Cash instead of bonds?

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DWesterb2iz2
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Cash instead of bonds?

Post by DWesterb2iz2 » Mon Apr 16, 2018 3:32 pm

I mentioned in another thread that I had lunch with a wealthy retired man whose investment advice for retirees was to buy the S&P 500 and keep two year's expenses in cash (money market). No other mutual funds or bonds. I don't know about the man's non-stockmarket investments, though I assume he has some.

I think it would be hard to handle this mentally. I think I'd need to have 3-4 years expenses in cash, and at that point it should probably be in bonds. I didn't ask about the mechanics of it, but I assume that the cash reserve would be used instead of withdrawing from the stock fund in a downturn year and that the cash fund would be replenished when the market recovered.

Does anyone know anyone else who invests this way? Any thoughts or feedback is welcome. Thank you.

snarlyjack
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Re: Cash instead of bonds?

Post by snarlyjack » Mon Apr 16, 2018 3:54 pm

DWesterb2iz2,

Welcome to Bogleheads.

I have read articles on the internet of people using
this strategy.

1). It is super low cost (ER).
2). The cash will cushion the S & P fund.
3). You can design your own AA, 80/20, 60/40. etc.

I have thought about this plan myself but chose to go
a bit different. But it's not a bad plan.

I hope my thoughts helped you...

Chuck
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Re: Cash instead of bonds?

Post by Chuck » Mon Apr 16, 2018 4:06 pm

That sounds like a fine plan.

A money market fund "feels" like cash, but it's actually bonds, although very short-term.

Vanguard's Prime MM is showing a 1.77% yield. Total bond market (what I assume when one says "bonds") yields 2.86%. So you're giving up yield to avoid volatility, but not tragically so.

On the other hand, if the rest of your money is in a 500 fund, you're already ok with volatility, so why not get the extra 1% by taking the bond fund?

Day9
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Re: Cash instead of bonds?

Post by Day9 » Mon Apr 16, 2018 4:11 pm

Very similar to Buffet's advice to his heirs or wife. Something like 90% in low cost S&P 500 fund, rest in T-Bills.

"Simplicity is the master key to financial success. When there are multiple solutions to a problem, choose the simplest one."
— Investing With Simplicity, John Bogle (http://www.vanguard.com/bogle_site/lib/sp19990130.html)
I'm just a fan of the person I got my user name from

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greg24
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Re: Cash instead of bonds?

Post by greg24 » Mon Apr 16, 2018 4:12 pm

Bonds and money market accounts both fall under the umbrella of "fixed income".

This is a fine plan, if you don't mind giving up yield for lack of volatility.

pascalwager
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Re: Cash instead of bonds?

Post by pascalwager » Mon Apr 16, 2018 6:10 pm

By buying the S&P 500 only, you're (currently) avoiding about 64% of world companies by capitalization. So you're making a bet on US large-cap out-performance. Do you specifically want to make such a bet? If not, then consider the VG Total World Stock Fund, or equivalent two-fund portfolio.

If you could lose your job in a recession, then a personal decision (single, married, children, etc) needs to be made about accumulating MM accounts, savings, and perhaps Treasury Direct bills and notes.

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whodidntante
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Re: Cash instead of bonds?

Post by whodidntante » Mon Apr 16, 2018 6:14 pm

Cash used to be taken seriously as an asset class and it was relatively common for fancy finance types to recommend you have some.

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Sandtrap
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Re: Cash instead of bonds?

Post by Sandtrap » Mon Apr 16, 2018 6:52 pm

DWesterb2iz2 wrote:
Mon Apr 16, 2018 3:32 pm
I mentioned in another thread that I had lunch with a wealthy retired man whose investment advice for retirees was to buy the S&P 500 and keep two year's expenses in cash (money market). No other mutual funds or bonds. I don't know about the man's non-stockmarket investments, though I assume he has some.

I think it would be hard to handle this mentally. I think I'd need to have 3-4 years expenses in cash, and at that point it should probably be in bonds. I didn't ask about the mechanics of it, but I assume that the cash reserve would be used instead of withdrawing from the stock fund in a downturn year and that the cash fund would be replenished when the market recovered.

Does anyone know anyone else who invests this way? Any thoughts or feedback is welcome. Thank you.
I have known quite a few senior business folks that have done this. Although the cash reserves were treated more as working capital for R/E investing and developing further income producing property.

aloha
j

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willthrill81
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Re: Cash instead of bonds?

Post by willthrill81 » Mon Apr 16, 2018 7:02 pm

I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

lostdog
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Re: Cash instead of bonds?

Post by lostdog » Mon Apr 16, 2018 7:04 pm

pascalwager wrote:
Mon Apr 16, 2018 6:10 pm
By buying the S&P 500 only, you're (currently) avoiding about 64% of world companies by capitalization. So you're making a bet on US large-cap out-performance. Do you specifically want to make such a bet? If not, then consider the VG Total World Stock Fund, or equivalent two-fund portfolio.

If you could lose your job in a recession, then a personal decision (single, married, children, etc) needs to be made about accumulating MM accounts, savings, and perhaps Treasury Direct bills and notes.
+1

Just replace the 500 fund with Total World. A couple years of cash in a Money Market fund and Total World. Simple.
Hear the clock ticking? That’s your life flying by while you listen to market pundits and watch stock prices fluctuate. -Humble Dollar

UpperNwGuy
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Re: Cash instead of bonds?

Post by UpperNwGuy » Mon Apr 16, 2018 7:08 pm

Cash instead of bonds? What about the impact of inflation upon the cash?

aristotelian
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Re: Cash instead of bonds?

Post by aristotelian » Mon Apr 16, 2018 7:08 pm

I think you are giving up too much return. This would be fine if you were 90/10 but otherwise that is a large portion of your portfolio losing to inflation. I like the simplicity but if you were in the typical 40/60 to 60/40 range, that is a lot of your portfolio with zero real return. You might consider a ladder of 5 year CDs to increase your return a bit.

mega317
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Re: Cash instead of bonds?

Post by mega317 » Mon Apr 16, 2018 7:14 pm

DWesterb2iz2 wrote:
Mon Apr 16, 2018 3:32 pm
I think I'd need to have 3-4 years expenses in cash, and at that point it should probably be in bonds.
OK but if you're retiring with a fairly typical 4% withdrawal rate, 25x expenses, then your asset allocation is 84/16 at retirement. Are you good with that?

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willthrill81
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Re: Cash instead of bonds?

Post by willthrill81 » Mon Apr 16, 2018 7:21 pm

UpperNwGuy wrote:
Mon Apr 16, 2018 7:08 pm
Cash instead of bonds? What about the impact of inflation upon the cash?
If by "cash" one means "T-Bills" or something similar, then historically you're unlikely to lag inflation by more than 1%, usually less in most time periods.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

gwrvmd
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Re: Cash instead of bonds?

Post by gwrvmd » Mon Apr 16, 2018 7:44 pm

I do exactly that. My asset allocation is 85% S&P 500 Index fund and 15% cash. Have done it all my life and I am 81
The Vanguard S&P 500 index fund (Investor shares VFINX) has returned 11.11% average total annual return since it was introduced in 1976, the past 42 years. Has your portfolio done better? If you have it in tax deferred it doubles every 6.5 years.
The most common criticism is there is no international. Well true but the US companies in the S&P 500 get 42.3% of their income from foreign sales. I am satisfied with that.

I didn't have a name for this type portfolio (some other people called it "Irrationally risky") but now it has a name, it's called Investing at Level 3 which is the name of the new book Investing at Level 3 by Jim Cloonan, the founder of AAII, the American Association of Individual Investors. The AAII group and local chapters are very much like Bogleheads..........Gordon
Disciple of John Neff

pascalwager
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Re: Cash instead of bonds?

Post by pascalwager » Mon Apr 16, 2018 9:30 pm

UpperNwGuy wrote:
Mon Apr 16, 2018 7:08 pm
Cash instead of bonds? What about the impact of inflation upon the cash?
Cash has the highest correlation to inflation of any asset, including TIPS. And there are long periods since 1972 when cash beat inflation.

gmaynardkrebs
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Re: Cash instead of bonds?

Post by gmaynardkrebs » Mon Apr 16, 2018 9:43 pm

Day9 wrote:
Mon Apr 16, 2018 4:11 pm
Very similar to Buffet's advice to his heirs or wife. Something like 90% in low cost S&P 500 fund, rest in T-Bills.
If I were his heir, I'd tell him to cram his stinkin' advice and leave me some serious dough.

banjo
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Re: Cash instead of bonds?

Post by banjo » Mon Apr 16, 2018 10:27 pm

Chuck wrote:
Mon Apr 16, 2018 4:06 pm
Vanguard's Prime MM is showing a 1.77% yield. Total bond market (what I assume when one says "bonds") yields 2.86%. So you're giving up yield to avoid volatility, but not tragically so.
I am confused. I just logged into my account, and the Vanguard Total Bond Market Index Fund Admiral Shares - VBTLX is showing me the fund average annual returns for 1 year as 1.11%. The Vanguard Prime Money Market Fund - VMMXX is showing the fund average annual returns for 1 year as 1.20%. What am I missing?

I am not sniping.... I am genuinely confused. Am I mis-interpreting the numbers at the Vanguard site? I ran the numbers myself based on the distributions I received over the past 12 months, and I got 2.63% and 1.18%, respectively. How are these yields being calculated?

Where did you get your numbers? I would like to know because I am facing the same issue right now, so I need to know what the real numbers are.

Thanks,
Banjo
(_)=='=~

NYCwriter
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Re: Cash instead of bonds?

Post by NYCwriter » Mon Apr 16, 2018 11:01 pm

That's actually my dream plan :) Like the other commenter mentioned, it's what Buffet offered, except for holding cash instead of bonds. For a retiree with sufficient wealth, it probably makes sense, especially in a rising interest rate environment.

One appeal is the tax simplification.

For those of us with a pension, 403b, 457b (or 401k), Roth, and taxable it's a bit trickier!

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Re: Cash instead of bonds?

Post by z3r0c00l » Mon Apr 16, 2018 11:14 pm

banjo wrote:
Mon Apr 16, 2018 10:27 pm

I am confused. I just logged into my account, and the Vanguard Total Bond Market Index Fund Admiral Shares - VBTLX is showing me the fund average annual returns for 1 year as 1.11%. The Vanguard Prime Money Market Fund - VMMXX is showing the fund average annual returns for 1 year as 1.20%. What am I missing?
You are confusing two different things, yield and return. Return for the bond fund is lower, despite a much higher yield, because rising interest rates cause the NAV to drop. So you get a capital loss in exchange for more interest every month. The yield is a good predictor of future returns but rising rates can eat away at it. The best argument for cash is that some people can't stomach these modest changes in bond funds. However they tend to ignore other, less visible ways to lose money in CDs and cash in rising interest rate/increasing inflation environments.

billfromct
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Re: Cash instead of bonds?

Post by billfromct » Mon Apr 16, 2018 11:22 pm

Banjo,

The bond fund total return includes interest income & bond mutual fund price change.

In a rising interest rate environment, as rates rise, the price of a bond falls. So in this case, you have a gain due to your interest return & a loss from the decrease in the bond fund price. You need to look at the bond fund "duration"; that is the mutual fund % price change if interest rates change by 1%.

If a short term bond fund has a "duration" of 2.5 and interest rates increase 1%, the bond fund price will go down 2.5%. If interest rates go down 1%, the value of the bond fund will increase by 2.5%. Interest rates have an inverse effect on the price of a bond or bond fund.

You need to understand how the change in interest rates (duration) will affect your bond mutual fund.

*****

Comment to the original post.

In my retirement accounts, I have about 10 years of my work salary in fixed income. Fixed income is about 39% & stocks are about 61% of my retirement account. My 10 years of salary (retirement accounts) in fixed income:
-3 years in money market (0 duration)
-2 years in short term bonds (2.8 duration)
-5 years in intermediate bonds (4.4 duration)

Since most stock market cycles last 5-7 years & 10 years of my work salary is in bonds, I feel I can ride out any stock market correction or bear market without selling stocks at the bottom of a bear market in my retirement accounts.

Once I start taking required minimum distributions (RMDs) at age 70 (next year), I will take my annual RMD from my MM or short term bond fund depending on interest rate stability at the time.

bill

PFInterest
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Re: Cash instead of bonds?

Post by PFInterest » Tue Apr 17, 2018 12:01 am

DWesterb2iz2 wrote:
Mon Apr 16, 2018 3:32 pm
I mentioned in another thread that I had lunch with a wealthy retired man whose investment advice for retirees was to buy the S&P 500 and keep two year's expenses in cash (money market). No other mutual funds or bonds. I don't know about the man's non-stockmarket investments, though I assume he has some.

I think it would be hard to handle this mentally. I think I'd need to have 3-4 years expenses in cash, and at that point it should probably be in bonds. I didn't ask about the mechanics of it, but I assume that the cash reserve would be used instead of withdrawing from the stock fund in a downturn year and that the cash fund would be replenished when the market recovered.

Does anyone know anyone else who invests this way? Any thoughts or feedback is welcome. Thank you.
You realize he's just quoting buffet....

gmaynardkrebs
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Re: Cash instead of bonds?

Post by gmaynardkrebs » Tue Apr 17, 2018 6:59 am

I wonder if the Sage of Omaha recognizes that the S&P500 is not the same as an FDIC-insured bank account.

banjo
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Re: Cash instead of bonds?

Post by banjo » Tue Apr 17, 2018 7:22 am

You are confusing two different things, yield and return. Return for the bond fund is lower, despite a much higher yield, because rising interest rates cause the NAV to drop. So you get a capital loss in exchange for more interest every month. The yield is a good predictor of future returns but rising rates can eat away at it. The best argument for cash is that some people can't stomach these modest changes in bond funds. However they tend to ignore other, less visible ways to lose money in CDs and cash in rising interest rate/increasing inflation environments.
Thanks for the clarification. I did miss that subtle difference in the terminology there.

Back to the OP's original question then. To answer the question "Cash vs. Bonds", would it not be a better choice to compare the return instead of the yield since return is what really comes back to the investor? Right now the return on the Money Market is slightly better than the return on the bonds, and with negligible risk of capital loss. Given that the Fed is in the mood to raise interest rates, I suspect that the capital losses on the bonds will continue for some time, keeping the return low.

I am considering putting the $$$ into the Money Market for a while to wait for the bonds to settle down.

However, I am already retired, so "long term" is not all that long anymore. The time horizon is an important input to the decision.

Iliketoridemybike
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Re: Cash instead of bonds?

Post by Iliketoridemybike » Tue Apr 17, 2018 7:28 am

willthrill81 wrote:
Mon Apr 16, 2018 7:02 pm
I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.

gmaynardkrebs
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Re: Cash instead of bonds?

Post by gmaynardkrebs » Tue Apr 17, 2018 8:13 am

Iliketoridemybike wrote:
Tue Apr 17, 2018 7:28 am
willthrill81 wrote:
Mon Apr 16, 2018 7:02 pm
I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.
The worst recent case I can think of is Japan at the peak of the bubble, where such a strategy would be seem to be the polar opposite of "not so bad," i.e., "disastrous." Buffet's embedded assumption is that the S&P 500 is a "safe" investment over the long run, which is what he believes based on his rah rah faith in American business. Had I made the billions he has, I'd probably feel the exact same way. But maybe I'd be less prone to pontificate to the non-billionaires in the room.

scone
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Re: Cash instead of bonds?

Post by scone » Tue Apr 17, 2018 8:20 am

Make sure you look at the ER in money market funds, some are surprisingly expensive. Personally I would only use a Treasury money market fund, or a bank CD, for short term "safe money."
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore

onourway
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Re: Cash instead of bonds?

Post by onourway » Tue Apr 17, 2018 8:35 am

banjo wrote:
Tue Apr 17, 2018 7:22 am

Thanks for the clarification. I did miss that subtle difference in the terminology there.

Back to the OP's original question then. To answer the question "Cash vs. Bonds", would it not be a better choice to compare the return instead of the yield since return is what really comes back to the investor? Right now the return on the Money Market is slightly better than the return on the bonds, and with negligible risk of capital loss. Given that the Fed is in the mood to raise interest rates, I suspect that the capital losses on the bonds will continue for some time, keeping the return low.

I am considering putting the $$$ into the Money Market for a while to wait for the bonds to settle down.

However, I am already retired, so "long term" is not all that long anymore. The time horizon is an important input to the decision.
This is a short-term point of view. In the original post you replied to it was mentioned that you trade off yield for volatility. What you are seeing right now in bonds is that volatility. Because the value of the bonds you purchase are based on changes in interest rates, you will see your account value vary up and down - that's volatility. Over time, however, that increased yield will produce larger returns.

Since interest rates have risen and bond prices have fallen, now is the time to be buying bonds, not selling them.

onourway
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Re: Cash instead of bonds?

Post by onourway » Tue Apr 17, 2018 8:35 am

scone wrote:
Tue Apr 17, 2018 8:20 am
Make sure you look at the ER in money market funds, some are surprisingly expensive. Personally I would only use a Treasury money market fund, or a bank CD, for short term "safe money."
The quoted yield includes the expense ratio.

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willthrill81
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Re: Cash instead of bonds?

Post by willthrill81 » Tue Apr 17, 2018 9:46 am

Iliketoridemybike wrote:
Tue Apr 17, 2018 7:28 am
willthrill81 wrote:
Mon Apr 16, 2018 7:02 pm
I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.
That still doesn't answer my questions. When do you deplete your cash reserves? When do you replenish you cash reserves?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

banjo
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Re: Cash instead of bonds?

Post by banjo » Tue Apr 17, 2018 9:50 am

onourway wrote:
Tue Apr 17, 2018 8:35 am

This is a short-term point of view. In the original post you replied to it was mentioned that you trade off yield for volatility. What you are seeing right now in bonds is that volatility. Because the value of the bonds you purchase are based on changes in interest rates, you will see your account value vary up and down - that's volatility. Over time, however, that increased yield will produce larger returns.

Since interest rates have risen and bond prices have fallen, now is the time to be buying bonds, not selling them.
So, given the spread between 1.11% for the bonds and 1.20% for Money Market (0.09%) , it might make sense to buy the bonds for the better future upside in yield.... in exchange for very little upside in the return from the MM . This is making my brain hurt. I am back on the fence.

Jack FFR1846
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Re: Cash instead of bonds?

Post by Jack FFR1846 » Tue Apr 17, 2018 9:55 am

I think the key is the "wealthy man". Where it's pretty common for Bogleheads to target 25 to 50 times spending, if one is wealthy enough to have 500 time spending sitting in investments, one's strategy can accept far more volatility.
Bogle: Smart Beta is stupid

Chuck
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Re: Cash instead of bonds?

Post by Chuck » Tue Apr 17, 2018 10:14 am

PFInterest wrote:
Tue Apr 17, 2018 12:01 am
DWesterb2iz2 wrote:
Mon Apr 16, 2018 3:32 pm
I mentioned in another thread that I had lunch with a wealthy retired man whose investment advice for retirees was to buy the S&P 500 and keep two year's expenses in cash (money market). No other mutual funds or bonds. I don't know about the man's non-stockmarket investments, though I assume he has some.
You realize he's just quoting buffet....
Maybe he inadvertently sat next to Buffett at the diner, and didn't recognize him.

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DWesterb2iz2
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Re: Cash instead of bonds?

Post by DWesterb2iz2 » Tue Apr 17, 2018 11:17 am

Chuck wrote:
Tue Apr 17, 2018 10:14 am
PFInterest wrote:
Tue Apr 17, 2018 12:01 am
DWesterb2iz2 wrote:
Mon Apr 16, 2018 3:32 pm
I mentioned in another thread that I had lunch with a wealthy retired man whose investment advice for retirees was to buy the S&P 500 and keep two year's expenses in cash (money market). No other mutual funds or bonds. I don't know about the man's non-stockmarket investments, though I assume he has some.
You realize he's just quoting buffet....
Maybe he inadvertently sat next to Buffett at the diner, and didn't recognize him.
haha. No, it wasn't Buffett, and he was no billionaire, but he was very well off and said he used this strategy for a long time.

RAchip
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Re: Cash instead of bonds?

Post by RAchip » Tue Apr 17, 2018 11:39 am

willthrill81 wrote:
Tue Apr 17, 2018 9:46 am
Iliketoridemybike wrote:
Tue Apr 17, 2018 7:28 am
willthrill81 wrote:
Mon Apr 16, 2018 7:02 pm
I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.
That still doesn't answer my questions. When do you deplete your cash reserves? When do you replenish you cash reserves?

It depends on your situation. You can take the dividends in cash. Thats about 2% of what you have in the S&P fund. So you are constantly adding to your cash account quarterly. In a down year, maybe take 50% of your spending from the MM and 50% from the S&P. Or maybe 25/75. In good years take 150% of your spending out of the S&P and replenish the cash. Another approach if you have a lot of money might be that unless something very very unusual happens just take 100% of your spending from the S&P fund. Under that approach the cash is there only in case someinf totaly unforeseeable happens.

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willthrill81
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Re: Cash instead of bonds?

Post by willthrill81 » Tue Apr 17, 2018 12:04 pm

RAchip wrote:
Tue Apr 17, 2018 11:39 am
willthrill81 wrote:
Tue Apr 17, 2018 9:46 am
Iliketoridemybike wrote:
Tue Apr 17, 2018 7:28 am
willthrill81 wrote:
Mon Apr 16, 2018 7:02 pm
I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.
That still doesn't answer my questions. When do you deplete your cash reserves? When do you replenish you cash reserves?

It depends on your situation. You can take the dividends in cash. Thats about 2% of what you have in the S&P fund. So you are constantly adding to your cash account quarterly. In a down year, maybe take 50% of your spending from the MM and 50% from the S&P. Or maybe 25/75. In good years take 150% of your spending out of the S&P and replenish the cash. Another approach if you have a lot of money might be that unless something very very unusual happens just take 100% of your spending from the S&P fund. Under that approach the cash is there only in case someinf totaly unforeseeable happens.
How do you determine what percentage to take from your cash reserves? How do you determine what is a 'good year'? The devil is in the details. For many employing this 'strategy', it seems that they may be just flying by the seat of their pants.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

RAchip
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Re: Cash instead of bonds?

Post by RAchip » Tue Apr 17, 2018 1:24 pm

"How do you determine what percentage to take from your cash reserves?"

Again, I think it depends on your situation. Lets say you need $100k per year to cover expenses and you have a total portfolio of $3mm. So you have $2.8mm in and S&P fund and $200k in a MMF. The dividends from your S&P fund will be about $56k/year. I would take the balance that you need from the S&P fund as your normal course. In particularly bad years you can decide to draw down some of the cash.

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JoMoney
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Re: Cash instead of bonds?

Post by JoMoney » Tue Apr 17, 2018 1:42 pm

As others mentioned, that is essentially the advice given by Warren Buffett.
I invest that way (+ some Savings Bonds).
... but I'm not retired either, I might want a little more fixed income when I'm drawing on it (or maybe not if I'm collecting pension and social security, depending on how much of my expenses that covers).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Iliketoridemybike
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Re: Cash instead of bonds?

Post by Iliketoridemybike » Tue Apr 17, 2018 4:20 pm

willthrill81 wrote:
Tue Apr 17, 2018 9:46 am
Iliketoridemybike wrote:
Tue Apr 17, 2018 7:28 am
willthrill81 wrote:
Mon Apr 16, 2018 7:02 pm
I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.
That still doesn't answer my questions. When do you deplete your cash reserves? When do you replenish you cash reserves?
When you run out of money and you need more? I mean its not that hard to figure out, no?

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willthrill81
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Re: Cash instead of bonds?

Post by willthrill81 » Tue Apr 17, 2018 5:16 pm

Iliketoridemybike wrote:
Tue Apr 17, 2018 4:20 pm
willthrill81 wrote:
Tue Apr 17, 2018 9:46 am
Iliketoridemybike wrote:
Tue Apr 17, 2018 7:28 am
willthrill81 wrote:
Mon Apr 16, 2018 7:02 pm
I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.
That still doesn't answer my questions. When do you deplete your cash reserves? When do you replenish you cash reserves?
When you run out of money and you need more? I mean its not that hard to figure out, no?
Specifically, when you will you sell equities vs. your cash? When equities were up? Over what time frame? The last month, quarter, year? When will you begin replenishing a depleted cash reserve? When stocks are up from the trough, when they're back up to where they were before, or somewhere else?

People think this 'stock and cash' strategy is very easy to implement, but it's not. There are countless ways to implement this, and that opens Pandora's box for a whole host of behavioral problems to occur.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Cash instead of bonds?

Post by munemaker » Tue Apr 17, 2018 5:25 pm

Chuck wrote:
Mon Apr 16, 2018 4:06 pm
That sounds like a fine plan.

Vanguard's Prime MM is showing a 1.77% yield. Total bond market (what I assume when one says "bonds") yields 2.86%. ... so why not get the extra 1% by taking the bond fund?
Here's one reason: What you actually receive with the bond fund is the total return, not just the yield. In a rising interest rate environment, the value of the bond fund goes down which partially offsets the yield. With the money market fund, you actually receive the yield as the price is fixed.

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Re: Cash instead of bonds?

Post by Iliketoridemybike » Tue Apr 17, 2018 6:21 pm

willthrill81 wrote:
Tue Apr 17, 2018 5:16 pm
Iliketoridemybike wrote:
Tue Apr 17, 2018 4:20 pm
willthrill81 wrote:
Tue Apr 17, 2018 9:46 am
Iliketoridemybike wrote:
Tue Apr 17, 2018 7:28 am
willthrill81 wrote:
Mon Apr 16, 2018 7:02 pm
I can see this strategy working fine for most periods, but what if stocks lose money for a decade, like 2000-2009? When do you deplete your cash reserves? When do you replenish them? These are important details that are rarely provided by those espousing this strategy, probably because they often haven't thought about how to accomplish them.
Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.
That still doesn't answer my questions. When do you deplete your cash reserves? When do you replenish you cash reserves?
When you run out of money and you need more? I mean its not that hard to figure out, no?
Specifically, when you will you sell equities vs. your cash? When equities were up? Over what time frame? The last month, quarter, year? When will you begin replenishing a depleted cash reserve? When stocks are up from the trough, when they're back up to where they were before, or somewhere else?

People think this 'stock and cash' strategy is very easy to implement, but it's not. There are countless ways to implement this, and that opens Pandora's box for a whole host of behavioral problems to occur.
You are searching for a “right” answer. There isn’t one. There are just ways to manage it, just like most financial plans. Don’t let a perfect plan get in the way of a very good one.

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Re: Cash instead of bonds?

Post by willthrill81 » Tue Apr 17, 2018 6:30 pm

Iliketoridemybike wrote:
Tue Apr 17, 2018 6:21 pm
willthrill81 wrote:
Tue Apr 17, 2018 5:16 pm
Iliketoridemybike wrote:
Tue Apr 17, 2018 4:20 pm
willthrill81 wrote:
Tue Apr 17, 2018 9:46 am
Iliketoridemybike wrote:
Tue Apr 17, 2018 7:28 am


Then you sell some equities when the market is down. You will either incur a cap gain or a tax loss. Nothing horribly wrong with either one. When you consider the worst case, the strategy doesn’t seem so bad.
That still doesn't answer my questions. When do you deplete your cash reserves? When do you replenish you cash reserves?
When you run out of money and you need more? I mean its not that hard to figure out, no?
Specifically, when you will you sell equities vs. your cash? When equities were up? Over what time frame? The last month, quarter, year? When will you begin replenishing a depleted cash reserve? When stocks are up from the trough, when they're back up to where they were before, or somewhere else?

People think this 'stock and cash' strategy is very easy to implement, but it's not. There are countless ways to implement this, and that opens Pandora's box for a whole host of behavioral problems to occur.
You are searching for a “right” answer. There isn’t one. There are just ways to manage it, just like most financial plans. Don’t let a perfect plan get in the way of a very good one.
I'm not looking for a perfect answer; I'm just looking for an answer, a specific one with details. Details matter. 'Winging it' is not much of a plan.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Iliketoridemybike
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Re: Cash instead of bonds?

Post by Iliketoridemybike » Tue Apr 17, 2018 6:52 pm

willthrill81 wrote:
Tue Apr 17, 2018 6:30 pm
Iliketoridemybike wrote:
Tue Apr 17, 2018 6:21 pm
willthrill81 wrote:
Tue Apr 17, 2018 5:16 pm
Iliketoridemybike wrote:
Tue Apr 17, 2018 4:20 pm
willthrill81 wrote:
Tue Apr 17, 2018 9:46 am


That still doesn't answer my questions. When do you deplete your cash reserves? When do you replenish you cash reserves?
When you run out of money and you need more? I mean its not that hard to figure out, no?
Specifically, when you will you sell equities vs. your cash? When equities were up? Over what time frame? The last month, quarter, year? When will you begin replenishing a depleted cash reserve? When stocks are up from the trough, when they're back up to where they were before, or somewhere else?

People think this 'stock and cash' strategy is very easy to implement, but it's not. There are countless ways to implement this, and that opens Pandora's box for a whole host of behavioral problems to occur.
You are searching for a “right” answer. There isn’t one. There are just ways to manage it, just like most financial plans. Don’t let a perfect plan get in the way of a very good one.
I'm not looking for a perfect answer; I'm just looking for an answer, a specific one with details. Details matter. 'Winging it' is not much of a plan.
When cash = 0, sell equities.

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willthrill81
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Re: Cash instead of bonds?

Post by willthrill81 » Tue Apr 17, 2018 7:00 pm

Iliketoridemybike wrote:
Tue Apr 17, 2018 6:52 pm
willthrill81 wrote:
Tue Apr 17, 2018 6:30 pm
Iliketoridemybike wrote:
Tue Apr 17, 2018 6:21 pm
willthrill81 wrote:
Tue Apr 17, 2018 5:16 pm
Iliketoridemybike wrote:
Tue Apr 17, 2018 4:20 pm


When you run out of money and you need more? I mean its not that hard to figure out, no?
Specifically, when you will you sell equities vs. your cash? When equities were up? Over what time frame? The last month, quarter, year? When will you begin replenishing a depleted cash reserve? When stocks are up from the trough, when they're back up to where they were before, or somewhere else?

People think this 'stock and cash' strategy is very easy to implement, but it's not. There are countless ways to implement this, and that opens Pandora's box for a whole host of behavioral problems to occur.
You are searching for a “right” answer. There isn’t one. There are just ways to manage it, just like most financial plans. Don’t let a perfect plan get in the way of a very good one.
I'm not looking for a perfect answer; I'm just looking for an answer, a specific one with details. Details matter. 'Winging it' is not much of a plan.
When cash = 0, sell equities.
1. When do you spend cash instead of selling equities?
2. When do you replenish your cash supply?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Cash instead of bonds?

Post by Thesaints » Tue Apr 17, 2018 7:21 pm

cash IS bonds

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Re: Cash instead of bonds?

Post by LadyGeek » Tue Apr 17, 2018 7:58 pm

I removed an off-topic post. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
Please stay on-topic.
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jpsc
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Re: Cash instead of bonds?

Post by jpsc » Tue Apr 17, 2018 8:44 pm

Why not just buy a 2 years Treasury, or a 5 years TIPS?
staying in cash, and have inflation eating at your money is just bad.

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Re: Cash instead of bonds?

Post by willthrill81 » Tue Apr 17, 2018 8:46 pm

jpsc wrote:
Tue Apr 17, 2018 8:44 pm
Why not just buy a 2 years Treasury, or a 5 years TIPS?
staying in cash, and have inflation eating at your money is just bad.
Surprisingly, T-bills have rarely lagged the current inflation rate by more than 1%. Their long-term real return has actually been around 1%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Cash instead of bonds?

Post by MrPotatoHead » Tue Apr 17, 2018 9:21 pm

I would suggest that his advice makes more or less sense when taken in context of what percent your annual expense are of your total investable assets. In other words, if your annual expenses are 1-2% of your total investment portfolio, heck yeah this will work. On the other hand if two years of expenses is half your investment portfolio, maybe rethink it a bit.

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