Strategy: %Cash in Portfolio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
bhwabeck3533
Posts: 48
Joined: Thu Sep 21, 2017 6:25 am
Location: Baldwin County, AL

Strategy: %Cash in Portfolio

Post by bhwabeck3533 » Thu May 21, 2020 8:31 am

Feel free to direct me to the appropriate thread on this site regarding my question, or respond accordingly.....
I have a pretty sophisticated spreadsheet to manage and track my assets, investment, and expenses. I use a two year month-to-month projection to drive withdrawals from traditional IRA (I am 64 years old, been retired for six years, very small annuity, not taking Social Security). My long-term projection (year end through age 95) of investment balance based on spending includes a "flag" where my balance hits a low point (driven by assumption of lower spending after age 75). I'd like to increase and maintain a "cash reserve" equal to 10% of total assets (not including home). When I model this increase my "low balance flag" drops to $1.5 million. Now the question(s).
1. Is a 10% cash target reasonable?
2. Is the $1.5 million figure reasonable?

jebmke
Posts: 10623
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Strategy: %Cash in Portfolio

Post by jebmke » Thu May 21, 2020 8:38 am

You will get answers on the cash that vary from zero to some positive number. I hold no cash but that is me.

What is the purpose of the flag?
When you discover that you are riding a dead horse, the best strategy is to dismount.

User avatar
Topic Author
bhwabeck3533
Posts: 48
Joined: Thu Sep 21, 2017 6:25 am
Location: Baldwin County, AL

Re: Strategy: %Cash in Portfolio

Post by bhwabeck3533 » Thu May 21, 2020 12:24 pm

The "flag" is a signal to me on "how low can I go?". A real Monte Carlo program would have confidence limits around this low point -- which my Excel spreadsheet does not include. Stock market crash? Unexpected life event which depletes my IRA? Is there a DIY tool out there that can help me "what if" futuristic estimates?

Dandy
Posts: 6233
Joined: Sun Apr 25, 2010 7:42 pm

Re: Strategy: %Cash in Portfolio

Post by Dandy » Thu May 21, 2020 12:49 pm

When I was in my late 60's I couldn't decide what my retirement allocation should be-- was 60/40 to aggressive? was 40/60 to conservative? I decided to roughly follow Dr. Wm Bernstein's idea for those who have enough. Put 20 or more years worth of drawdown needed to supplement other retirement income in "safe" products. The rest you can invest any way you want --even 100% stocks.

This "bottom up" approach i.e. securing your retirement withdrawal needs for a couple of decades made more sense in retirement with zero human capital. I decided to move enough assets to supplement my other retirement income in FDIC products, money markets and short term bond funds to fund my retirement to age 90. I ended up with a 45/55 overall allocation. -- and lots of peace of mind.

When it comes to withdrawals I view my "safe" portfolio more as insurance rather than an ATM i.e. I withdraw from both my "safe" and "risk" assets unless equities have a bad year. This tends to grow the "safe" assets. So they are available to offset inflation, extend the age of coverage, gift or spend. We have gifted some early inheritance to our children the past few years. Our heirs appreciate the "early inheritance" to offset some of their expense/investment needs now rather than have to wait, hopefully for a long time, to inherit.

I am so pleased with how this turned out.

jebmke
Posts: 10623
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Strategy: %Cash in Portfolio

Post by jebmke » Thu May 21, 2020 1:23 pm

bhwabeck3533 wrote:
Thu May 21, 2020 12:24 pm
The "flag" is a signal to me on "how low can I go?". A real Monte Carlo program would have confidence limits around this low point -- which my Excel spreadsheet does not include. Stock market crash? Unexpected life event which depletes my IRA? Is there a DIY tool out there that can help me "what if" futuristic estimates?
I understand that but, if the flag goes up, what is your intended action? If all you do is salute the flag, you don't really need it.
When you discover that you are riding a dead horse, the best strategy is to dismount.

grok87
Posts: 9038
Joined: Tue Feb 27, 2007 9:00 pm

Re: Strategy: %Cash in Portfolio

Post by grok87 » Thu May 21, 2020 2:23 pm

bhwabeck3533 wrote:
Thu May 21, 2020 8:31 am
Feel free to direct me to the appropriate thread on this site regarding my question, or respond accordingly.....
I have a pretty sophisticated spreadsheet to manage and track my assets, investment, and expenses. I use a two year month-to-month projection to drive withdrawals from traditional IRA (I am 64 years old, been retired for six years, very small annuity, not taking Social Security). My long-term projection (year end through age 95) of investment balance based on spending includes a "flag" where my balance hits a low point (driven by assumption of lower spending after age 75). I'd like to increase and maintain a "cash reserve" equal to 10% of total assets (not including home). When I model this increase my "low balance flag" drops to $1.5 million. Now the question(s).
1. Is a 10% cash target reasonable?
2. Is the $1.5 million figure reasonable?
for a retirement portfolio in drawdown, David Swensen's approach seems to imply perhaps as much as 18% in cash. See this thread
viewtopic.php?f=10&t=311560
cheers,
grok
RIP Mr. Bogle.

User avatar
midareff
Posts: 6803
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Strategy: %Cash in Portfolio

Post by midareff » Thu May 21, 2020 2:36 pm

I measure cash on the first of the month, monthly right after SS and pension pays. They are adequate to pay our bills. RMD and withdrawals from taxable (low 2 comma portfolio) are for spending on travel and such. Total cash stays around 4% between checking, savings, +/- ..... it's a bit higher now as I bought some CDs. Checking generally starts the month at $8500 and finishes at $500 by the 17th or 18th. I don't like to leave money where it doesn't receive any money for being there.
Last edited by midareff on Fri May 22, 2020 6:59 am, edited 1 time in total.

jtdavid
Posts: 136
Joined: Thu Mar 01, 2007 12:21 pm

Re: Strategy: %Cash in Portfolio

Post by jtdavid » Thu May 21, 2020 4:25 pm

I'm a long way from retirement but I've thought about this for a while. I think it makes sense to have a year or two's worth of expenses in cash. Ten or more years worth of expenses in something like Target Retirement Income. And the rest primarily in stocks or a fund like LifeStrategy Growth. Some will call that a bucket approach that is is just a psychological crutch. Maybe so, but at least it is a logical way to back into an allocation that makes sense to me. Otherwise your allocation is just kind of arbitrary. I've found I'm likely to fiddle and tinker with something arbitrary. There is no such thing as a perfect plan.

grok87
Posts: 9038
Joined: Tue Feb 27, 2007 9:00 pm

Re: Strategy: %Cash in Portfolio

Post by grok87 » Fri May 22, 2020 6:30 am

jtdavid wrote:
Thu May 21, 2020 4:25 pm
I'm a long way from retirement but I've thought about this for a while. I think it makes sense to have a year or two's worth of expenses in cash. Ten or more years worth of expenses in something like Target Retirement Income. And the rest primarily in stocks or a fund like LifeStrategy Growth. Some will call that a bucket approach that is is just a psychological crutch. Maybe so, but at least it is a logical way to back into an allocation that makes sense to me. Otherwise your allocation is just kind of arbitrary. I've found I'm likely to fiddle and tinker with something arbitrary. There is no such thing as a perfect plan.
in Unconventional Success, David Swensen makes the following arguments:

1) A long term (LT) portfolio should be equity-oriented and broadly diversified including real estate. He argues for 55% stocks, 15% real-estate, 15% treasuries, 15% TIPS. So no cash.

2) This portfolio is suitable for investing horizons of 10 years plus.

3) if your investing horizon is 1-2 years, you should be 100% in cash.

4) for intermediate investing horizons one would interpolate. so for a 6 year horizon (halfway between 2 years and 10 years) you would be 50% in cash and 50% in the LT portfolio. so 50% cash, 27.5% stocks, 7.5% real estate, 7.5% treasuries, 7.5% tips.

if one thinks of drawing down from a retiree investment portfolio over 30 years and apply the above logic, then clearly some part of the funds needed during years 1-10 should be in cash. For the whole portfolio the math implies being about 18% in cash. See this thread for more details, discussion:
viewtopic.php?f=10&t=311560
cheers,
grok
RIP Mr. Bogle.

User avatar
Topic Author
bhwabeck3533
Posts: 48
Joined: Thu Sep 21, 2017 6:25 am
Location: Baldwin County, AL

Re: Strategy: %Cash in Portfolio

Post by bhwabeck3533 » Fri May 22, 2020 6:47 am

I'm ready to take your feedback to the next level. I'm asking for a recommendation on which book(s) to buy on Amazon by Dr William Bernstein and David Swensen. Both men have authored more than one book. Our public library has zero copies by either author. Thanks.

grok87
Posts: 9038
Joined: Tue Feb 27, 2007 9:00 pm

Re: Strategy: %Cash in Portfolio

Post by grok87 » Fri May 22, 2020 6:54 am

bhwabeck3533 wrote:
Fri May 22, 2020 6:47 am
I'm ready to take your feedback to the next level. I'm asking for a recommendation on which book(s) to buy on Amazon by Dr William Bernstein and David Swensen. Both men have authored more than one book. Our public library has zero copies by either author. Thanks.
for Swensen I would recommend Unconventional Success
https://www.amazon.com/Unconventional-S ... 0743228383

Bernstein has a lot of worthwhile books. the one that has probably influenced me the most is: "Deep Risk"
https://www.amazon.com/Deep-Risk-Histor ... B00EV25GAM

cheers,
grok
RIP Mr. Bogle.

David Althaus
Posts: 193
Joined: Wed Feb 14, 2018 8:05 pm

Re: Strategy: %Cash in Portfolio

Post by David Althaus » Fri May 22, 2020 7:40 am

At 73 we have seven years living expenses in fixed assets--one year in checking and money market, year two in CD, and the rest in intermediate bond fund. The remainder is in Total Market. Why 7? Worst bear market in history lasted ten years, most last less than five. I also read in an old book that preparing for seven lean years was a good idea--or maybe I dreamt it. You may also note that with each passing birthday the strategy becomes, ever so slightly, more conservative.

If the spreadsheets make you more comfortable and more likely to stay the course by all means use them. You might also benefit from analyzing whether or not you could be overthinking. Precision leads to good business decision. Precision in personal investing can be (all too often) an illusion or false comfort. Just a thought.

All the best

MikeG62
Posts: 2629
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Strategy: %Cash in Portfolio

Post by MikeG62 » Fri May 22, 2020 8:35 am

bhwabeck3533 wrote:
Thu May 21, 2020 8:31 am

...Is a 10% cash target reasonable?
If it's uninvested cash I'd say no - too much idle cash. If it's invested (say in CD's), then it really represents the short end of your fixed income exposure and that would probably be fine. Depends on how the rest of your financial assets are invested.
Real Knowledge Comes Only From Experience

BW1985
Posts: 2033
Joined: Tue Mar 23, 2010 6:12 pm

Re: Strategy: %Cash in Portfolio

Post by BW1985 » Fri May 22, 2020 8:39 am

MikeG62 wrote:
Fri May 22, 2020 8:35 am
bhwabeck3533 wrote:
Thu May 21, 2020 8:31 am

...Is a 10% cash target reasonable?
If it's uninvested cash I'd say no - too much idle cash. If it's invested (say in CD's), then it really represents the short end of your fixed income exposure and that would probably be fine. Depends on how the rest of your financial assets are invested.
Nowadays the difference between cash and CD's is very little though, to me these are practically the same thing.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

MikeG62
Posts: 2629
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Strategy: %Cash in Portfolio

Post by MikeG62 » Fri May 22, 2020 8:48 am

BW1985 wrote:
Fri May 22, 2020 8:39 am
MikeG62 wrote:
Fri May 22, 2020 8:35 am
bhwabeck3533 wrote:
Thu May 21, 2020 8:31 am

...Is a 10% cash target reasonable?
If it's uninvested cash I'd say no - too much idle cash. If it's invested (say in CD's), then it really represents the short end of your fixed income exposure and that would probably be fine. Depends on how the rest of your financial assets are invested.
Nowadays the difference between cash and CD's is very little though, to me these are practically the same thing.
They are not to me. Still adding $50,000 per month to two add-on CD’s I opened at PSECU in Nov at rates between 3.0% (24-month CD) and 3.25% (36 month CD). Opened and fully funded a 37-month CD with NFCU in March of 2020 at 3.0%. Those are well above the yield on cash both current as well as at the time these CD’s were open. One needs to look around and act quick when these promotional rates pop up.
Real Knowledge Comes Only From Experience

BW1985
Posts: 2033
Joined: Tue Mar 23, 2010 6:12 pm

Re: Strategy: %Cash in Portfolio

Post by BW1985 » Fri May 22, 2020 8:55 am

MikeG62 wrote:
Fri May 22, 2020 8:48 am
BW1985 wrote:
Fri May 22, 2020 8:39 am
MikeG62 wrote:
Fri May 22, 2020 8:35 am
bhwabeck3533 wrote:
Thu May 21, 2020 8:31 am

...Is a 10% cash target reasonable?
If it's uninvested cash I'd say no - too much idle cash. If it's invested (say in CD's), then it really represents the short end of your fixed income exposure and that would probably be fine. Depends on how the rest of your financial assets are invested.
Nowadays the difference between cash and CD's is very little though, to me these are practically the same thing.
They are not to me. Still adding $50,000 per month to two add-on CD’s I opened at PSECU in Nov at rates between 3.0% (24-month CD) and 3.25% (36 month CD). Opened and fully funded a 37-month CD with NFCU in March of 2020 at 3.0%. Those are well above the yield on cash both current as well as at the time these CD’s were open. One needs to look around and act quick when these promotional rates pop up.
Good rates, but I'm talking about today's rates. If you know of any 3% CD's I can open right now by all means please share.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

MikeG62
Posts: 2629
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Strategy: %Cash in Portfolio

Post by MikeG62 » Fri May 22, 2020 9:08 am

BW1985 wrote:
Fri May 22, 2020 8:55 am
MikeG62 wrote:
Fri May 22, 2020 8:48 am
BW1985 wrote:
Fri May 22, 2020 8:39 am
MikeG62 wrote:
Fri May 22, 2020 8:35 am
bhwabeck3533 wrote:
Thu May 21, 2020 8:31 am

...Is a 10% cash target reasonable?
If it's uninvested cash I'd say no - too much idle cash. If it's invested (say in CD's), then it really represents the short end of your fixed income exposure and that would probably be fine. Depends on how the rest of your financial assets are invested.
Nowadays the difference between cash and CD's is very little though, to me these are practically the same thing.
They are not to me. Still adding $50,000 per month to two add-on CD’s I opened at PSECU in Nov at rates between 3.0% (24-month CD) and 3.25% (36 month CD). Opened and fully funded a 37-month CD with NFCU in March of 2020 at 3.0%. Those are well above the yield on cash both current as well as at the time these CD’s were open. One needs to look around and act quick when these promotional rates pop up.
Good rates, but I'm talking about today's rates. If you know of any 3% CD's I can open right now by all means please share.
Follow Deposit Accounts. When you see an attractive promotional rate CD, be prepared to move quickly. Nothing overly compelling this week. You could get 2.0% in a 5-year CD (which is probably 3x or 4x the market rate on cash currently), if that is of interest to you. Personally I am holding out for something better. Based upon past experience, promo deals do crop up from time to time and I see no reason why they won’t again. You need to be patient. In the meantime, use NP CD’s at Ally or Marcus.
Real Knowledge Comes Only From Experience

User avatar
Toons
Posts: 13587
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Strategy: %Cash in Portfolio

Post by Toons » Fri May 22, 2020 9:32 am

Whatever makes you feel comfortable
1 dollar or
1 million dollars
:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Post Reply