Thoughts on Percentage of Cash in Fixed Income Allocation?

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4th&Goal
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Thoughts on Percentage of Cash in Fixed Income Allocation?

Post by 4th&Goal »

What do my friends here believe to be a reasonable percentage of cash in the fixed income part of a portfolio? In a 50/50 Stock/Bond portfolio how does this fixed income allocation look:
40% Treasuries
40% TIPS
20% Prime Money Market

What are the dangers of holding more in a money market? What would be the advantages?

Thank you
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sport
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Post by sport »

The advantage of holding money in a MM fund is that it is immediately available, with no chance of loss due to interest rate increases. The disadvantage is that if interest rates go down, you will not gain as you would with a bond fund, and you will not have the higher rate "locked in" as you would with a CD.

Keep in mind that this is not an "all or nothing" decision. There is nothing wrong with dividing your cash between MM, CDs and ST bonds.

Best wishes,
Jeff
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Index Fan
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Post by Index Fan »

Cash is seen by some as an additional asset class, but generally it isn't popular when compared to short-term bonds, for example. Cash is 'safe' but the risk is that it will not keep up with inflation.

With cash doing as well as it is now (~4.9% VG Prime MM) you won't have many problems. Just be aware that as short-term interest rates go down, MM yield will follow.

As far as 20% of your fixed income in cash, that would be the maximum I'd consider. I hold perhaps 5-10% of my FI in a MM and use short-term bonds for a bit more in the risk/return department while still remaining a fairly liquid asset.
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Dale_G
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Post by Dale_G »

I think cash holdings are a matter of personal preference. That said, over the long haul, bonds of any duration should outperform MM accounts.

I am comfortable with a 50% equity, 48.5% bond and 1.5% cash position. The bonds have an average duration of duration of 5 years, but I plan on living at least 10 years, so the volatility is a minor issue.

Keep in mind, that Prime MM paid less than 1% only a few short years ago. Some MM funds paid nothing.

Dale
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DaveTH
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Post by DaveTH »

My target allocation is 30% bonds and 5% cash.
Gekko
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Post by Gekko »

i like to keep a minimum 1x gross annual income in cash.
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Vig Oren
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Post by Vig Oren »

Goal, you have not stated the purpose of the money in your MMF. Is it being accumulated from other assets' dividends & distributions for living expenses, to buy something within 3 years, or what?

I myself am retired and have only taxable accounts. The money in my MMF of some $20K is for living expenses. The other fixed income is in a 5 years ladder (like) CDs (at the State Employees Credit Union). In my case the CDs interests flow monthly to the MMF. I have no TIPS. So my reply is: the minimum %.
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woof755
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Post by woof755 »

Gekko wrote:i like to keep a minimum 1x gross annual income in cash.
Speaking for the rest of the accumulation investor crowd: "Wouldn't this be nice!"

:P
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Valuethinker
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Re: Thoughts on Percentage of Cash in Fixed Income Allocatio

Post by Valuethinker »

4th&Goal wrote:What do my friends here believe to be a reasonable percentage of cash in the fixed income part of a portfolio? In a 50/50 Stock/Bond portfolio how does this fixed income allocation look:
40% Treasuries
40% TIPS
20% Prime Money Market

What are the dangers of holding more in a money market? What would be the advantages?

Thank you
As others have pointed out, you are exposing yourself to the risk of a big fall in interest rates.

Suppose the US housing crash continues, and spreads to commercial real estate. Then the Fed, as it did in 2001, gets aggressive lowering rates. Money Market funds go back to paying sub 1%.

Now the converse is of course true (interest rates rise, bond funds perform badly).

The general principle is to match the duration of your investment to the timing of the need/ reason of holding the investment. So if you are going to need that 20% within 12 months, you are best off holding MMFs.
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at
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Post by at »

If the fixed-income portion is large and of shorter durations, you don't need such a large position in MMF.
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