AA Conundrum - Cash vs Bonds

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Topic Author
tindel
Posts: 148
Joined: Sun Nov 12, 2017 10:06 am

AA Conundrum - Cash vs Bonds

Post by tindel » Thu Jan 10, 2019 12:18 am

I have a desired AA of 60/20/20 - US Stock/US Bond/Int'l

As I've matured in my investing I've continued to realize that all of my assets are part of my AA. Including cash. So if I include my emergency fund in my AA as cash then I'm holding ~20% of my assets in cash. So I started thinking about considering my I-bonds as part of my bond allocation. When I do that then I end up holding ~10% of my assets in cash - that's more palatable, more than I'd like (Ideally I would not hold cash per my AA), but I want some liquidity too.

There's only one problem with doing this. If I consider my I-bonds part of my bond allocation then they end up being ~60% of my bond allocation (12% of my total portfolio). I'm not sure this is wise. The rest of my bond allocation is in intermediate bonds with about a 6 year duration and 30-day yields of ~3.1%.

I've also thought about holding my emergency fund in intermediate bonds within my portfolio as a whole, but I have concerns with maintaining liquidity as most of my assets are in retirement accounts that I don't want to touch for a while. So if I were to do this, I'd have to either hold these bonds in taxable accounts or hold my money in a higher risk investments within taxable accounts while holding the bonds in retirement funds which opens myself up to liquidity risk.

To confuse matters more, nearly my entire EF are in investments yielding about 2.2% or better (pre-tax). Essentially short-term bonds. Therefore, if I considered all of my EF as bonds then I wouldn't hold any intermediate bonds at all!

How have others here rationalized how to consider their cash vs bond allocation? I'm just not sure what to do now that I'm realizing that holding onto cash is throwing off my AA.

Dandy
Posts: 5865
Joined: Sun Apr 25, 2010 7:42 pm

Re: AA Conundrum - Cash vs Bonds

Post by Dandy » Thu Jan 10, 2019 8:36 am

I think of my fixed income in 3 categories:
1. No loss of principal - e.g. FDIC products, Money Market Funds, I bonds, EE bonds, Stable Value funds, Individual Treasury Bills, etc. The assumption is that they will be held to maturity. Their common quality is safety.

2. Short Term bond funds

3. Intermediate bond funds including the portion of any TD, Life Strategy, or Balanced Funds that is allocated to bonds.

I count all of the above as just fixed income -- my allocation is equities/fixed income.

I wouldn't get too hung up on cash vs bonds. When your riskiest fixed income is a decent intermediate bond fund you aren't taking that much risk with your fixed income. The risk for an intermediate bond fund or other fixed income cited above pale when compared to equities that can drop 50% or more.

Monster99
Posts: 173
Joined: Tue Aug 29, 2017 10:28 am

Re: AA Conundrum - Cash vs Bonds

Post by Monster99 » Thu Jan 10, 2019 9:43 am

I consider term investments (CD, ibonds) as part of fixed income. If I can pull money TODAY, I call it cash and consider it separate... My AA is 55/42/3 (stock/bond/cash) with 15% international.

dbr
Posts: 29798
Joined: Sun Mar 04, 2007 9:50 am

Re: AA Conundrum - Cash vs Bonds

Post by dbr » Thu Jan 10, 2019 9:48 am

I don't think there is a problem that should concern you. If your situation is such that you have quite a bit in emergency funds and haven't accumulated a lot in other investments yet, then by nature you may be a little cash heavy. That is expected.

I bonds are the same way. Because there are limits on how much you can purchase each year it can make sense to get ahead of the curve by starting early. Just as with the E fund when your total investing has not built up a lot it may seem too much is in I bonds, but it really is not a problem.

Note that I bonds are not a bad way to hold emergency funds with the one issue that if you really do have to cash them out they are hard to replace quickly when you recover. You also have to allow for the one year and five year limits on I bonds.

Topic Author
tindel
Posts: 148
Joined: Sun Nov 12, 2017 10:06 am

Re: AA Conundrum - Cash vs Bonds

Post by tindel » Thu Jan 10, 2019 9:56 am

Well, I found this post: viewtopic.php?t=217262

It talks a lot about my conundrum. It seems that there are as many opinions as [expletive]. Which doesn't help me figure out what to do.

Up until this point I've considered my Ibonds to be part of my bond portfolio. I'm currently growing my I-bond as part of my emergency fund - however, I'm not sure that's wise considering intermediate bonds theoretically yield higher returns - as they should since they can be longer term investments.

I guess my real questions are
1) Can I sleep at night with 12% of my portfolio in Ibonds instead of intermediate bonds?
2) Which is a better investment I-bonds or intermediate?
3) Is it worth considering my entire EF as part of my bond allocation? This would be ~20% and I would be buying intermediate bonds with new money.

dbr
Posts: 29798
Joined: Sun Mar 04, 2007 9:50 am

Re: AA Conundrum - Cash vs Bonds

Post by dbr » Thu Jan 10, 2019 10:15 am

tindel wrote:
Thu Jan 10, 2019 9:56 am

I guess my real questions are
1) Can I sleep at night with 12% of my portfolio in Ibonds instead of intermediate bonds?

That's simple. Yes. If you can't you need a psychiatrist rather than investment advice. (That is meant as an expression and not as an insult). Besides that I bonds are effectively intermediate bonds. I don't understand the problem.

2) Which is a better investment I-bonds or intermediate?

Neither is a better investment than the other in general. They do have different operational details that may fit a person's situation better or worse. I am not that busy this morning so I will list a few:

a. I bonds are indexed for inflation and intermediate bonds other than TIPS are not.
b. I bonds maintain a fixed dollar value for redemption. Normal bonds are priced on the market at all times. However, CDs also maintain a fixed dollar value for redemption but there are no inflation indexed CDs
{comment: Fluctuation at market price is an over-rated problem for the long term investor including almost everyone posting here. Many people argue that inflation indexing over long times is an exaggerated and unneeded benefit as well. It might be important to someone especially concerned with the impact of inflation on their situation.}
c. I bonds income is tax deferred. That is like putting the money into a TIRA. That also makes I-bonds partly pointless in an actual IRA. I bonds income is also state tax exempt. That is also true of any other Treasury bonds. Muni bonds exist that are federal tax exempt and may also be state tax exempt. For high tax individuals there may be meaningful tax choices among bonds.
d. There are no I bond mutual funds. Intermediate bond mutual funds are very convenient and very effective. That can include a TIPS mutual fund if you want inflation indexed bonds. Some people prefer not to add an additiional account at Treasury Direct or to engage in the tracking of separate bond holdings.
e. One big one. There is an annual purchase limit on I bonds which means you don't get to save and invest for years and then decide you want you money in I bonds. This may be a good reason to start buying them now.


Jack FFR1846
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Re: AA Conundrum - Cash vs Bonds

Post by Jack FFR1846 » Thu Jan 10, 2019 10:48 am

You can think of ibonds however you want, but don't get yourself all twisted up about it.

How I document it all on my spread sheet: iBonds are bonds. Period. Equity....US and International are obvious. Cash anywhere: I don't count it in my AA at all. You can if you want. I add it in for a net worth number (which is mostly meaningless).

Shrug. I went 20 years without ever looking at any of my accounts except for moving to random new choices when I changed jobs and I did fine. Don't overthink this whole thing.
Bogle: Smart Beta is stupid

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