The cost of excess cash in portfolio
Posted: Tue Dec 19, 2017 10:23 am
Just doodling around with some numbers. Does this seem sound? I'm trying to calculate the "cost" of having a larger Cash allocation.(Using my assumptions, of course).
Assumptions:
Portfolio: $1,000,000
Residual Living Expenses(RLE): 25,000 per year
Asset Allocation: 60/40 (Stocks/Bonds)
Retired
Expected Total Return:
Cash 1.3%
Bonds 2.6%
Stocks 7.5%
Example 1.
Cash $25,000 x 1.3% = $325
Bonds $375,000 x 2.6% = $9,750
Stocks $600,000 X 7.5% =$45,000
Total $1,000,000 x 5.51% = $55,075
Example 2.
Cash $100,000 x 1.3% = $1,300
Bonds $300,000 x 2.6% = $7,800
Stocks $600,000 X 7.5% =$45,000
Total $1,000,000 x 5.41% = $54,100
In Example 1, you have $25,000 in Cash which is equal to 1 year's RLE. In Example 2, you increase your Cash to cover 4 year's of RLE This was done by increasing Cash by $75,000 and decreasing Bonds by the same $75,000. Stocks stay the same.
Portfolio 1 with the smaller allocation to Cash has a total return of 5.51% ($55,075) and Portfolio 2 with the larger allocation to Cash has a total return of 5.41% ($54,100)
So, in this example, the annual "cost" of the additional cash is 0.10%. ($975)
In my real portfolio I'm somewhat heavy in cash. I'm just trying to make myself feel good by saying that the "cost" of the additional security of the extra cash is minimal.
Comments?
1210
Assumptions:
Portfolio: $1,000,000
Residual Living Expenses(RLE): 25,000 per year
Asset Allocation: 60/40 (Stocks/Bonds)
Retired
Expected Total Return:
Cash 1.3%
Bonds 2.6%
Stocks 7.5%
Example 1.
Cash $25,000 x 1.3% = $325
Bonds $375,000 x 2.6% = $9,750
Stocks $600,000 X 7.5% =$45,000
Total $1,000,000 x 5.51% = $55,075
Example 2.
Cash $100,000 x 1.3% = $1,300
Bonds $300,000 x 2.6% = $7,800
Stocks $600,000 X 7.5% =$45,000
Total $1,000,000 x 5.41% = $54,100
In Example 1, you have $25,000 in Cash which is equal to 1 year's RLE. In Example 2, you increase your Cash to cover 4 year's of RLE This was done by increasing Cash by $75,000 and decreasing Bonds by the same $75,000. Stocks stay the same.
Portfolio 1 with the smaller allocation to Cash has a total return of 5.51% ($55,075) and Portfolio 2 with the larger allocation to Cash has a total return of 5.41% ($54,100)
So, in this example, the annual "cost" of the additional cash is 0.10%. ($975)
In my real portfolio I'm somewhat heavy in cash. I'm just trying to make myself feel good by saying that the "cost" of the additional security of the extra cash is minimal.
Comments?
1210