Cash heavy portfolio

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Missing_Out
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Joined: Fri Jan 26, 2018 5:26 pm

Cash heavy portfolio

Post by Missing_Out » Fri Jan 26, 2018 6:17 pm

Curious as to how Bogleheads might approach my situation.

Here’s a summary of my portfolio:

Cash - $2.6mm
Brokerage account: $150k (single stock from prior company)
Restricted company stock: $900k (pretax) vests over 3 years
401k - $225k (50% in cash, 50% in equities)
Other: renting ($2,100/month), no debt, age 39, single, was shooting for early retirement in 1-2 years

Career started during tech crash in 2001 and then post-MBA during financial crisis (hence my aversion to risk).

Have largely believed (and still do) that the market is extremely overvalued. Coming to the conclusion that policy-makers are trapped and will continue to do whatever it takes to keep rates low and equity values (and other financial assets) inflated, given problematic demographic trends and high debt levels, underfunded pensions, etc. So currently getting hit by the 1-2 punch of “missing out” on the rally (have been WAY underinvested since I started accumulating savings just after the financial crisis), while seeing the value of my US dollar holdings decline.

Key question is “what to do now?”. I suspect many of you will advise gradually adding equity exposure until I get to somewhere between 50 and 70% equity allocation. Not sure how I could possibly capitulate at this point, particularly given my views on the market and overall economy. Would anyone here wait for a material reversal (probably not)? Not trying to time the market because I “think we’re due” for a pullback ... it’s more of a strong fundamental view on the market/economy.

All thoughts appreciated in advance.

chicagoan23
Posts: 299
Joined: Thu Jan 29, 2015 4:34 pm

Re: Cash heavy portfolio

Post by chicagoan23 » Fri Jan 26, 2018 7:23 pm

You probably already know this, but all of the factors that you listed are well known and widely considered, and the risks associated with each of them are part of how this stock market is priced. That doesn’t mean you are wrong, but it also doesn’t mean you are right.

So with that out of the way, what type of allocation would you be comfortable with? If you have no need to take risk/grow your portfolio, then you don’t need to put anything in equities. Probably not the best move but it’s your call.

I would at least move the cash into TIPs for some inflation protection.

longleaf
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Joined: Sun Nov 26, 2017 4:13 pm

Re: Cash heavy portfolio

Post by longleaf » Fri Jan 26, 2018 7:26 pm

What are your annual expenses?

Are the equities in your 401k index funds or individual stocks?
Frugality, indexing, time.

mega317
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Re: Cash heavy portfolio

Post by mega317 » Fri Jan 26, 2018 7:47 pm

So if the issue is not being due for a pullback but rather stocks being a fundamentally bad investment, what are you asking?

Missing_Out
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Re: Cash heavy portfolio

Post by Missing_Out » Fri Jan 26, 2018 7:58 pm

longleaf wrote:
Fri Jan 26, 2018 7:26 pm
What are your annual expenses?

Are the equities in your 401k index funds or individual stocks?
Annual expenses are $40k (including rent) vs. $300k of after-tax income (base, bonus, annual vesting).

Issue is that I can’t count on more than 1-2 years in the current job. Earnings likely to drop to ~$100k after-tax annually (to the extent I forgo the early retirement and take another job). And at some point expenses will also go up as I hope to have a family eventually (1-2 kids).

401k is index fund. The 50% weighting to equities is from early January 2018 purchase (yeah ... I moved into all cash the day before the election and felt smart for about 20 minutes on election night).

As to the other question earlier in the thread, I fully appreciate I need to increase equity exposure at some point (and don’t see stocks as “a fundamentally bad investment”). More of a question of timing and execution given current market conditions.

Appreciate that the market digests all available information, but fundamentally believe risk is currently way mis-priced given easy money policies.

Thanks for your responses.

longleaf
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Joined: Sun Nov 26, 2017 4:13 pm

Re: Cash heavy portfolio

Post by longleaf » Fri Jan 26, 2018 8:08 pm

At your age, level of assets and annual spending, I believe you should try a 60/40 stocks/bonds. As you get comfortable you can change if necessary.

Have you used firecalc? Remember: Time in the market, not timing the market. Enjoy your early retirement! :sharebeer
Frugality, indexing, time.

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corn18
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Re: Cash heavy portfolio

Post by corn18 » Fri Jan 26, 2018 8:10 pm

Missing_Out wrote:
Fri Jan 26, 2018 6:17 pm
Not trying to time the market
Missing_Out wrote:
Fri Jan 26, 2018 7:58 pm
More of a question of timing
I sense a disturbance in the force.

Missing_Out
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Joined: Fri Jan 26, 2018 5:26 pm

Re: Cash heavy portfolio

Post by Missing_Out » Fri Jan 26, 2018 8:34 pm

corn18 wrote:
Fri Jan 26, 2018 8:10 pm
Missing_Out wrote:
Fri Jan 26, 2018 6:17 pm
Not trying to time the market
Missing_Out wrote:
Fri Jan 26, 2018 7:58 pm
More of a question of timing
I sense a disturbance in the force.
You caught me!

I generally don’t believe in market timing as a practical strategy over time. Just feel this is a somewhat unique time and would like to avoid losing a chunk of my nest egg when the market corrects. It’s easier to handle the drop when you’re already playing with house money.

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Leif
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Re: Cash heavy portfolio

Post by Leif » Fri Jan 26, 2018 8:43 pm

Missing_Out wrote:
Fri Jan 26, 2018 8:34 pm
Just feel this is a somewhat unique time and would like to avoid losing a chunk of my nest egg when the market corrects. It’s easier to handle the drop when you’re already playing with house money.
The house takes it's cut, but it is all your money.

Given that no one knows the direction of the market over the short term (or really even the long term), you should look into either dollar cost average or value averaging. Yes, the market is high measured by daily new records and P/E ratios. However, P/E ratios have been higher.

Select a period, say 1 year, and buy each month or quarter. If the market drops you don't stop, you just buy more shares with the same $s. But first you must determine your asset allocation. Lots of posts here on that.

Eric76
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Re: Cash heavy portfolio

Post by Eric76 » Fri Jan 26, 2018 8:50 pm

Missing_Out wrote:
Fri Jan 26, 2018 8:34 pm
corn18 wrote:
Fri Jan 26, 2018 8:10 pm
Missing_Out wrote:
Fri Jan 26, 2018 6:17 pm
Not trying to time the market
Missing_Out wrote:
Fri Jan 26, 2018 7:58 pm
More of a question of timing
I sense a disturbance in the force.
You caught me!

I generally don’t believe in market timing as a practical strategy over time. Just feel this is a somewhat unique time and would like to avoid losing a chunk of my nest egg when the market corrects. It’s easier to handle the drop when you’re already playing with house money.
You indicated that you've had a cash heavy portfolio since the financial crisis. So you've essentially been market timing (very poorly may I add) for going on a decade. Eventually the market will go down, but you've timed it so poorly thus far, what makes you think you can time it better starting now? A 60/40 mix is probably the way to go IMO.

RangerHD
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Joined: Fri Jan 26, 2018 8:50 pm

Re: Cash heavy portfolio

Post by RangerHD » Fri Jan 26, 2018 8:52 pm

I liked it when someone on here said the market generally hangs out about the Peak of the market most of the time. Waiting for a correction can be a long endeavor.

Yenah
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Re: Cash heavy portfolio

Post by Yenah » Fri Jan 26, 2018 8:55 pm

I'm going to go against the grain and suggest that with that huge pile of cash and relatively low expenses you have the luxury of moving slowly.

You already have significant equity exposure. I suggest you migrate your current equity exposure to a mix of index funds, such as total international and total stock market index by immediately selling the $150K in the single stock and buying one or both of those funds. You can do total international if you feel international stocks are not currently as pricey as US stocks. That will bring you to around $262,500 in equity index funds. Then, as your restricted stock becomes unrestricted sell it and put the after-tax proceeds toward more index funds. That should bring you to somewhere around $600K to $1M in equities in three years, depending on what the markets and your company stock do over the next few years.

If you wanted to move just a little bit more you could move to 100% equities in your 401K, or buy a bond fund there and convert an equivalent amount of your cash pile to equity index funds.

Finally, move your cash to a mix of cash, TIPs, and treasuries.

At a later date, perhaps after a correction or crash, you might feel comfortable putting a little more into equities, but I think you might be good to go with $2.6 million in cash and bonds and around $1 million in equity index funds.

DrGoogle2017
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Re: Cash heavy portfolio

Post by DrGoogle2017 » Fri Jan 26, 2018 9:17 pm

I would slowly DCA, even with very small amount. If the market has a correction, move more into equities. Lump sum usually is the advice here but if you can't stomach it, then DCA.

SimplicityNow
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Re: Cash heavy portfolio

Post by SimplicityNow » Fri Jan 26, 2018 11:18 pm

First you need to realize that whatever way you want to phrase it or couch your words. You're market timing.

To put it bluntly: You have been wrong the past ten years, why do you think you are right now?

Until you learn that you really don't know any better then anyone else about what the market is doing, no advice is really going to help you.

You have a huge percentage of your portfolio in 2 stocks. At least diversify those into a few index funds.

Finridge
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Re: Cash heavy portfolio

Post by Finridge » Sat Jan 27, 2018 1:43 am

SimplicityNow wrote:
Fri Jan 26, 2018 11:18 pm
First you need to realize that whatever way you want to phrase it or couch your words. You're market timing.

To put it bluntly: You have been wrong the past ten years, why do you think you are right now?

Until you learn that you really don't know any better then anyone else about what the market is doing, no advice is really going to help you.

You have a huge percentage of your portfolio in 2 stocks. At least diversify those into a few index funds.
This is spot on. Classic case of losing literally millions of dollars in potential gains due to attempting to time the markets.

And your portfolio is mostly in cash. You'd have done quite a bit better if all the cash had even just been in bonds. I'd suggest spending some time reading some of the books recommended in the Boghleads wiki. I suggest starting with the Four Pillars of Investing and A Random Walk Down Wall Street.

If it makes you feel any better, I've been guilty of the same thing, but on a smaller scale--doing this with a much smaller portion of my portfolio and over a shorter time.

I recommend putting your cash back into the market. Treat it like you would a windfall. https://www.bogleheads.org/wiki/Managing_a_windfall You need to arrive at an asset allocation first. Then decide if you are going to invest it lumpsum or trickle it in via dollar-cost averaging.

Archimedes
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Joined: Wed Feb 15, 2017 11:27 am

Re: Cash heavy portfolio

Post by Archimedes » Sat Jan 27, 2018 2:08 am

Over a long period it is highly likely for you to be better off invested rather than in cash. However, given your large cash position, it is clear that market volatility scares the heck out of you.

Based on your psychological fears, I think it would be best for you to first choose an asset allocation that you are comfortable with, and for you to then start small with an automatic monthly transfer into investments from cash. If you put the transfer on autopilot, it gets easier. Over time, as you slowly (hopefully) become more comfortable, you could decide to increase the amount of your monthly transfer.

Investing is a steady marathon, not a sprint. If it was me, I might use a single vanguard fund such as a life strategy fund with the AA that I was comfortable with to start those small monthly automatic transfers.

BW1985
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Re: Cash heavy portfolio

Post by BW1985 » Sat Jan 27, 2018 6:08 am

You have a net worth of $4mm and only $40k in expenses, you're going to be fine whatever happens to the market because you don't need to take a lot of risk.

Suggest to look at the VG Wellesley Income fund.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

Dandy
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Re: Cash heavy portfolio

Post by Dandy » Sat Jan 27, 2018 7:23 am

I think putting some money in a conservative balanced or all in one fund is where you need to be. Wellesley Income fund, Retirement Income Fund, even LIfe Strategy Income fund might be considered. They have equity exposure of from 20 to say 35% equities. What you get is that for these assets is you are out of the management game and when stocks fall those funds will buy more and when stocks rise they sell stocks and will buy bonds.

It is a very tough time to invest especially for conservative investors - equities seem very overbought and fixed income yields are low and in a rising rate environment that has a drag on bond performance - what is left is low yielding FDIC products or other government guaranteed ones. Too much of those and high inflation becomes a unwanted risk.

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market timer
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Re: Cash heavy portfolio

Post by market timer » Sat Jan 27, 2018 8:10 am

Sounds like you've won the game and the only thing that can derail your plans is losing what you have. My situation is similar, and I'm also cash heavy. The past year was annoying from the perspective of missing out on the rally, but I try to keep in mind that this is not a game where I'm trying to maximize a score, just control my destiny.

Call me a market timer, but I think there will be better opportunities down the road. I think now is a decent time to lock in a certain standard of living in conservative investments--a paid-off primary residence, lots of long term TIPS, some commodities. It's also a good time to work, since the labor market is so tight.

OldSport
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Re: Cash heavy portfolio

Post by OldSport » Sat Jan 27, 2018 8:21 am

Missing_Out wrote:
Fri Jan 26, 2018 6:17 pm
Curious as to how Bogleheads might approach my situation.

Here’s a summary of my portfolio:

Cash - $2.6mm
Brokerage account: $150k (single stock from prior company)
Restricted company stock: $900k (pretax) vests over 3 years
401k - $225k (50% in cash, 50% in equities)
Other: renting ($2,100/month), no debt, age 39, single, was shooting for early retirement in 1-2 years

Career started during tech crash in 2001 and then post-MBA during financial crisis (hence my aversion to risk).

Have largely believed (and still do) that the market is extremely overvalued. Coming to the conclusion that policy-makers are trapped and will continue to do whatever it takes to keep rates low and equity values (and other financial assets) inflated, given problematic demographic trends and high debt levels, underfunded pensions, etc. So currently getting hit by the 1-2 punch of “missing out” on the rally (have been WAY underinvested since I started accumulating savings just after the financial crisis), while seeing the value of my US dollar holdings decline.

Key question is “what to do now?”. I suspect many of you will advise gradually adding equity exposure until I get to somewhere between 50 and 70% equity allocation. Not sure how I could possibly capitulate at this point, particularly given my views on the market and overall economy. Would anyone here wait for a material reversal (probably not)? Not trying to time the market because I “think we’re due” for a pullback ... it’s more of a strong fundamental view on the market/economy.

All thoughts appreciated in advance.
Congratulations on doing remarkably well. May I ask what you do for a living to make such an insanely good income, that is likely 3x pretax than many hardworking professionals?

You seem to have a lower risk tolerance. I would have at least 30-40% in equities and the rest in a shorter term bond fund, such as short term investment grade or short term corporate bond. When markets correct, which may take years, you can slowly reallocate if you'd like.

chicagoan23
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Joined: Thu Jan 29, 2015 4:34 pm

Re: Cash heavy portfolio

Post by chicagoan23 » Sat Jan 27, 2018 8:24 am

Missing_Out wrote:
Fri Jan 26, 2018 7:58 pm
As to the other question earlier in the thread, I fully appreciate I need to increase equity exposure at some point (and don’t see stocks as “a fundamentally bad investment”). More of a question of timing and execution given current market conditions.

Appreciate that the market digests all available information, but fundamentally believe risk is currently way mis-priced given easy money policies.
It is OK to believe that risk is mispriced and that the market is due for a correction, but you just need to consider that you may be wrong.

Put it this way: you are obviously very intelligent and successful, reaching a level of success greater than 95% of the population. You may be right about where the investment markets are heading. On the other hand, consider that Ray Dalio recently said that “it feels pretty stupid to own cash in this kind of environment” and that bonds were entering a bear market. He suggests a greater allocation than normal to stocks. He is also well aware of the risks that you mentioned earlier. Of course many other prominent asset managers agree with that take.

You can’t both be right. Now, consider that it would take you about 4,200 lifetimes to reach the level of wealth that Dalio has achieved. So which of you is correct? I don’t know, and neither does Dalio, and neither do you.

Your best choice would be to come up with a level of risk that you feel comfortable with, and set an asset allocation accordingly. If it is 25% stocks, 25% bonds and 50% cash, that is perfectly reasonable. You’re probably leaving a ton of money on the table and would lose purchasing power due to inflation, but you are well insulated against significant losses.

As mentioned earlier, given what you have already achieved and your expense level, it is almost impossible for you to ever run out of money. You’re also still working. If it were me, I’d put five years of expenses in cash, another five years in bonds, and put the rest in stocks with a 60/40 split between domestic and foreign. In other words, if I were you I’d be 90/5/5. I would do it on Monday morning. I really don’t see the equity markets being lower than they are today in 10 years, although I know it could happen.

If you’re not comfortable with that then decide where you are comfortable and act accordingly. Best of luck to you.

J295
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Re: Cash heavy portfolio

Post by J295 » Sat Jan 27, 2018 8:33 am

Work hard and develop an investment policy statement you believe in and can follow. From my perspective, it doesn’t have to be like mine, or like anybody else on this board, but it needs to be something you believe in and will stick with.

dmk395
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Re: Cash heavy portfolio

Post by dmk395 » Sat Jan 27, 2018 9:00 am

I'd just keep doing what you're doing. The numbers you've got are INCREDIBLE. Only thing your missing is a house!

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F150HD
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Re: Cash heavy portfolio

Post by F150HD » Sat Jan 27, 2018 9:37 am

Missing_Out wrote:
Fri Jan 26, 2018 6:17 pm
Curious as to how Bogleheads might approach my situation.

Here’s a summary of my portfolio:

Cash - $2.6mm
Brokerage account: $150k (single stock from prior company)
Restricted company stock: $900k (pretax) vests over 3 years
401k - $225k (50% in cash, 50% in equities)
Other: renting ($2,100/month), no debt, age 39, single, was shooting for early retirement in 1-2 years

Many above are correct that your efforts to time the market so far have left you out of some really big gains since 2009. That has to be painful....this is where the BH philosophy shines though. Being invested at all times for the long term ensures you share in those gains. Sure, the market will correct at some point, but that is to be expected.

What will you do with your time if you retire in 2 years?

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sperry8
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Location: Miami FL

Re: Cash heavy portfolio

Post by sperry8 » Sat Jan 27, 2018 10:18 am

Missing_Out wrote:
Fri Jan 26, 2018 6:17 pm
Curious as to how Bogleheads might approach my situation.

Key question is “what to do now?”.
I recalled reading an article about the worst market timer. Here it is: http://awealthofcommonsense.com/2014/02 ... ket-timer/
Even this hypothetical man who bought at absolutely the worst time did quite well for himself. I would definitely start getting some of that cash in the market.

Remember also you feel US Stocks are overvalued. Do you feel the same about International Stocks? Emerging Stocks? Frontier Stocks? My point is there are a lot of markets out there. It's not like you are limited to just US Stocks. Still, with all that said... even if you turn out to be the worst market timer, you should be just fine if you stay the course after you invest.

If you want to read more articles like this, google: "if you only buy stocks at market peaks". Then read all the articles on the first page. You will notice something quite interesting.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

anoop
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Re: Cash heavy portfolio

Post by anoop » Sat Jan 27, 2018 1:06 pm

I have a cash heavy portfolio too, perhaps even more than yours. But I own a house so I guess I have some exposure to the markets that way.

Fixed income returns are on the rise now. So I’m enjoying that ride. :)

Things are a bit insane, right now, so is very tempting to join in the party with insane things like this:
https://www.themaven.net/mishtalk/econo ... RAfYpiKZgQ

Yes, that’s a pension fund issuing bonds and planning to invest the money in stocks!!

I have a feeling Dow will hit 100K in 5 years as more and more sovereign and pension funds print money and buy stocks.

It’s hard to sit on the sidelines and watch the insanity but that is what I plan to do.

Newone88
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Re: Cash heavy portfolio

Post by Newone88 » Sat Jan 27, 2018 4:22 pm

I think your post and a lot of the replies support how the psychology of the markets can be the most difficult part of investing in them.
A lot of people have said you've missed out on all the gains over the years, but if you think that way, you're just putting yourself at risk of the fear of missing out (FOMO).

On the other hand you're somewhat fearful of the current market conditions being at risk of a correction.

I am also currently cash heavy (20%) and view it as a balance against my high equity position. Yes I could put more into fixed income and I may, but I'm also ok with being patient and timing a little bit of my portfolio. I agree with another post that discussed the other aspects of the market that may not be as "over priced" as the current US market. And I also agree that you have the luxury of time because of the worth of your portfolio.

I'd be curious what you decide to do in the future.

anoop
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Re: Cash heavy portfolio

Post by anoop » Sat Jan 27, 2018 5:37 pm

Newone88 wrote:
Sat Jan 27, 2018 4:22 pm
I think your post and a lot of the replies support how the psychology of the markets can be the most difficult part of investing in them.
A lot of people have said you've missed out on all the gains over the years, but if you think that way, you're just putting yourself at risk of the fear of missing out (FOMO).

On the other hand you're somewhat fearful of the current market conditions being at risk of a correction.

I am also currently cash heavy (20%) and view it as a balance against my high equity position. Yes I could put more into fixed income and I may, but I'm also ok with being patient and timing a little bit of my portfolio. I agree with another post that discussed the other aspects of the market that may not be as "over priced" as the current US market. And I also agree that you have the luxury of time because of the worth of your portfolio.

I'd be curious what you decide to do in the future.
I hope you’re kidding when you say you’re cash heavy with 20%!

In my book, you’d have to be > 80% cash to be considered cash heavy.

I think we need to form a huddle within bogleheads for people with cash-heavy portfolios. :). They are very rare on here but they do exist.

Newone88
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Re: Cash heavy portfolio

Post by Newone88 » Sat Jan 27, 2018 9:29 pm

anoop wrote:
Sat Jan 27, 2018 5:37 pm
Newone88 wrote:
Sat Jan 27, 2018 4:22 pm
I think your post and a lot of the replies support how the psychology of the markets can be the most difficult part of investing in them.
A lot of people have said you've missed out on all the gains over the years, but if you think that way, you're just putting yourself at risk of the fear of missing out (FOMO).

On the other hand you're somewhat fearful of the current market conditions being at risk of a correction.

I am also currently cash heavy (20%) and view it as a balance against my high equity position. Yes I could put more into fixed income and I may, but I'm also ok with being patient and timing a little bit of my portfolio. I agree with another post that discussed the other aspects of the market that may not be as "over priced" as the current US market. And I also agree that you have the luxury of time because of the worth of your portfolio.

I'd be curious what you decide to do in the future.
I hope you’re kidding when you say you’re cash heavy with 20%!

In my book, you’d have to be > 80% cash to be considered cash heavy.

I think we need to form a huddle within bogleheads for people with cash-heavy portfolios. :). They are very rare on here but they do exist.
I guess I should feel better then! I thought I was holding too much in cash :D

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