Is Cash Trash? The Purpose of Cash

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Rick Ferri
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Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Sun Mar 04, 2018 12:26 pm

People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

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Re: Is Cash Trash? The Purpose of Cash

Post by hilink73 » Sun Mar 04, 2018 12:37 pm

Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

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Re: Is Cash Trash? The Purpose of Cash

Post by Sheepdog » Sun Mar 04, 2018 12:40 pm

This is another way of saying the same as Rick, but adding in risk tolerance.
Holding cash as a portfolio position provides benefits for aggressive traders as well as investors with less tolerance for risk. Aggressive traders can take advantage of portfolio liquidity for opportunistic purchases, while others can opt to reduce risk using dollar cost averaging strategies.
Cash holdings can make periods of high volatility more tolerable by providing an anchor to reduce the swings in the value of portfolios. Cash also provides a solution for investors seeking to rotate out of equities after a prolonged bull market due to high P/Es across the market, the correlation of commodities to equities and the risk of buying bonds at or near their all-time highs.
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Re: Is Cash Trash? The Purpose of Cash

Post by SimpleGift » Sun Mar 04, 2018 12:59 pm

Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio.
We're probably dinosaurs, but we've always kept a 5% allocation to cash in our retirement portfolios, even through the low interest rates of the past decade. Other advantages to a cash allocation not mentioned by Rick:
  • • Instant Liquidity (no worries about funding big purchases, e.g., car replacement)
    • Portfolio Diversification (low correlation with other asset classes)
    • Inflation Protection (against future unexpected increases in inflation)
    • Portfolio Stability (a defensive investment, helping moderate downside risk)
Cash has fallen out of favor as an asset class in recent years due to its low yields, but it still has a role to play in many conservative portfolios, in my view.
Last edited by SimpleGift on Sun Mar 04, 2018 1:04 pm, edited 1 time in total.
Cordially, Todd

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Re: Is Cash Trash? The Purpose of Cash

Post by goingup » Sun Mar 04, 2018 1:01 pm

I don't think of our 5% cash allocation as "waiting" especially. It's a permanent bulwark against volatility. Or ballast in the hull of our portfolio ship! :D

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Re: Is Cash Trash? The Purpose of Cash

Post by nedsaid » Sun Mar 04, 2018 1:05 pm

Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
Rick, you are in good company, John Bogle has said about the same thing. He said that cash investments are for savers and not for investors. Investors put their fixed asset allocation into bonds. With the Fed rate hikes, yields on money market investments are better but still don't beat inflation. I just could bear seeing my money market account yield 1 cent per month. At that point, I moved those funds.
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Re: Is Cash Trash? The Purpose of Cash

Post by jebmke » Sun Mar 04, 2018 1:07 pm

SimpleGift wrote:
Sun Mar 04, 2018 12:59 pm
Instant Liquidity (no worries about funding big purchases, e.g., car replacement)
My entire portfolio is liquid. I can convert it to cash in 24 hours and move it to my bank in another 24 hours. In fact, I don't count anything as being in my portfolio that can't make this trip in that short of time. That is why I never counted real estate or even vested stock options.
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Re: Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Sun Mar 04, 2018 1:24 pm

The yield curve it typically steep on the short end. Rather than holding cash as a fixed allocation to reduce volatility, I’d prefer to hold a short-term bond fund and pick up the extra yield.
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Re: Is Cash Trash? The Purpose of Cash

Post by jebmke » Sun Mar 04, 2018 1:28 pm

Rick Ferri wrote:
Sun Mar 04, 2018 1:24 pm
The yield curve it typically steep on the short end. Rather than holding cash as a fixed allocation to reduce volatility, I’d prefer to hold a short-term bond fund and pick up the extra yield.
I have used Limited Term Tax Exempt Bond fund extensively for years.

Ltd TE(Admiral) - 1.84%
TE MM Fund - 1%

Duration of LTE is ~2.6
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Re: Is Cash Trash? The Purpose of Cash

Post by ResearchMed » Sun Mar 04, 2018 1:31 pm

SimpleGift wrote:
Sun Mar 04, 2018 12:59 pm
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio.
We're probably dinosaurs, but we've always kept a 5% allocation to cash in our retirement portfolios, even through the low interest rates of the past decade. Other advantages to a cash allocation not mentioned by Rick:
  • • Instant Liquidity (no worries about funding big purchases, e.g., car replacement)
    • Portfolio Diversification (low correlation with other asset classes)
    • Inflation Protection (against future unexpected increases in inflation)
    • Portfolio Stability (a defensive investment, helping moderate downside risk)
Cash has fallen out of favor as an asset class in recent years due to its low yields, but it still has a role to play in many conservative portfolios, in my view.
How does cash protect against inflation?

RM
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Re: Is Cash Trash? The Purpose of Cash

Post by Theoretical » Sun Mar 04, 2018 1:37 pm

ResearchMed wrote:
Sun Mar 04, 2018 1:31 pm
SimpleGift wrote:
Sun Mar 04, 2018 12:59 pm
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio.
We're probably dinosaurs, but we've always kept a 5% allocation to cash in our retirement portfolios, even through the low interest rates of the past decade. Other advantages to a cash allocation not mentioned by Rick:
  • • Instant Liquidity (no worries about funding big purchases, e.g., car replacement)
    • Portfolio Diversification (low correlation with other asset classes)
    • Inflation Protection (against future unexpected increases in inflation)
    • Portfolio Stability (a defensive investment, helping moderate downside risk)
Cash has fallen out of favor as an asset class in recent years due to its low yields, but it still has a role to play in many conservative portfolios, in my view.
How does cash protect against inflation?

RM
Tbills and other ultrashort debt track interest rates very well and have historically (for quite a long time), with one big exception (interest rate controls after WWII), done very well in periods of high or unexpected inflation. Note, it must be interest bearing cash not a .01% Bank of America brick and mortar mattress to have this effect. For example, the humble t-bill was one of the better investments in the 1970s by quite a margin compared to most stocks and especially bonds.

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Re: Is Cash Trash? The Purpose of Cash

Post by ThrustVectoring » Sun Mar 04, 2018 1:40 pm

Sheepdog wrote:
Sun Mar 04, 2018 12:40 pm
others can opt to reduce risk using dollar cost averaging strategies.
Dollar cost averaging doesn't reduce risk beyond just having a lower equity percentage.
Current portfolio: 60% VTI / 40% VXUS

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Re: Is Cash Trash? The Purpose of Cash

Post by SimpleGift » Sun Mar 04, 2018 1:42 pm

jebmke wrote:
Sun Mar 04, 2018 1:07 pm
SimpleGift wrote:
Sun Mar 04, 2018 12:59 pm
Instant Liquidity (no worries about funding big purchases, e.g., car replacement)
My entire portfolio is liquid. I can convert it to cash in 24 hours and move it to my bank in another 24 hours.
Yes, but in taxable accounts, not without incurring a tax liability on appreciated shares, plus the year-end tax reporting required for each transaction. For most big purchases, the simplicity of a cash allocation in retirement has been a boon for us. It's not for everyone, of course.
ResearchMed wrote:
Sun Mar 04, 2018 1:31 pm
How does cash protect against inflation?
Cordially, Todd

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Re: Is Cash Trash? The Purpose of Cash

Post by ResearchMed » Sun Mar 04, 2018 1:46 pm

Theoretical wrote:
Sun Mar 04, 2018 1:37 pm
ResearchMed wrote:
Sun Mar 04, 2018 1:31 pm
SimpleGift wrote:
Sun Mar 04, 2018 12:59 pm
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio.
We're probably dinosaurs, but we've always kept a 5% allocation to cash in our retirement portfolios, even through the low interest rates of the past decade. Other advantages to a cash allocation not mentioned by Rick:
  • • Instant Liquidity (no worries about funding big purchases, e.g., car replacement)
    • Portfolio Diversification (low correlation with other asset classes)
    • Inflation Protection (against future unexpected increases in inflation)
    • Portfolio Stability (a defensive investment, helping moderate downside risk)
Cash has fallen out of favor as an asset class in recent years due to its low yields, but it still has a role to play in many conservative portfolios, in my view.
How does cash protect against inflation?

RM
Tbills and other ultrashort debt track interest rates very well and have historically (for quite a long time), with one big exception (interest rate controls after WWII), done very well in periods of high or unexpected inflation. Note, it must be interest bearing cash not a .01% Bank of America brick and mortar mattress to have this effect. For example, the humble t-bill was one of the better investments in the 1970s by quite a margin compared to most stocks and especially bonds.
I understood "cash" to mean "actual cash", not "cash-like instruments" such as bonds/bond funds, etc.

That was the basis for my question.

RM
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Re: Is Cash Trash? The Purpose of Cash

Post by Garco » Sun Mar 04, 2018 1:50 pm

When I was still working, I always had a source of cash: my paycheck. I spent upwards of 80% of it each month, invested the rest.

Now that I'm retired, my cash comes from Social Security and RMD's from my retirement fund. I spend upwards of 90% each month, "save" the rest for a rainy day or special purchases (e.g., vacations).

In a few years, after I transition to a new home, I expect the RMD's to be larger than I need and I will be reinvesting a portion of them. In the meantime, they are cash for spending.

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Re: Is Cash Trash? The Purpose of Cash

Post by The Wizard » Sun Mar 04, 2018 2:11 pm

ResearchMed wrote:
Sun Mar 04, 2018 1:46 pm

I understood "cash" to mean "actual cash", not "cash-like instruments" such as bonds/bond funds, etc.

That was the basis for my question.

RM
I would expand "cash" to include amounts in checking accounts, savings accounts, and probably MM accounts, but as you say, not bond funds.
Correct me if I'm wrong.

And I basically agree with Rick's assessment on cash, tho I keep a bit more in my checking account than a strict constructionist would...
Attempted new signature...

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Re: Is Cash Trash? The Purpose of Cash

Post by ResearchMed » Sun Mar 04, 2018 2:22 pm

The Wizard wrote:
Sun Mar 04, 2018 2:11 pm
ResearchMed wrote:
Sun Mar 04, 2018 1:46 pm

I understood "cash" to mean "actual cash", not "cash-like instruments" such as bonds/bond funds, etc.

That was the basis for my question.

RM
I would expand "cash" to include amounts in checking accounts, savings accounts, and probably MM accounts, but as you say, not bond funds.
Correct me if I'm wrong.

And I basically agree with Rick's assessment on cash, tho I keep a bit more in my checking account than a strict constructionist would...
Yes, thanks.
I would consider things like checking /savings accounts, and MM accounts to be sort of vessels to hold "cash"... a more sophisticated piggy bank, in a way, with "cash in the pocket" being most liquid (and certainly "ready to be spent" :wink: )

RM
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Re: Is Cash Trash? The Purpose of Cash

Post by JBTX » Sun Mar 04, 2018 2:38 pm

I guess for us having 5-8 months liquid cash provides some level of comfort. It is arguably an irrational feeling.

Most of our investments are in retirement accounts and we don’t have cash in retirement accounts unless a particular fund does. I view the cash as a replacement for bonds so I don’t view it as a huge drag, especially in a low rate/increasing rate environment. We also keep 6-8 months in ibonds. If cash gets too large we will increase ibonds amount.

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Re: Is Cash Trash? The Purpose of Cash

Post by JBTX » Sun Mar 04, 2018 2:42 pm

SimpleGift wrote:
Sun Mar 04, 2018 1:42 pm
jebmke wrote:
Sun Mar 04, 2018 1:07 pm
SimpleGift wrote:
Sun Mar 04, 2018 12:59 pm
Instant Liquidity (no worries about funding big purchases, e.g., car replacement)
My entire portfolio is liquid. I can convert it to cash in 24 hours and move it to my bank in another 24 hours.
Yes, but in taxable accounts, not without incurring a tax liability on appreciated shares, plus the year-end tax reporting required for each transaction. For most big purchases, the simplicity of a cash allocation in retirement has been a boon for us. It's not for everyone, of course.
ResearchMed wrote:
Sun Mar 04, 2018 1:31 pm
How does cash protect against inflation?
Cash, especially if money market accounts will typically increase rates in an inflationary environment and don’t have nominal interest rate risk like bonds. Money market accounts got well into double digits around late 70s early 80s. I remember them being all the rage then. It is probably true they will suffer a modest real after tax return but will certainly outperform bonds and will likely outperform stocks.

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Re: Is Cash Trash? The Purpose of Cash

Post by SimpleGift » Sun Mar 04, 2018 2:52 pm

Rick Ferri wrote:
Sun Mar 04, 2018 1:24 pm
The yield curve it typically steep on the short end. Rather than holding cash as a fixed allocation to reduce volatility, I’d prefer to hold a short-term bond fund and pick up the extra yield.
This makes good sense. In fact, in retirement, we hold both a short-term bond allocation and a money market allocation, in about a 4:1 ratio — plus an intermediate-term bond allocation on top of that.

To be completely honest, there's also a hard-to-define psychological benefit to a cash allocation for us that isn't exactly rational. Perhaps it's just knowing there's a pool of easily-accessible, highly-liquid funds available — for unexpected large expenditures, for emergencies with the grandchildren, or taking advantage of investment opportunities. Illogical, perhaps, but somehow reassuring.
Cordially, Todd

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Re: Is Cash Trash? The Purpose of Cash

Post by WanderingDoc » Sun Mar 04, 2018 2:58 pm

jebmke wrote:
Sun Mar 04, 2018 1:28 pm
Rick Ferri wrote:
Sun Mar 04, 2018 1:24 pm
The yield curve it typically steep on the short end. Rather than holding cash as a fixed allocation to reduce volatility, I’d prefer to hold a short-term bond fund and pick up the extra yield.
I have used Limited Term Tax Exempt Bond fund extensively for years.

Ltd TE(Admiral) - 1.84%
TE MM Fund - 1%

Duration of LTE is ~2.6
Is that 1.84% yield guaranteed? Because I am using a 1.75% Ally no-penalty 11 month CD which is just as liquid, and doesn't have expense fees.
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Re: Is Cash Trash? The Purpose of Cash

Post by jebmke » Sun Mar 04, 2018 3:00 pm

WanderingDoc wrote:
Sun Mar 04, 2018 2:58 pm
Is that 1.84% yield guaranteed? Because I am using a 1.75% Ally no-penalty 11 month CD which is just as liquid, and doesn't have expense fees.
Not guaranteed; but NAV volatility is low and the yield is exempt from US taxes. The yield is net of expenses.
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Re: Is Cash Trash? The Purpose of Cash

Post by MiddleGround » Sun Mar 04, 2018 3:02 pm

Cash is something waiting to be invested or spent.
Emergency or planned.
Hopefully, planned.
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Re: Is Cash Trash? The Purpose of Cash

Post by WanderingDoc » Sun Mar 04, 2018 3:04 pm

My cash holdings have been 200% of my equities portfolio. I guess this is high? I have been holding some 'dry powder' for the next property or apartment deal.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Re: Is Cash Trash? The Purpose of Cash

Post by nisiprius » Sun Mar 04, 2018 3:04 pm

ResearchMed wrote:
Sun Mar 04, 2018 1:31 pm
How does cash protect against inflation?
Obviously physical paper bills, or a 0% business checking account... or an 0.15% checking account... do not.

Historically, Treasury bills have had something like an 0.6% real return and have done so over both short and long periods of time. Treasury bills are, in fact, often listed as "inflation hedges." Money market mutual funds and good competitive bank accounts have done about the same.

It turned out that since inception in 1975, the tax-exempt money market fund, VMMXX, has almost exactly kept up with inflation--it fell a hair short, something like $10,000 in 1975 became maybe $9,970 in 2018. Prime Money Market exceeded inflation.

I'm a bit of a broken record on this because one of the ways the "investment" industry sells risk is by claiming that "cash" will be savaged by inflation. It hasn't been, if you mean ordinary interest-paying vehicles (rather than literal, physical currency).
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Re: Is Cash Trash? The Purpose of Cash

Post by WanderingDoc » Sun Mar 04, 2018 3:07 pm

jebmke wrote:
Sun Mar 04, 2018 3:00 pm
WanderingDoc wrote:
Sun Mar 04, 2018 2:58 pm
Is that 1.84% yield guaranteed? Because I am using a 1.75% Ally no-penalty 11 month CD which is just as liquid, and doesn't have expense fees.
Not guaranteed; but NAV volatility is low and the yield is exempt from US taxes. The yield is net of expenses.
I am looking at that fund (VMLUX) on Vanguard. 3 year and 5 year yields are ~1.15%. Thats poor and any CD would beat that.

One thing I was interested in, someone posted something like "Vanguard tax exempt high yield (corporate? not sure) bond fund which had like a 5-7% return. Still has the principal risk but I need to do some more digging on this.
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Re: Is Cash Trash? The Purpose of Cash

Post by jebmke » Sun Mar 04, 2018 3:09 pm

WanderingDoc wrote:
Sun Mar 04, 2018 3:07 pm
I am looking at that fund (VMLUX) on Vanguard. 3 year and 5 year yields are ~1.15%. Thats poor and any CD would beat that.
That is the historical return, not the yield. Over the last 10 years (fairly short term) it has returned 2% after tax.

Corporate bonds are not tax exempt.
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Re: Is Cash Trash? The Purpose of Cash

Post by nisiprius » Sun Mar 04, 2018 3:11 pm

Rick Ferri wrote:
Sun Mar 04, 2018 1:24 pm
The yield curve it typically steep on the short end. Rather than holding cash as a fixed allocation to reduce volatility, I’d prefer to hold a short-term bond fund and pick up the extra yield.
With Vanguard having recently launched an ultrashort bond fund, any tips on how you can tell the differences between a legitimate short-term and ultrashort bond funds, and something like Schwab YieldPlus?
Image
I did a bit of web searching, and couldn't find any place that had anything but kind words to say about Schwab YieldPlus before it crashed. A typical comment, by Moringstar in 2005
Schwab YieldPlus SWYPX

Low money market yields have sent investors searching for bond funds that can stand in for money markets, and many have alighted upon this fund. With a duration of just under half a year, this fund is only taking on a touch of interest-rate risk in exchange for higher yields than you'd see in a Treasury bill. Although that sounds mundane, the fund's assets have soared to about $6 billion. Unfortunately, that hasn't led to a lower expense ratio, as the fund still charges a pricey 0.60%. You can find cheaper ultrashort-term bond funds out there.
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Re: Is Cash Trash? The Purpose of Cash

Post by samsoes » Sun Mar 04, 2018 3:13 pm

How is this thread actionable?

I think I missed the question being asked in the OP.
Non-actionable topics are in violation for forum rules: rules
Last edited by samsoes on Sun Mar 04, 2018 3:14 pm, edited 2 times in total.
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Re: Is Cash Trash? The Purpose of Cash

Post by midareff » Sun Mar 04, 2018 3:13 pm

70 and retired 6 years. Cash in our account is spent for nicer travel as it accumulates. No other purpose.

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Re: Is Cash Trash? The Purpose of Cash

Post by WanderingDoc » Sun Mar 04, 2018 3:13 pm

jebmke wrote:
Sun Mar 04, 2018 3:09 pm
WanderingDoc wrote:
Sun Mar 04, 2018 3:07 pm
I am looking at that fund (VMLUX) on Vanguard. 3 year and 5 year yields are ~1.15%. Thats poor and any CD would beat that.
That is the historical return, not the yield. Over the last 10 years (fairly short term) it has returned 2% after tax.

Corporate bonds are not tax exempt.
Found it. VWALX. 4.33% 3 year, 4.20% 5 year returns. 3.20% SEC yield. Thats the yield you speak of? So if the return of this fund goes negative, will I still earn this 3.2% SEC yield?
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Re: Is Cash Trash? The Purpose of Cash

Post by WanderingDoc » Sun Mar 04, 2018 3:15 pm

samsoes wrote:
Sun Mar 04, 2018 3:13 pm
How is this thread actionable?

I think I missed the question being asked.
Non-actionable topics are in violation for forum rules: rules
Plenty of actionable material. We are diecussing places to store cash (funds) other than a 0% checking account or under the matress. Also discussing what constitutes a cash equivalent vs. an investment with actual risk.
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Re: Is Cash Trash? The Purpose of Cash

Post by midareff » Sun Mar 04, 2018 3:15 pm

samsoes wrote:
Sun Mar 04, 2018 3:13 pm
How is this thread actionable?

I think I missed the question being asked in the OP.
Non-actionable topics are in violation for forum rules: rules
WOW, have you read any of his books?
Last edited by midareff on Sun Mar 04, 2018 3:17 pm, edited 1 time in total.

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Re: Is Cash Trash? The Purpose of Cash

Post by jebmke » Sun Mar 04, 2018 3:15 pm

The yield is the best estimate of future returns. The historical returns are meaningless going forward.
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Re: Is Cash Trash? The Purpose of Cash

Post by samsoes » Sun Mar 04, 2018 3:19 pm

WanderingDoc wrote:
Sun Mar 04, 2018 3:15 pm
samsoes wrote:
Sun Mar 04, 2018 3:13 pm
How is this thread actionable?

I think I missed the question being asked.
Non-actionable topics are in violation for forum rules: rules
Plenty of actionable material. We are diecussing places to store cash (funds) other than a 0% checking account or under the matress. Also discussing what constitutes a cash equivalent vs. an investment with actual risk.
The original post is just an obvious statement. Nothing more, nothing less, nothing actionable.
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Re: Is Cash Trash? The Purpose of Cash

Post by samsoes » Sun Mar 04, 2018 3:21 pm

midareff wrote:
Sun Mar 04, 2018 3:15 pm
samsoes wrote:
Sun Mar 04, 2018 3:13 pm
How is this thread actionable?

I think I missed the question being asked in the OP.
Non-actionable topics are in violation for forum rules: rules
WOW, have you read any of his books?
Yes I have, and I was a client for many years and spoke with him on the phone. Nevertheless, the original post is just an obvious statement, nothing more, nothing less, nothing actionable. rules
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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Sun Mar 04, 2018 3:22 pm

Vanguard's Prime Money Market fund is now yielding in excess of 1.50%.
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Re: Is Cash Trash? The Purpose of Cash

Post by WanderingDoc » Sun Mar 04, 2018 3:23 pm

jebmke wrote:
Sun Mar 04, 2018 3:15 pm
The yield is the best estimate of future returns. The historical returns are meaningless going forward.
Gotcha. Looks like all the Vanguard tax-exempt bond funds are negative 1-2% yield YTD. Do you think this will continue.
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Re: Is Cash Trash? The Purpose of Cash

Post by WanderingDoc » Sun Mar 04, 2018 3:28 pm

abuss368 wrote:
Sun Mar 04, 2018 3:22 pm
Vanguard's Prime Money Market fund is now yielding in excess of 1.50%.
Similar to the yield on Ally's savings account. Do you know if the tax treatment between the two will be the same. ie. if I earn $1000 in interest from the Prime Money Market vs. Ally savings account, will the taxes paid be the same?
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Re: Is Cash Trash? The Purpose of Cash

Post by midareff » Sun Mar 04, 2018 3:29 pm

samsoes wrote:
Sun Mar 04, 2018 3:21 pm
midareff wrote:
Sun Mar 04, 2018 3:15 pm
samsoes wrote:
Sun Mar 04, 2018 3:13 pm
How is this thread actionable?

I think I missed the question being asked in the OP.
Non-actionable topics are in violation for forum rules: rules
WOW, have you read any of his books?
Yes I have, and I was a client for many years and spoke with him on the phone. Nevertheless, the original post is just an obvious statement, nothing more, nothing less, nothing actionable. rules

I see it as asking a question, same as many, many posts here.

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Re: Is Cash Trash? The Purpose of Cash

Post by willthrill81 » Sun Mar 04, 2018 3:31 pm

If you mean physical cash or money in a savings account earning virtually nothing, then yes, cash is not a particularly useful asset for investors. But if we mean "cash equivalents" like T-bills, then cash can indeed be a valuable asset class for investors.
As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time. And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation. Believe it or not, even as inflation in the US spiked well into double digits in the late 70s and early 80s, Tbills lagged inflation by more than 1% only once in that period! Completely counter to common belief, properly invested cash is perhaps the single most consistent inflation hedge available.
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Re: Is Cash Trash? The Purpose of Cash

Post by triceratop » Sun Mar 04, 2018 3:33 pm

Please stay on-topic: the role of cash and interest-bearing instruments in a portfolio. Report all violations of forum rules with the Report button present on every post, do not complain about forum moderation in the thread.
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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Sun Mar 04, 2018 3:40 pm

WanderingDoc wrote:
Sun Mar 04, 2018 3:28 pm
abuss368 wrote:
Sun Mar 04, 2018 3:22 pm
Vanguard's Prime Money Market fund is now yielding in excess of 1.50%.
Similar to the yield on Ally's savings account. Do you know if the tax treatment between the two will be the same. ie. if I earn $1000 in interest from the Prime Money Market vs. Ally savings account, will the taxes paid be the same?
I would expect they would be unless tax exempt municipals are involved.
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Re: Is Cash Trash? The Purpose of Cash

Post by MarkRoulo » Sun Mar 04, 2018 4:11 pm

Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.
How long would the bond (or bond fund) duration need to be before you would consider the thing to be "not cash"? Or, alternately, does a very short term bond fund with a yield of 1% serve a different purpose than a federally insured savings account yielding 1%?

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Re: Is Cash Trash? The Purpose of Cash

Post by dbr » Sun Mar 04, 2018 4:17 pm

samsoes wrote:
Sun Mar 04, 2018 3:19 pm
WanderingDoc wrote:
Sun Mar 04, 2018 3:15 pm
samsoes wrote:
Sun Mar 04, 2018 3:13 pm
How is this thread actionable?

I think I missed the question being asked.
Non-actionable topics are in violation for forum rules: rules
Plenty of actionable material. We are diecussing places to store cash (funds) other than a 0% checking account or under the matress. Also discussing what constitutes a cash equivalent vs. an investment with actual risk.
The original post is just an obvious statement. Nothing more, nothing less, nothing actionable.
I think what is actionable is advice to investors to not waste time and motion trying to manage "actual cash" as a portfolio asset in favor of not having any. The ground as to what is cash has been covered before and doesn't need to be covered again.

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Re: Is Cash Trash? The Purpose of Cash

Post by samsoes » Sun Mar 04, 2018 4:18 pm

MarkRoulo wrote:
Sun Mar 04, 2018 4:11 pm
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.
How long would the bond (or bond fund) duration need to be before you would consider the thing to be "not cash"? Or, alternately, does a very short term bond fund with a yield of 1% serve a different purpose than a federally insured savings account yielding 1%?
If you're going to store cash for its own sake (emergency fund, pending college expenses), then why subject it to risk? It should be in an FDIC-insured account.
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Re: Is Cash Trash? The Purpose of Cash

Post by cfs » Sun Mar 04, 2018 4:21 pm

Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
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Re: Is Cash Trash? The Purpose of Cash

Post by Clever_Username » Sun Mar 04, 2018 4:36 pm

nisiprius wrote:
Sun Mar 04, 2018 3:04 pm
It turned out that since inception in 1975, the tax-exempt money market fund, VMMXX, has almost exactly kept up with inflation--it fell a hair short, something like $10,000 in 1975 became maybe $9,970 in 2018. Prime Money Market exceeded inflation.

I'm a bit of a broken record on this because one of the ways the "investment" industry sells risk is by claiming that "cash" will be savaged by inflation. It hasn't been, if you mean ordinary interest-paying vehicles (rather than literal, physical currency).
Minor quibble: VMMXX is the prime money market, which I believe is taxable. I'm not sure if you meant VMSXX (Municipal Money Market) here? But prime is the only "since 1975" money market fund at Vanguard unless I'm missing something.

Either way, good to know prime money market is fine vs inflation -- one less worry for me as it's a tier in my emergency plan. An hour ago I definitely believed it would be losing to inflation.
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Re: Is Cash Trash? The Purpose of Cash

Post by 2b2 » Sun Mar 04, 2018 4:37 pm

The only cash I hold is in Vanguard Prime Money Market.
I retired almost 10 years ago and up until now I have not held any cash at all. We've recently decided to pay for our grandson's college education, so I'm moving money there for safety.

PS - Nice to see you back on the radar, Rick.

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Last edited by 2b2 on Sun Mar 04, 2018 4:39 pm, edited 1 time in total.

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Re: Is Cash Trash? The Purpose of Cash

Post by ThrustVectoring » Sun Mar 04, 2018 4:38 pm

Garco wrote:
Sun Mar 04, 2018 1:50 pm
When I was still working, I always had a source of cash: my paycheck. I spent upwards of 80% of it each month, invested the rest.

Now that I'm retired, my cash comes from Social Security and RMD's from my retirement fund. I spend upwards of 90% each month, "save" the rest for a rainy day or special purchases (e.g., vacations).

In a few years, after I transition to a new home, I expect the RMD's to be larger than I need and I will be reinvesting a portion of them. In the meantime, they are cash for spending.
It's a bit later for you than is ideal, but if you expect to have excessive RMDs you're generally better off making Roth conversions to smooth out your realized deferred income and lower your overall tax burden.
Current portfolio: 60% VTI / 40% VXUS

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