Is Cash Trash? The Purpose of Cash

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Doc
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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Wed Mar 07, 2018 9:14 am

tadamsmar wrote:
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.
What's an emergency?
What is EMERGENCY?
Situation requiring immediate attention and remedial action. Involves injury, loss of life, damage to the property, or catastrophic interference with the normal activities. A sudden, unexpected, or impending situation.
https://thelawdictionary.org/emergency/

The key words here are catastrophic and unexpected. There is no good reason to have a huge pile of cash around for an unexpected event. It may happen tomorrow, or it may happen ten years from now or it may never happen at all.

We should all be willing to take some risk to be able to respond to an event that may never happen. Do you have a deductible on your car insurance? The higher the deductible the lower the cost. The same concept should apply to our emergency fund. It need not be and probably shouldn't be cash but some other asset that is easily converted to cash even at some cost. Think of the cost of having to sell say your 2 yr Treasury at a loss. The loss is the deductible in your insurance policy.
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Re: Is Cash Trash? The Purpose of Cash

Post by dbr » Wed Mar 07, 2018 9:27 am

The fact that an emergency is catastrophic or unexpected does not usually mean that a very large amount of cash is needed in hand withing minutes or hours. The most common example of emergency we think of for investors on this board would be losing one's job and not being reemployed for months. While the day of being laid off may be sudden and unexpected the need for spending is at a low rate and prolonged. You only need an emergency fund to the extent you want to avoid things you don't want to do such as raiding your 401k or having your house foreclosed. Even health emergencies that provoke large expenses tend to work down through systems over months and years. There are possible exceptions, but finding them is hard. One of the few I have heard around here is needing to come up with a large ransom for a kidnapping, which is how far you have to go to imagine things. Otherwise probably the first source for emergency funds in more ordinary circumstances is a credit card. I'm sure there is a list we can imagine that will probably prove its own point.

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Wed Mar 07, 2018 9:46 am

dbr wrote:
Wed Mar 07, 2018 9:27 am
The most common example of emergency we think of for investors on this board would be losing one's job and not being reemployed for months.
Maybe, depending on who's on line. For the tenured college professor losing his job is facing an emergency. To a contract construction engineer it is a contingency because he expects seasonal layoffs. The prof does not need a large pile of cash on hand. The construction engineer does.

Both of these people should have a plan for the job loss situation. What's in their emergency/contingency fund may differ but neither of them should plan to raid their 401k.
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Re: Is Cash Trash? The Purpose of Cash

Post by exoilman » Wed Mar 07, 2018 9:51 am

Sheepdog wrote:
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.
:sharebeer

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Re: Is Cash Trash? The Purpose of Cash

Post by dbr » Wed Mar 07, 2018 9:52 am

Doc wrote:
Wed Mar 07, 2018 9:46 am
dbr wrote:
Wed Mar 07, 2018 9:27 am
The most common example of emergency we think of for investors on this board would be losing one's job and not being reemployed for months.
Maybe, depending on who's on line. For the tenured college professor losing his job is facing an emergency. To a contract construction engineer it is a contingency because he expects seasonal layoffs. The prof does not need a large pile of cash on hand. The construction engineer does.

Both of these people should have a plan for the job loss situation. What's in their emergency/contingency fund may differ but neither of them should plan to raid their 401k.
Yes, exactly.

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Re: Is Cash Trash? The Purpose of Cash

Post by dbr » Wed Mar 07, 2018 9:55 am

exoilman wrote:
Wed Mar 07, 2018 9:51 am
Sheepdog wrote:
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.
:sharebeer
I think it is a very subtle argument to identify cash as specifically at advantage compared to any variety of other low risk instruments. "Risk of buying bonds at or near all-time highs" is not a very convincing argument considering the range of characteristics spanned by "bonds." In fact I am pretty much lost on how cash is not just the end of a spectrum of risk vs return and doesn't deserve being called out as an asset class.

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Re: Is Cash Trash? The Purpose of Cash

Post by White Coat Investor » Wed Mar 07, 2018 10:00 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 if the cash option was currently paying 2.875%? Seems like a good bond alternative at that point.

That's the current yield on the TSP G fund- treasury yields with MMF volatility.
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Re: Is Cash Trash? The Purpose of Cash

Post by dbr » Wed Mar 07, 2018 10:06 am

White Coat Investor wrote:
Wed Mar 07, 2018 10:00 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 if the cash option was currently paying 2.875%? Seems like a good bond alternative at that point.

That's the current yield on the TSP G fund- treasury yields with MMF volatility.
You can call the G fund cash by some definition but if you do you reach the conclusion you just reached which is that some bonds can be cash that is not a bond and be a better bond than bonds, etc.

Your comment is evidence to the absurdity of the OP and I am still trying to figure out what point Rick is trying to make here.

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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 10:13 am

Bogleheads -

In my opinion, how much cash, if any, should be maintained is a very personal decision that may be different for each individual. Factors such as where one is in their life journey, the risk or stability of their chosen profession or field, starting a business, running a business with fluctuations, will determine the best strategy for cash purposes.

If one can raise cash in the event of need from an investment portfolio, ATM, credit cards, line of credits, bank loans, friends, family, and so forth, then there may or may not be as much of a need.

Personally, we add a small amount of cash every other week and never use the accumulated funds. This has worked well for us and we intend to stay the course. We simply use the Vanguard Prime Money Market fund. If there was a need for cash, the funds can be transferred the same day and will appear in our bank account in a day or two.

Best.
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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Wed Mar 07, 2018 10:50 am

abuss368 wrote:
Wed Mar 07, 2018 10:13 am
In my opinion, how much cash, if any, should be maintained is a very personal decision that may be different for each individual. Factors such as where one is in their life journey, the risk or stability of their chosen profession or field, starting a business, running a business with fluctuations, will determine the best strategy for cash purposes.
Agreed.
abuss368 wrote:
Wed Mar 07, 2018 10:13 am
Personally, we add a small amount of cash every other week and never use the accumulated funds. This has worked well for us and we intend to stay the course. We simply use the Vanguard Prime Money Market fund. If there was a need for cash, the funds can be transferred the same day and will appear in our bank account in a day or two.
So what is the purpose for this cash you have in your MM account? That's what this thread is all about.

We have about $4k in our investment accounts that I consider cash but 80% of that is in Vanguard Ultra Short fund which is not really cash. It's all waiting to be invested. If I really need cash I can have any amount I could conceivably need in our checking account in less than an hour. How and when I pay down that margin loan is another question. :D
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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 11:10 am

Doc wrote:
Wed Mar 07, 2018 10:50 am
abuss368 wrote:
Wed Mar 07, 2018 10:13 am
In my opinion, how much cash, if any, should be maintained is a very personal decision that may be different for each individual. Factors such as where one is in their life journey, the risk or stability of their chosen profession or field, starting a business, running a business with fluctuations, will determine the best strategy for cash purposes.
Agreed.
abuss368 wrote:
Wed Mar 07, 2018 10:13 am
Personally, we add a small amount of cash every other week and never use the accumulated funds. This has worked well for us and we intend to stay the course. We simply use the Vanguard Prime Money Market fund. If there was a need for cash, the funds can be transferred the same day and will appear in our bank account in a day or two.
So what is the purpose for this cash you have in your MM account? That's what this thread is all about.

We have about $4k in our investment accounts that I consider cash but 80% of that is in Vanguard Ultra Short fund which is not really cash. It's all waiting to be invested. If I really need cash I can have any amount I could conceivably need in our checking account in less than an hour. How and when I pay down that margin loan is another question. :D
Hi Doc -

For us it simply provides peace of mind and additional assurance. It is available if there was a loss of income or another extreme and unfortunate event (which may or may not occur).
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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 11:14 am

One additional benefit of having a cash account that we learned of was during the home buying process: We were able to obtain the mortgage based on income, credit scores, overall low existing debt, and the cash account. The lender required a Statement of Net Worth. When reviewing and disclosing the asset section with him, he stated the cash balances were high enough that there was no need for disclosing the investment portfolio. I was not comfortable and was able to avoid disclosing the investment portfolio.

Having cash available in a separate account, with its own statement, was a learning experience and rewarding.

Now this could have easily been a CD, Bond fund, or yes, an investment account. To my original point, it is a very personal decision.
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Re: Is Cash Trash? The Purpose of Cash

Post by iceport » Wed Mar 07, 2018 11:36 am

White Coat Investor wrote:
Wed Mar 07, 2018 10:00 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 if the cash option was currently paying 2.875%? Seems like a good bond alternative at that point.

That's the current yield on the TSP G fund- treasury yields with MMF volatility.
It's exactly the same with a good stable value fund. Mine is paying 2.84% and rising, and there are no restrictions on selling. Before the great recession, it was paying over 5%. The fund has a long history of furnishing decent real returns. Now in retirement, I can call for a check if ever I need to. Very cash-like, even by the OP's measures.

But at a high enough interest rate, I see no problem with incorporating such an asset into the long term portfolio allocation.
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Re: Is Cash Trash? The Purpose of Cash

Post by iceport » Wed Mar 07, 2018 11:40 am

abuss368 wrote:
Wed Mar 07, 2018 11:10 am
For us it simply provides peace of mind and additional assurance.
It's not just you, abuss368. From casual reading somewhere, having a comfortable cash cushion is a apparently major source of contentment in life for people in general. As with most things, the value probably depends on the person to some extent. But holding a cash buffer works the same for me as it does for you.
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Re: Is Cash Trash? The Purpose of Cash

Post by AndyFromPennsylvania » Wed Mar 07, 2018 11:54 am

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. 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.
What do you do to have this kind of fast liquidity?

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Wed Mar 07, 2018 11:58 am

AndyFromPennsylvania wrote:
Wed Mar 07, 2018 11:54 am
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. 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.
What do you do to have this kind of fast liquidity?
Any Vanguard mutual fund maybe?
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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 12:37 pm

iceport wrote:
Wed Mar 07, 2018 11:40 am
abuss368 wrote:
Wed Mar 07, 2018 11:10 am
For us it simply provides peace of mind and additional assurance.
It's not just you, abuss368. From casual reading somewhere, having a comfortable cash cushion is a apparently major source of contentment in life for people in general. As with most things, the value probably depends on the person to some extent. But holding a cash buffer works the same for me as it does for you.
I agree that it is a very personal decision and strategy. :beer
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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 12:38 pm

Doc wrote:
Wed Mar 07, 2018 11:58 am
AndyFromPennsylvania wrote:
Wed Mar 07, 2018 11:54 am
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. 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.
What do you do to have this kind of fast liquidity?
Any Vanguard mutual fund maybe?
Hi Doc -

Does a transfer from Vanguard to your bank take one day or two days for the transferred amount to appear as available in your bank?
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Re: Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Wed Mar 07, 2018 1:17 pm

White Coat Investor wrote:
Wed Mar 07, 2018 10:00 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 if the cash option was currently paying 2.875%? Seems like a good bond alternative at that point.

That's the current yield on the TSP G fund- treasury yields with MMF volatility.
Yes, however in a “normal” interest rate environment where the yield curve is relatively steep from 1-10 years, it makes sense to add duration risk (interest rate risk) with part of your portfolio that’s in fixed income long-term. This better matches your assets to your liabilities while increasing your overall return.

Notwithstanding TSP G is a unique fund. Those with access do have the option you suggest.
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Re: Is Cash Trash? The Purpose of Cash

Post by WhiteMaxima » Wed Mar 07, 2018 2:39 pm

Cash is everything. I should say gold backed cash is the king.

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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 2:53 pm

Bogleheads -

There is an old saying (and for good measure): "Cash is King"!
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Re: Is Cash Trash? The Purpose of Cash

Post by bradshaw1965 » Wed Mar 07, 2018 2:53 pm

A little bit of cash for a bug-out, lights-out, no ATM environment.

A little bit too much cash in checking because I don't want to pay fees, and they keep switching up the requirements, and why am I still at this awful mega-bank anyway.

A little bit too much cash because my spouse sometimes forgets to transfer from her credit union.

A little bit of extra cash because my spouse likes a little bit of extra cash and happy wife, happy life.

A little slack in the system isn't the worst thing in the world.

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Re: Is Cash Trash? The Purpose of Cash

Post by 1210sda » Wed Mar 07, 2018 3:32 pm

Using expected returns of 1.5% for cash, 3.0% for bonds and 7.0% for equities, I got the following.

A $1,000,000 portfolio with a 60/40 AA would have a return of $54,000.

A $1,000,000 portfolio with a 60/35/5 AA would have a return of $53,250.

A $750 difference on a $1,000,000 portfolio for one year. (5.4% vs 5.325% return).

If the $750 bothered me a lot, I could adjust my AA to 62/33/5. (Return of $54,050)

The increased risk of a larger equity allocation would be reduced by cash being less risky than bonds and by cash reducing the sequence of return risk. I imagine that the 62/33/5 would be similar in risk to the 60/40.

For retiree's, 5% cash would probably cover a lot of residual living expenses. (RLE).

1210

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Wed Mar 07, 2018 3:33 pm

abuss368 wrote:
Wed Mar 07, 2018 12:38 pm
Does a transfer from Vanguard to your bank take one day or two days for the transferred amount to appear as available in your bank?
That's a receiving bank issue not a sending bank issue.

Basically its available in one day but it might show as pending until the bank runs it's nightly bookkeeping program.
Many of us are familiar with automated clearing house (ACH) transfers in the form of bill pay. An ACH transfer goes through a clearing house each day, and this is where it gets its name. These transactions are actually processed in batches. Instead of money being available immediately, a receiving bank collects information about all of the transactions. At the end of the day, all of the transactions are batched and processed as a single transaction. Funds aren’t actually available until the day following the batch transaction in many cases.
http://www.knowyourbank.com/education/a ... -transfer/

I once went over this with the manager at our main bank. I was told that if money was coming in by ACH from a firm like Schwab or Vanguard it could go out the same day.

The money I sent Schwab last week was to cover a buy order that settled the same day. So the incoming transfer was available that same day or I would have had a margin fee.

We have only Vanguard Brokerage Accounts. Mutual fund only accounts may have different policies since I believe they have different regulators.
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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 3:46 pm

bradshaw1965 wrote:
Wed Mar 07, 2018 2:53 pm
A little bit too much cash in checking because I don't want to pay fees, and they keep switching up the requirements, and why am I still at this awful mega-bank anyway.
Years ago I read an article where Vanguard was sending survey's inquiring and polling responses if they created a bank. Could you imagine a low cost, friendly shareholder owned bank. I would suspect it would be structured like a credit union.
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Re: Is Cash Trash? The Purpose of Cash

Post by bradshaw1965 » Wed Mar 07, 2018 4:35 pm

abuss368 wrote:
Wed Mar 07, 2018 3:46 pm
bradshaw1965 wrote:
Wed Mar 07, 2018 2:53 pm
A little bit too much cash in checking because I don't want to pay fees, and they keep switching up the requirements, and why am I still at this awful mega-bank anyway.
Years ago I read an article where Vanguard was sending survey's inquiring and polling responses if they created a bank. Could you imagine a low cost, friendly shareholder owned bank. I would suspect it would be structured like a credit union.
That would be great. I absolutely know that I should be hitting escape velocity on my current setup, but the time and effort to get all of the inputs and outputs reconfigured make the switching costs so high, even with all the clear incentives in place.

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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Wed Mar 07, 2018 4:41 pm

The heat map for cash on Portfolio Charts website shows that cash deposits/purchases made between 1970 and 1998 were still providing a real return in 2017. Purchases made after 1998 have not provided a real return as of 2017.

The Portfolio Charts article on cash makes me feel better about the long term prospects for my large cash allocation (although 11.6% might be excessive) and helps legitimize it as a part of my portfolio. Between 1980 and 1995 I accumulated around $400k in T-bills. Using the heat map I can see now that I did at least make a real return. Then, in 1995, I put 85% of this money into the stock market and the rest into bonds.

Cash includes bank savings, T-bills, and T-notes up to three years term. So the Vanguard Treasury MM fund and two short-term Treasury bond funds would qualify as cash. (I'm going to remove my interest-free checking account from my portfolio spreadsheet.)

So, cash seems to be an actual investment, historically, as it provides a (small) real return.

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Re: Is Cash Trash? The Purpose of Cash

Post by andypanda » Wed Mar 07, 2018 5:07 pm

" From casual reading somewhere, having a comfortable cash cushion is a apparently major source of contentment in life for people in general."

Great, I was starting to feel all alone because I wasn't trying wring an extra penny out of every dollar. :) Been there, done that, didn't even have a penny some days.

I have approximately 11% in cash at age 67. There used to be more, but I've given some away and even spent a little on me. I'm getting used to the idea of spending $419 on a Metanium casting reel; $499 on a Steez reel and $649 on a Conquest bass rod, but I'm still fishing out of a 16-foot jon boat I carpeted and rigged for small water. (Okay, I admit I got 10% off on each of the reels using a one-time coupon.)

But I still buy $12 carpenter pants at Tractor Supply and dress slacks at LL Bean. I've given up on the clothes at Orvis. ;)






















I don't think of cash as part of my portfolio; it's my anti-portfolio. It's the extra icing on the cake that already has too much icing on it. I may have worked too long and overdone it, but I never really figured I'd reach the point where I was living well on my pension and SSA retirement and didn't need to use my 403/457/401, much less my taxable portfolio. Heck, there's $42k in cash in the taxable portfolio at the moment that I didn't include.

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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 5:28 pm

andypanda wrote:
Wed Mar 07, 2018 5:07 pm
" From casual reading somewhere, having a comfortable cash cushion is a apparently major source of contentment in life for people in general."

Great, I was starting to feel all alone because I wasn't trying wring an extra penny out of every dollar. :) Been there, done that, didn't even have a penny some days.

I have approximately 11% in cash at age 67. There used to be more, but I've given some away and even spent a little on me. I'm getting used to the idea of spending $419 on a Metanium casting reel; $499 on a Steez reel and $649 on a Conquest bass rod, but I'm still fishing out of a 16-foot jon boat I carpeted and rigged for small water. (Okay, I admit I got 10% off on each of the reels using a one-time coupon.)

But I still buy $12 carpenter pants at Tractor Supply and dress slacks at LL Bean. I've given up on the clothes at Orvis. ;)

I don't think of cash as part of my portfolio; it's my anti-portfolio. It's the extra icing on the cake that already has too much icing on it. I may have worked too long and overdone it, but I never really figured I'd reach the point where I was living well on my pension and SSA retirement and didn't need to use my 403/457/401, much less my taxable portfolio. Heck, there's $42k in cash in the taxable portfolio at the moment that I didn't include.
Job well done! Thank you for sharing your perspectives and accomplishments. :beer
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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Wed Mar 07, 2018 5:30 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.
The researcher on Portfolio Charts website shows (see his heat maps) that cash does provide a real return--historically (not now, of course). He also considers short-term Treasury bond funds between 2 and 3 years to be cash.

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Re: Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Wed Mar 07, 2018 6:15 pm

Cash and cash equalants mature in less than one year. Bonds that mature in 2 to 3 years are called notes.
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Re: Is Cash Trash? The Purpose of Cash

Post by abuss368 » Wed Mar 07, 2018 6:55 pm

pascalwager wrote:
Wed Mar 07, 2018 5:30 pm
The researcher on Portfolio Charts website shows (see his heat maps) that cash does provide a real return--historically (not now, of course). He also considers short-term Treasury bond funds between 2 and 3 years to be cash.
Financial accounting rules state Cash & Cash Equivalents are considered one year and less for balance sheet purposes.
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Re: Is Cash Trash? The Purpose of Cash

Post by zaboomafoozarg » Wed Mar 07, 2018 7:16 pm

Some say that cash is trash,
some say it's king.
From what I've tasted of the bear,
I think that "cash is king" is fair.
But after 10 years of the bull,
I feel like I should probably
exchange my bank account in full
for equities
'cause cash is dull.

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Re: Is Cash Trash? The Purpose of Cash

Post by nisiprius » Wed Mar 07, 2018 7:59 pm

zaboomafoozarg wrote:
Wed Mar 07, 2018 7:16 pm
Some say that cash is trash,
some say it's king.
From what I've tasted of the bear,
I think that "cash is king" is fair.
But after 10 years of the bull,
I feel like I should probably
exchange my bank account in full
for equities
'cause cash is dull.
Bravo! Bravo!
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Is Cash Trash? The Purpose of Cash

Post by nisiprius » Wed Mar 07, 2018 8:03 pm

pascalwager wrote:
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.
I'm not sure what your point is, here. Rick Ferri gives a definition I think is very reasonable: "For the record, cash and cash equivalents are composed of investments that mature in less than one year." At least three of Vanguard's assets meet this definition easily; they are "cash." Short-term bonds... maybe not.
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Re: Is Cash Trash? The Purpose of Cash

Post by tadamsmar » Wed Mar 07, 2018 8:04 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
Are you saying that the purpose of cash in a portfolio is waiting to be spent? How can that make sense? Most people have their portfolio in tax-deferred accounts where they face a penalty for spending it.

Malkiel recommend 5% cash (duration < 1.5 years) in a portfolio. Probably based on MPT analysis that is based (in part) on historical performance. There have periods when cash performs relatively well so it's reasonable to project that it can increase risk adjusted return.

The Vanguard Total Bond Market Fund holds some cash (at least 0.6%, maybe more, I can't find a specific breakdown for the <1.5 year duration). Are we suppose to avoid that fund? Do you hold that fund? Do you know how much of your portfolio is in cash?

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Re: Is Cash Trash? The Purpose of Cash

Post by tadamsmar » Wed Mar 07, 2018 9:40 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.
Nope, investments don't have to achieve a real rate of return.

They just have to interact with one's other investments to optimize your overall portfolio risk-adjusted return. They just have to perform well in relative terms under certain possible projected future conditions to optimize estimated risk-adjusted return.

Vanguard Target Retirement Income Fund (VTINX) looks to be at least 3% cash (1 year or less duration).

3% (not 0%) cash is apparently what the math says is required to optimize risk-adjusted return for VTINX.

I have my 90 year old MIL in VTINX. It performs as well as the annuity that she use to be in that was covering her broker's boat payments.

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Re: Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Wed Mar 07, 2018 10:57 pm

tadamsmar wrote:
Wed Mar 07, 2018 9:40 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.
Nope, investments don't have to achieve a real rate of return.

They just have to interact with one's other investments to optimize your overall portfolio risk-adjusted return. They just have to perform well in relative terms under certain possible projected future conditions to optimize estimated risk-adjusted return.
I disagree with your presumption that there is an optimal portfolio allocation that can be known in advance, or that investing in certain assets for the sole purpose of achieving a portfolio benefit with this supposed optimal allocation is prudent. That’s not what I believe and not the way I invest.

I have never recommended investing in anything that can only help a portfolio if it happens by chance to have low or negative correlation with the rest of the portfolio and because of this happens to provide a portfolio benefit net of fees. For example, I do not view commodities, gold, currencies or Bitcoin as investments that help a portfolio in the long term. You can put money there, but don’t expect to make money there.

I only recommend investing in assets that produce earnings, interest, rents or some other type of income. Call me old fashioned, but the value of any investment is the discounted value of its future cash flows. If it doesn’t create cash flow, it doesn’t produce a real return, and doesn’t go in my portfolio, and I don’t care what some acedemic study or textbook says to the contrary.
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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Wed Mar 07, 2018 11:26 pm

nisiprius wrote:
Wed Mar 07, 2018 8:03 pm
pascalwager wrote:
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.
I'm not sure what your point is, here. Rick Ferri gives a definition I think is very reasonable: "For the record, cash and cash equivalents are composed of investments that mature in less than one year." At least three of Vanguard's assets meet this definition easily; they are "cash." Short-term bonds... maybe not.
My point disappeared, somehow.

Vanguard is inconsistent in categorizing short-term bond funds. In some site areas they're called short-term reserves (see above), but in Portfolio Watch, my own Short-Term Bond Index holding is included under bonds and short-term reserves show zero percent.

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Re: Is Cash Trash? The Purpose of Cash

Post by Cycle » Wed Mar 07, 2018 11:29 pm

We keep 20k in our checking as our emergency fund, 1.7% of net worth. In case our car was to get totalled, we could immediately buy 3 more.

We get 2% on that 20k. We would probably have a smaller cash allocation if it weren't for the satisfactory interest rate on it.

Having cash temps one to market time, speculate, buy btc, DCA or other such nonsense

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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Wed Mar 07, 2018 11:40 pm

Rick Ferri wrote:
Wed Mar 07, 2018 6:15 pm
Cash and cash equalants mature in less than one year. Bonds that mature in 2 to 3 years are called notes.
Portfolio Charts site:

"Both stable and secure with interest rates usually slightly higher than Tbills, short term bonds are a common substitute for portfolio cash." He's referring to a fund composed of T-securities (probably bills and notes) with an overall maturity of 2 to 3 years.

Also, I think I recall you and Larry Swedroe both using short-term funds (DFA and VG) a few years ago for cash. One fund was the DFA Short-Term Extended Quality Portfolio (2.75 years duration).

But I'm content to use online bank savings, Treasury MM, or T-bills, myself.

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Re: Is Cash Trash? The Purpose of Cash

Post by WhyNotUs » Wed Mar 07, 2018 11:42 pm

Seems like a good start of a thread of investment aphorisms.
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Re: Is Cash Trash? The Purpose of Cash

Post by dkturner » Thu Mar 08, 2018 6:40 am

bradshaw1965 wrote:
Wed Mar 07, 2018 4:35 pm
abuss368 wrote:
Wed Mar 07, 2018 3:46 pm
bradshaw1965 wrote:
Wed Mar 07, 2018 2:53 pm
A little bit too much cash in checking because I don't want to pay fees, and they keep switching up the requirements, and why am I still at this awful mega-bank anyway.
Years ago I read an article where Vanguard was sending survey's inquiring and polling responses if they created a bank. Could you imagine a low cost, friendly shareholder owned bank. I would suspect it would be structured like a credit union.
That would be great. I absolutely know that I should be hitting escape velocity on my current setup, but the time and effort to get all of the inputs and outputs reconfigured make the switching costs so high, even with all the clear incentives in place.
Actually Vanguard has had a “bank” account of sorts for quite awhile - it’s called the Advantage Account. It has the following feature, that I’m aware of - there may be others: (1) no minimum balance requirements, (2) interest at Vanguard’s high money market fund rates, (3) unlimited checkwriting privileges with no minimum check amount, (4) online bill pay, (5) ability to have SS and pension payments directly deposited to the account and (6) ACH transfer capabilities between Vanguard and a local bank. For me that covers most of the bases, except for ATM access - and with ACH transfer one can arrange to have periodic transfers to a local bank for indirect ATM access. No loan products though.

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Re: Is Cash Trash? The Purpose of Cash

Post by Call_Me_Op » Thu Mar 08, 2018 8:14 am

Differentiating cash from bonds is really splitting hairs. I like 1 year t-bills right now. Over 2% yield and as safe and liquid as you can get. I use these instead of money market funds or short-term bond funds.
Last edited by Call_Me_Op on Thu Mar 08, 2018 8:18 am, edited 2 times in total.
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Re: Is Cash Trash? The Purpose of Cash

Post by westrichj312 » Thu Mar 08, 2018 8:17 am

I keep 25% of all assets in cash/ ST treasuries. Cash is and always will be king.

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Re: Is Cash Trash? The Purpose of Cash

Post by tadamsmar » Thu Mar 08, 2018 8:28 am

Rick Ferri wrote:
Wed Mar 07, 2018 10:57 pm
tadamsmar wrote:
Wed Mar 07, 2018 9:40 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.
Nope, investments don't have to achieve a real rate of return.

They just have to interact with one's other investments to optimize your overall portfolio risk-adjusted return. They just have to perform well in relative terms under certain possible projected future conditions to optimize estimated risk-adjusted return.
I disagree with your presumption that there is an optimal portfolio allocation that can be known in advance, or that investing in certain assets for the sole purpose of achieving a portfolio benefit with this supposed optimal allocation is prudent. That’s not what I believe and not the way I invest.

I have never recommended investing in anything that can only help a portfolio if it happens by chance to have low or negative correlation with the rest of the portfolio and because of this happens to provide a portfolio benefit net of fees. For example, I do not view commodities, gold, currencies or Bitcoin as investments that help a portfolio in the long term. You can put money there, but don’t expect to make money there.

I only recommend investing in assets that produce earnings, interest, rents or some other type of income. Call me old fashioned, but the value of any investment is the discounted value of its future cash flows. If it doesn’t create cash flow, it doesn’t produce a real return, and doesn’t go in my portfolio, and I don’t care what some acedemic study or textbook says to the contrary.
OK, the historical record shows that cash would have served a purpose. Denying that is not merely old fashioned.

You are perhaps on firmer ground denying that the future resembles the past. That's not merely old fashioned either.

You might be better off arguing that a 5% or 3% allocation to cash does not matter much even at low portfolio risk levels.
Last edited by tadamsmar on Thu Mar 08, 2018 9:48 am, edited 1 time in total.

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Re: Is Cash Trash? The Purpose of Cash

Post by KSOC » Thu Mar 08, 2018 8:46 am

dkturner wrote:
Thu Mar 08, 2018 6:40 am
bradshaw1965 wrote:
Wed Mar 07, 2018 4:35 pm
abuss368 wrote:
Wed Mar 07, 2018 3:46 pm
bradshaw1965 wrote:
Wed Mar 07, 2018 2:53 pm
A little bit too much cash in checking because I don't want to pay fees, and they keep switching up the requirements, and why am I still at this awful mega-bank anyway.
Years ago I read an article where Vanguard was sending survey's inquiring and polling responses if they created a bank. Could you imagine a low cost, friendly shareholder owned bank. I would suspect it would be structured like a credit union.
That would be great. I absolutely know that I should be hitting escape velocity on my current setup, but the time and effort to get all of the inputs and outputs reconfigured make the switching costs so high, even with all the clear incentives in place.
Actually Vanguard has had a “bank” account of sorts for quite awhile - it’s called the Advantage Account. It has the following feature, that I’m aware of - there may be others: (1) no minimum balance requirements, (2) interest at Vanguard’s high money market fund rates, (3) unlimited checkwriting privileges with no minimum check amount, (4) online bill pay, (5) ability to have SS and pension payments directly deposited to the account and (6) ACH transfer capabilities between Vanguard and a local bank. For me that covers most of the bases, except for ATM access - and with ACH transfer one can arrange to have periodic transfers to a local bank for indirect ATM access. No loan products though.
dkturner - Interesting. I did not know this. Thanks for sharing.
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Re: Is Cash Trash? The Purpose of Cash

Post by bradshaw1965 » Thu Mar 08, 2018 9:19 am

dkturner wrote:
Thu Mar 08, 2018 6:40 am
bradshaw1965 wrote:
Wed Mar 07, 2018 4:35 pm
abuss368 wrote:
Wed Mar 07, 2018 3:46 pm
bradshaw1965 wrote:
Wed Mar 07, 2018 2:53 pm
A little bit too much cash in checking because I don't want to pay fees, and they keep switching up the requirements, and why am I still at this awful mega-bank anyway.
Years ago I read an article where Vanguard was sending survey's inquiring and polling responses if they created a bank. Could you imagine a low cost, friendly shareholder owned bank. I would suspect it would be structured like a credit union.
That would be great. I absolutely know that I should be hitting escape velocity on my current setup, but the time and effort to get all of the inputs and outputs reconfigured make the switching costs so high, even with all the clear incentives in place.
Actually Vanguard has had a “bank” account of sorts for quite awhile - it’s called the Advantage Account. It has the following feature, that I’m aware of - there may be others: (1) no minimum balance requirements, (2) interest at Vanguard’s high money market fund rates, (3) unlimited checkwriting privileges with no minimum check amount, (4) online bill pay, (5) ability to have SS and pension payments directly deposited to the account and (6) ACH transfer capabilities between Vanguard and a local bank. For me that covers most of the bases, except for ATM access - and with ACH transfer one can arrange to have periodic transfers to a local bank for indirect ATM access. No loan products though.
Thanks for the heads up.

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Thu Mar 08, 2018 9:32 am

Call_Me_Op wrote:
Thu Mar 08, 2018 8:14 am
Differentiating cash from bonds is really splitting hairs. I like 1 year t-bills right now. Over 2% yield and as safe and liquid as you can get. I use these instead of money market funds or short-term bond funds.
I know what you mean but the statement can lead to confusion. We might avoid some of that confusion if we sticked to actual definitions of various US Treasury obligations.

From Treasury Direct:

Treasury bills are short-term securities maturing in one year or less. https://www.treasurydirect.gov/instit/m ... tbills.htm

Treasury notes are interest-bearing securities that have a fixed maturity of not less than 1 year and not more than 10 years from date of issue. https://www.treasurydirect.gov/instit/m ... tnotes.htm

Treasury bonds are interest-bearing securities with maturities over 10 years. https://www.treasurydirect.gov/instit/m ... tbonds.htm

One of the problems with these definitions is that when we say a bond has less than one year left to maturity it is considered "cash" by accounting standards.

Another problem is that we all use "bonds" to refer to any fixed income security regardless of its duration.
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Re: Is Cash Trash? The Purpose of Cash

Post by tadamsmar » Thu Mar 08, 2018 9:55 am

If we were in a period where we were moving toward stagflation (toward recession and increasing inflation), cash (short-term TIPs) would be king. Cash in a portfolio has a purpose, but perhaps it's not that useful.

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