Retirees - do you hold extra cash for a bear market?

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snowox
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Re: Retirees - do you hold extra cash for a bear market?

Post by snowox »

I retired about 4.5 years ago and Keep 2 Years in VMMXX and a third year in a CD which in all accounts for about 10% of my portfolio.
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Re: Retirees - do you hold extra cash for a bear market?

Post by sixtyforty »

Hold very little cash. Withdrawing monthly to pay bills from a balanced fund. The fund is set at 35/65, which should last 7+ years with an average 1.5% real return. It's held up okay in past bear markets. Accounts I'm not withdrawing from are set at 60/40.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Flashes1 »

I'm approx. 10 years from retirement; however, as of right now, I expect to keep 2 years of expenses (net of pension & SS) in cash. That would give me peace of mind that the market could decline +50% and I'd still have liquid resources to pay expenses for two years prior to tapping my retirement assets.
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Re: Retirees - do you hold extra cash for a bear market?

Post by catalina355 »

pascalwager wrote: Mon Sep 30, 2019 11:15 pm
catalina355 wrote: Mon Sep 30, 2019 6:28 pm
pascalwager wrote: Mon Sep 30, 2019 3:10 pm
rossington wrote: Sun Sep 29, 2019 1:23 pm
NoblesvilleIN wrote: Sat Sep 28, 2019 12:34 pm From the context of the OP, I am assuming that you mean holding cash to keep from selling equities when they are low and not the idea of "dry powder" to purchase equities when they are low. I am getting ready to start month 10 of my retirement and DW is still working (until the end of this year), so I don't have lots of experience at the retirement thing. We are planning on getting most of our income from the dividends and interest and very little or no income from selling equities and bonds. In a recession, my risk is more from dividends being cut and interest rates being even lower than today. To offset that risk, we have 2 years of expenses in CD's, 18 months in a short term treasury fund, and 18 months in an intermediate term treasury fund. So we could go 5 years before we would have to liquidate stocks or other bonds funds. Realistically, it is probably much longer because it is unlikely 100% of the dividends would be cut to zero. The 2-years of CD's are divided into eight 2-year CD's with one maturing every 3 months. In a downturn we would have the option of not rolling all of a maturing CD into a new one, off-setting a reduction in dividend income. After a couple of years of this, we could begin to tap the short-term and intermediate-term treasury funds to supplement the diminished CD's. As a buffer, we have about 2/3rds of a year's expenses sitting in a money market in the taxable account. In the meantime, the CD's, treasury funds, and money market interest is added to our income. So far this year, we have used 78% of the income (dividends and interest) received from our taxable account to supplement my wife's income. The dividend and interest income in the tIRAs has been reinvested. In the last month, I have started to let the tIRA income accumulate into the sweep account instead of reinvesting. This is in anticipation of DW retiring and us starting to use the tIRA income next year. About 1/3 of our portfolio is in the taxable account and 2/3 in the tIRA. We are also trying to keep our income down to get a subsidy on our ACA premiums. So far it is working.
Very interesting. It is interesting, and required a lot of careful thought and planning; but it may still be sub-optimal.

Estrada showed, in his portfolio studies, that a retirement portfolio actually becomes less productive when you remove cash/bonds from the general rebalancing process. The optimal portfolio doesn't include a lot of external cash. It still may fail(!), but will last longer than the portfolio and external cash combination.

So a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash. Ultimately, one may need to decide between more money and less sleep, or vice versa.
Since cash is fixed income with zero duration how can it be that a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash?

Because the cash has been removed from the portfolio balancing process and is not, therefore, available for buying more stocks when stocks are down.

A 60:40 portfolio with several years cash is effectively a 50:50 portfolio which is still in the 40 to 100% range. Or are those with external cash never rebalancing the "main" stocks and bonds portfolio?

They are, presumably, but not with the external cash (see above).
The cash may not be available however the bonds are available for rebalancing and the results should be the same as a portfolio with some bonds of zero duration.

Do you have a reference to Estrada's study.
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Re: Retirees - do you hold extra cash for a bear market?

Post by NoblesvilleIN »

Post by pascalwager » Tue Oct 01, 2019 12:20 am

When you say "X years of expenses", that implies being external to your portfolio and not part of the rebalancing process. Being a part of your portfolio means that the cash is not X years of expenses, but rather some fixed percentage of your portfolio.
I see your point and that is somewhat different than how I am looking at it. My whole portfolio is about 70/30. The 5 years of CDs, MM and treasury funds are part of the 30% FI. They add up to around 25% of the portfolio (so most of the FI portion). As far as re-balancing, I've only been retired 10 months and DW is still working (until the end of the year); we have not attempted any re-balancing since I retired. About 5 years ago we were 80/20 and were thinking about how to fund retirement. At that time I started letting the dividends from the equity portion accumulate in the MM instead of reinvesting. As the MM grew, it was used to purchase the CD's. I retired 12/31/18 and rolled the 401K from the last employer (of 20+ years) into the tIRA that was established years ago from my first employer (16 years). As part of the rollover, I took some of the equity funds that wouldn't roll over in-kind and purchased the two treasury funds (short-term and intermediate-term). The end result was a re-balance from 80/20 to 70/30. The dividends from the equities have continued to flow to the MM. I'm not sure we will be doing much re-balancing unless we need to rebuild the CD's after a recession.
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Re: Retirees - do you hold extra cash for a bear market?

Post by ruralavalon »

I am 74 years old, retired since 2011, so I am in a permanent state of unemployment.

All of our portfolio is available to deal with this "emergency", so I see no need for a cash buffer. The bond a allocation is large enough to cover about 14 years of expenses net of Social Security.
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Re: Retirees - do you hold extra cash for a bear market?

Post by willthrill81 »

chipperd wrote: Tue Oct 01, 2019 5:11 am
willthrill81 wrote: Mon Sep 30, 2019 11:34 pm
NoblesvilleIN wrote: Mon Sep 30, 2019 7:36 pm The intent of the CDs, MM, and treasury funds is not to optimize, it is to sleep well and prevent bad behavior (selling equities in a down market as a panicked reaction). I do not consider the X years of expenses to be external to my portfolio, but part of the fixed income allocation.
Actually, CDs may offer a bit of a free lunch compared to bonds. Larry Swedroe has been recommending them as an excellent, perhaps superior, alternative. The big catch is that it can be difficult for accumulators to get adequate access to them (e.g. seldom feasible in a 401k). Right now, you can easily get 2 year CDs yielding 3.20% vs. the 2.72% of VBTLX.
Can you share where you are seeing 2 year CD at 3.2%? I can't find anything over 2.6% for 18-24 months. Thanks
CDBank.com is currently offering 3.2% for a 2 year CD, minimum $10k.

Magnify Money is a great place to see many current CD rates.
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Re: Retirees - do you hold extra cash for a bear market?

Post by NoblesvilleIN »

willthrill81,

I'm derailing this thread just a little bit. Is there really that much difference in rates from a website/bank than what I see at Fidelity? This morning, the best 2-year rate for a callable CD is 1.9% and for call protected it is 1.85%. Back in mid September, I rolled a 2-year CD and will be receiving 1.8% (call protected). I always assumed that I was not giving up much for the convenience of keeping all my CD's in one brokerage. Do I need to re-think that? How much of a hassle is it to research rates, open an account at a new location, fund the new account, and purchase a CD? I have a CD mature every 3 months (as per my above discussions). I am wondering if it is worth doing the research 4 times a year. I very much like having everything at one institution, but you now have me questioning the cost (in forgone interest) for CD's.

Side note: my father used to do this with his CD's. He was not computer literate and also banks did not have a large web presence back then (he's been gone for almost a decade). He would call around and drive around when it was time to roll a CD. When I was gathering assets after he passed, I found CD's at 6 different institutions that I needed to deal with.
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Re: Retirees - do you hold extra cash for a bear market?

Post by willthrill81 »

NoblesvilleIN wrote: Tue Oct 01, 2019 12:13 pm willthrill81,

I'm derailing this thread just a little bit. Is there really that much difference in rates from a website/bank than what I see at Fidelity? This morning, the best 2-year rate for a callable CD is 1.9% and for call protected it is 1.85%. Back in mid September, I rolled a 2-year CD and will be receiving 1.8% (call protected). I always assumed that I was not giving up much for the convenience of keeping all my CD's in one brokerage. Do I need to re-think that? How much of a hassle is it to research rates, open an account at a new location, fund the new account, and purchase a CD? I have a CD mature every 3 months (as per my above discussions). I am wondering if it is worth doing the research 4 times a year. I very much like having everything at one institution, but you now have me questioning the cost (in forgone interest) for CD's.

Side note: my father used to do this with his CD's. He was not computer literate and also banks did not have a large web presence back then (he's been gone for almost a decade). He would call around and drive around when it was time to roll a CD. When I was gathering assets after he passed, I found CD's at 6 different institutions that I needed to deal with.
I have not personally done it, but many here shop around for CDs fairly often. You can search for existing threads about it. Whether it's worth the higher yield is up to you. But I'd say that if you're looking at a considerable sum of money, over 1% higher yields are probably worth the effort.
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

NoblesvilleIN wrote: Tue Oct 01, 2019 8:51 am
Post by pascalwager » Tue Oct 01, 2019 12:20 am

When you say "X years of expenses", that implies being external to your portfolio and not part of the rebalancing process. Being a part of your portfolio means that the cash is not X years of expenses, but rather some fixed percentage of your portfolio.
I see your point and that is somewhat different than how I am looking at it. My whole portfolio is about 70/30. The 5 years of CDs, MM and treasury funds are part of the 30% FI. They add up to around 25% of the portfolio (so most of the FI portion). As far as re-balancing, I've only been retired 10 months and DW is still working (until the end of the year); we have not attempted any re-balancing since I retired. About 5 years ago we were 80/20 and were thinking about how to fund retirement. At that time I started letting the dividends from the equity portion accumulate in the MM instead of reinvesting. As the MM grew, it was used to purchase the CD's. I retired 12/31/18 and rolled the 401K from the last employer (of 20+ years) into the tIRA that was established years ago from my first employer (16 years). As part of the rollover, I took some of the equity funds that wouldn't roll over in-kind and purchased the two treasury funds (short-term and intermediate-term). The end result was a re-balance from 80/20 to 70/30. The dividends from the equities have continued to flow to the MM. I'm not sure we will be doing much re-balancing unless we need to rebuild the CD's after a recession.
If you don't rebalance, how will you keep the portfolio at your desired risk level? If stocks do poorly one year (I don't mean a crash), you may need to sell fixed income and buy more stocks to maintain your AA. Otherwise, you begin to treat your fixed income as a one-way bucket and should expect a less productive portfolio for the long-term.

Here's the Estrada paper that discusses these issues:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

catalina355 wrote: Tue Oct 01, 2019 7:54 am
pascalwager wrote: Mon Sep 30, 2019 11:15 pm
catalina355 wrote: Mon Sep 30, 2019 6:28 pm
pascalwager wrote: Mon Sep 30, 2019 3:10 pm
rossington wrote: Sun Sep 29, 2019 1:23 pm
Very interesting. It is interesting, and required a lot of careful thought and planning; but it may still be sub-optimal.

Estrada showed, in his portfolio studies, that a retirement portfolio actually becomes less productive when you remove cash/bonds from the general rebalancing process. The optimal portfolio doesn't include a lot of external cash. It still may fail(!), but will last longer than the portfolio and external cash combination.

So a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash. Ultimately, one may need to decide between more money and less sleep, or vice versa.
Since cash is fixed income with zero duration how can it be that a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash?

Because the cash has been removed from the portfolio balancing process and is not, therefore, available for buying more stocks when stocks are down.

A 60:40 portfolio with several years cash is effectively a 50:50 portfolio which is still in the 40 to 100% range. Or are those with external cash never rebalancing the "main" stocks and bonds portfolio?

They are, presumably, but not with the external cash (see above).
The cash may not be available however the bonds are available for rebalancing and the results should be the same as a portfolio with some bonds of zero duration.

Do you have a reference to Estrada's study.
How can the results be the same if the cash is external to the portfolio and not available for buying stocks in down years?

Here's the Estrada paper:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
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Re: Retirees - do you hold extra cash for a bear market?

Post by catalina355 »

pascalwager wrote: Tue Oct 01, 2019 2:58 pm
catalina355 wrote: Tue Oct 01, 2019 7:54 am
pascalwager wrote: Mon Sep 30, 2019 11:15 pm
catalina355 wrote: Mon Sep 30, 2019 6:28 pm
pascalwager wrote: Mon Sep 30, 2019 3:10 pm


Estrada showed, in his portfolio studies, that a retirement portfolio actually becomes less productive when you remove cash/bonds from the general rebalancing process. The optimal portfolio doesn't include a lot of external cash. It still may fail(!), but will last longer than the portfolio and external cash combination.

So a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash. Ultimately, one may need to decide between more money and less sleep, or vice versa.
Since cash is fixed income with zero duration how can it be that a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash?

Because the cash has been removed from the portfolio balancing process and is not, therefore, available for buying more stocks when stocks are down.

A 60:40 portfolio with several years cash is effectively a 50:50 portfolio which is still in the 40 to 100% range. Or are those with external cash never rebalancing the "main" stocks and bonds portfolio?

They are, presumably, but not with the external cash (see above).
The cash may not be available however the bonds are available for rebalancing and the results should be the same as a portfolio with some bonds of zero duration.

Do you have a reference to Estrada's study.
How can the results be the same if the cash is external to the portfolio and not available for buying stocks in down years?

Here's the Estrada paper:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
If you take a look at the paper you will see:
The three bucket strategies consist of two buckets, one with funds parked in bills (Bucket 1) and the other with funds invested in stocks (Bucket 2). All three strategies set aside two years worth of inflation-adjusted withdrawals and park them in bills, investing the rest in stocks. Also, all three strategies determine whether to make the annual withdrawal from Bucket 1 or Bucket 2, and whether to refill Bucket 1 when it has less than two years of real withdrawals, depending on the performance of the stock market; the specific rules are outlined in Exhibit 1.
After the withdrawal is made, in the case of static strategies the portfolio is rebalanced to the target asset allocation; in the case of bucket strategies, no rebalancing takes place.
Of course a "bucket" strategy that is never rebalanced will not be as effective as a stock bond portfolio that is rebalanced.

But this is not what most of the people on this thread are talking about nor is it the advice that Jonathan Clements gives, amongst others.

I think we have to be careful in quoting academic papers that are not representative of the situation.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Broken Man 1999 »

ruralavalon wrote: Tue Oct 01, 2019 9:25 am I am 74 years old, retired since 2011, so I am in a permanent state of unemployment.

All of our portfolio is available to deal with this "emergency", so I see no need for a cash buffer. The bond a allocation is large enough to cover about 14 years of expenses net of Social Security.
This! No buckets, nothing required but choosing between Column A (equities), or Column B (bonds). I make the choice once a month, and go on with my life.

I like this approach because it works and fits nicely with my laziness.

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Leif
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Re: Retirees - do you hold extra cash for a bear market?

Post by Leif »

I aim for around 1 year of residual living expenses in cash. Nothing "extra" for a bear market specifically, but more to handle lumps in my cash needs. I have CDs maturing yearly so that I can replenish from that and perhaps do additional investment if in a bear market. I don't want to need to monitor my cash/spending so closely to keep checks/auto credit card payments from bouncing. I want to take off on vacation for a month or two without checking my accounts. So, this is my solution.

Christine Benz from Morningstar recommends 1-2 years of cash to prevent panic and selling low during a bear market.
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

catalina355 wrote: Tue Oct 01, 2019 3:44 pm
pascalwager wrote: Tue Oct 01, 2019 2:58 pm
catalina355 wrote: Tue Oct 01, 2019 7:54 am
pascalwager wrote: Mon Sep 30, 2019 11:15 pm
catalina355 wrote: Mon Sep 30, 2019 6:28 pm

Since cash is fixed income with zero duration how can it be that a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash?

Because the cash has been removed from the portfolio balancing process and is not, therefore, available for buying more stocks when stocks are down.

A 60:40 portfolio with several years cash is effectively a 50:50 portfolio which is still in the 40 to 100% range. Or are those with external cash never rebalancing the "main" stocks and bonds portfolio?

They are, presumably, but not with the external cash (see above).
The cash may not be available however the bonds are available for rebalancing and the results should be the same as a portfolio with some bonds of zero duration.

Do you have a reference to Estrada's study.
How can the results be the same if the cash is external to the portfolio and not available for buying stocks in down years?

Here's the Estrada paper:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
If you take a look at the paper you will see:
The three bucket strategies consist of two buckets, one with funds parked in bills (Bucket 1) and the other with funds invested in stocks (Bucket 2). All three strategies set aside two years worth of inflation-adjusted withdrawals and park them in bills, investing the rest in stocks. Also, all three strategies determine whether to make the annual withdrawal from Bucket 1 or Bucket 2, and whether to refill Bucket 1 when it has less than two years of real withdrawals, depending on the performance of the stock market; the specific rules are outlined in Exhibit 1.
After the withdrawal is made, in the case of static strategies the portfolio is rebalanced to the target asset allocation; in the case of bucket strategies, no rebalancing takes place.
Of course a "bucket" strategy that is never rebalanced will not be as effective as a stock bond portfolio that is rebalanced.

But this is not what most of the people on this thread are talking about nor is it the advice that Jonathan Clements gives, amongst others.

I think we have to be careful in quoting academic papers that are not representative of the situation.
Clements recommends a minimum of 20% cash, but he actually leans more strongly towards a minimum of 5 years of cash. BH Nords above, for example, set aside two years of cash during his initial ten years of retirement. BH Noblesville characterizes his fixed income as covering 5 years of expenses.

The "situation" is that many BH retirees, including in this thread, set aside from one-to-five--even ten--years of cash external to their portfolio in order to sleep better, but not realizing that they may be impairing long-term returns.

And what is the thread title? "Retirees--do you hold extra cash for a bear market?"
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Re: Retirees - do you hold extra cash for a bear market?

Post by mindboggling »

"Retirees - do you hold extra cash for a bear market?"

No, but I hold extra cash. :happy
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Re: Retirees - do you hold extra cash for a bear market?

Post by catalina355 »

pascalwager wrote: Tue Oct 01, 2019 5:59 pm
catalina355 wrote: Tue Oct 01, 2019 3:44 pm
pascalwager wrote: Tue Oct 01, 2019 2:58 pm
catalina355 wrote: Tue Oct 01, 2019 7:54 am
pascalwager wrote: Mon Sep 30, 2019 11:15 pm
The cash may not be available however the bonds are available for rebalancing and the results should be the same as a portfolio with some bonds of zero duration.

Do you have a reference to Estrada's study.
How can the results be the same if the cash is external to the portfolio and not available for buying stocks in down years?

Here's the Estrada paper:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
If you take a look at the paper you will see:
The three bucket strategies consist of two buckets, one with funds parked in bills (Bucket 1) and the other with funds invested in stocks (Bucket 2). All three strategies set aside two years worth of inflation-adjusted withdrawals and park them in bills, investing the rest in stocks. Also, all three strategies determine whether to make the annual withdrawal from Bucket 1 or Bucket 2, and whether to refill Bucket 1 when it has less than two years of real withdrawals, depending on the performance of the stock market; the specific rules are outlined in Exhibit 1.
After the withdrawal is made, in the case of static strategies the portfolio is rebalanced to the target asset allocation; in the case of bucket strategies, no rebalancing takes place.
Of course a "bucket" strategy that is never rebalanced will not be as effective as a stock bond portfolio that is rebalanced.

But this is not what most of the people on this thread are talking about nor is it the advice that Jonathan Clements gives, amongst others.

I think we have to be careful in quoting academic papers that are not representative of the situation.
Clements recommends a minimum of 20% cash, but he actually leans more strongly towards a minimum of 5 years of cash. BH Nords above, for example, set aside two years of cash during his initial ten years of retirement. BH Noblesville characterizes his fixed income as covering 5 years of expenses.

The "situation" is that many BH retirees, including in this thread, set aside from one-to-five--even ten--years of cash external to their portfolio in order to sleep better, but not realizing that they may be impairing long-term returns.

And what is the thread title? "Retirees--do you hold extra cash for a bear market?"
Clements recommends five years of portfolio withdrawals in cash like investments. That could be a less than 20%.

https://humbledollar.com/money-guide/your-safety-net/

I do think the BHs that are holding cash are also rebalancing their portfolios with their bond holdings. Other BHs use both short term and intermediate term bonds. I would suggest that short terms bonds and cash are quite similar.

This is not what Estrada was modeling in his paper.

I understand what the title of the thread is but I am reading that folks on the thread are talking about holding cash so they can sleep well rather than holding cash for a bear market.

I hope others will respond.
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Re: Retirees - do you hold extra cash for a bear market?

Post by willthrill81 »

Where there is often confusion in these types of discussions is whether the person intends on spending down the cash in the event of a market downturn (i.e. a dynamic AA) or maintaining a fixed cash allocation. I'm not endorsing either view.
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Re: Retirees - do you hold extra cash for a bear market?

Post by bradinsky »

5 years worth in CDs & high yield MMA. It’s a SWAN thing, primarily for my DW.
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Re: Retirees - do you hold extra cash for a bear market?

Post by flaccidsteele »

ThankYouJack wrote: Thu Sep 26, 2019 4:42 pm I forget his name but I recently read an article about a Boglehead who retired from the military in his 40's. I think he said he holds 2 years worth of cash to get him bear markets - that way he isn't selling low.

I'm curious if others on here do the same and if so, how much do you keep and where do you keep it?
I hold cash

Booms and busts are inevitable. Like Death and Taxes

But not to tie me over during a bear market, but to go shopping

Some call it market timing. I do

Cash has always served me well during busts

As a Canadian, the last bust was the Credit Crisis when the C$ was at parity with the US$. Cash allowed me to buy a number of US rental properties

Before that, it was the tech wreck. Cash allowed me to buy berkshire hathaway class B

I know for a fact that a crash will happen. I just don't know when. But I do know that when crashes happen, cash is king :moneybag
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

catalina355 wrote: Tue Oct 01, 2019 7:51 pm
pascalwager wrote: Tue Oct 01, 2019 5:59 pm
catalina355 wrote: Tue Oct 01, 2019 3:44 pm
pascalwager wrote: Tue Oct 01, 2019 2:58 pm
catalina355 wrote: Tue Oct 01, 2019 7:54 am

The cash may not be available however the bonds are available for rebalancing and the results should be the same as a portfolio with some bonds of zero duration.

Do you have a reference to Estrada's study.
How can the results be the same if the cash is external to the portfolio and not available for buying stocks in down years?

Here's the Estrada paper:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
If you take a look at the paper you will see:
The three bucket strategies consist of two buckets, one with funds parked in bills (Bucket 1) and the other with funds invested in stocks (Bucket 2). All three strategies set aside two years worth of inflation-adjusted withdrawals and park them in bills, investing the rest in stocks. Also, all three strategies determine whether to make the annual withdrawal from Bucket 1 or Bucket 2, and whether to refill Bucket 1 when it has less than two years of real withdrawals, depending on the performance of the stock market; the specific rules are outlined in Exhibit 1.
After the withdrawal is made, in the case of static strategies the portfolio is rebalanced to the target asset allocation; in the case of bucket strategies, no rebalancing takes place.
Of course a "bucket" strategy that is never rebalanced will not be as effective as a stock bond portfolio that is rebalanced.

But this is not what most of the people on this thread are talking about nor is it the advice that Jonathan Clements gives, amongst others.

I think we have to be careful in quoting academic papers that are not representative of the situation.
Clements recommends a minimum of 20% cash, but he actually leans more strongly towards a minimum of 5 years of cash. BH Nords above, for example, set aside two years of cash during his initial ten years of retirement. BH Noblesville characterizes his fixed income as covering 5 years of expenses.

The "situation" is that many BH retirees, including in this thread, set aside from one-to-five--even ten--years of cash external to their portfolio in order to sleep better, but not realizing that they may be impairing long-term returns.

And what is the thread title? "Retirees--do you hold extra cash for a bear market?"
Clements recommends five years of portfolio withdrawals in cash like investments. That could be a less than 20%.

https://humbledollar.com/money-guide/your-safety-net/

I do think the BHs that are holding cash are also rebalancing their portfolios with their bond holdings. Other BHs use both short term and intermediate term bonds. I would suggest that short terms bonds and cash are quite similar.

This is not what Estrada was modeling in his paper.

I understand what the title of the thread is but I am reading that folks on the thread are talking about holding cash so they can sleep well rather than holding cash for a bear market.

I hope others will respond.
The 20% or 5-years cash concept was also discussed on the Clements-Rick Ferri BH Podcast, towards the end. He made it sound like 20% was a second choice in his view.

Yes, most BH investors with a cash bucket probably also have bonds in their portfolio. Estrada discussed this as a three bucket approach, but only used two buckets (cash and stocks) in the study (for analysis manageability). So, the study is quite relevant for anyone considering a years-based cash bucket. He studied one-, three-, and five-year cash buckets.

If you read BH Nords (a young FIRE retiree) above, you'll probably assume that he has a small margin for error, and he dropped the cash bucket after the sequence of returns risk had been reduced. He certainly needs to maximize portfolio productivity over several decades of retirement.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Nords »

pascalwager wrote: Tue Oct 01, 2019 10:13 pmIf you read BH Nords (a young FIRE retiree) above, you'll probably assume that he has a small margin for error, and he dropped the cash bucket after the sequence of returns risk had been reduced. He certainly needs to maximize portfolio productivity over several decades of retirement.
Well, I stopped working in 2002 at age 41, and now I’m 59 years old.

I’m not sure what a margin for error is in an investment portfolio, let alone a small one. We used the 4% Safe Withdrawal Rate as a tripwire (assets of 25x annual expenses), and even back then we were aware that one of the most frequent failures of the 4% SWR is sequence of returns risk. As long as we were vulnerable to that risk, we used the tactic of keeping two years’ expenses in cash.

By the time our first decade of financial independence had passed, our spending had remained flat while our portfolio had grown considerably faster than inflation. Our actual SWR has dropped low enough to be sustainable for the rest of our lives.

We no longer need to maximize portfolio productivity, but our portfolio is unlikely to fail at our current withdrawal rate. (“We’re not spending it fast enough.”) There’s no longer a reason to hold bonds or cash.

During the next few years we’re minimizing our fund expense ratios by moving most of the portfolio to the Vanguard total stock market index ETF (VTI). We’ll continue to hold our Berkshire Hathaway “B” shares for a while to see how the company evolves after Buffett & Munger.

Speaking of Buffett & Munger, I hope that my spouse and I have at least another four decades of financial independence. Our college’s current 10 oldest living alumni are nearly all in triple digits, and we hope to eventually join that club. I’m a year older than her, so she’s letting me join first.
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Re: Retirees - do you hold extra cash for a bear market?

Post by chipperd »

willthrill81 wrote: Tue Oct 01, 2019 10:30 am
chipperd wrote: Tue Oct 01, 2019 5:11 am
willthrill81 wrote: Mon Sep 30, 2019 11:34 pm
NoblesvilleIN wrote: Mon Sep 30, 2019 7:36 pm The intent of the CDs, MM, and treasury funds is not to optimize, it is to sleep well and prevent bad behavior (selling equities in a down market as a panicked reaction). I do not consider the X years of expenses to be external to my portfolio, but part of the fixed income allocation.
Actually, CDs may offer a bit of a free lunch compared to bonds. Larry Swedroe has been recommending them as an excellent, perhaps superior, alternative. The big catch is that it can be difficult for accumulators to get adequate access to them (e.g. seldom feasible in a 401k). Right now, you can easily get 2 year CDs yielding 3.20% vs. the 2.72% of VBTLX.
Can you share where you are seeing 2 year CD at 3.2%? I can't find anything over 2.6% for 18-24 months. Thanks
CDBank.com is currently offering 3.2% for a 2 year CD, minimum $10k.

Magnify Money is a great place to see many current CD rates.
Thanks for those resources. I'm seeing 2.15% at CDbank for 24 mos. on their website, but magnify money has it listed at 3.2%. Confusing. Maybe Magnify isn't updated? Sorry to take a detour here.
3 Months 2.00%
6 Months 2.35%
9 Months 2.30%
12 Months 2.25%
18 Months 2.25%
24 Months 2.15%
36 Months 2.15%
48 Months 2.00%
60 Months 2.15%
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Re: Retirees - do you hold extra cash for a bear market?

Post by catalina355 »

pascalwager wrote: Tue Oct 01, 2019 10:13 pm
catalina355 wrote: Tue Oct 01, 2019 7:51 pm
pascalwager wrote: Tue Oct 01, 2019 5:59 pm
catalina355 wrote: Tue Oct 01, 2019 3:44 pm
pascalwager wrote: Tue Oct 01, 2019 2:58 pm

How can the results be the same if the cash is external to the portfolio and not available for buying stocks in down years?

Here's the Estrada paper:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
If you take a look at the paper you will see:
The three bucket strategies consist of two buckets, one with funds parked in bills (Bucket 1) and the other with funds invested in stocks (Bucket 2). All three strategies set aside two years worth of inflation-adjusted withdrawals and park them in bills, investing the rest in stocks. Also, all three strategies determine whether to make the annual withdrawal from Bucket 1 or Bucket 2, and whether to refill Bucket 1 when it has less than two years of real withdrawals, depending on the performance of the stock market; the specific rules are outlined in Exhibit 1.
After the withdrawal is made, in the case of static strategies the portfolio is rebalanced to the target asset allocation; in the case of bucket strategies, no rebalancing takes place.
Of course a "bucket" strategy that is never rebalanced will not be as effective as a stock bond portfolio that is rebalanced.

But this is not what most of the people on this thread are talking about nor is it the advice that Jonathan Clements gives, amongst others.

I think we have to be careful in quoting academic papers that are not representative of the situation.
Clements recommends a minimum of 20% cash, but he actually leans more strongly towards a minimum of 5 years of cash. BH Nords above, for example, set aside two years of cash during his initial ten years of retirement. BH Noblesville characterizes his fixed income as covering 5 years of expenses.

The "situation" is that many BH retirees, including in this thread, set aside from one-to-five--even ten--years of cash external to their portfolio in order to sleep better, but not realizing that they may be impairing long-term returns.

And what is the thread title? "Retirees--do you hold extra cash for a bear market?"
Clements recommends five years of portfolio withdrawals in cash like investments. That could be a less than 20%.

https://humbledollar.com/money-guide/your-safety-net/

I do think the BHs that are holding cash are also rebalancing their portfolios with their bond holdings. Other BHs use both short term and intermediate term bonds. I would suggest that short terms bonds and cash are quite similar.

This is not what Estrada was modeling in his paper.

I understand what the title of the thread is but I am reading that folks on the thread are talking about holding cash so they can sleep well rather than holding cash for a bear market.

I hope others will respond.
The 20% or 5-years cash concept was also discussed on the Clements-Rick Ferri BH Podcast, towards the end. He made it sound like 20% was a second choice in his view.

Yes, most BH investors with a cash bucket probably also have bonds in their portfolio. Estrada discussed this as a three bucket approach, but only used two buckets (cash and stocks) in the study (for analysis manageability). So, the study is quite relevant for anyone considering a years-based cash bucket. He studied one-, three-, and five-year cash buckets.

If you read BH Nords (a young FIRE retiree) above, you'll probably assume that he has a small margin for error, and he dropped the cash bucket after the sequence of returns risk had been reduced. He certainly needs to maximize portfolio productivity over several decades of retirement.
Thank you. I will listen to the Clements-Rick Ferri BH Podcast.

I agree his study is relevant to anyone considering a cash bucket and equities with no bonds. It seems that Nords did indeed use a 2 year cash and 100% equities portfolio for the first 10 years. I agree with you that this approach probably has a small margin of error. In his case the margin for error was not as small as Estrada found as Nords has a military pension.

Everybody's situation is different.
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Re: Retirees - do you hold extra cash for a bear market?

Post by nguy44 »

I keep enough cash to cover my planned withdrawals (with a "fudge factor") to maintain our desired standard of living until we choose to take SS. I am 61, and currently looking at taking SS no earlier than 64. This will keep me from being forced to sell equities during market downturns (but does not preclude me for selling equities in a rising market when I decide to take some money off the table).

Based on 15 months of retirement, my cash will easily do that, in fact it might be a little on the high side, projecting to last 8-9 years. We'll see. If the trend continues to show I have "too much" in cash, I will consider things such as paying off our mortgage to reduce the cash amount.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Gnirk »

My conservative AA calls for 35% equities, 55% bonds, 10% cash/CD's; bonds are mostly muni funds because over 90% of my portfolio is taxable.
Currently, it is 38%/ 53%/ 9% with no plans to rebalance unless equities drift above 40% or below 30%. I sleep well at night. Age 75, retired 12 years.
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Re: Retirees - do you hold extra cash for a bear market?

Post by bengal22 »

Retired. No need for cash. My credit card is my emergency fund. I can sell from my taxable funds to pay CC bill.
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Re: Retirees - do you hold extra cash for a bear market?

Post by willthrill81 »

chipperd wrote: Wed Oct 02, 2019 4:42 am
willthrill81 wrote: Tue Oct 01, 2019 10:30 am
chipperd wrote: Tue Oct 01, 2019 5:11 am
willthrill81 wrote: Mon Sep 30, 2019 11:34 pm
NoblesvilleIN wrote: Mon Sep 30, 2019 7:36 pm The intent of the CDs, MM, and treasury funds is not to optimize, it is to sleep well and prevent bad behavior (selling equities in a down market as a panicked reaction). I do not consider the X years of expenses to be external to my portfolio, but part of the fixed income allocation.
Actually, CDs may offer a bit of a free lunch compared to bonds. Larry Swedroe has been recommending them as an excellent, perhaps superior, alternative. The big catch is that it can be difficult for accumulators to get adequate access to them (e.g. seldom feasible in a 401k). Right now, you can easily get 2 year CDs yielding 3.20% vs. the 2.72% of VBTLX.
Can you share where you are seeing 2 year CD at 3.2%? I can't find anything over 2.6% for 18-24 months. Thanks
CDBank.com is currently offering 3.2% for a 2 year CD, minimum $10k.

Magnify Money is a great place to see many current CD rates.
Thanks for those resources. I'm seeing 2.15% at CDbank for 24 mos. on their website, but magnify money has it listed at 3.2%. Confusing. Maybe Magnify isn't updated? Sorry to take a detour here.
3 Months 2.00%
6 Months 2.35%
9 Months 2.30%
12 Months 2.25%
18 Months 2.25%
24 Months 2.15%
36 Months 2.15%
48 Months 2.00%
60 Months 2.15%
You might want to start a new thread on that issue. I've not personally used that resource to open a CD, but many others here have and can explain the details.
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Re: Retirees - do you hold extra cash for a bear market?

Post by birdy »

In the 2008-2009 market downturn, I continued to contribute to my 401k and added to my savings. I also quit checking my fund balances during that time and trusted I had picked my portfolio well enough not to mess with it (stay the course!). I count my 5 year CD ladder as part of my "Bonds" portion. I don't think of the ladder as money for a bear market. It is just another way I diversified my portfolio, but I arranged the ladder so I have a CD mature every 6 months in case I would need cash unexpectedly. I am retired 2 years. My portfolio has grown over the last 50 years large enough for my lifestyle to be maintained and worry free (thank you Bogleheads!). If we had another bad downturn (bear market) I would use my CD ladder so I would not have to touch my mutual funds.

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Re: Retirees - do you hold extra cash for a bear market?

Post by mptfan »

"Extra" compared to what?
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Re: Retirees - do you hold extra cash for a bear market?

Post by MnD »

delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets read the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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Re: Retirees - do you hold extra cash for a bear market?

Post by delamer »

MnD wrote: Wed Oct 02, 2019 11:18 am
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets read the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
You didn’t answer my question.

I was not asking/debating whether a cash bucket is a good idea; I was asking why having a cash bucket would be considered “mental accounting?”

Is having stocks in a retirement account “mental accounting?” I don’t think so. It’s just an allocation decision, as is holding cash.
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Re: Retirees - do you hold extra cash for a bear market?

Post by catalina355 »

MnD wrote: Wed Oct 02, 2019 11:18 am
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets read the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
Please see my posts above. Estrada only compared cash plus stock portfolios versus fixed allocation stock and bond portfolios. Worse these cash only and stock portfolios were never rebalanced. He did not compare rebalanced stock and bond portfolios that included a cash component.

I think most of the BH on this thread are maintaining a rebalanced stock and bond portfolio with a cash allocation of varying size.

So the negative outcomes in Estrada's papers are not comparable to what most BH are doing.

Do you think keeping a cash bucket of say 1 year's expenses to manage cash flows is a good idea? Vanguard recommends this approach as does Johnathan Clements, although Clements suggests keeping 5 years of expenses in cash or cash equivalents.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Phineas J. Whoopee »

I suspect buckets of money worked very well for Ray Lucia.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Broken Man 1999 »

Phineas J. Whoopee wrote: Wed Oct 02, 2019 2:46 pm I suspect buckets of money worked very well for Ray Lucia.
PJW
Interesting reading about Mr Lucia. I am not familiar with him other than seeing his name mentioned occasionally here.

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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

catalina355 wrote: Wed Oct 02, 2019 12:09 pm
MnD wrote: Wed Oct 02, 2019 11:18 am
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets read the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
Please see my posts above. Estrada only compared cash plus stock portfolios versus fixed allocation stock and bond portfolios. Worse these cash only and stock portfolios were never rebalanced. He did not compare rebalanced stock and bond portfolios that included a cash component.

I think most of the BH on this thread are maintaining a rebalanced stock and bond portfolio with a cash allocation of varying size.

So the negative outcomes in Estrada's papers are not comparable to what most BH are doing.

Do you think keeping a cash bucket of say 1 year's expenses to manage cash flows is a good idea? Vanguard recommends this approach as does Johnathan Clements, although Clements suggests keeping 5 years of expenses in cash or cash equivalents.
Estrada agrees with Kitces that re-balanced bucket portfolios are fine, just as efficient as rebalanced static allocations. But this means that the cash has a percentage target, not a years target. (Kitces first identified the unrebalanced cash bucket inefficiency in a 2014 paper.)
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Re: Retirees - do you hold extra cash for a bear market?

Post by willthrill81 »

pascalwager wrote: Wed Oct 02, 2019 4:00 pm
catalina355 wrote: Wed Oct 02, 2019 12:09 pm
MnD wrote: Wed Oct 02, 2019 11:18 am
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets read the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
Please see my posts above. Estrada only compared cash plus stock portfolios versus fixed allocation stock and bond portfolios. Worse these cash only and stock portfolios were never rebalanced. He did not compare rebalanced stock and bond portfolios that included a cash component.

I think most of the BH on this thread are maintaining a rebalanced stock and bond portfolio with a cash allocation of varying size.

So the negative outcomes in Estrada's papers are not comparable to what most BH are doing.

Do you think keeping a cash bucket of say 1 year's expenses to manage cash flows is a good idea? Vanguard recommends this approach as does Johnathan Clements, although Clements suggests keeping 5 years of expenses in cash or cash equivalents.
Estrada agrees with Kitces that re-balanced bucket portfolios are fine, just as efficient as rebalanced static allocations. But this means that the cash has a percentage target, not a years target. (Kitces first identified the unrebalanced cash bucket inefficiency in a 2014 paper.)
But the reason that they are equally efficient is because they are objectively exactly the same thing when analyzed in the way that Kitces described them (i.e. a fixed AA). For instance, a retiree with 25x and a 60/40 AA could alternatively say that they have a bucket strategy with 10 years of spending in bonds and 15 years in stocks. It's merely a matter of perception.
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Re: Retirees - do you hold extra cash for a bear market?

Post by NoblesvilleIN »

by pascalwager » Tue Oct 01, 2019 3:55 pm

If you don't rebalance, how will you keep the portfolio at your desired risk level? If stocks do poorly one year (I don't mean a crash), you may need to sell fixed income and buy more stocks to maintain your AA. Otherwise, you begin to treat your fixed income as a one-way bucket and should expect a less productive portfolio for the long-term.

Here's the Estrada paper that discusses these issues:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
I've not had a chance to read the Estrada paper yet. I haven't viewed the CD's, MM, and treasury funds as a bucket approach, but as how I want most of my fixed income invested. I do not want to derail this conversation with my next few statements, but I think they are needed to put my use of cash-like instruments in context. We plan to live off the income our portfolio throws off and to avoid selling equities. We both come from backgrounds where selling principal will be hard (kind of the old "don't eat your seed corn"). We both realize that this could cause us to shortchange our retirement and we discuss this occasionally. Additionally, I have very little of our equities in an index fund - the reasons are not germane to this thread. In my taxable are 8 2-year CD's, a MM, and 21 dividend paying stocks purchased over several years. In my tIRA are 21 additional dividend paying stock, the two treasury funds (short term and intermediate term), an international index fund, and a US index fund and a couple legacy bond funds. I only found BH a couple of years ago although we have lived below our means our entire marriage and before. Please don't castigate me for the above, we are comfortable with it for now. Last year, the portfolio yielded 4%. But you have to realize that the yield is probably high because the divisor (portfolio value on 12/31/18) was down a bit because of the December selloff. The numerator (dividend and interest income) was up over 10% from the prior year. End of level setting and back to the thread.

The dividends and interest flow to the money market accounts in both the taxable and tIRA. In a "normal" downturn, I would expect a few, but not many, of the stocks to reduce or cut their dividend. The CD's and buffer I keep in the MM would be used to offset that decline in income for a period of time. At some point, I would have to sell some of the treasury funds. In a "terrible" downturn, I'll definitely be relying on the CD's and treasuries. I am not sure how I will handle re-balancing at that time. My initial thought is that I will be drawing down Fixed Income at the same time the equity values are dropping. What this will do to my 70/30 AA remains to be seen, but if it gets too out of whack, I'll have to sell from one (bonds) and purchase the other. To reiterate, the cash like investments in my accounts are to buffer dividend cuts. In good times (like now), I have been adding a few thousand to each CD when it rolls - this also helps keep my AA in line. In a recovery after a draw down of Fixed Income, I will have to do the same.

Please also note that one of my adult children is in index funds and the other is in a target date fund (kind of "do as I say, not as I do). Their friends and my nieces and nephews that have asked have been advised to use the 3 fund or a target date fund and I am happy that they seem to have listened.
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

catalina355 wrote: Wed Oct 02, 2019 12:09 pm
MnD wrote: Wed Oct 02, 2019 11:18 am
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets red the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
Please see my posts above. Estrada only compared cash plus stock portfolios versus fixed allocation stock and bond portfolios. Worse these cash only and stock portfolios were never rebalanced. He did not compare rebalanced stock and bond portfolios that included a cash component.

I think most of the BH on this thread are maintaining a rebalanced stock and bond portfolio with a cash allocation of varying size.

So the negative outcomes in Estrada's papers are not comparable to what most BH are doing.

Do you think keeping a cash bucket of say 1 year's expenses to manage cash flows is a good idea? Vanguard recommends this approach as does Johnathan Clements, although Clements suggests keeping 5 years of expenses in cash or cash equivalents.
Estrada does discuss portfolios which have stocks, bonds, and cash--all three assets. He calls them (3) bucket portfolios. Again, if the cash is part of the rebalancing process, then there's no problem. Contrarily, if the cash is measured in years, then this may be a sleep-well portfolio--but it's not as productive long-term as a rebalanced static allocation portfolio. It's not enough that the stocks and bonds are rebalanced, the cash must also be part of the rebalancing process--or it's an unrebalanced bucket portfolio with diminished long-term productivity.
pascalwager
Posts: 1868
Joined: Mon Oct 31, 2011 8:36 pm

Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

NoblesvilleIN wrote: Wed Oct 02, 2019 6:05 pm
by pascalwager » Tue Oct 01, 2019 3:55 pm

If you don't rebalance, how will you keep the portfolio at your desired risk level? If stocks do poorly one year (I don't mean a crash), you may need to sell fixed income and buy more stocks to maintain your AA. Otherwise, you begin to treat your fixed income as a one-way bucket and should expect a less productive portfolio for the long-term.

Here's the Estrada paper that discusses these issues:

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
I've not had a chance to read the Estrada paper yet. I haven't viewed the CD's, MM, and treasury funds as a bucket approach, but as how I want most of my fixed income invested. I do not want to derail this conversation with my next few statements, but I think they are needed to put my use of cash-like instruments in context. We plan to live off the income our portfolio throws off and to avoid selling equities. We both come from backgrounds where selling principal will be hard (kind of the old "don't eat your seed corn"). We both realize that this could cause us to shortchange our retirement and we discuss this occasionally. Additionally, I have very little of our equities in an index fund - the reasons are not germane to this thread. In my taxable are 8 2-year CD's, a MM, and 21 dividend paying stocks purchased over several years. In my tIRA are 21 additional dividend paying stock, the two treasury funds (short term and intermediate term), an international index fund, and a US index fund and a couple legacy bond funds. I only found BH a couple of years ago although we have lived below our means our entire marriage and before. Please don't castigate me for the above, we are comfortable with it for now. Last year, the portfolio yielded 4%. But you have to realize that the yield is probably high because the divisor (portfolio value on 12/31/18) was down a bit because of the December selloff. The numerator (dividend and interest income) was up over 10% from the prior year. End of level setting and back to the thread.

The dividends and interest flow to the money market accounts in both the taxable and tIRA. In a "normal" downturn, I would expect a few, but not many, of the stocks to reduce or cut their dividend. The CD's and buffer I keep in the MM would be used to offset that decline in income for a period of time. At some point, I would have to sell some of the treasury funds. In a "terrible" downturn, I'll definitely be relying on the CD's and treasuries. I am not sure how I will handle re-balancing at that time. My initial thought is that I will be drawing down Fixed Income at the same time the equity values are dropping. What this will do to my 70/30 AA remains to be seen, but if it gets too out of whack, I'll have to sell from one (bonds) and purchase the other. To reiterate, the cash like investments in my accounts are to buffer dividend cuts. In good times (like now), I have been adding a few thousand to each CD when it rolls - this also helps keep my AA in line. In a recovery after a draw down of Fixed Income, I will have to do the same.

Please also note that one of my adult children is in index funds and the other is in a target date fund (kind of "do as I say, not as I do). Their friends and my nieces and nephews that have asked have been advised to use the 3 fund or a target date fund and I am happy that they seem to have listened.
You might consider de-emphasizing dividends and interest and short-term funds. Mainly, just sell stocks and bonds when you need money--it's called total return.

You can access the SS life expectancy calculator, type in your birthdate, and view your life expectancy. Then select some bond funds to produce the same overall duration as your life expectancy. It really can be that simple.

Of course, you can keep the MMF and feed distributions into it as part of your annual redemptions. Nothing wrong with that, but there's no such thing as principal in stocks, unless you mean the inflation-adjusted money that you spent to buy the original shares.

I'm retired and this is what I've done.
pascalwager
Posts: 1868
Joined: Mon Oct 31, 2011 8:36 pm

Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

delamer wrote: Wed Oct 02, 2019 12:05 pm
MnD wrote: Wed Oct 02, 2019 11:18 am
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets read the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
You didn’t answer my question.

I was not asking/debating whether a cash bucket is a good idea; I was asking why having a cash bucket would be considered “mental accounting?”

Is having stocks in a retirement account “mental accounting?” I don’t think so. It’s just an allocation decision, as is holding cash.
Keeping a cash bucket is certainly mental accounting. Investors find appealing the sense of separation between the withdrawal account and the investment account (Estrada).
catalina355
Posts: 283
Joined: Sun Jun 10, 2018 6:46 pm

Re: Retirees - do you hold extra cash for a bear market?

Post by catalina355 »

pascalwager wrote: Wed Oct 02, 2019 6:16 pm
catalina355 wrote: Wed Oct 02, 2019 12:09 pm
MnD wrote: Wed Oct 02, 2019 11:18 am
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets red the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
Please see my posts above. Estrada only compared cash plus stock portfolios versus fixed allocation stock and bond portfolios. Worse these cash only and stock portfolios were never rebalanced. He did not compare rebalanced stock and bond portfolios that included a cash component.

I think most of the BH on this thread are maintaining a rebalanced stock and bond portfolio with a cash allocation of varying size.

So the negative outcomes in Estrada's papers are not comparable to what most BH are doing.

Do you think keeping a cash bucket of say 1 year's expenses to manage cash flows is a good idea? Vanguard recommends this approach as does Johnathan Clements, although Clements suggests keeping 5 years of expenses in cash or cash equivalents.
Estrada does discuss portfolios which have stocks, bonds, and cash--all three assets. He calls them (3) bucket portfolios. Again, if the cash is part of the rebalancing process, then there's no problem. Contrarily, if the cash is measured in years, then this may be a sleep-well portfolio--but it's not as productive long-term as a rebalanced static allocation portfolio. It's not enough that the stocks and bonds are rebalanced, the cash must also be part of the rebalancing process--or it's an unrebalanced bucket portfolio with diminished long-term productivity.
Let's say one has a 60:38:2 portfolio. If stock markets go down beyond the rebalancing bands there is 38% bonds available for rebalancing. One does not need to use the cash to rebalance. As other posters have commented above they refill the cash allocation with dividends and a yearly withdrawal, for example. How is the portfolio an "unrebalanced bucket portfolio with diminished long-term productivity"?
pascalwager
Posts: 1868
Joined: Mon Oct 31, 2011 8:36 pm

Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

catalina355 wrote: Thu Oct 03, 2019 10:34 am
pascalwager wrote: Wed Oct 02, 2019 6:16 pm
catalina355 wrote: Wed Oct 02, 2019 12:09 pm
MnD wrote: Wed Oct 02, 2019 11:18 am
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
Because maintaining a fixed asset allocation results in selling from equity when equity outperforms and vice-versa. There is zero need to maintain a bolted on cash bucket to draw from in subjectively "down/bear/bad" markets to avoid selling equity in down periods. Cash bucket approaches are demonstrably inferior, add complexity and emotional timing decisions and actually increase the risk of portfolio failure when tested across numerous countries and time intervals.

The negative outcomes of cash buckets is counter-intuitive to this comfortable/safe sounding approach, so I would suggest anyone using or contemplating cash buckets red the financial news article and the underlying paper it is based one at the links below. In addition to "cash buckets for bear markets clearly falling under "mental accounting", it is also a textbook example of an "illusion of control" investment behavioral error.

Good luck!

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
Please see my posts above. Estrada only compared cash plus stock portfolios versus fixed allocation stock and bond portfolios. Worse these cash only and stock portfolios were never rebalanced. He did not compare rebalanced stock and bond portfolios that included a cash component.

I think most of the BH on this thread are maintaining a rebalanced stock and bond portfolio with a cash allocation of varying size.

So the negative outcomes in Estrada's papers are not comparable to what most BH are doing.

Do you think keeping a cash bucket of say 1 year's expenses to manage cash flows is a good idea? Vanguard recommends this approach as does Johnathan Clements, although Clements suggests keeping 5 years of expenses in cash or cash equivalents.
Estrada does discuss portfolios which have stocks, bonds, and cash--all three assets. He calls them (3) bucket portfolios. Again, if the cash is part of the rebalancing process, then there's no problem. Contrarily, if the cash is measured in years, then this may be a sleep-well portfolio--but it's not as productive long-term as a rebalanced static allocation portfolio. It's not enough that the stocks and bonds are rebalanced, the cash must also be part of the rebalancing process--or it's an unrebalanced bucket portfolio with diminished long-term productivity.
Let's say one has a 60:38:2 portfolio. If stock markets go down beyond the rebalancing bands there is 38% bonds available for rebalancing. One does not need to use the cash to rebalance. As other posters have commented above they refill the cash allocation with dividends and a yearly withdrawal, for example. How is the portfolio an "unrebalanced bucket portfolio with diminished long-term productivity"?
Estrada used time-based, annual rebalancing, not rebalance bands, and stock dividends were evidently reinvested.

The important thing is for the cash to be subject to the same rebalancing system as the more aggressive assets. But if you didn't hold individual stocks/bonds/CDs, then you might not even need a portfolio cash component. Just reinvest all stock fund/bond fund distributions.

There are some BH members who have almost no cash, not just in their portfolios, but period. They do monthly withdrawals and make most of their purchases/payments with credit cards.
13.1Runner
Posts: 13
Joined: Sun Jun 22, 2014 7:36 pm

Re: Retirees - do you hold extra cash for a bear market?

Post by 13.1Runner »

Hi....we are not retired, but are very fortunate and are looking at doing so within next six to 18 months. I'm 58 and hubby is 62. We had several CDs and cash in high yield savings. Due to intrest rates, we did not renew CDs and are now holding about 6 years of living expenses in savings. Outside of this we have $ invested in retirement funds that have a high % of supporting us 40 years or so. Our thought is if we retire during bear market or recession, we can pull from cash until economy recovers. Cash gives us a comfortable cushion as we prepare to jump into retirement.

As retirees, we'd carry about 2 years of cash.
:happy
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