Portfolio for long-ish term expenses

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TomatoBoy
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Portfolio for long-ish term expenses

Post by TomatoBoy » Mon Oct 23, 2017 4:36 pm

I carry about 7-8 months worth of expenses in terms of cash. Beyond saving for emergencies, there are other expenses that will likely exist in the future. For instance, in 7-10 years we'll need a new roof. At some point, I would like to buy a new car (though mine is running just fine for now). Etc.

Would like to put extra money away each month dedicated towards these types of things. However, already holding so much cash as it is, I don't know if the wisest thing to do is to pile more money in the bank (even at a higher interest online bank). Are there any rules of thumb or bogleheads recommendations concerning a portfolio for the purposes being described here? Perhaps half (or more) cash, half equities? Maybe some mix of muni bonds and equities? Too heavy on the stock side can be problematic in the event of a poorly timed crash, but too heavy on cash can also be a problem because the money will be piling up, uninvested, for years upon years.

Any insights would be greatly appreciated. Thank you.

EDIT: I did not include the basic portfolio questions information about myself because I didn't view this as a typical portfolio question. As per Sandtrap's recommendation, I have added:

E fund = ~7 times expenses.
Debt = ~300k mortgage (worth ~425k)
Tax: married, jointly.
Tax Rate: 28% (0 state - FL)
AA for retirement accounts = 90/10 (with 60/40 split between US and international)
Age = 30

I have no taxable account.
Last edited by TomatoBoy on Mon Oct 23, 2017 5:21 pm, edited 1 time in total.

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Sandtrap
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Re: Portfolio for long-ish term expenses

Post by Sandtrap » Mon Oct 23, 2017 4:49 pm

Depending on one's income stream and expenses, age and expected windfalls or liabilities, and amount of available cash. . . .
Some would consider this. Everyone is different per need and circumstance and how much to keep in each category is unique.

Emergency funds: "X" times annual income: liquid.
Short term: high yield savings, money market account, short term cd's
Mid term: as above perhaps, plus mid term cd's or cd ladder, maybe some of the next category.
Longer term: as above perhaps, plus longer term cd's, cd ladder, short term bond funds, maybe some of the next category.
Longer longer term: as above perhaps, plus intermed term and other bond funds, equity/index funds, etc, etc.


Again, everyone has a unique circumstance and might construct this differently depending on age, risk tolerance, income stream, etc. You might want to post a more detailed question in your context for more specific help tailored to you.
Some helpful links:
Bogle Philosophy
https://www.bogleheads.org/wiki/Bogleh ... hilosophy
Here are links to the wiki's "Getting Started" and "Investing Startup Kit" pages:
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Bogleh ... rt-up_kit
Define General Investment Goals and Objectives
https://www.bogleheads.org/wiki/Invest ... statement
Outline of Investing
https://www.bogleheads.org/wiki/Outline_of_investing
Suggested Reading List
https://www.bogleheads.org/RecommendedReading.php
What the experts say about investing
https://www.bogleheads.org/wiki/What_ ... investing

Do this for better help.
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212

TomatoBoy
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Re: Portfolio for long-ish term expenses

Post by TomatoBoy » Mon Oct 23, 2017 5:15 pm

Thank you for your comment. I understand that the bogleheads philosophy is to view all portoflios as one. I am looking at it a bit differently in that I have 3 buckets. Retirement (which I am on top of), emergency savings (which is there), and then this other type of savings which is for mid-/long-term expenses. I'd like to view this as being separate from my retirement accounts as it has nothing to do with retirement. It is a place to put money that I want to be able to draw from as needed over time to cover expenses, but do not necessarily want all in cash because, for an expense that is 7+ years away, that's a long time to hold a lot of cash.

From your points raised, it seems like most of this money would go into CDs. I am with Discover bank and they have some attractive options. I will look into those and others. Thanks for the insight. I will edit my initial post to include some additional details.

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Sandtrap
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Re: Portfolio for long-ish term expenses

Post by Sandtrap » Mon Oct 23, 2017 6:26 pm

Since you mentioned "buckets", here are some threads that can explore how you might best allocate your funds. Just "google" the Boglehead forum for "buckets".
Bucket portfolios:
viewtopic.php?t=196485
Buckets vs Bogleheads
viewtopic.php?t=95440

pkcrafter
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Re: Portfolio for long-ish term expenses

Post by pkcrafter » Mon Oct 23, 2017 6:57 pm

Thank you for your comment. I understand that the bogleheads philosophy is to view all portoflios as one.
Not quit right. View all accounts marked for retirement as one portfolio.
I carry about 7-8 months worth of expenses in terms of cash.
So, you have an EF (emergency fund) that covers 7-8 months of living expenses? Does your wife work? At the same company? Do you have children?

Normally we don't recommend money needed in less than 5-6 years be in the market, but that may depend on how much you are counting on it being all there when you need it.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

TomatoBoy
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Re: Portfolio for long-ish term expenses

Post by TomatoBoy » Mon Oct 23, 2017 8:52 pm

pkcrafter wrote:
Mon Oct 23, 2017 6:57 pm
Thank you for your comment. I understand that the bogleheads philosophy is to view all portoflios as one.
Not quit right. View all accounts marked for retirement as one portfolio.
I carry about 7-8 months worth of expenses in terms of cash.
So, you have an EF (emergency fund) that covers 7-8 months of living expenses? Does your wife work? At the same company? Do you have children?

Normally we don't recommend money needed in less than 5-6 years be in the market, but that may depend on how much you are counting on it being all there when you need it.

Paul
Thanks Paul. Yes, 7-8 months in expenses in efund. Expenses are about 6.5k/month (can be brought down in an actual emergency to stretch it out even longer). Wife does work. Different company/sector. No children at the moment, will be planning in for some in near future though.

jmk
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Re: Portfolio for long-ish term expenses

Post by jmk » Tue Oct 24, 2017 12:31 pm

TomatoBoy wrote:
Mon Oct 23, 2017 4:36 pm
in 7-10 years we'll need a new roof. At some point, I would like to buy a new car (though mine is running just fine for now). Etc.
I'm in same position and I use a separate taxable bucket for anticipated expenses over next 7-10 years: roof, a/c, new car, etc. I have my long term monies spread across misc tax-efficient assets; but I keep this "medium term expenses" in taxable separate bucket for convenience and to make sure I don't miscalculate and appropriate monies I'll need for essential expenses.

The problem is one needs liquidity for these type of high expense items: I found the easiest way to do this is with the Lifestrategy funds and breakable CDs. I like the LS funds since they are quite diversified internationally on both the bond and stock side, so less volatile than a simple TSM/TBM alternative. (With long-term funds there is plenty of time to recover; but for these expenses I don't want too many surprises.) You can mix them to get any combination stock/bond. I decided on 30% stock allocation given the 7-10 year time frame. Because CDs tend to offer better rates than bonds, I finally decided on the following allocation:
  • 50% Lifestrategy Moderate
  • 50% Breakable 5-10 year CDs
This comes to 30% equity, 20% bonds, 50% CDs and ensures I have enough liquidity for when the a/c gives out or other unanticipated expenses. The downside is it's mostly taxed at marginal rate. Also, bonds are not yielding as much as CDs, so I am giving up some yield for liquidity.
Last edited by jmk on Tue Oct 24, 2017 4:04 pm, edited 2 times in total.

aristotelian
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Re: Portfolio for long-ish term expenses

Post by aristotelian » Tue Oct 24, 2017 12:42 pm

I have "one portfolio" but I hold I-Bonds and muni bonds for this purpose. I don't consider them separately as a "roof account" and "car account" etc, but rather as a second layer after my emergency fund that guarantees some stable and liquid assets while also counting as part of the bond allocation of my overall portfolio.

If I need a new roof, I don't necessarily draw from those funds. If stocks are up, I might realize some capital gains. At any point in time, you want to stick to your allocation and pay as little tax as possible.

LeeMKE
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Re: Portfolio for long-ish term expenses

Post by LeeMKE » Tue Oct 24, 2017 12:55 pm

You are correctly describing an emergency fund and a SINKING FUND.

This is exactly the way I worked when I was a consultant. I first funded my emergency fund (size was based on my estimation of how long a drought in income I might suffer). Then, I worked up those expenses that weren't "emergency" but certain, and created a separate plan to save for those expenses.

Most folks here bundle all that into their emergency fund, but that would not make sense to me because I might use a different time horizon for each. The emergency fund needed a certain amount liquid, and the rest could be laddered (maturing each quarter, but not immediately liquid). The sinking fund had a few big items with pretty well guessed time due, and that affected where I held that money.

You have the right idea. I used a spreadsheet to outline how much money would be needed when, and then invested it accordingly.
The mightiest Oak is just a nut who stayed the course.

Nearly A Moose
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Re: Portfolio for long-ish term expenses

Post by Nearly A Moose » Tue Oct 24, 2017 1:12 pm

Here's what I'd do if I were in your shoes: invest either your "medium term expense" fund or your medium term expense fund AND your emergency fund in a reasonably conservative allocation that has both stock and bond allocation. This could be a single all-in-one fund or a simple combination of stock and bond funds. I'd lean toward the latter. But this could be something like a 40/60 stock/bond allocation, a LifeStrategy fund, or something like Vanguard's Wellesley fund.

Here's why: You are saving for several large expenses a number of years out, the expenses are not necessarily correlated with each other (or can be actively dis-correlated from each other, for example, by postponing a car purchase if you have to replace the roof that year), and this sounds like it's going to be a bucket that's perpetually in existence (as opposed to a downpayment fund for a "forever house," which gets depleted at the end). Therefore, this bucket will exist for a long time (a reason to have some stock exposure and to protect against inflation), and all the money doesn't actually need to be there at any given time, just enough to cover some subset of the expenses. You therefore can afford to take some risk on the money available, and you could actually stand to benefit from the long-term opportunities offered by the stock market.

Let's say you create a bucket with 40% total stock market and 60% total bond (or a tax-exempt bond fund if more appropriate). According to Portfolio Visualizer, since 1987, this would have resulted in a real CAGR of 5.24%, 6.59% standard deviation, and a max drawdown of just slightly less than 20% over this period. Outside of the Great Recession, next-highest drawdowns are ~13% (1987) and ~7% (2002). So, based on historical results, you can reasonably anticipate this allocation to drop by as much as 20% (of course, it could drop more, could drop less). Based on the expenses you described, that sounds like a very tolerable risk, especially relative to the much better return you'd get compared to a CD.

Let's say you took this approach and eventually get $40,000 in this bucket: $20,000 for a roof and $20,000 for a car. Odds are, you'll use this money when the market is on an upswing, because it's usually on an upswing. But assume the time you need to fix your roof coincides with a Great Recession-style market crash, and what should have been a $40,000 bucket is down to $32,000 (a 20% drop). No problem, because this bucket is way overfunded for your roof replacement needs (because there's also car money in there). You just sell $20,000 of bonds (you'll have enough bonds because you weighted it 40/60 and it was the stock component that tanked, not the bonds), buy your new roof, and hold onto the stock portion long enough for it to recover (and you're probably continuing to save into this bucket all along too). All the while, you've been able to enjoy higher returns from this strategy than you would have from a CD, so you either have more money in this bucket than you needed or otherwise would have had, or you've been able to build the bucket large enough more quickly thanks to the returns. The more different categories of expenses that you put into this "medium term" bucket, the less risky this strategy becomes.

Full disclosure: I've borrowed this idea from Betterment, who probably borrowed it from someone else. They use it for their emergency fund strategy. They say to overfund your emergency fund by ~30%, invest it roughly as described above, and you will have a greater expected value than if you just saved the emergency fund into the bank and invested the overage, while giving yourself enough of a cushion to absorb a market downturn. I really like the math. And I think it's particularly appropriate for your needs because you (1) have a longish time horizon and (2) have multiple sub-buckets within this fund, so it in effect has the overfunding built in, as per the example above. The most significant risk would come if you needed every single dollar out of this fund all at once, but that seems unlikely based on the nature of the expenses, and it's a small risk I personally would be willing to take on for the better returns.

You mentioned the "Boglehead way" (my words, not yours) in your OP. I don't think there's one way, although many here are very conservative for money you feel need to have. But you might also want to consider rolling your entire emergency fund bucket plus your medium term expense bucket into this strategy (just use a spreadsheet or two separate brokerage accounts with similar AAs if you want to be able to track how much is in each bucket). Again, you'll put that emergency fund money to better use, and if you found yourself really up against (job lost in a Great-Recession-style crash), you could always fall back on the car money (you're probably not buying a shiny new car under those circumstances).

Finally, the other way to approach this is to simply roll the medium-term money into your overall portfolio and not worry too much about it. This seems to be an approach that many who have "made it" follow, as it simplifies things. You would just want to make sure you have a way to tap bond funds so that you're not forced to liquidate stocks during a downturn.

Hope this gives you something to think about.
-Moose
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

LeeMKE
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Re: Portfolio for long-ish term expenses

Post by LeeMKE » Tue Oct 24, 2017 1:15 pm

+1 Moose
The mightiest Oak is just a nut who stayed the course.

jmk
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Re: Portfolio for long-ish term expenses

Post by jmk » Tue Oct 24, 2017 4:32 pm

Nearly A Moose wrote:
Tue Oct 24, 2017 1:12 pm
Let's say you create a bucket with 40% total stock market and 60% total bond (or a tax-exempt bond fund if more appropriate). According to Portfolio Visualizer, since 1987, this would have resulted in a real CAGR of 5.24%, 6.59% standard deviation, and a max drawdown of just slightly less than 20% over this period. Outside of the Great Recession, next-highest drawdowns are ~13% (1987) and ~7% (2002). So, based on historical results, you can reasonably anticipate this allocation to drop by as much as 20% (of course, it could drop more, could drop less). Based on the expenses you described, that sounds like a very tolerable risk, especially relative to the much better return you'd get compared to a CD.
What you're saying makes sense in some contexts such as misc expenses, especially if you have other sources for paying. But if this is a true "emergency fund", like what Betterment discusses, wouldn't you want something safer from Black Swans? I think of an emergency fund as money you cannot afford to lose: home, food, health insurance. You have to know it's going to be there; so you don't want to take risks based solely on the presumption that the market has only dropped 13/7/20% since 1987.

Nearly A Moose
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Re: Portfolio for long-ish term expenses

Post by Nearly A Moose » Tue Oct 24, 2017 9:09 pm

jmk wrote:
Tue Oct 24, 2017 4:32 pm
Nearly A Moose wrote:
Tue Oct 24, 2017 1:12 pm
Let's say you create a bucket with 40% total stock market and 60% total bond (or a tax-exempt bond fund if more appropriate). According to Portfolio Visualizer, since 1987, this would have resulted in a real CAGR of 5.24%, 6.59% standard deviation, and a max drawdown of just slightly less than 20% over this period. Outside of the Great Recession, next-highest drawdowns are ~13% (1987) and ~7% (2002). So, based on historical results, you can reasonably anticipate this allocation to drop by as much as 20% (of course, it could drop more, could drop less). Based on the expenses you described, that sounds like a very tolerable risk, especially relative to the much better return you'd get compared to a CD.
What you're saying makes sense in some contexts such as misc expenses, especially if you have other sources for paying. But if this is a true "emergency fund", like what Betterment discusses, wouldn't you want something safer from Black Swans? I think of an emergency fund as money you cannot afford to lose: home, food, health insurance. You have to know it's going to be there; so you don't want to take risks based solely on the presumption that the market has only dropped 13/7/20% since 1987.
To each their own, and I wouldn't want someone to put their efund into an allocation like this if they couldn't sleep well at night. But OP was expressing concern about trying up a lot of money in a bank account. And the scenario I drew up includes the second worst financial collapse in our history, with the stock market dropping 50%. If the stock market drops 90% like it did in the depression, that allocation drops 36% (I'll admit I don't know what Treasuries did during the depression). But one reason I suggested combining the efund and the medium term fund was to build in a buffer.

I guess I'm also not really holding an emergency fund with a true black swan / deep risk event in mind, at least as I understand that term. I don't have much actual cash accessible, and I don't hold precious metals, either tangible or in a fund. If we're talking collapse-of-the-us-government-bad, then I doubt I'd get much money out of my savings account either. But perhaps I misunderstood the risk you're thinking about, and in any event, to each their own.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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