>
3) money market account?<br/>
4) short term bonds?<br/>
also, is an Emergency Fund considered cash? Or should this be completely separate from portfolio investments?<br/>
Thank you!<br/>
Hacksaw</r>
Cash = $ in checking & saving accounts, plus small dollar bills I carry just in case.
Cash Equivalents = CDs, short-term treasuries.

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dm200
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Re: Please define "cash"

Post by dm200 » Mon Oct 09, 2017 5:20 pm

Niemanterry wrote:
Mon Oct 09, 2017 5:16 pm
Bankers used to use the term “cash”for any accounts one could draw from a bank immediately. “Cash equivalents” were a cd, that could be drawn with some effort.
This was back in the Old Bob Cratchet days of accounting.
Today, for credit unions (and I assume for banks), "cash" is defined as currency, coin, overnight deposits in other financial institutions. "Cash equivalents" are things like CDs with an original maturity of 90 days or less.

That is "accounting" - but for an individual I would include CDs maturing in a few months.

longinvest
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Re: Please define "cash"

Post by longinvest » Mon Oct 09, 2017 5:40 pm

dbr,
dbr wrote:
Mon Oct 09, 2017 4:06 pm
One aspect that is required to be cash is that the value of the "investment" in nominal dollars is fixed. Things that have that property are currency, savings accounts, money market funds, CDs, etc. This does not count any interest that might be used. Some people would argue about CDs because there can be a market for trading at variable value. Other people would argue that a very short bond is close enough to being redeemed at a fixed dollar value to meet this requirement.

People would often demand that cash be liquid. This might rule out stable value funds, sometimes CDs, etc.

There can also be virtual cash contained in the ability of one to pay with credit. A lot of people have a larger credit card charge limit than they would ever hold in actual cash.

I think the discussion of what is cash is not very interesting because cash in the pure sense is not a useful asset to hold in the sense of asset allocation. If a person does have a reason to hold cash it is still sufficient to just consider this a form of fixed income for portfolio purposes.
Awesome explanation!

What would you think about adding I-Bonds to your list as inflation-indexed cash (after the first year)?
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

dbr
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Re: Please define "cash"

Post by dbr » Mon Oct 09, 2017 5:48 pm

longinvest wrote:
Mon Oct 09, 2017 5:40 pm
dbr,
dbr wrote:
Mon Oct 09, 2017 4:06 pm
One aspect that is required to be cash is that the value of the "investment" in nominal dollars is fixed. Things that have that property are currency, savings accounts, money market funds, CDs, etc. This does not count any interest that might be used. Some people would argue about CDs because there can be a market for trading at variable value. Other people would argue that a very short bond is close enough to being redeemed at a fixed dollar value to meet this requirement.

People would often demand that cash be liquid. This might rule out stable value funds, sometimes CDs, etc.

There can also be virtual cash contained in the ability of one to pay with credit. A lot of people have a larger credit card charge limit than they would ever hold in actual cash.

I think the discussion of what is cash is not very interesting because cash in the pure sense is not a useful asset to hold in the sense of asset allocation. If a person does have a reason to hold cash it is still sufficient to just consider this a form of fixed income for portfolio purposes.
Awesome explanation!

What would you think about adding I-Bonds to your list as inflation-indexed cash (after the first year)?

I did forget that savings bonds after a period can be redeemed at a certain face value and therefore should be called cash. In this case EE bonds are nominal and I bonds are real.

dbr
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Re: Please define "cash"

Post by dbr » Mon Oct 09, 2017 5:49 pm

longinvest wrote:
Mon Oct 09, 2017 5:40 pm
dbr,
dbr wrote:
Mon Oct 09, 2017 4:06 pm
One aspect that is required to be cash is that the value of the "investment" in nominal dollars is fixed. Things that have that property are currency, savings accounts, money market funds, CDs, etc. This does not count any interest that might be used. Some people would argue about CDs because there can be a market for trading at variable value. Other people would argue that a very short bond is close enough to being redeemed at a fixed dollar value to meet this requirement.

People would often demand that cash be liquid. This might rule out stable value funds, sometimes CDs, etc.

There can also be virtual cash contained in the ability of one to pay with credit. A lot of people have a larger credit card charge limit than they would ever hold in actual cash.

I think the discussion of what is cash is not very interesting because cash in the pure sense is not a useful asset to hold in the sense of asset allocation. If a person does have a reason to hold cash it is still sufficient to just consider this a form of fixed income for portfolio purposes.
Awesome explanation!

What would you think about adding I-Bonds to your list as inflation-indexed cash (after the first year)
I did forget that savings bonds after a period can be redeemed at a certain face value and therefore should be called cash. In this case EE bonds are nominal and I bonds are real.

ThrustVectoring
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Re: Please define "cash"

Post by ThrustVectoring » Mon Oct 09, 2017 6:30 pm

dbr wrote:
Mon Oct 09, 2017 4:06 pm
There can also be virtual cash contained in the ability of one to pay with credit. A lot of people have a larger credit card charge limit than they would ever hold in actual cash.
I've got a very handy $10k line of credit attached to my checking account at my credit union. It basically means that for medium-sized cash needs, I can just pay 9% APR for a few days instead of having to worry about how long it takes to transfer money out of another account. It means I can usually keep my checking account balance pretty low, especially since paychecks are conveniently aligned to my bills.

lhl12
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Re: Please define "cash"

Post by lhl12 » Mon Oct 09, 2017 6:35 pm

I hope this doesn't muddy the waters too much, but it is also worth noting that debt is cash with a negative sign in front of it (as long as it is prepayable at any time without penalty).

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grabiner
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Re: Please define "cash"

Post by grabiner » Mon Oct 09, 2017 8:11 pm

lhl12 wrote:
Mon Oct 09, 2017 6:35 pm
I hope this doesn't muddy the waters too much, but it is also worth noting that debt is cash with a negative sign in front of it (as long as it is prepayable at any time without penalty).

The opportunity to prepay your debt makes your debt a negative callable bond, not cash. If you have a bond which is callable now at $1000, the issuer can pay you $1000 now, or keep making payments on the bond until it matures, so you can at best get the designated interest rate. Similarly, if you have 10 years left on your 3% mortgage, then you can choose to get rid of your last month's payment of $1344 by paying $1000 today, get rid of all your future payments by paying the current mortgage balance today.

Another reason not to view debt as negative cash is that you don't have the obligation to pay it, and thus you don't need to hold positive cash to compensate. Having a mortgage requires you to have a larger emergency fund so that you can make the payments, but having a larger mortgage with the same payments doesn't require an even larger emergency fund.
David Grabiner

J295
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Re: Please define "cash"

Post by J295 » Mon Oct 09, 2017 8:28 pm

For us it is Amx Bank (now 1.25%), CDs, iBonds, brokerage misc sweep accounts.

AlohaJoe
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Re: Please define "cash"

Post by AlohaJoe » Mon Oct 09, 2017 8:38 pm

To further muddy the water, with T+2 now being faster than some ACH transfers, selling an ETF can be more liquid than an online checking account.

Instead of worrying about the definition of cash, I'd ask what's the goal of that part of the portfolio. Then you'll be able to figure out what financial instruments (which change and evolve over the many decades of one's investing life) meet that goal.

MathWizard
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Re: Please define "cash"

Post by MathWizard » Tue Oct 10, 2017 1:47 pm

For me, anything that is
  • highly liquid, and
    backed by the "full faith and credit of the US Government"
is the same as the US dollar. This includes dollars, FDIC insured savings, CDs, treasury notes.

These have no more risk than holding dollars.

Non-FDIC Money markets are probably safe as well, but would fail my definition.

I don't include bonds, they could lose value, or even become worthless, the same with stocks.

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Re: Please define "cash"

Post by azanon » Tue Oct 10, 2017 3:18 pm

dbr wrote:
Mon Oct 09, 2017 4:06 pm
I think the discussion of what is cash is not very interesting because cash in the pure sense is not a useful asset to hold in the sense of asset allocation. If a person does have a reason to hold cash it is still sufficient to just consider this a form of fixed income for portfolio purposes.
I found your overall explanation very good, but I'm not sure I can agree that cash - let's say for example Money Market funds - is not a useful asset to hold in an asset allocation. Money market funds score very highly in terms of both stability of principle as well as stability of interest. Granted that interest is quite low to non-existent these days, but even I'm old enough to remember a money market fund paying pretty decent. What good is maximum stability of principle and interest in a portfolio? It reduces volatility.

One might be surprised just how well CASHX in doses of 5-10%, helps a portfolio at portfoliovisualizer. Not the return, mind you, but the risk-adjusted return.

dbr
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Re: Please define "cash"

Post by dbr » Tue Oct 10, 2017 3:23 pm

azanon wrote:
Tue Oct 10, 2017 3:18 pm
dbr wrote:
Mon Oct 09, 2017 4:06 pm
I think the discussion of what is cash is not very interesting because cash in the pure sense is not a useful asset to hold in the sense of asset allocation. If a person does have a reason to hold cash it is still sufficient to just consider this a form of fixed income for portfolio purposes.
I found your overall explanation very good, but I'm not sure I can agree that cash - let's say for example Money Market funds - is not a useful asset to hold in an asset allocation. Money market funds score very highly in terms of both stability of principle as well as stability of interest. Granted that interest is quite low to non-existent these days, but even I'm old enough to remember a money market fund paying pretty decent. What good is maximum stability of principle and interest in a portfolio? It reduces volatility. At best, that's an opinion, and many people by their actual portfolios actively disagree with it.

One might be surprised just how well CASHX in doses of 5-10%, helps a portfolio at portfoliovisualizer.
I didn't say cash was not a useful asset for portfolio purposes. I said or at least meant that calling out cash as an asset distinct from fixed income generally is not useful. I suppose technically we could put cash on the spectrum of lowest returning lowest risk fixed income which spectrum then runs upward in factors of duration and credit risk to an opposite extreme as far as fixed income goes.

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Re: Please define "cash"

Post by azanon » Tue Oct 10, 2017 3:29 pm

I read or understood you to have said that cash is not useful to hold in a portfolio. If you meant something else, sorry for the misunderstanding. And, yes, I do tend to distinguish cash and cash equivalents from bonds. Bonds, or debt instruments, are varying degrees of more volatile/risky than cash depending on the type, credit rating, duration, etc., not to mention generally less liquid.

longinvest
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Re: Please define "cash"

Post by longinvest » Tue Oct 10, 2017 3:56 pm

dbr wrote:
Tue Oct 10, 2017 3:23 pm
I didn't say cash was not a useful asset for portfolio purposes. I said or at least meant that calling out cash as an asset distinct from fixed income generally is not useful. I suppose technically we could put cash on the spectrum of lowest returning lowest risk fixed income which spectrum then runs upward in factors of duration and credit risk to an opposite extreme as far as fixed income goes.
I increasingly dislike the term "fixed income" to describe cash and bonds. I prefer to think in terms of stocks, bonds, and cash for investment securities. I would prefer "fixed income" to refer to income which is fixed, like a single premium immediate annuity (SPIA).

The reason I dislike the use of "fixed income" when referring to bonds and cash, is that a) neither provides income which is fixed in the long term and b) the term is misleading for new investors unaware of that fact.

The distinction between bonds and cash is important. Some new investors learning about of bonds and thinking that they're "fixed income" are unsettled when they learn that both the NAV and the distributions of a bond fund fluctuate. If, instead, we kept a clear distinction between bonds and cash, it would become clear that bonds have a fluctuating market value, whereas cash has a stable value.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

dbr
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Re: Please define "cash"

Post by dbr » Tue Oct 10, 2017 4:11 pm

longinvest wrote:
Tue Oct 10, 2017 3:56 pm
dbr wrote:
Tue Oct 10, 2017 3:23 pm
I didn't say cash was not a useful asset for portfolio purposes. I said or at least meant that calling out cash as an asset distinct from fixed income generally is not useful. I suppose technically we could put cash on the spectrum of lowest returning lowest risk fixed income which spectrum then runs upward in factors of duration and credit risk to an opposite extreme as far as fixed income goes.
I increasingly dislike the term "fixed income" to describe cash and bonds. I prefer to think in terms of stocks, bonds, and cash for investment securities. I would prefer "fixed income" to refer to income which is fixed, like a single premium immediate annuity (SPIA).

The reason I dislike the use of "fixed income" when referring to bonds and cash, is that a) neither provides income which is fixed in the long term and b) the term is misleading for new investors unaware of that fact.

The distinction between bonds and cash is important. Some new investors learning about of bonds and thinking that they're "fixed income" are unsettled when they learn that both the NAV and the distributions of a bond fund fluctuate. If, instead, we kept a clear distinction between bonds and cash, it would become clear that bonds have a fluctuating market value, whereas cash has a stable value.
One of my favorite quips is that fixed income is neither fixed nor income. Historically however, fixed income would refer to people owning bonds and living on the fixed income from the coupons.

I think your thoughts about the terminology are well taken but it isn't likely usage is going to change.

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Re: Please define "cash"

Post by nisiprius » Tue Oct 10, 2017 4:49 pm

hacksaw2025 wrote:
Mon Oct 09, 2017 3:32 pm
...What is meant by the term "cash" as it relates to one's portfolio asset allocation?...
Beware of false precision, and always keep in mind the reason why you're trying to do something. In an investment portfolio, particularly a retirement savings portfolio, you usually want to include fairly liquid assets that have easily and accurately determined values, and that can be rebalanced. All mutual funds would meet that criterion.

So, we are going to break our portfolio into three categories with the idea that things in each category behave similarly to other things in that category, and differently from things in other categories. No category definition is cut and dried. (We need to be careful of "cheating." For example, low-credit-quality bonds (euphemistically called "high yield") might be described as "somewhat stock-like bonds," so if we are 60% "bonds" but our bond allocation has a lot of "high yield" bonds in it, then our portfolio is a bit riskier and has a bit higher return than you might expect from the 60% number.)

Anyway, I am going to produce a massive and unreadable chart in which I am going to include three stock funds, three bond funds, and two money market mutual funds--which are normally considered a form "cash."

I'm not even going to tell you which is which. Do you agree that among these eight funds, you can pick out three that have high risk and high return; three more that clearly fall in a different category--lower return but much smoother, less volatile growth charts, with downturns that look very small because of the scaling of this semilog chart--and two more that are clearly in a third category, lowest return but completely smooth. They have no big fluctuations at all, and they only go up, there aren't even the smallest fluctuations downward.

Well, those are stocks, bonds, and "cash." So, to me, there is justification for putting cash into a category of its own, and for asset allocation purposes, the thing that defines the category--this is just my personal definition is that
  • it is as liquid and accurately valued as a money market fund; you can look up today's value, and if it is $12,345.67, you can ask the brokerage to sell it and you will get $12,345.67;
  • it only goes up. No downward fluctuations, ever, no matter how small. If the number you see today is $12,345.67, the number you see a month from now will be at least $12,345.67, not $12,345.66.
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Phineas J. Whoopee
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Re: Please define "cash"

Post by Phineas J. Whoopee » Wed Oct 11, 2017 7:42 pm

longinvest wrote:
Tue Oct 10, 2017 3:56 pm
...
I increasingly dislike the term "fixed income" to describe cash and bonds. I prefer to think in terms of stocks, bonds, and cash for investment securities. I would prefer "fixed income" to refer to income which is fixed, like a single premium immediate annuity (SPIA).
...
A simple bond pays the same amount of money, the coupon, every interval. That's why it's called fixed income. One may not like it, but there it is.
PJW

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joe8d
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Re: Please define "cash"

Post by joe8d » Wed Oct 11, 2017 8:20 pm

Cash is the money in your wallet.Anything that pays interest is a "Debt Instrument".
All the Best, | Joe

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