Money Market account part of AA?

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JD2775
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Money Market account part of AA?

Post by JD2775 »

I have a MM account that is designated for general savings (house down payment, future car payments, trips etc...) Do I include that as part of my AA? It would noticeably shift it if so. Currently I isolate my AA (75/25) to the other accounts (401k, HSA, Roth, Taxable)

Was just curious how others would treat this...
beehivehave
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Re: Money Market account part of AA?

Post by beehivehave »

It's called cash, no doubt a quaint asset.
Silk McCue
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Re: Money Market account part of AA?

Post by Silk McCue »

Definitely not useful for me to include such funds in my Investment AA. I'm certainly not going to rebalance to my desired AA based upon short term savings needs.

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dbr
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Re: Money Market account part of AA?

Post by dbr »

Things like this can be done either way, but after you decide you assess your need, ability, and willingness to take risk using whatever scheme you choose.

A lot of people would leave money for short term spending (meaning less than ten years out compared to 40-50-60 years for retirement investing) out of the AA. It is probably simpler.

A reason to account for this money in your AA is that it is a more complete assessment of how you are using your assets.

I also think the decision depends on how definite you are about the use for the money. If you are certain you are buying a house in, say 3-4 years, and how much down payment you need, I would keep the money separate. If it is just a kind of general idea that someday you might buy a house and will need savings, I would not.

Sorry to be vague, but I think these things are "it depends" kinds of questions.
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Re: Money Market account part of AA?

Post by abuss368 »

I do not include and cash or money market balances in our asset allocation. Nothing wrong with it and it can be considered part of fixed income. I have one Prime Money Market fund in a separate account. That is our cash account. Used as needed and added to. Not included as part of portfolio.
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beehivehave
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Re: Money Market account part of AA?

Post by beehivehave »

abuss368 wrote: Thu Jan 16, 2020 1:13 pm I do not include and cash or money market balances in our asset allocation. Nothing wrong with it and it can be considered part of fixed income. I have one Prime Money Market fund in a separate account. That is our cash account. Used as needed and added to. Not included as part of portfolio.
User preference, especially if it's low relative to total assets, but all fund reports and automated portfolio analyzers designate cash as an asset class.
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JD2775
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Re: Money Market account part of AA?

Post by JD2775 »

Got it, thanks everyone!
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Re: Money Market account part of AA?

Post by dbr »

From the perspective of a retired person without plans for major uses of cash, such as a new yacht, I include all cash including the checking account in assets. But it doesn't matter much because we don't hold very much cash. I do cash rather than accrual accounting of credit card spending, so those accounts don't come in. The nominal target for cash as such is zero.
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Re: Money Market account part of AA?

Post by abuss368 »

beehivehave wrote: Thu Jan 16, 2020 1:19 pm
abuss368 wrote: Thu Jan 16, 2020 1:13 pm I do not include and cash or money market balances in our asset allocation. Nothing wrong with it and it can be considered part of fixed income. I have one Prime Money Market fund in a separate account. That is our cash account. Used as needed and added to. Not included as part of portfolio.
User preference, especially if it's low relative to total assets, but all fund reports and automated portfolio analyzers designate cash as an asset class.
User preference exactly. No right or wrong answer.
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rkhusky
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Re: Money Market account part of AA?

Post by rkhusky »

If you have a set allocation to cash and you plan to rebalance to maintain that allocation, then it should be in your asset allocation. If not, then it should not be in your asset allocation.
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Re: Money Market account part of AA?

Post by RickBoglehead »

dbr wrote: Thu Jan 16, 2020 1:12 pm A reason to account for this money in your AA is that it is a more complete assessment of how you are using your assets.
For me, this is the reason to include it. But I also included it in my AA. In other words, my AA has three components, not two.

Instead of say 60/40, my AA would be 60/37/3.

By NOT including it, you're overstating your fixed income and putting too little in equities. Of course, it matters how much cash. If you have $10,000 in cash in a total $1 million portfolio, it doesn't matter. But, if you have $250,000 cash in a $1 million portfolio, look at the difference you would have:

60/40 not including cash - $450,000 (60% of $750k) equities, $300,000 (40% of $750k) bonds, $250,000 cash.

60/40 including cash - $600,000 equities, $400,000 split between bonds and cash.

So, if you're not going to include it, then adjust your AA to reflect that you have it - instead of 60/40 I'd be 80/20 and have $250,000 in cash.
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TierArtz
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Re: Money Market account part of AA?

Post by TierArtz »

Yes; I count cash in a money market account as part of my fixed income allocation. Overall, I somewhat arbitrarily want 60% stocks, 39% bonds and 1% cash. Everyone's situation is different, and as long one has enough cash for emergency short-term needs after any dependable monthly income (pension) and/or the amount does not significantly decrease one's equity allocation, it does not matter. I think 1% gives me more than enough cash to cover any emergency that might arise. I raid it in January of each year to fund two IRAs and fill it back to 1% shortly thereafter.

I use Morningstar portfolio X-ray to dissect my portfolio and also use a spreadsheet tab that pretends fund balances in each account represent a "pure" allocation to US, ex-US, bonds, or cash. Per Morningstar, Vanguard Total Stock Market Index is really only about 98.5% US stocks and the rest is cash or ex-US. Presently, both analytical approaches tell me I need less cash, but the unavailable cash "impurities" in many indexes make the Morningstar numbers roughly 1% different than my account balance spreadsheet tab. The point is, if Morningstar considers cash part of your portfolio AA, perhaps one should believe it is.
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Re: Money Market account part of AA?

Post by joeschmo »

I’ve given this considerable thought as a high-net-worth person more concerned with avoiding losses than maximizing returns.

At first I was looking at stock vs “everything else,” but that is misleading because cash savings accounts basically have zero chance of losing value, whereas bonds are still risky assets.

Instead, I decided on the largest loss in portfolio value that I believe I could stomach without changing my asset allocation. Then I decided the amount of cash that felt comfortable to me in FDIC-insured savings accounts. For the non-cash piece, I used Vanguard numbers on “greatest historical loss” to find the stock/bond balance within the portfolio that makes most sense.

This change in perspective helped me move to more stock - from 60/40 to 70/30. I know I could take more risk and have higher returns, but I am fortunate I don’t need to.
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Re: Money Market account part of AA?

Post by 3funder »

abuss368 wrote: Thu Jan 16, 2020 1:13 pm I do not include and cash or money market balances in our asset allocation. Nothing wrong with it and it can be considered part of fixed income. I have one Prime Money Market fund in a separate account. That is our cash account. Used as needed and added to. Not included as part of portfolio.
+1
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Re: Money Market account part of AA?

Post by stocknoob4111 »

I have a general savings account for future expenses (travel, annual insurance payment etc.), some people call this a "sinking fund"... I don't include this in my asset allocation as the funds have already been earmarked to be spent but I do include it in my net worth calculation.

I have another Money Market for my Emergency fund which I absolutely DO include in my asset allocation under the "Cash" asset class and I do consider it part of my portfolio.
joeschmo wrote: Thu Jan 16, 2020 2:47 pm At first I was looking at stock vs “everything else,” but that is misleading because cash savings accounts basically have zero chance of losing value, whereas bonds are still risky assets.
Cash loses money to inflation and that is guaranteed in today's climate which is why I try to hold as little of it as possible. Bonds are basically breaking even but that too may change. Interesting times we are living in.
Last edited by stocknoob4111 on Thu Jan 16, 2020 3:55 pm, edited 1 time in total.
UpperNwGuy
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Re: Money Market account part of AA?

Post by UpperNwGuy »

Some people intentionally use money market funds as part of the bond component of their portfolios. I think that's fine as long as they're not double counting emergency funds, savings for down payments on a house, and other short/intermediate savings as part of their long-term investments.
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Re: Money Market account part of AA?

Post by ruralavalon »

JD2775 wrote: Thu Jan 16, 2020 1:05 pm I have a MM account that is designated for general savings (house down payment, future car payments, trips etc...) Do I include that as part of my AA? It would noticeably shift it if so. Currently I isolate my AA (75/25) to the other accounts (401k, HSA, Roth, Taxable)

Was just curious how others would treat this...
I would not count cash for general savings as part of our asset allocation.

But it doesn't matter, the only cash we have is a couple of months worth of expenses (net of Social Security) in our joint checking account.

I do think it's OK to use a good money market fund or Stable Value Fund as part of a fixed income allocation, although we don't do that.
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Re: Money Market account part of AA?

Post by anon_investor »

For any funds earmarked for specific upcoming expenses (e.g next month's mortgage payment, coming tax payments, etc.), I do not count it as part of my AA. I do count my emergency fund (currently in FDIC HYS/no penalty CDs) as part of my fixed income allocation.
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Re: Money Market account part of AA?

Post by retire57 »

We do. I consider cash a short-term reserve.
TheRealJohnDoe
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Re: Money Market account part of AA?

Post by TheRealJohnDoe »

I certainly include cash and cash equivalents in my AA. I'm retired and those funds are my buffer against having to sell in a down market. Now, most of it is earning 2.75% right now so it isn't just sitting in my wallet. But yes, that's one of the most important assets I have. I watch it carefully.
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Re: Money Market account part of AA?

Post by fuddbogle »

TheRealJohnDoe wrote: Thu Jan 16, 2020 7:14 pm ... Now, most of it is earning 2.75% right now so it isn't just sitting in my wallet. ...
Very good, but how? Did you lock in CD rates at that %?
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Re: Money Market account part of AA?

Post by fuddbogle »

I really like what is below. I'm about 8-10 years from retirement and the XX/XX/X AA is what I've projected to tame my anxiety the most. My wife and I will have roughly 100k/yr. in pension and other annual income at retirement (excluding our investments). Expenses shouldn't exceed 100K unless health insurance goes haywire.

I'm planning on roughly 70/22/8 at retirement in our investment with the 8% largely MM. We occasionally have a little burr in our saddle so the 8% is a 5yr+ buffer spending(if at all). That allows us to increase our projected equity allocation. The goal of the equity is to eventually gift to our 3 daughters so it's a long term investment.

So, whatever it's worth, I include our MM in our AA.

RickBoglehead wrote: Thu Jan 16, 2020 1:30 pm
dbr wrote: Thu Jan 16, 2020 1:12 pm A reason to account for this money in your AA is that it is a more complete assessment of how you are using your assets.
For me, this is the reason to include it. But I also included it in my AA. In other words, my AA has three components, not two.

Instead of say 60/40, my AA would be 60/37/3.

By NOT including it, you're overstating your fixed income and putting too little in equities. Of course, it matters how much cash. If you have $10,000 in cash in a total $1 million portfolio, it doesn't matter. But, if you have $250,000 cash in a $1 million portfolio, look at the difference you would have:

60/40 not including cash - $450,000 (60% of $750k) equities, $300,000 (40% of $750k) bonds, $250,000 cash.

60/40 including cash - $600,000 equities, $400,000 split between bonds and cash.

So, if you're not going to include it, then adjust your AA to reflect that you have it - instead of 60/40 I'd be 80/20 and have $250,000 in cash.
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Re: Money Market account part of AA?

Post by rkhusky »

fuddbogle wrote: Thu Jan 16, 2020 8:23 pm I'm planning on roughly 70/22/8 at retirement in our investment with the 8% largely MM. We occasionally have a little burr in our saddle so the 8% is a 5yr+ buffer spending(if at all).

So, whatever it's worth, I include our MM in our AA.
If stocks go on a tear and you end up at 75/20/5, will you sell stocks and buy bonds and move more into cash (even if that results in 7-8 years spending). Or if stocks crash and you end up at 60/25/15, will you sell bonds and use cash to buy stocks (even if that puts your cash at 2-3 yr spending)?
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Re: Money Market account part of AA?

Post by TheRealJohnDoe »

fuddbogle wrote: Thu Jan 16, 2020 7:57 pm
TheRealJohnDoe wrote: Thu Jan 16, 2020 7:14 pm ... Now, most of it is earning 2.75% right now so it isn't just sitting in my wallet. ...
Very good, but how? Did you lock in CD rates at that %?
An add-on CD that started before rates started going back down.
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Re: Money Market account part of AA?

Post by LeftCoastIV »

We include cash in our AA calculation, and it is the vast majority of our fixed income. Bond index funds don't seem to offer a notably superior return without moving into lower credit ratings, so I'm comfortable with money market accounts and/or CDs.
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Re: Money Market account part of AA?

Post by watchnerd »

We include cash in our AA because 50% of our fixed income is in either short TIPS or MM.

Why?

Because the yield is so miserable compared to the duration risk for anything longer.
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Re: Money Market account part of AA?

Post by fuddbogle »

rkhusky wrote: Thu Jan 16, 2020 8:34 pm
fuddbogle wrote: Thu Jan 16, 2020 8:23 pm I'm planning on roughly 70/22/8 at retirement in our investment with the 8% largely MM. We occasionally have a little burr in our saddle so the 8% is a 5yr+ buffer spending(if at all).

So, whatever it's worth, I include our MM in our AA.
If stocks go on a tear and you end up at 75/20/5, will you sell stocks and buy bonds and move more into cash (even if that results in 7-8 years spending). Or if stocks crash and you end up at 60/25/15, will you sell bonds and use cash to buy stocks (even if that puts your cash at 2-3 yr spending)?
Good question. Those are just a targeted AA now as our retirement isn't for another 7.5 years or so. I will want to keep around 100k to 150k in MM so the "8" is more an estimation based on the investable income projection at that time (I used 5% growth). If the market does well between now and then, the 8 will be lower and if it does poorly, it will be a higher percent.
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Re: Money Market account part of AA?

Post by nguy44 »

RickBoglehead wrote: Thu Jan 16, 2020 1:30 pm
For me, this is the reason to include it. But I also included it in my AA. In other words, my AA has three components, not two.

Instead of say 60/40, my AA would be 60/37/3.
I take this approach, since I have a lot in cash, e.g. 36/42/22. It helps me decide, in addition to my stock/bond allocation, if I have too much/little in cash and apply it as part of any overall re-balancing needed
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Re: Money Market account part of AA?

Post by Wiggums »

Yes, I count cash.
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Re: Money Market account part of AA?

Post by rkhusky »

fuddbogle wrote: Fri Jan 17, 2020 1:07 pm
rkhusky wrote: Thu Jan 16, 2020 8:34 pm
fuddbogle wrote: Thu Jan 16, 2020 8:23 pm I'm planning on roughly 70/22/8 at retirement in our investment with the 8% largely MM. We occasionally have a little burr in our saddle so the 8% is a 5yr+ buffer spending(if at all).

So, whatever it's worth, I include our MM in our AA.
If stocks go on a tear and you end up at 75/20/5, will you sell stocks and buy bonds and move more into cash (even if that results in 7-8 years spending). Or if stocks crash and you end up at 60/25/15, will you sell bonds and use cash to buy stocks (even if that puts your cash at 2-3 yr spending)?
Good question. Those are just a targeted AA now as our retirement isn't for another 7.5 years or so. I will want to keep around 100k to 150k in MM so the "8" is more an estimation based on the investable income projection at that time (I used 5% growth). If the market does well between now and then, the 8 will be lower and if it does poorly, it will be a higher percent.
I am suggesting that if you set a fixed amount in cash ($100K or 3 years spending, etc), as opposed to a fixed percentage, then cash should not be in your AA. It can influence your AA, but not be a component of your AA.
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Re: Money Market account part of AA?

Post by nisiprius »

It depends on how I have it earmarked in my mental accounting.

If it is part of my customary income-and-expense flow, then no.

If I have made a point of tucking it away in a separate account where I consider it to be "earmarked" as among the assets available to draw down in retirement, then yes. I consider it separate if I have to go to some special effort to get it out--if it's a CD that doesn't mature for a while, for example, or if it's in a Roth IRA.

Traditionally, asset allocation included three categories: stocks aka equities, bonds aka fixed income, and cash aka short-term reserves. Up until perhaps 2011 or so, Vanguard's LifeStrategy account contained within them holdings classified as "short-term reserves." This was clearly part of one's AA, as there was no way at all to break it out separately and spend it without touching the stocks and bonds.

I do, however, object when someone seems to me to be double-counting. A cash holding can be part of your emergency fund, or it can be part of your investment portfolio, but IMHO it is one or the other, it cannot be both at the same time.
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