Peter L. Bernstein: Cash BETTER than Bonds

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Copernicus
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Peter L. Bernstein: Cash BETTER than Bonds

Post by Copernicus » Mon Oct 02, 2017 7:10 pm

I am NOT thinking giving up on bonds for the fear of rising rates. Recently, I read the 1989 article by Peter L. Bernstein where he recommends that cash should replace bonds in portfolios. Mr. Bernstein states, without reservations, that “bonds should trade places with cash as the “residual stepchild” of asset allocation to reduce portfolio risk and improve returns.” (How True Are the Tried Principles?, March/April 1989 edition of Investment Management Review)

Cash loses buying power due to inflation, but a higher amount of stocks in portfolio should more than compensate for that, and, if past trends continue in future, garner even higher returns. If cash offers more stability than bonds, one should be able to take more risk on the stocks side, and get even higher portfolio returns.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by CULater » Mon Oct 02, 2017 7:14 pm

Copernicus wrote:
Mon Oct 02, 2017 7:10 pm
I am NOT thinking giving up on bonds for the fear of rising rates. Recently, I read the 1989 article by Peter L. Bernstein where he recommends that cash should replace bonds in portfolios. Mr. Bernstein states, without reservations, that “bonds should trade places with cash as the “residual stepchild” of asset allocation to reduce portfolio risk and improve returns.” (How True Are the Tried Principles?, March/April 1989 edition of Investment Management Review)

Cash loses buying power due to inflation, but a higher amount of stocks in portfolio should more than compensate for that, and, if past trends continue in future, garner even higher returns. If cash offers more stability than bonds, one should be able to take more risk on the stocks side, and get even higher portfolio returns.
How about CDs instead of cash? Higher return, should be safe, not as liquid obviously.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by VictoriaF » Mon Oct 02, 2017 7:51 pm

I have just re-listened to Russ Roberts's 2009 interview with Nassim Taleb on EconTalk. It took place in March 2009, when the market was at its lowest point. (Obviously, they did not know that at the time.) Roberts and Taleb have agreed that the 2008-2009 crisis has demonstrated that cash is an asset class. In 2009, one could buy a lot of other assets on sale, if one had cash.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by nisiprius » Mon Oct 02, 2017 7:55 pm

Copernicus wrote:
Mon Oct 02, 2017 7:10 pm
...Cash loses buying power due to inflation...
But does it?

Certainly it does if, by cash, you mean physical paper currency, or deposits in a non-interest-bearing checking account.

It's hard to generalize across all bank accounts but typically "good" bank accounts--"high yield" savings accounts, so-called "money market deposit accounts," etc. have interest rates in the same ballpark as Treasury bills, and Treasury bills have historically eked out around an 0.5% real return (above inflation). If "cash" means things like interest-bearing bank accounts, Treasury bills, or money market mutual funds, I don't think it has historically lost buying power to inflation.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by nisiprius » Mon Oct 02, 2017 7:58 pm

VictoriaF wrote:
Mon Oct 02, 2017 7:51 pm
I have just re-listened to Russ Roberts's 2009 interview with Nassim Taleb on EconTalk. It took place in March 2009, when the market was at its lowest point. (Obviously, they did not know that at the time.) Roberts and Taleb have agreed that the 2008-2009 crisis has demonstrated that cash is an asset class. In 2009, one could buy a lot of other assets on sale, if one had cash.

Victoria
Traditional asset allocation pie charts have three sectors, "stocks" (or "equities,") "bonds" (or "fixed income,") and "cash" (or "short-term reserves.") Up until the late 1990s it was customary for model portfolio recommendations to include a cash allocation, and the Vanguard LifeStrategy Funds had a "short-term reserves" allocation for quite a long time.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by avalpert » Mon Oct 02, 2017 8:13 pm

nisiprius wrote:
Mon Oct 02, 2017 7:58 pm
VictoriaF wrote:
Mon Oct 02, 2017 7:51 pm
I have just re-listened to Russ Roberts's 2009 interview with Nassim Taleb on EconTalk. It took place in March 2009, when the market was at its lowest point. (Obviously, they did not know that at the time.) Roberts and Taleb have agreed that the 2008-2009 crisis has demonstrated that cash is an asset class. In 2009, one could buy a lot of other assets on sale, if one had cash.

Victoria
Traditional asset allocation pie charts have three sectors, "stocks" (or "equities,") "bonds" (or "fixed income,") and "cash" (or "short-term reserves.") Up until the late 1990s it was customary for model portfolio recommendations to include a cash allocation, and the Vanguard LifeStrategy Funds had a "short-term reserves" allocation for quite a long time.
I would suggest that recommended asset allocations still include those three - we just call short term reserves an emergency fund now and tend to size based on needs rather than portfolio size.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by dodecahedron » Mon Oct 02, 2017 8:15 pm

nisiprius wrote:
Mon Oct 02, 2017 7:55 pm
Copernicus wrote:
Mon Oct 02, 2017 7:10 pm
...Cash loses buying power due to inflation...
If "cash" means things like interest-bearing bank accounts, Treasury bills, or money market mutual funds, I don't think it has historically lost buying power to inflation.
In a taxable account, I believe that interest-bearing bank accounts, T-bills, and money market funds have historically lost buying power to inflation over the past 50 years, because income taxes are assessed on the nominal interest, notwithstanding that much of it may simply be return of capital due to decreased purchasing power.

This was particularly problematic when inflation was at its highest levels in the 70s and early 80s, especially since marginal tax rates were high and few people had much access to tax-advantaged accounts at that time.

It has been less of an issue in recent years, since inflation has dropped and most employees have access to at least some tax-advantaged space.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by VictoriaF » Mon Oct 02, 2017 8:19 pm

nisiprius wrote:
Mon Oct 02, 2017 7:58 pm
VictoriaF wrote:
Mon Oct 02, 2017 7:51 pm
I have just re-listened to Russ Roberts's 2009 interview with Nassim Taleb on EconTalk. It took place in March 2009, when the market was at its lowest point. (Obviously, they did not know that at the time.) Roberts and Taleb have agreed that the 2008-2009 crisis has demonstrated that cash is an asset class. In 2009, one could buy a lot of other assets on sale, if one had cash.

Victoria
Traditional asset allocation pie charts have three sectors, "stocks" (or "equities,") "bonds" (or "fixed income,") and "cash" (or "short-term reserves.") Up until the late 1990s it was customary for model portfolio recommendations to include a cash allocation, and the Vanguard LifeStrategy Funds had a "short-term reserves" allocation for quite a long time.
Thank you, nisiprius, for the context.

Did cash lose its status as an asset class in the 1990s? Today, I see numerous references to cash as a "performance drag." If we get a repeat of 2008-2009, cash may become again a "performance drug."

Taleb made another interesting point in that interview. We always adopt the most recent worst case as the worst case ever. We forget that before the last worst case, there was another, milder, worst case. There was the worst case of the 23% drop, and people used it in models until the 27% drop has replaced it. Then we had the 50% drop in 2008-2009, and so now we think that the worst that can happen is another 50% drop. But just as in the -27% age we were unaware of the possibility of the -50% age, in the -50% age we are oblivious to the possibility of the -65% age or -80% age.

Victoria
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by Dandy » Mon Oct 02, 2017 8:58 pm

Nice to hear some kudos for cash, a much maligned asset. Don't know that I would say go all cash on the fixed income side but would say that most should have some in addition to any emergency fund.

Sometimes there is a confusion as to what constitutes cash. i.e. does it have no variability in value? How liquid does it have to be-- instant like a checking account with an ATM card? Does an early withdrawal penalty make a CD not cash? I like to think of cash as really safe assets that are easy to access. So, I include CDs (that will be held to maturity), money markets, Savings/checking accounts, Stable Value Funds, EE bonds (liquid if held at Treasury Direct), Individual Treasury Bills, --I'm sure I am missing some. I will tolerate a bit of liquidity delay for safety.

These type of cash assets probably keep up with moderate inflation but on a bit of a lag. Some will actually increase when interest rates rise, again on a bit of a lag. Many want their fixed income for portfolio stability and these cash assets ace that test. Also, cash assets do have a soothing effect on investment emotions.

Bonds certainly have a role so I don't sign on to the just having very safe cash assets instead of bonds except in rare cases.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by VictoriaF » Tue Oct 03, 2017 8:47 am

Dandy wrote:
Mon Oct 02, 2017 8:58 pm
Sometimes there is a confusion as to what constitutes cash. i.e. does it have no variability in value? How liquid does it have to be-- instant like a checking account with an ATM card? Does an early withdrawal penalty make a CD not cash?
This is a great question.

I have purchased some 5-year brokered CDs in an IRA account. Let's say there is a large market decline, and I want to cash these CDs and put the proceeds into stock funds.
- Will the price of the brokered CDs get higher due to the flight to safety during a stock market decline?
- Does the early withdrawal penalty apply to brokered CDs?
- Will the spreads between buy and sell prices become much wider?

Victoria
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by dodecahedron » Tue Oct 03, 2017 8:55 am

VictoriaF wrote:
Tue Oct 03, 2017 8:47 am
Dandy wrote:
Mon Oct 02, 2017 8:58 pm
Sometimes there is a confusion as to what constitutes cash. i.e. does it have no variability in value? How liquid does it have to be-- instant like a checking account with an ATM card? Does an early withdrawal penalty make a CD not cash?
This is a great question.

I have purchased some 5-year brokered CDs in an IRA account. Let's say there is a large market decline, and I want to cash these CDs and put the proceeds into stock funds.
- Will the price of the brokered CDs get higher due to the flight to safety during a stock market decline? Normally, yes.
- Does the early withdrawal penalty apply to brokered CDs? Definitely NOT. As far as the issuing bank is concerned, the funds inside the CD have not been withdrawn. The ownership of the CD asset has simply been transferred.
- Will the spreads between buy and sell prices become much wider?

Victoria
The last is an interesting empirical question. I don't know the answer, but my general impression is that the illiquidity of brokered CDs is a sufficient issue to discourage me from buying them unless I believe there is very little likelihood I would need to redeem prior to maturity for *any reason.*

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by Kenkat » Tue Oct 03, 2017 9:15 am

In 1989, I bought a 18 month CD that paid 9.4%. I remember this so well because it was the high water mark of my CD investing experience. Interest rates and inflation have plunged since 1989, so to move from bonds to cash in 1989 was pretty bad advice from a performance point of view based on how things turned out.

Could things go differently from this point? Yes, they could. Cash is an asset class, there are times when “cash is king”, so a diversified portfolio should probably contain both cash and bonds, including some shorter term bonds. It doesn’t have to or shouldn’t be either or.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by jadd806 » Tue Oct 03, 2017 10:16 am

I hold my entire bond allocation in the TSP's G Fund. I think it's incredibly unlikely that cash outperforms my G Fund. I'm no economist, but I imagine that it would probably take a deflationary environment for that to happen.

I feel the same level of comfort with 25% of my portfolio in the G Fund as I would feel with 30-35% in the F Fund or a total bond index. The former puts me right in line with the "age in bonds" rule, whereas the latter would probably have me holding what most would consider too conservative of a portfolio for my age.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by Christine_NM » Tue Oct 03, 2017 10:26 am

I just cashed in some I bonds from 2001 and they more than doubled in value. Still have some from 1999 and 2000. That is much better than beating inflation according to the BLS inflation calculator. I guess all cash is not created equal.

Bank person offered to put it in my money market fund, but I said I had my eye on a new sofa. :D 8-)
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by itstoomuch » Tue Oct 03, 2017 12:52 pm

+++ copernicus, bernstein, taleb.
When I want to trade, I want the cash to do so and not wait the 2 days to clear brokerage.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by bigred77 » Tue Oct 03, 2017 1:06 pm

I know the quote in the OP was "bonds should trade places with cash" but what I get out of the sentiment is Bernstein does not think duration and credit risk is worth taking. He is advocating for duration of 1 day. You can buy some of his argument without going whole hog by just buying short term treasuries instead of total bond market (or CDs as has been mentioned).

I have to say I disagree with him (although I don't have access to the article to read his reasoning in detail). If I wanted to decrease my allocation to fixed income and increase my equity allocation, I'd prefer to take on MORE duration. If I was 90/10 or thereabouts, I'd prefer long term treasuries as my sole fixed income holding because it has historically had a sharp, negative correlation to equities in times of crisis.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by rkhusky » Tue Oct 03, 2017 1:09 pm

I keep a small amount of cash in savings/MM/CD's, but I also have an asset allocation to short term bonds, which IMO are near cash. I also have an allocation to intermediate term bonds, which I don't consider near cash.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by Tyler9000 » Tue Oct 03, 2017 3:05 pm

nisiprius wrote:
Mon Oct 02, 2017 7:55 pm
Copernicus wrote:
Mon Oct 02, 2017 7:10 pm
...Cash loses buying power due to inflation...
But does it?

Certainly it does if, by cash, you mean physical paper currency, or deposits in a non-interest-bearing checking account.

It's hard to generalize across all bank accounts but typically "good" bank accounts--"high yield" savings accounts, so-called "money market deposit accounts," etc. have interest rates in the same ballpark as Treasury bills, and Treasury bills have historically eked out around an 0.5% real return (above inflation). If "cash" means things like interest-bearing bank accounts, Treasury bills, or money market mutual funds, I don't think it has historically lost buying power to inflation.
Very good point. I think a lot of people compare the long-term average inflation number of 3-4% to current short term interest rates while missing how interest rates and inflation track each other historically. Cash is a lot more dynamic than most people realize

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by VictoriaF » Tue Oct 03, 2017 3:57 pm

dodecahedron wrote:
Tue Oct 03, 2017 8:55 am
VictoriaF wrote:
Tue Oct 03, 2017 8:47 am
Dandy wrote:
Mon Oct 02, 2017 8:58 pm
Sometimes there is a confusion as to what constitutes cash. i.e. does it have no variability in value? How liquid does it have to be-- instant like a checking account with an ATM card? Does an early withdrawal penalty make a CD not cash?
This is a great question.

I have purchased some 5-year brokered CDs in an IRA account. Let's say there is a large market decline, and I want to cash these CDs and put the proceeds into stock funds.
- Will the price of the brokered CDs get higher due to the flight to safety during a stock market decline? Normally, yes.
- Does the early withdrawal penalty apply to brokered CDs? Definitely NOT. As far as the issuing bank is concerned, the funds inside the CD have not been withdrawn. The ownership of the CD asset has simply been transferred.
- Will the spreads between buy and sell prices become much wider?

Victoria
The last is an interesting empirical question. I don't know the answer, but my general impression is that the illiquidity of brokered CDs is a sufficient issue to discourage me from buying them unless I believe there is very little likelihood I would need to redeem prior to maturity for *any reason.*
Thank you for responding about the early withdrawal penalty.

As for the illiquidity of brokered CDs, I purchased them because I got tired from chasing credit union CD rates, which is particularly cumbersome for IRA funds. If I can't re-balance from CDs to stocks, I can live with that. Alternatively, someone in the Bogleheads will post instructions on selling brokered CDs, if selling becomes prudent.

Victoria
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by Artsdoctor » Tue Oct 03, 2017 5:06 pm

Victoria,

I've had brokered CDs for many years. I have bought both initial offerings and CDs on the secondary market. When I buy them, I do it with the intention of holding them until maturity.

I have sold brokered CDs occasionally so I cannot claim to be an expert on this. My personal experience has been that the sale price may be very different from the price that was posted the night before. I have had to call the fixed income desk and place an order to sell and it can take the entire day to sell; I remember giving them a limit price at their urging. The sales prices were lower than expected although I really wanted the money (to buy equities during the 2008-2009 swoon).

I would treat a brokered CD almost like a rarely traded individual bond. You won't have a website that will give you recent sales prices and the bid-ask spread can be unpredictable and sometimes different than posted. Holding to maturity would be recommended but selling early would be possible if you had to.

Hope this helps a bit.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by Copernicus » Tue Oct 03, 2017 6:03 pm

nisiprius wrote:
Mon Oct 02, 2017 7:58 pm
VictoriaF wrote:
Mon Oct 02, 2017 7:51 pm
I have just re-listened to Russ Roberts's 2009 interview with Nassim Taleb on EconTalk. It took place in March 2009, when the market was at its lowest point. (Obviously, they did not know that at the time.) Roberts and Taleb have agreed that the 2008-2009 crisis has demonstrated that cash is an asset class. In 2009, one could buy a lot of other assets on sale, if one had cash.

Victoria
Traditional asset allocation pie charts have three sectors, "stocks" (or "equities,") "bonds" (or "fixed income,") and "cash" (or "short-term reserves.") Up until the late 1990s it was customary for model portfolio recommendations to include a cash allocation, and the Vanguard LifeStrategy Funds had a "short-term reserves" allocation for quite a long time.
Returns of stocks and bonds are not highly correlated, hence bonds provide diversification. But returns on stocks and cash are even less correlated. Question: In the long term, would the risk profile and long-term return on a portfolio of 80/20 socks/cash be equivalent to or better than a portfolio of lower % of stocks and higher % of bonds (just as an example, not precisely 70/30 or 60/40 or something like that)?

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by GibsonL6s » Tue Oct 03, 2017 10:41 pm

It seems like an odd recommendation when even a short term treasury fund like Vanguards VFISX has a negative correlation of -.17 since 1993 to the overall market. I would think that is a valuable balance to a portfolio as compared to cash.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by VictoriaF » Wed Oct 04, 2017 7:54 am

Artsdoctor wrote:
Tue Oct 03, 2017 5:06 pm
Victoria,

I've had brokered CDs for many years. I have bought both initial offerings and CDs on the secondary market. When I buy them, I do it with the intention of holding them until maturity.

I have sold brokered CDs occasionally so I cannot claim to be an expert on this. My personal experience has been that the sale price may be very different from the price that was posted the night before. I have had to call the fixed income desk and place an order to sell and it can take the entire day to sell; I remember giving them a limit price at their urging. The sales prices were lower than expected although I really wanted the money (to buy equities during the 2008-2009 swoon).

I would treat a brokered CD almost like a rarely traded individual bond. You won't have a website that will give you recent sales prices and the bid-ask spread can be unpredictable and sometimes different than posted. Holding to maturity would be recommended but selling early would be possible if you had to.

Hope this helps a bit.
Artsdoctor,

Excellent information. Thank you!

Victoria
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by stemikger » Wed Oct 04, 2017 9:42 am

No disrespect to the late Peter Bernstein, but he wrote one of my favorite papers entitled the 60/40 solution only later to retract it. I would listen to Jack Bogle instead. 60/40 stocks/bonds (all U.S.).
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by book lover » Wed Oct 04, 2017 10:29 am

We have the Total Bond Market for all IRAs and I like to keep a cash cushion to match the duration of those funds. When people speak of inflation, we calculate our expenses each year and I compare to previous year for inflation rate which has averaged 1.5 percent over the past twenty seven years. Am I maximizing total return by keeping that much cash? No, but I like the psychological effect.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by DartThrower » Wed Oct 04, 2017 11:49 am

I'm just curious why no one has mentioned short term TIPS. They should reduce inflation risk and have zero default risk. They have most of the benefits of cash but keep up with inflation, no?
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by garlandwhizzer » Wed Oct 04, 2017 1:44 pm

I have always been a fan of cash, kept a lot of it, and a equity heavy portfolio. It has a bad and IMO unfair reputation among many financial analysts who tend to prepare for the last war instead of the next one. We've just ended a 35 year bull market in bonds which saw ever increasing bond principal values as interest rates and inflation declined. Cash saw no such increase in its stable principal value and, with lower yields and no principal tailwind, cash been shunned by many. That was the past. Things have changed now. Over the past year, Vanguard's Prime MM Fund has outperformed their Intermediate Term Treasury Fund by over 2%, a fact that goes unmentioned by cash detractors. In fact the Intermediate Treasury Fund has suffered losses in real inflation adjusted terms not just over the last year but over the last 5 years. No one complains about that. I'm not picking on that fund, I think it's a great one. The point is the bond market is currently undergoing change and with the anticipated future unwinding of the FED's balance sheet and the possibility of increased rates in the future, those changes may continue. The beauty of cash is that it instantly and without principal loss (unlike bonds) keeps up with rising interest rates. I think it's a rational choice to include in the fixed income portion of the portfolio. Covering both bases--cash which may do better if rates rise, bonds which will do better if rates fall--seems rational to me.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by ThrustVectoring » Wed Oct 04, 2017 2:14 pm

itstoomuch wrote:
Tue Oct 03, 2017 12:52 pm
+++ copernicus, bernstein, taleb.
When I want to trade, I want the cash to do so and not wait the 2 days to clear brokerage.
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Run a margin account, buy immediately, and cover the margin loan two days later when it clears to your brokerage account. Paying 3% APR for two days is, like, whatever.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by acanthurus » Wed Oct 04, 2017 3:31 pm

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by BlueEars » Wed Oct 04, 2017 5:12 pm

This discussion caused me to check on the performance of cash versus bonds. The following chart shows Tbills which were (I believe) 1 month Tbills.

Image

And here is another one in a somewhat different format. Shows maybe a little better how various eras can give quite different results (no surprise to Bogleheads I am sure). I think the government bonds here might be the long term ones. Somewhat surprising that the Tbills gave 2.7% real returns but I would personally give the period from the 1920's to present more much more weight in my planning. I've personally ignored the 1800's in my planning.

Image

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by David Scubadiver » Wed Oct 04, 2017 5:21 pm

Cash is the only thing that is stable when a financial crisis hits. Whether it is worrh having versus investing in bonds is open to debate. Certainly there is a place for cash in a diversified portfolio.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by BlueEars » Wed Oct 04, 2017 5:28 pm

David Scubadiver wrote:
Wed Oct 04, 2017 5:21 pm
Cash is the only thing that is stable when a financial crisis hits. Whether it is worrh having versus investing in bonds is open to debate. Certainly there is a place for cash in a diversified portfolio.
Bonds usually do better then cash in a crisis. See this for details: viewtopic.php?t=2409

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by David Scubadiver » Wed Oct 04, 2017 5:34 pm

Usually doesn’t do you any good when everything is melting and you want something to buy things on sale.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by BlueEars » Wed Oct 04, 2017 5:37 pm

David Scubadiver wrote:
Wed Oct 04, 2017 5:34 pm
Usually doesn’t do you any good when everything is melting and you want something to buy things on sale.
Did you look at that data I linked to?

Anyway, I don't buy in a crisis as the sale might become an even better sale and then an even better sale ... example, think of the sale in 1930.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by David Scubadiver » Wed Oct 04, 2017 5:42 pm

Wasn’t the sale of 1930 a good time to buy equities? I know I was thrilled to be buying stock in 2008 when the markets were falling off the cliff. I have no idea how bonds were performing since I didn’t own any. But I can say with certainty that my position in Apple grew exponentially and recovered very nicely!

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by BlueEars » Wed Oct 04, 2017 6:05 pm

David Scubadiver wrote:
Wed Oct 04, 2017 5:42 pm
Wasn’t the sale of 1930 a good time to buy equities? I know I was thrilled to be buying stock in 2008 when the markets were falling off the cliff. I have no idea how bonds were performing since I didn’t own any. But I can say with certainty that my position in Apple grew exponentially and recovered very nicely!
1930 was very bad timing for equities and the bottom was in 1932. That period was a true Depression and good investors should study that as an outlier. The 2008 decline was short lived in comparison.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by JoMoney » Wed Oct 04, 2017 6:30 pm

BlueEars wrote:
Wed Oct 04, 2017 5:12 pm
...The following chart shows Tbills which were (I believe) 1 month Tbills...
Yes, it's 30 day Tbills ... which would be very comparable to something like a money market account.
Here's a link to the same chart using data at Morningstar that can be adjusted to look at different specific start/stop time periods
US 30 Day TBill Inflation Adjusted

and one with (Nominal) 30 Day TBill vs. US Inflation

I think the second chart is interesting to look at, and generally supportive of nisiprius' claim
nisiprius wrote:
Mon Oct 02, 2017 7:55 pm
...
It's hard to generalize across all bank accounts but typically "good" bank accounts--"high yield" savings accounts, so-called "money market deposit accounts," etc. have interest rates in the same ballpark as Treasury bills, and Treasury bills have historically eked out around an 0.5% real return (above inflation). If "cash" means things like interest-bearing bank accounts, Treasury bills, or money market mutual funds, I don't think it has historically lost buying power to inflation.
Past 90 years (9/30/1927 - 9/30/2017) .35% CAGR (above inflation)
Past 45 years (9/30/1972 - 9/30/2017 -Post Bretton Woods) 0.74%

However, in the post 'Global Economic' crisis era, inflation has been ahead of short-term TBills... same could be said of the Great depression period 1932-1952... So it is 'period dependent' ...If you put cash in rolling TBills in 1933, you would have had to hold on until the year 2000 to be 'even' with inflation.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by nedsaid » Wed Oct 04, 2017 7:01 pm

nisiprius wrote:
Mon Oct 02, 2017 7:55 pm
Copernicus wrote:
Mon Oct 02, 2017 7:10 pm
...Cash loses buying power due to inflation...
But does it?

Certainly it does if, by cash, you mean physical paper currency, or deposits in a non-interest-bearing checking account.

It's hard to generalize across all bank accounts but typically "good" bank accounts--"high yield" savings accounts, so-called "money market deposit accounts," etc. have interest rates in the same ballpark as Treasury bills, and Treasury bills have historically eked out around an 0.5% real return (above inflation). If "cash" means things like interest-bearing bank accounts, Treasury bills, or money market mutual funds, I don't think it has historically lost buying power to inflation.
Well, money market funds and savings accounts did lose purchasing power after the 2008-2009 financial crisis and bear market. Short term interest rates were kept to essentially zero until the recent short term rate hikes by the Federal Reserve Bank. I liquidated almost all my money market funds in retirement accounts because I was fed up with receiving almost zero interest, I went to bonds with those funds. I also thought about Mr. Bogle's comment that cash is for savings and bonds are for investment.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by nedsaid » Wed Oct 04, 2017 7:04 pm

David Scubadiver wrote:
Wed Oct 04, 2017 5:21 pm
Cash is the only thing that is stable when a financial crisis hits. Whether it is worrh having versus investing in bonds is open to debate. Certainly there is a place for cash in a diversified portfolio.
If you define cash as Treasury bills, you are correct. Money market funds had other short term instruments in them such as commercial paper. Recall that AAA rated GE could not roll over its commercial paper during the 2008-2009 financial crisis and took a bailout from Warren Buffett. So it depends on how you define cash.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by rotorhead » Wed Oct 04, 2017 7:40 pm

Re: Peter L. Bernstein: Cash BETTER than Bonds
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Post by stemikger » Wed Oct 04, 2017 10:42 am

No disrespect to the late Peter Bernstein, but he wrote one of my favorite papers entitled the 60/40 solution only later to retract it. I would listen to Jack Bogle instead. 60/40 stocks/bonds (all U.S.).
stemikger, that 2002 article about the 60/40 solution by Bernstein is one of my favorites. I keep a copy of it as attachment to my IPS, among other such articles; and periodically refer back to it as a reminder.

I would be interested to know when he retracted it; and the context. Can you direct me to a link?

Thanks.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by LadyGeek » Wed Oct 04, 2017 7:50 pm

Those owning brokered CDs inside an IRA should read this wiki article: Brokered CDs

The footnote regarding Required Minimum Distributions is important.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by David Scubadiver » Wed Oct 04, 2017 8:04 pm

I guess the way I see it is, if I have 70,000 in cash that won’t beat inflation, it doesn’t really matter to me. It gives me options that bonds do not. Options have value and whether they exeeed the cost or not, only time will tell.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by David Scubadiver » Wed Oct 04, 2017 8:22 pm

Don’t get me wrong—I have ALWAYS invested all of my money, never having cash out of the market for more than a few months tops. But my need for gains has lessened somewhat and I am still not comfortable with fixed income. It smacks like equities to me because it trades on an exchange and the prices fluctuate.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by garlandwhizzer » Wed Oct 04, 2017 8:34 pm

nedsaid wrote:
Short term interest rates were kept to essentially zero until the recent short term rate hikes by the Federal Reserve Bank. I liquidated almost all my money market funds in retirement accounts because I was fed up with receiving almost zero interest, I went to bonds with those funds
Good point. The place to park cash IMO is not in tax advantaged accounts but in personal taxable accounts to have ready at any time for either emergencies or compelling buying opportunities. Sales of cash assets generate no capital gains and their lower interest rates in non-retirement accounts generate less in tax on an annual basis than bonds. You do lose something in yield relative to bonds, but you're paying for a couple of benefits. First, you don't suffer principal loss in an environment of increasing interest rates. Second, you have instant liquidity at any time without generating any income taxes at all. Tax-free money comes in very handy at the right time.

Studies suggest that happiness and contentment in an investor's life is more closely correlated with cash holdings than with the size of asset base. That's an interesting fact. Happiness and contentment are not determined by backtesting graphs that show bonds to be superior. Go figure.

Vanguard rates their MM Funds at risk level 1, the lowest level, the fewest things to worry about. Although Treasuries performed quite well in the 2007-9 disaster, the Vanguard TIPS Fund lost almost 15% due to masses of investors rushing for the exits all at once. They were government guaranteed but still lost big. At the same time there was not a penny of drop in the price per share of Vanguard's Prime MM Fund. Vanguard pledged to back Prime's $1 share value and the US Government pledged to hold the $1 principal value of all well-run MM funds. Recall that at that time financial markets locked up. The Government also explicitly guarantees Bank deposits up to 250K (I believe). Having a secure port in such a storm is worth a lot. If you actually use these instantly available safe assets to buy quality assets at fire sale prices during a severe collapse those lower yields will be overwhelmed by your future gains. That's why Buffett's wife portfolio is 90% S&P, 10% Short Term Treasuries. He's not counting on bond yields for get rich--smart guy--but rather he seeks principal stability in crisis and instant liquidity to use for well-timed purchases of assets whose forward returns will dwarf all bond categories. We're not Warren Buffett, but I do believe that cash has a role and should be at least considered as a portion of fixed income investments.

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by HomerJ » Wed Oct 04, 2017 8:42 pm

Copernicus wrote:
Mon Oct 02, 2017 7:10 pm
the 1989 article
Total Bond Market Index Fund has returned about 6% a year since 1989. How much has cash returned?

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by itstoomuch » Wed Oct 04, 2017 8:47 pm

^ 2008-early 2009, USA had a huge debate on how much, the FR and the Treasury would back such funds.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by abuss368 » Wed Oct 04, 2017 8:50 pm

I moved past market timing many years ago and plan to stay the course with our stock and bond allocation. This worked very well through the years and during the financial crisis.

Best.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by stemikger » Wed Oct 04, 2017 8:53 pm

abuss368 wrote:
Wed Oct 04, 2017 8:50 pm
I moved past market timing many years ago and plan to stay the course with our stock and bond allocation. This worked very well through the years and during the financial crisis.

Best.
+1

Awesome!! Me too!
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by abuss368 » Wed Oct 04, 2017 8:54 pm

stemikger wrote:
Wed Oct 04, 2017 8:53 pm
abuss368 wrote:
Wed Oct 04, 2017 8:50 pm
I moved past market timing many years ago and plan to stay the course with our stock and bond allocation. This worked very well through the years and during the financial crisis.

Best.
+1

Awesome!! Me too!
Hi stemikger -

Indeed! As Mr. Bogle always recommends "Stay the course"!

Hope all is well.
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Re: Peter L. Bernstein: Cash BETTER than Bonds

Post by stemikger » Wed Oct 04, 2017 8:58 pm

rotorhead wrote:
Wed Oct 04, 2017 7:40 pm
Re: Peter L. Bernstein: Cash BETTER than Bonds
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Post by stemikger » Wed Oct 04, 2017 10:42 am

No disrespect to the late Peter Bernstein, but he wrote one of my favorite papers entitled the 60/40 solution only later to retract it. I would listen to Jack Bogle instead. 60/40 stocks/bonds (all U.S.).
stemikger, that 2002 article about the 60/40 solution by Bernstein is one of my favorites. I keep a copy of it as attachment to my IPS, among other such articles; and periodically refer back to it as a reminder.

I would be interested to know when he retracted it; and the context. Can you direct me to a link?

Thanks.
rotorhead, sorry unfortunately I can't. I read that he retracted it in John Bogle's book Enough. I believe he favored some sort of tactical (market timing strategy) after that. I also have the 60/40 article saved. It made sense then and it makes sense now. IMHO market timing never made sense. I will provide this Youtube link by Morningstar that agrees with us when it comes to the good old fashioned 60/40 buy and hold with other tactical strategies.

https://www.youtube.com/watch?v=mYilk7ZFxlk
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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