Is Cash Trash? The Purpose of Cash

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GibsonL6s
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Re: Is Cash Trash? The Purpose of Cash

Post by GibsonL6s » Sun Mar 04, 2018 4:42 pm

I view cash as short duration fixed income, money I have for safety in my portfolio. I currently plan to neither invest it nor spend it but like to know its there. I view risk more like a dimmer switch as opposed to an on off switch.

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Re: Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Sun Mar 04, 2018 5:59 pm

For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
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Re: Is Cash Trash? The Purpose of Cash

Post by livesoft » Sun Mar 04, 2018 6:13 pm

OK, I have some money in T-bills waiting to invest in an intermediate-term bond fund. T-bills are cash.
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Re: Is Cash Trash? The Purpose of Cash

Post by iceport » Sun Mar 04, 2018 6:17 pm

Rick Ferri wrote:
Sun Mar 04, 2018 5:59 pm
For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
Hi Rick!

Where do stable value funds fit into that definition? Right on the borderline?
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Re: Is Cash Trash? The Purpose of Cash

Post by Noobvestor » Sun Mar 04, 2018 11:33 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
I read this as you saying 'cash is not an investment' - correct?
Rick Ferri wrote:
Sun Mar 04, 2018 5:59 pm
For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
Right now 1-year Treasuries are yielding 2.05%. I'm not shortening from intermediate duration myself, but the 5-year is only 2.75%, so not a lot higher and five times the duration. Guess I don't see why one would qualify as an investment and the other not.
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Re: Is Cash Trash? The Purpose of Cash

Post by radiowave » Mon Mar 05, 2018 12:18 am

Rick Ferri wrote:
Sun Mar 04, 2018 5:59 pm
For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
So there is a point of order in separating cash waiting to be invested or used, versus cash flow that defines the normal inputs of cash vs. the output (expenditures). There is a certain set point for all of us needed to pay bills, handle unexpected expenses, etc. This residual amount is a function of normal, expected monthly expenses and a certain percentage above that for use. So say a married couple with $4k monthly expenses (baseline) has $5k of expenses due to unexpected travel, car maintenance, etc. Do you keep $5k in liquid cash, e.g. checking, or invest it in short term instruments such as T-Bills, CDs, etc or long term investments (total domestic stock in a taxable account or Roth IRA). The extra work to cash in these investments when needed increases workload and could add some expense (e.g. early withdrawal penalty for a CD). On the other hand, keeping too much cash in reserve places a drag on overall investments.

Not trying to belabor the point, but it does matter when we are trying to optimize return from assets (in this case cash that is not needed for immediate consumption) vs. potential gain/loss due to investing that cash. There are any number of tradeoffs how best to balance that relationship.

Thanks Rick for posting the question and grateful you are engaged on the forum.
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Re: Is Cash Trash? The Purpose of Cash

Post by saltycaper » Mon Mar 05, 2018 12:31 am

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
This thread is in the Theory and News subforum. Theory is automatically considered actionable.
Quod vitae sectabor iter?

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Re: Is Cash Trash? The Purpose of Cash

Post by saltycaper » Mon Mar 05, 2018 12:44 am

nisiprius wrote:
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).
According to PortfolioVisualizer, cash "invested" at the end of 2000 lost more than 10% of its purchasing power by now. Cash invested at the end of 2009 lost about 14% of its purchasing power. You have to go back more than 20 years to reach breakeven to present. I think he uses T-bills for cash. Less analytical: For several years the yield of VMMXX was about 0%. Inflation was something greater than 0%. It's pretty obvious you were losing purchasing power at that time.
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Re: Is Cash Trash? The Purpose of Cash

Post by SGM » Mon Mar 05, 2018 3:10 am

It seems to me that after taxes and inflation are both considered cash has not kept its purchasing power. This year we have had some cash infusions and I am leaving more in treasury bills and the Vanguard prime money market tax exempt fund. My vehicle is old and although it is running fine I am getting the itch to purchase something in addition. We are also have a few projects requiring cash. When we get some time maybe we will spend on travel.

The last time I looked at Vanguard's prime money market tax exempt account it had a yield of 0.88%. A Vanguard rep offered to connect me with a fixed income specialist after I had some questions about purchasing individual treasuries. I would rather purchase them at auction dates through Vanguard than through Treasury Direct. Having been largely in stock and stock funds up until retirement I need to focus a little more on cash. Currently most of my taxable bonds are in several Vanguard muni bond funds and I am comfortable with that.

We have never been forced to sell when the market is down. However, we have sold long held stock with large capital gains. I am tired of having large tax bills so i am looking to take the proceeds and keep it in cash so we are not tempted to sell anything for some time.

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Re: Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Mon Mar 05, 2018 10:08 am

Is cash an investment? IMO, it is not.

The goal of an “investment” is achieve a real rate of return over time. Cash investments do not do this, and are not priced to do it. Cash is (or should) be risk free, and that should mean it keeps up with inflation before tax. This doesn’t always happen because the market for cash is for the most part controlled by Central Banks.

Bottom line: We hold cash. We do not invest in cash. Cash does not earn a real return.
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Re: Is Cash Trash? The Purpose of Cash

Post by dbr » Mon Mar 05, 2018 10:29 am

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
I gather this post is for the purpose of advising people that cash does not have a purpose in a portfolio. Perhaps you are suggesting that holdings of cash are just simply not part of a portfolio, aren't investments, etc. I would hold that view myself.

But then, what is your post aimed at? For example, if someone has 15% of their assets in cash, are you advising them in any particular manner, such as unless that money is savings for an immediate need it should be invested in longer than one year instruments and cash equivalents?

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Re: Is Cash Trash? The Purpose of Cash

Post by iceport » Mon Mar 05, 2018 12:13 pm

iceport wrote:
Sun Mar 04, 2018 6:17 pm
Rick Ferri wrote:
Sun Mar 04, 2018 5:59 pm
For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
Hi Rick!

Where do stable value funds fit into that definition? Right on the borderline?
Still trying to get a read on where stable value funds fit into this discussion...

Does the yield matter?

Anyone??
"Discipline matters more than allocation.” ─William Bernstein

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Re: Is Cash Trash? The Purpose of Cash

Post by dbr » Mon Mar 05, 2018 12:20 pm

iceport wrote:
Mon Mar 05, 2018 12:13 pm
iceport wrote:
Sun Mar 04, 2018 6:17 pm
Rick Ferri wrote:
Sun Mar 04, 2018 5:59 pm
For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
Hi Rick!

Where do stable value funds fit into that definition? Right on the borderline?
Still trying to get a read on where stable value funds fit into this discussion...

Does the yield matter?

Anyone??
If the point of the OP is that there are sorts of holdings of assets that we are going to call cash that one should not consider to be investments, then that is not SV funds. In other words the OP is not advice for investors to ignore SV funds or get rid of them.

The question is why do you ask if an SV fund is "cash." Getting that answer does not then lead to anything useful.

I myself do not use "cash" as a label applied to anything because I don't know what I would do about it if I did. That does not mean I do not have assets in my wallet, my checking account, a couple or six money market funds/settlement accounts at brokers, etc.

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Re: Is Cash Trash? The Purpose of Cash

Post by saltycaper » Mon Mar 05, 2018 12:30 pm

iceport wrote:
Mon Mar 05, 2018 12:13 pm
iceport wrote:
Sun Mar 04, 2018 6:17 pm
Rick Ferri wrote:
Sun Mar 04, 2018 5:59 pm
For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
Hi Rick!

Where do stable value funds fit into that definition? Right on the borderline?
Still trying to get a read on where stable value funds fit into this discussion...

Does the yield matter?

Anyone??
They are essentially bonds with insured principal. I'd assume most funds include some securities that mature in less than one year. But the potential lack of liquidity would prevent stable value from being considered a cash equivalent for me. (Limitations on exchanging from stable value to a money market or short-term bond fund, for example.)
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Re: Is Cash Trash? The Purpose of Cash

Post by iceport » Mon Mar 05, 2018 12:30 pm

dbr wrote:
Mon Mar 05, 2018 12:20 pm
iceport wrote:
Mon Mar 05, 2018 12:13 pm
iceport wrote:
Sun Mar 04, 2018 6:17 pm
Rick Ferri wrote:
Sun Mar 04, 2018 5:59 pm
For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
Hi Rick!

Where do stable value funds fit into that definition? Right on the borderline?
Still trying to get a read on where stable value funds fit into this discussion...

Does the yield matter?

Anyone??
If the point of the OP is that there are sorts of holdings of assets that we are going to call cash that one should not consider to be investments, then that is not SV funds. In other words the OP is not advice for investors to ignore SV funds or get rid of them.

The question is why do you ask if an SV fund is "cash." Getting that answer does not then lead to anything useful.
How do we know the intent of the OP with respect to stable value funds if we don't know if they are included in the OP's definition of "cash?"

BTW, I don't think it was Rick's intent "to ignore or get rid of" cash, either.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Is Cash Trash? The Purpose of Cash

Post by randomizer » Mon Mar 05, 2018 12:32 pm

Rick Ferri wrote:
Mon Mar 05, 2018 10:08 am
Is cash an investment? IMO, it is not.

The goal of an “investment” is achieve a real rate of return over time. Cash investments do not do this, and are not priced to do it. Cash is (or should) be risk free, and that should mean it keeps up with inflation before tax. This doesn’t always happen because the market for cash is for the most part controlled by Central Banks.

Bottom line: We hold cash. We do not invest in cash. Cash does not earn a real return.
Seems very clear and obvious. I think practice cash not only does not earn a real return but also isn't that great at preserving real value (like you say, it "doesn't always happen").
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Re: Is Cash Trash? The Purpose of Cash

Post by SimpleGift » Mon Mar 05, 2018 12:55 pm

Rick Ferri wrote:
Mon Mar 05, 2018 10:08 am
The goal of an “investment” is achieve a real rate of return over time. Cash investments do not do this...
Not sure this is an accurate statement. Certainly there have been long periods historically when cash investments produced a real return, and other periods when they have not (chart below). But the long-term real return of Treasury bills over the 20th Century, though tiny, has at least been positive overall.
Whatever one can say about the real returns of cash, applies equally to nominal bonds — in some periods they've generated positive real returns and in other periods they have not. But this is not a reason to exclude bonds (or cash) categorically from consideration for a portfolio allocation.

They both have portfolio benefits beyond a guaranteed real return (that's what TIPS are for). Just my perspective.
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Re: Is Cash Trash? The Purpose of Cash

Post by aj76er » Mon Mar 05, 2018 1:07 pm

I think if one has a propensity for holding a large percentage of cash (for psychological reasons, etc..), then one can compensate by increasing the duration of their bonds. For example, the two portfolios will behave similarly:

65/35 - stocks/intermediate bonds
65/20/10/5 - stocks/intermediate bonds/longterm bonds/cash

In essence, if you hold cash, then you can increase the convexity of your fixed income holdings and create a slightly more efficient portfolio which will compensate for the cash. Note that for the cash portion, it also helps to hold very efficient instruments (e.g. I-Bonds, T-bills, short-term CDs, etc...).
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Re: Is Cash Trash? The Purpose of Cash

Post by lack_ey » Mon Mar 05, 2018 1:07 pm

SimpleGift wrote:
Mon Mar 05, 2018 12:55 pm
Rick Ferri wrote:
Mon Mar 05, 2018 10:08 am
The goal of an “investment” is achieve a real rate of return over time. Cash investments do not do this...
Not sure this is an accurate statement. Certainly there have been long periods historically when cash investments produced a real return, and other periods when they have not (chart below). But the long-term real return of Treasury bills over the 20th Century, though tiny, has at least been positive overall.
Whatever one can say about the real returns of cash, applies equally to nominal bonds — in some periods they've generated real returns and in other periods they have not. But this is not a reason to exclude bonds (or cash) categorically from consideration for a portfolio allocation.

They both have portfolio benefits beyond a guaranteed real return (that's what TIPS are for). Just my perspective.
Maybe he means that they don't have a positive real rate of return now. But that would be weird too, meaning that it is sometimes an investment and sometimes not.

In fact, I'd have to disagree with the idea of benchmarking investments to inflation. Ideally you would like to beat inflation, and in general it would be nice to invest only in things that beat inflation, but that seems unnecessarily restrictive. I don't see why you should have a bottom-up portfolio construction that only includes pieces with a positive real expected return. Better to look at the portfolio's characteristics as a whole.


Actually...

As I recall, Rick has TIPS as part of fixed income, and TIPS fund yields were quite negative in 2013, below -1% as I recall. They were negative as recently as last year. I wonder if TIPS aren't investments either. Or if they are, why cash isn't by this definition as you've shown with the data.

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Re: Is Cash Trash? The Purpose of Cash

Post by midareff » Mon Mar 05, 2018 1:16 pm

FWIW, I accumulate cash to pay expected incoming bills. Mostly for travel cruise expenses that are due at a date certain date. When I was working it was for emergencies, now retired with multiple cash flow streams it is just used for our travel enjoyment and pleasure expenses.

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Re: Is Cash Trash? The Purpose of Cash

Post by Happy2BeFree » Mon Mar 05, 2018 1:36 pm

abuss368 wrote:
Sun Mar 04, 2018 3:22 pm
Vanguard's Prime Money Market fund is now yielding in excess of 1.50%.
May I ask, is the MM's yield/return lessened by its 0.16% ER? Or is 1.53% (as of today) the net return?

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Re: Is Cash Trash? The Purpose of Cash

Post by triceratop » Mon Mar 05, 2018 1:41 pm

Happy2BeFree wrote:
Mon Mar 05, 2018 1:36 pm
abuss368 wrote:
Sun Mar 04, 2018 3:22 pm
Vanguard's Prime Money Market fund is now yielding in excess of 1.50%.
May I ask, is the MM's yield/return lessened by its 0.16% ER? Or is 1.53% (as of today) the net return?
SEC yield is post-expense ratio.
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Re: Is Cash Trash? The Purpose of Cash

Post by Happy2BeFree » Mon Mar 05, 2018 1:54 pm

triceratop wrote:
Mon Mar 05, 2018 1:41 pm
Happy2BeFree wrote:
Mon Mar 05, 2018 1:36 pm
abuss368 wrote:
Sun Mar 04, 2018 3:22 pm
Vanguard's Prime Money Market fund is now yielding in excess of 1.50%.
May I ask, is the MM's yield/return lessened by its 0.16% ER? Or is 1.53% (as of today) the net return?
SEC yield is post-expense ratio.
Thank you!

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Re: Is Cash Trash? The Purpose of Cash

Post by iceport » Mon Mar 05, 2018 2:26 pm

dbr wrote:
Mon Mar 05, 2018 12:20 pm
iceport wrote:
Mon Mar 05, 2018 12:13 pm
iceport wrote:
Sun Mar 04, 2018 6:17 pm
Rick Ferri wrote:
Sun Mar 04, 2018 5:59 pm
For the record, cash and cash equivalents are composed of investments that mature in less than one year. A security that matures in one year or greater is considered a note or bond.
Hi Rick!

Where do stable value funds fit into that definition? Right on the borderline?
Still trying to get a read on where stable value funds fit into this discussion...

Does the yield matter?

Anyone??
If the point of the OP is that there are sorts of holdings of assets that we are going to call cash that one should not consider to be investments, then that is not SV funds. In other words the OP is not advice for investors to ignore SV funds or get rid of them.
Surely the yield must factor into this type of determination. I would think a stable value fund with a long history of barely meeting or falling behind inflation should be treated differently than a stable value fund with a long history of beating inflation handily.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Is Cash Trash? The Purpose of Cash

Post by MathWizard » Mon Mar 05, 2018 2:45 pm

The other purpose of cash (besides to spend or waiting to invest) is to be used in an Emergency Fund.
The first tier of my EF will always be cash or CDs, held in a local bank. It's only about 2 the size of
my retirement investments, but it will handle a few month's expenses.

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Re: Is Cash Trash? The Purpose of Cash

Post by saltycaper » Mon Mar 05, 2018 2:49 pm

iceport wrote:
Mon Mar 05, 2018 2:26 pm

Surely the yield must factor into this type of determination. I would think a stable value fund with a long history of barely meeting or falling behind inflation should be treated differently than a stable value fund with a long history of beating inflation handily.
I think the yield should factor into the decision of whether or not to invest in the fund, but investment performance doesn't dictate whether something is cash or not.
Quod vitae sectabor iter?

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Re: Is Cash Trash? The Purpose of Cash

Post by iceport » Mon Mar 05, 2018 3:37 pm

saltycaper wrote:
Mon Mar 05, 2018 2:49 pm
iceport wrote:
Mon Mar 05, 2018 2:26 pm

Surely the yield must factor into this type of determination. I would think a stable value fund with a long history of barely meeting or falling behind inflation should be treated differently than a stable value fund with a long history of beating inflation handily.
I think the yield should factor into the decision of whether or not to invest in the fund, but investment performance doesn't dictate whether something is cash or not.
I guess that makes sense.

There are two qualities offered by the OP to describe cash, time to maturity and whether or not it produces a real rate of return. Liquidity is another quality thrown in the mix by others. With respect to all three qualities, it seems a stable value fund can blur the lines. It all depends on the specific attributes of the fund and the rules of the account that holds it. And I suppose those, in turn, affect the role it can — or should — fill in a portfolio.
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Re: Is Cash Trash? The Purpose of Cash

Post by WhiteMaxima » Mon Mar 05, 2018 3:52 pm

You should ask W Buffett for this question. In his 2018 letter to share holders, he explained this and I totally agree with him.

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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Mon Mar 05, 2018 8:39 pm

Happy2BeFree wrote:
Mon Mar 05, 2018 1:36 pm
abuss368 wrote:
Sun Mar 04, 2018 3:22 pm
Vanguard's Prime Money Market fund is now yielding in excess of 1.50%.
May I ask, is the MM's yield/return lessened by its 0.16% ER? Or is 1.53% (as of today) the net return?
It is always after the expense ratio.
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Re: Is Cash Trash? The Purpose of Cash

Post by Happy2BeFree » Mon Mar 05, 2018 9:16 pm

abuss368 wrote:
Mon Mar 05, 2018 8:39 pm
Happy2BeFree wrote:
Mon Mar 05, 2018 1:36 pm
abuss368 wrote:
Sun Mar 04, 2018 3:22 pm
Vanguard's Prime Money Market fund is now yielding in excess of 1.50%.
May I ask, is the MM's yield/return lessened by its 0.16% ER? Or is 1.53% (as of today) the net return?
It is always after the expense ratio.
Thanks!

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Re: Is Cash Trash? The Purpose of Cash

Post by Sandtrap » Mon Mar 05, 2018 10:58 pm

There is also "cash" as working capital. IE: in R/E, business, etc.
j :D

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Re: Is Cash Trash? The Purpose of Cash

Post by smectym » Mon Mar 05, 2018 11:22 pm

Criticizing cash for its low yield is a bit of a contradiction for at least some Bogleheads, who continued to recommend low-yielding Series I savings bonds during the recent lengthy interest rate drought. And the counter “but savings bonds yields adjust for inflation semi-annually,” ignores that as a practical matter treasury and prime money market fund yields tend to adjust higher in inflationary environments almost continuously.

I too remember the 1980’s. During that epoch, which saw the introduction of the first “money market funds” as we know them today, “cash” in the form of funds holding short term treasury bills and/or commercial paper was routinely considered an asset class. Let’s assume that those who argue some merit in cash are referring to allocating a portion of ones portfolio to competitive Treasury and Prime money market funds, not to $20 bills in the drawer.

Agree with those who champion short term bond funds as a cash surrogate—but there are times when cash qua cash will perform better than short term bonds. Solution? Own both.

Every portfolio should feature a certain allocation to “stuff that won’t go down” in nominal terms. Within that allocation, capital should be directed to assets that throw off a competitive yield commensurate with the current interest rate environment. Money market funds, better yielding bank CD’s, savings bonds, shorter individual treasuries to be held to maturity: all qualify. Such portfolio ballast may indeed bring with it the “cash drag” on portfolios in bull markets decried by the “cash is trash” faction; on the other hand, in down markets it juices relative performance; lowers portfolio volatility; and for these reasons makes the investor less likely to make panicky decisions with the riskier part of the portfolio.

Smectym

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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Tue Mar 06, 2018 3:26 am

My cash is working for me–-most of it. My online bank savings account generates about $323 each month. Some posters still talk about miniscule interest at local banks, but they fail to mention interest of 1.55% and higher at online banks.

It doesn't seem prudent to me to channel all of one's monetary resources into risky assets like stocks and bonds.

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Re: Is Cash Trash? The Purpose of Cash

Post by AlohaJoe » Tue Mar 06, 2018 3:50 am

pascalwager wrote:
Tue Mar 06, 2018 3:26 am
My cash is working for me–-most of it. My online bank savings account generates about $323 each month. Some posters still talk about miniscule interest at local banks, but they fail to mention interest of 1.55% and higher at online banks.
1.55% isn't minimal? Wasn't inflation over 2%? Isn't a negative real interest rate minuscule?

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Re: Is Cash Trash? The Purpose of Cash

Post by dkturner » Tue Mar 06, 2018 11:45 am

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.
Help me out here.

I'm looking at the Vanguard Short-Term Investment Grade Bond Fund performance over the last year. The Vanguard website says it provided a total return of 76 basis points for the period March 1, 2017 through February 28, 2018. The Vanguard Prime Money Market Fund had a total return of 113 basis points over the same period. With the Federal Reserve Board signaling it intends to raise short-term interest rates 3 or 4 times in 2018 and a few more times in 2019, why would you recommend holding a cash reserve in a short-term bond fund for the next year or two? Wouldn't we be better off holding our reserves in the Prime Money Market Fund as long as the Fed continues to "guide" short-term rates upward? I realize that "market timing" is a four letter word on these boards but continuing to hold a short-term bond fund that is likely to have its, slower, increase in yield partially offset by a decline in principal value seems like a non-starter in the current interest rate enviornment.

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Re: Is Cash Trash? The Purpose of Cash

Post by gmaynardkrebs » Tue Mar 06, 2018 12:08 pm

dkturner wrote:
Tue Mar 06, 2018 11:45 am
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.
Help me out here.

I'm looking at the Vanguard Short-Term Investment Grade Bond Fund performance over the last year. The Vanguard website says it provided a total return of 76 basis points for the period March 1, 2017 through February 28, 2018. The Vanguard Prime Money Market Fund had a total return of 113 basis points over the same period. With the Federal Reserve Board signaling it intends to raise short-term interest rates 3 or 4 times in 2018 and a few more times in 2019, why would you recommend holding a cash reserve in a short-term bond fund for the next year or two? Wouldn't we be better off holding our reserves in the Prime Money Market Fund as long as the Fed continues to "guide" short-term rates upward? I realize that "market timing" is a four letter word on these boards but continuing to hold a short-term bond fund that is likely to have its, slower, increase in yield partially offset by a decline in principal value seems like a non-starter in the current interest rate enviornment.
The argument would be that the expected rates of interest are priced in to the Short-Term Investment grade. So, you might grab a little term premium over Prime if things work out as expected or better. I would also check whether the bonds in the short-term corporate are slightly riskier than the paper in Prime.

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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Tue Mar 06, 2018 12:09 pm

AlohaJoe wrote:
Tue Mar 06, 2018 3:50 am
pascalwager wrote:
Tue Mar 06, 2018 3:26 am
My cash is working for me–-most of it. My online bank savings account generates about $323 each month. Some posters still talk about miniscule interest at local banks, but they fail to mention interest of 1.55% and higher at online banks.
1.55% isn't minimal? Wasn't inflation over 2%? Isn't a negative real interest rate minuscule?
Okay, degrees of miniscule. Cash (bank savings, T-bills) is part of my portfolios diversification.

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Re: Is Cash Trash? The Purpose of Cash

Post by WhiteMaxima » Tue Mar 06, 2018 12:25 pm

cash, stock, bond, real estate, etc should be your invest folio. give your example, you go to shopping and find an ideal stuff you would dream and happens on big sale, you can't say I pay you stock or bond, you need cash. Who has the cash during 2008 crisis and dare to buy would be a winner. W Buffett is the one know this better.

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Tue Mar 06, 2018 12:35 pm

If I can place an order to transfer "assets" during business hours and that money is in my bank the next day those "assets" are cash.

If it takes two business days it's not cash.

(Ironically that may make my margin account cash and it certainly doesn't keep up with inflation. But then margin is nor an asset but a liability.)

If I ever use wire transfers I may have to rethink my definition.
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Re: Is Cash Trash? The Purpose of Cash

Post by dkturner » Tue Mar 06, 2018 1:24 pm

Doc wrote:
Tue Mar 06, 2018 12:35 pm
If I can place an order to transfer "assets" during business hours and that money is in my bank the next day those "assets" are cash.

If it takes two business days it's not cash.

(Ironically that may make my margin account cash and it certainly doesn't keep up with inflation. But then margin is nor an asset but a liability.)

If I ever use wire transfers I may have to rethink my definition.
That’s an interesting definition of “cash”. We keep the money we know we’re going to need for the current calendar year expenses (income and property tax payments primarily) in the Vanguard Federal MM Fund, against which we can write checks or move money to our bank checking account on the next business day. The rest of our “cash” at Vanguard is held in either the Prime or the Municipal MM fund, depending upon which is currently providing the higher after tax yield. Unless I’m mistaken, if we need to tap our Prime or Municipal MM Fund we have to first transfer the funds to our Federal MM Fund then, next business day, write a check or make the transfer to our bank checking account. If that’s the case we have less “cash” than the Vanguard customers who only use the Federal MM Fund.

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Re: Is Cash Trash? The Purpose of Cash

Post by Kevin K » Tue Mar 06, 2018 2:30 pm

Rick Ferri wrote:
Mon Mar 05, 2018 10:08 am
Is cash an investment? IMO, it is not.

The goal of an “investment” is achieve a real rate of return over time. Cash investments do not do this, and are not priced to do it. Cash is (or should) be risk free, and that should mean it keeps up with inflation before tax. This doesn’t always happen because the market for cash is for the most part controlled by Central Banks.

Bottom line: We hold cash. We do not invest in cash. Cash does not earn a real return.
This seems to reflect a pretty thorough misunderstanding of the role of cash. Here is the link to the comprehensive article on cash over at Portfolio Charts that was mentioned briefly earlier in this thread:

https://portfoliocharts.com/2017/05/12/ ... -investor/

A key quote from this piece:

"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."

As for cash not being an "investment," neither is gold by your definition, yet there are any number of robust portfolios that include both cash and a substantial allocation to gold that utterly trounce plain vanilla (and even intricate, tilted slice-and0-dice) portfolios for risk-adjusted return and safe withdrawal rates in retirement. The Golden Butterfly, which includes a full 20% each of cash and gold, is probably the best example:

https://portfoliocharts.com/2016/04/18/ ... butterfly/

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Tue Mar 06, 2018 2:49 pm

dkturner wrote:
Tue Mar 06, 2018 1:24 pm
... in the Vanguard Federal MM Fund, against which we can write checks or move money to our bank checking account on the next business day. The rest of our “cash” at Vanguard is held in either the Prime or the Municipal MM fund, depending upon which is currently providing the higher after tax yield. Unless I’m mistaken, if we need to tap our Prime or Municipal MM Fund we have to first transfer the funds to our Federal MM Fund then, next business day, write a check or make the transfer to our bank checking account. If that’s the case we have less “cash” than the Vanguard customers who only use the Federal MM Fund.
This gets pretty nuanced. This is my understanding. Your Federal MM account is your sweep account. You can request a transfer from that account to your bank and it will get there the next business day. The Prime MM Account is now just another Vanguard mutual fund (both T1 securities) and you can sell it and have the proceeds go to your bank but that takes two business. (You don't need to move it to your MM account first). You can sell a Treasury security (T1) and it will show up as cleared cash the next day and you can move that cleared money to your bank and it will show up in the bank the next business day. Again you don't need to wait until this sweeps to your MM fund to initiate the transfer.

I just did this last week. Sold a VG mutual fund on Monday w/ proceeds directly going to bank on Wednesday - two days. Sold a Treasury note on Monday and transferred that cleared cash along with MM funds on Tuesday to get to the bank on Wednesday - two days. (The bank in these cases was actually the correspondent bank of another broker but it was considered as cleared cash by that broker the same day.)

As a side issue, writing a check on a brokerage account scares the pants off of me. I would much rather transfer that money to my bank and write a check on that bank account the same day.
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Re: Is Cash Trash? The Purpose of Cash

Post by radiowave » Tue Mar 06, 2018 3:14 pm

Current inflation rate is hovering around 2.0% (http://www.usinflationcalculator.com/in ... on-rates/ ). So cash (no interest checking, actual money is a safe/wallet) will lose this much value each year. Competitive current high yield savings accounts are between approximately 1.40 - 1.55% ( https://www.bankrate.com/banking/savings/rates/ ) losing about .5% due to inflation. 1yr CDs 1.95-2.05% (bankrate) and 1 year treasuries at 2.05% https://www.treasury.gov/resource-cente ... ata=yield both are just keeping up with inflation.

The current cash drag is the rate of inflation or 2% overall. If you have say $10,000 normal cash flow, that is about $200 opportunity cost of having cash in checking or safe/wallet, etc. per year. For short term high yield savings say in Ally or one of the other online savings banks, the opportunity costs is $50/year per 10K compared to other cash instruments that keep up with inflation, e.g. a 2.0% 1 year CD at Ally. That would be the break even point of holding money in a cash instrument with yield at inflation rate compared to other cash instruments/cash. As Rick notes, even at break even, you are not building capital, just keeping up with inflation (before taxes assuming funds are in a taxable account).
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Re: Is Cash Trash? The Purpose of Cash

Post by Toons » Tue Mar 06, 2018 3:31 pm

I am traveling,
I need to move cash around to and from Cap-one checking and money market accounts.
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Re: Is Cash Trash? The Purpose of Cash

Post by nisiprius » Tue Mar 06, 2018 5:26 pm

Rick Ferri wrote:
Mon Mar 05, 2018 10:08 am
Is cash an investment? IMO, it is not.

The goal of an “investment” is achieve a real rate of return over time. Cash investments do not do this, and are not priced to do it....
Except, Rick, unless we are playing semantic games with the word "cash," I've presented evidence and Willthrill81 has presented evidence and many statistics show that cash investments in fact have achieved a real return over time. This is a pretty robust observation, for different varieties of "cash" investment and varying time periods.

For example, according to the Ibbotson SBBI 2015 Classic Yearbook, the return of Treasury bills from 1926 through 2014 inclusive was an average of 3.5% (CAGR), while inflation over the same time period averaged 2.9%, for an average real return 0.6%.

Similarly, over its lifetime, the Vanguard Prime Money Market Account has grown $10,000 to $80,358.23,

Image

which is (cumulatively) the equivalent of $17,377 in 6/1975, and thus a real return of about 1.3% per year.

Image
Last edited by nisiprius on Tue Mar 06, 2018 5:34 pm, edited 1 time in total.
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Re: Is Cash Trash? The Purpose of Cash

Post by nisiprius » Tue Mar 06, 2018 5:32 pm

I am not sure when, why, or what the rationale was, but during the 1990s and earlier, just about every model or sample portfolio used to include allocations to three asset classes: stocks, bonds, and cash (aka short-term reserves). The clearest proof of this is that all of the Vanguard LifeStrategy funds had an allocation to "short-term reserves" from inception up through at least 2010. Here, LifeStrategy Conservative:

Image

Notice that this is an explicit allocation inside a mutual fund, not an "emergency fund" that can be tapped independently of other investments.

I think it was sometime during the bull market of the 1990s that a cash or short-term reserves allocation began to vanish from consensus recommendations.
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Re: Is Cash Trash? The Purpose of Cash

Post by boyohead » Wed Mar 07, 2018 1:11 am

nisiprius wrote:
Tue Mar 06, 2018 5:32 pm
I think it was sometime during the bull market of the 1990s that a cash or short-term reserves allocation began to vanish from consensus recommendations.
I've read you make this claim in multiple threads and, each time, I'm reminded of the asset allocation calculator https://www.ipers.org/members/estimate- ... calculator that the SEC offers a link to in an article about asset allocation https://www.sec.gov/reportspubs/investo ... onhtm.html. I'm sure there are flaws that can be found with it but it's notable that it reflects both a more conservative stock to bond ratio than most of the advice seen these days and also the continued presence of a cash position in its portfolio recommendations.

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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Wed Mar 07, 2018 3:19 am

nisiprius wrote:
Tue Mar 06, 2018 5:32 pm
I am not sure when, why, or what the rationale was, but during the 1990s and earlier, just about every model or sample portfolio used to include allocations to three asset classes: stocks, bonds, and cash (aka short-term reserves). The clearest proof of this is that all of the Vanguard LifeStrategy funds had an allocation to "short-term reserves" from inception up through at least 2010. Here, LifeStrategy Conservative:

Image

Notice that this is an explicit allocation inside a mutual fund, not an "emergency fund" that can be tapped independently of other investments.

I think it was sometime during the bull market of the 1990s that a cash or short-term reserves allocation began to vanish from consensus recommendations.
From Vanguard website:

short-term reserves

Investments in interest-bearing bank deposits, money market instruments, U.S. Treasury bills, and short-term bonds.

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Re: Is Cash Trash? The Purpose of Cash

Post by tadamsmar » Wed Mar 07, 2018 8:19 am

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
What about an emergency fund? It's not really cash waiting to be spent.

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Re: Is Cash Trash? The Purpose of Cash

Post by AtlasShrugged? » Wed Mar 07, 2018 8:32 am

There is another dimension with cash that bears consideration: The feeling of security it can give you, or peace of mind.

Example: We keep three months expenses in cash in our home safe as part of our emergency fund. Knowing that I have this 'cash cushion' in case of an emergency, zombie apocalypse, whatever gives me peace of mind. Am I losing return? Yes. Am I losing much return? No, not at today's rates. We are talking at most $75-$100 on an annual basis. The other half of our emergency fund is with WF, earning a truly puny interest rate.

But I will tell you what: I sleep much easier just knowing there is cash on hand, less than 30 seconds away, to deal with emergencies. There is something to be said for having peace of mind. How do you put a price on that?

So I guess I would not go along with 'cash is trash'. I am more of the 'Cash is King' type, myself. At least, when it comes to having an emergency fund.
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