Cash in lieu of bonds

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50ismygoal
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Cash in lieu of bonds

Post by 50ismygoal »

This link was on a post from ScubaHog on another thread. I guess this is why I sold much of my bond funds (BIV and BSV) and put that money into Ally and Vanguard MM accounts. This paper tells me there’s not much risk to that type of move. What do you think?

https://portfoliocharts.com/2017/05/12/ ... -investor/
tibbitts
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Re: Cash in lieu of bonds

Post by tibbitts »

50ismygoal wrote: Wed Jun 17, 2020 10:01 am This link was on a post from ScubaHog on another thread. I guess this is why I sold much of my bond funds (BIV and BSV) and put that money into Ally and Vanguard MM accounts. This paper tells me there’s not much risk to that type of move. What do you think?

https://portfoliocharts.com/2017/05/12/ ... -investor/
I think most Bogleheads have regarded short or intermediate bonds, stable value, CDs, and high-yield savings as pretty close to interchangeable for a while now. Of course Bogleheads have also evolved to recommend lower and lower allocations of fixed income in portfolios so it also matters less for that reason.
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50ismygoal
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Re: Cash in lieu of bonds

Post by 50ismygoal »

Tibbits, I see a lot of posters suggesting moving from bond funds to “cash” is a mistake, but this paper really explains why “cash” might be a good move for those of us who don’t want our principal to drop, even temporarily, on the “safe” side of our asset allocation.
sycamore
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Re: Cash in lieu of bonds

Post by sycamore »

Nothing wrong with holding some of fixed income in "cash" for expected short-term spending needs, say in the next year or two.

But with many money market and regular savings accounts and short-term bond funds yielding next-to-nothing, I find shifting into them isn't such a good deal. Better to look for good deals on CDs and for bank/brokerage sign-up bonuses that effectively provide a decent return.

I haven't and don't plan to shift completely out of intermediate or long term bonds. That's primarily because I still have a long-term investing horizon.
Robot Monster
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Re: Cash in lieu of bonds

Post by Robot Monster »

I have the majority of my portfolio in cash. I fear two things:
1. Negative interest rates on money markets.
2. The Fed letting inflation shoot above the 2% target while keeping rates at zero or below.

I have about 12% of my portfolio in TIPS that could (will?) do better than cash under the above conditions.
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Rudedog
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Re: Cash in lieu of bonds

Post by Rudedog »

I've set up CD ladder. The rates are barely over 1 %, but I want to protect my principal.
MathWizard
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Re: Cash in lieu of bonds

Post by MathWizard »

Right now upping your cash cushion is not imprudent, but I would not move all my bonds
to cash. Bonds still earn better than cash over long periods of time.
I have about 5% in cash right now, close to 18 months expenses, which is
much more than I have had for along time, but the rest is invested 60/40.
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anon_investor
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Re: Cash in lieu of bonds

Post by anon_investor »

If the money is for the long term and is in a taxable account Series I and EE US Savings Bonds look good right now, better than cash.

https://www.bogleheads.org/wiki/I_savings_bonds
https://www.bogleheads.org/wiki/EE_savings_bonds
delamer
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Re: Cash in lieu of bonds

Post by delamer »

Consider this from Bill Bernstein, in response to a question on his clients’ allocation:

Dr. William Bernstein: Well, I try not to talk too much about what we do with clients--it's just a confidentiality and a privacy matter. But I've always felt that people should be taking risks on the stock side and not on the bond side. At the end of the day, there are really only two assets. There are risky assets and there are riskless assets, and then there is an exchange rate between them.
KlangFool
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Re: Cash in lieu of bonds

Post by KlangFool »

50ismygoal wrote: Wed Jun 17, 2020 10:27 am Tibbits, I see a lot of posters suggesting moving from bond funds to “cash” is a mistake, but this paper really explains why “cash” might be a good move for those of us who don’t want our principal to drop, even temporarily, on the “safe” side of our asset allocation.
50ismygoal,

That is why you have an emergency fund.

CASH and Bond are two separate asset classes. Instead of 3 baskets: CASH, Bond, and the stock, you are only having 2 baskets: cash and stock.

Why is it safer to have your eggs in 2 baskets instead of 3 baskets? Can you predict the future?

I know that I know nothing. I put my money (eggs) into many baskets.

KlangFool
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Archean
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Re: Cash in lieu of bonds

Post by Archean »

We match our FI duration/maturity to our liabilities, so have cash for expenses over the next several years in CDs or varying maturity, as well as longer-term bond fund. So, the multiple buckets as KlangFool just noted.

For cash, a very nice deal was had from our Credit Union in March, where you could purchase a "smart-saver" CD for a low initial investment and lock in the rate (was 2% at the time for 30 mo), and then have the option to add to it later (up to $100K for each CD). This seems like a really nice flexibility option, so I bought three of these and can eventually fill up to $300K this way if the opportunity arises.
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1789
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Re: Cash in lieu of bonds

Post by 1789 »

This may not be a logical thing but the way i separate three in my head is
CASH: Short term needs up-to a year or two
BONDS: Intermediate term needs
STOCKS: Long term needs
So ideally, it is best to have all three in a portfolio.
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123
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Re: Cash in lieu of bonds

Post by 123 »

Bonds have historically been seen as a long term stabilizing influence on a portfolio. However with the historically low rates now available, in view of the higher rates in the recent past, it would seem that any significant rise in rates could significantly diminish the value of bonds being held. Accordingly using cash (CDs, MMF, etc) does appear to be a reasonable alternative.
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Re: Cash in lieu of bonds

Post by abuss368 »

50ismygoal wrote: Wed Jun 17, 2020 10:01 am This link was on a post from ScubaHog on another thread. I guess this is why I sold much of my bond funds (BIV and BSV) and put that money into Ally and Vanguard MM accounts. This paper tells me there’s not much risk to that type of move. What do you think?

https://portfoliocharts.com/2017/05/12/ ... -investor/
I have read about a Bond “crash” since the financial crisis. I have collected a lot of dividends since then.

The correct answer is to do what makes you sleep best at night.
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Topic Author
50ismygoal
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Re: Cash in lieu of bonds

Post by 50ismygoal »

Another thing I should have put in my original post, I’m retired and plan on withdrawing a fixed percentage from my portfolio, so a drop in principal, even if it will come back as interest rates change, is something I want to avoid. If my stocks drop, I’d really hate to watch my bonds drop right along with them.
columbia
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Re: Cash in lieu of bonds

Post by columbia »

My take:

Cash/money market/CDs
Stable value
Treasuries
Corporates
Munis
TIPS

- all/any of the above at whatever duration:

They’re all great. The idea that anyone needs to invest in any of those at a certain duration, as opposed to another at perhaps a different duration is pure poppycock. Every investor’s needs, risk tolerance and preferences are different: find what makes sense for you and - above all - avoid shyster financial advisors and/or strangers on the Internet telling you what you supposedly need to do.

You’ll know what’s right *you*.
KlangFool
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Re: Cash in lieu of bonds

Post by KlangFool »

50ismygoal wrote: Wed Jun 17, 2020 6:39 pm Another thing I should have put in my original post, I’m retired and plan on withdrawing a fixed percentage from my portfolio, so a drop in principal, even if it will come back as interest rates change, is something I want to avoid. If my stocks drop, I’d really hate to watch my bonds drop right along with them.
50ismygoal,

And, to avoid that you keep enough CASH. That still does not change the need for the BOND. As for the interest rate changes, it affects the BOND and the STOCK differently. Hence, you need both of them.

<<If my stocks drop, I’d really hate to watch my bonds drop right along with them.>>

The BOND is beating the STOCK this year. Without the BOND, your portfolio will lose even more money. CASH does not help at all.

It is very simple.

You assume that you know how the interest rate will change. Aka, it will only go up. How do you know that?

I know that I know nothing. Hence, I have money in 3 baskets. And, with DIVERSIFICATION, you will always have something does badly.

Why do you think that

A) Assuming that you know how the interest rate will move

B) Keeping money in 2 baskets instead of 3 baskets

are safer? This does not pass the common sense test.

KlangFool
Ferdinand2014
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Re: Cash in lieu of bonds

Post by Ferdinand2014 »

I listened to some guy in Omaha and keep T-bills(cash) enough to sleep well and a low cost S&P 500 fund. That’s it. Cash (t-bills) historically protects against inflation, deflation and provides safety and liquidity. I do not keep any other fixed investments and am very happy.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
andrew99999
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Re: Cash in lieu of bonds

Post by andrew99999 »

Interesting article.

Between these 2 options (first being barbelled)
• 50% money market + 50% 12 year govt bonds
• 100% in 6 year govt bonds

Can someone smarter than myself tell me
1. Are these considered roughly equally in terms of risk and return and if not, what would be; and
2. Are there any downsides to barrelling - ie the first option ?
IndexCore
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Re: Cash in lieu of bonds

Post by IndexCore »

50ismygoal wrote: Wed Jun 17, 2020 6:39 pm Another thing I should have put in my original post, I’m retired and plan on withdrawing a fixed percentage from my portfolio, so a drop in principal, even if it will come back as interest rates change, is something I want to avoid. If my stocks drop, I’d really hate to watch my bonds drop right along with them.
Most of your return will come from stocks, so bonds vs cash might not matter too much. If your plan is to hold cash until the Fed raises rates, then I'd agree with you. Right now, bonds don't yield much.

I prefer the approach of keeping some number of months/years in cash as an emergency fund, and not even considering it part of my portfolio. That also means you can invest whatever you find in your brokerage account, knowing it won't impact your emergency fund - they're separated (emergency fund at banks, for example).
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50ismygoal
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Re: Cash in lieu of bonds

Post by 50ismygoal »

IndexCore, you got to the core of my question/point, which is over the difference between having “safe” money in bonds v cash. I just don’t think it matters. Thanks.
sycamore
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Re: Cash in lieu of bonds

Post by sycamore »

andrew99999 wrote: Thu Jun 18, 2020 1:48 am
Interesting article.

Between these 2 options (first being barbelled)
• 50% money market + 50% 12 year govt bonds
• 100% in 6 year govt bonds

Can someone smarter than myself tell me
1. Are these considered roughly equally in terms of risk and return and if not, what would be; and
2. Are there any downsides to barrelling - ie the first option ?
Depends on what your goal is for those funds. If it's for an emergency fund option 1 is better I'd say because at least the MMF will be safe in terms of providing a certain (if nominal) return of principal. Ditto if the money is intended for short-term funds like a house down payment in a couple of years.

But if it's for general purpose fixed income in your retirement portfolio to be consumed years down the road, I think they're roughly the same. One could ask about whether the MMF owns govt versus corp paper (Fedaral vs Prime) but regardless the two options have about the same duration risk.

We won't know which has the better return until after the fact. If rates rise more at the long end of the rate spectrum, option 2 would take a bigger initial hit but eventually should return more over time. You can play the "what if" game with rates all day and find problems with either or both options.
tommyt
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Re: Cash in lieu of bonds

Post by tommyt »

For anyone considering moving their bond allocation over to cash, I'd suggest reading this great post from vineviz on de-risking vs diversification: viewtopic.php?t=285269#p4633572

The bottom line is that you are giving up the free lunch of diversification by throwing your bonds out for cash. If you want to hold more cash and less bonds, consider barbelling your bonds allocation 2/3 cash, and 1/3 long term treasuries. This will allow you to hold cash in higher yielding HYSA accounts, and also allow you to achieve similar diversification benefits to an intermediate term bond fund.
J295
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Re: Cash in lieu of bonds

Post by J295 »

For us .... cash and bonds

Not ... cash or bonds
ScubaHogg
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Re: Cash in lieu of bonds

Post by ScubaHogg »

In the article tyler9000 talk about cash (ie, tbills or the like) as a complement to a stock/bond portfolio. He also addresses the fallacy that cash has lost bad in rising interest rates and inflationary environments. Nowhere in there did he say totally dump bonds.

(Just clarifying what the article said)
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andrew99999
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Re: Cash in lieu of bonds

Post by andrew99999 »

sycamore wrote: Thu Jun 18, 2020 6:03 am
andrew99999 wrote: Thu Jun 18, 2020 1:48 am
Interesting article.

Between these 2 options (first being barbelled)
• 50% money market + 50% 12 year govt bonds
• 100% in 6 year govt bonds

Can someone smarter than myself tell me
1. Are these considered roughly equally in terms of risk and return and if not, what would be; and
2. Are there any downsides to barrelling - ie the first option ?
Depends on what your goal is for those funds. If it's for an emergency fund option 1 is better I'd say because at least the MMF will be safe in terms of providing a certain (if nominal) return of principal. Ditto if the money is intended for short-term funds like a house down payment in a couple of years.

But if it's for general purpose fixed income in your retirement portfolio to be consumed years down the road, I think they're roughly the same. One could ask about whether the MMF owns govt versus corp paper (Fedaral vs Prime) but regardless the two options have about the same duration risk.

We won't know which has the better return until after the fact. If rates rise more at the long end of the rate spectrum, option 2 would take a bigger initial hit but eventually should return more over time. You can play the "what if" game with rates all day and find problems with either or both options.
During drawdown, you draw from the one that is below it's target, and bonds tend to be in that situation when equities have fallen, so even without money being earmarked for a specific purpose in drawdown, it sounds like it would make more sense to barbell it so that when you do actually end up drawing down on your bonds, you can then also leave your bonds alone if they are down by drawing on cash if you have barbelled.

So I'm wondering if there is any case against barbelling intermediate bonds into MM + LTT for those planning their drawdown phase.
Dandy
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Re: Cash in lieu of bonds

Post by Dandy »

When I started out the investment allocations were discussed as stocks, bonds and cash. Somewhere along the line cash was dropped and we now have allocations only tagged as stocks and bonds. I suspect a reason might be that brokers didn't make much money on cash -- and want customers to keep money in their brokerage accounts --just a guess.

For many, especially those with a large allocation to fixed income - like some retirees --cash can play an important part. We also need to define what "cash" is. For me it is FDIC products, money markets, Stable Value Funds, I bonds, EE bonds, etc i.e. fixed income that is very safe and doesn't lose money and is reasonably liquid. The plus side is that they don't lose money the minus side is that those assets don't keep up with even low inflation -- usually.

Most would consider using cash for emergency funds, perhaps having a few years worth of expenses to use when equities are in decline and/or if they become unemployed so they don't have to sell other investments.

For those who "have won the game" they can choose to be aggressive investors or asset preservation investors. The latter, especially retirees, will likely have use of cash products for a decent portion of their fixed income allocation.

I'm 72 with an allocation of about 45/40/15 which will probably to to 45/45/10 this year.
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Re: Cash in lieu of bonds

Post by Dottie57 »

KlangFool wrote: Wed Jun 17, 2020 2:25 pm
50ismygoal wrote: Wed Jun 17, 2020 10:27 am Tibbits, I see a lot of posters suggesting moving from bond funds to “cash” is a mistake, but this paper really explains why “cash” might be a good move for those of us who don’t want our principal to drop, even temporarily, on the “safe” side of our asset allocation.
50ismygoal,

That is why you have an emergency fund.

CASH and Bond are two separate asset classes. Instead of 3 baskets: CASH, Bond, and the stock, you are only having 2 baskets: cash and stock.

Why is it safer to have your eggs in 2 baskets instead of 3 baskets? Can you predict the future?

I know that I know nothing. I put my money (eggs) into many baskets.

KlangFool
+1

I have a couple of years in Cash (MMF), CDs, and then TIPS funds And finally a total bond fund.
magneto
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Re: Cash in lieu of bonds

Post by magneto »

delamer wrote: Wed Jun 17, 2020 2:16 pm Consider this from Bill Bernstein, in response to a question on his clients’ allocation:

Dr. William Bernstein: Well, I try not to talk too much about what we do with clients--it's just a confidentiality and a privacy matter. But I've always felt that people should be taking risks on the stock side and not on the bond side. At the end of the day, there are really only two assets. There are risky assets and there are riskless assets, and then there is an exchange rate between them.
This seems to chime with Dreman approach of :-
Risk Portfolio = Stocks plus various + Bonds
Riskless = Cash
moving towards Riskless as time horizon shortens.

Don't however understand about the mentioned "exchange rate between them".
'There is a tide in the affairs of men ...', Brutus (Market Timer)
hudson
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Re: Cash in lieu of bonds

Post by hudson »

50ismygoal wrote: Thu Jun 18, 2020 5:15 am IndexCore, you got to the core of my question/point, which is over the difference between having “safe” money in bonds v cash. I just don’t think it matters. Thanks.
Maybe NCUA/FDIC CDs? maybe not bonds....but fixed income.
delamer
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Re: Cash in lieu of bonds

Post by delamer »

magneto wrote: Thu Jun 18, 2020 8:48 am
delamer wrote: Wed Jun 17, 2020 2:16 pm Consider this from Bill Bernstein, in response to a question on his clients’ allocation:

Dr. William Bernstein: Well, I try not to talk too much about what we do with clients--it's just a confidentiality and a privacy matter. But I've always felt that people should be taking risks on the stock side and not on the bond side. At the end of the day, there are really only two assets. There are risky assets and there are riskless assets, and then there is an exchange rate between them.
This seems to chime with Dreman approach of :-
Risk Portfolio = Stocks plus various + Bonds
Riskless = Cash
moving towards Riskless as time horizon shortens.

Don't however understand about the mentioned "exchange rate between them".
I took “exchange rate” to mean the trade-off between risk and return.
Van
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Re: Cash in lieu of bonds

Post by Van »

Very interesting link. Thank you for posting.
Topic Author
50ismygoal
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Re: Cash in lieu of bonds

Post by 50ismygoal »

Van, the link was meaningful to me because I see a lot of comments here to the effect that any cash you hold is at risk due to inflation, but that paper makes a good case that cash can hold up reasonably well through inflation. I haven’t seen any comments here refuting his claim.
Van
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Re: Cash in lieu of bonds

Post by Van »

I need to study the graphs, as some are not a familiar style to me. But the general thesis of cash pretty much keeping up with inflation is something I WANT TO BELIEVE. I'm retired and risk aversive at this point. Fortunately, my most people's analysis, I have "won the game". Therefore, I don't need to make a lot investing. I'd be completely content to not loose any principal and keep up with inflation.
Topic Author
50ismygoal
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Re: Cash in lieu of bonds

Post by 50ismygoal »

I was hoping someone would show why this paper was incorrect, but that hasn’t been the case.
KlangFool
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Re: Cash in lieu of bonds

Post by KlangFool »

50ismygoal wrote: Thu Jun 18, 2020 4:40 pm I was hoping someone would show why this paper was incorrect, but that hasn’t been the case.
50ismygoal.

You had made your bet. So, what is there to tell you?

<<I guess this is why I sold much of my bond funds (BIV and BSV) and put that money into Ally and Vanguard MM accounts. >>

1) How many years of expense in CASH are you holding?

2) How many years of expense in STOCK are you holding?

3) What happened to your CASH if the interest rate dropped to a negative level?

4) What happened to the BOND if the interest rate dropped to a negative level?

KlangFool
Topic Author
50ismygoal
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Re: Cash in lieu of bonds

Post by 50ismygoal »

KlangFool,
I have roughly 14 years of expenses in cash, 3 in bonds and 16 in equities. My cash will hold flat regardless of interest rates, other than slight additions if rates stay the same or rise, and slight reductions if they go negative. Bond funds will increase in NAV if rates drop, and the reverse if they increase. Not sure where this is going.
pascalwager
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Re: Cash in lieu of bonds

Post by pascalwager »

Bucket approach, I gather. Might work--lots of stable cash.

My approach in retirement is different: Total return, 55/45, declining bonds duration to match my life expectancy, $10k cash buffer--but I have an adequate pension.
KlangFool
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Re: Cash in lieu of bonds

Post by KlangFool »

50ismygoal wrote: Thu Jun 18, 2020 4:58 pm KlangFool,
I have roughly 14 years of expenses in cash, 3 in bonds and 16 in equities. My cash will hold flat regardless of interest rates, other than slight additions if rates stay the same or rise, and slight reductions if they go negative. Bond funds will increase in NAV if rates drop, and the reverse if they increase. Not sure where this is going.
50ismygoal,

<<My cash will hold flat regardless of interest rates, other than slight additions if rates stay the same or rise, and slight reductions if they go negative.>>

A) How do you know that the reduction would be slight if they go negative?

B) If the interest rate goes to -3% and the inflation is 3%, you lose 6% per year on your cash.

C) If the interest rate goes to -3%, the bond index fund will go up by about 6x 3% = 18%.

CASH is not risk-free too.

You assume that you know how the interest rate and inflation will move in the future. You believe that you can predict the future.

I know that I know nothing.

KlangFool
Lee_WSP
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Re: Cash in lieu of bonds

Post by Lee_WSP »

50ismygoal wrote: Wed Jun 17, 2020 10:01 am This link was on a post from ScubaHog on another thread. I guess this is why I sold much of my bond funds (BIV and BSV) and put that money into Ally and Vanguard MM accounts. This paper tells me there’s not much risk to that type of move. What do you think?

https://portfoliocharts.com/2017/05/12/ ... -investor/
The article basically redefines cash as the T-bill rate. Which may be accurate for those with high yield online savings accounts, but for the vast majority of savings accounts and checking accounts, the yield is nearly the same as holding onto physical currency minus the carry cost.
bck63
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Re: Cash in lieu of bonds

Post by bck63 »

delamer wrote: Wed Jun 17, 2020 2:16 pm Consider this from Bill Bernstein, in response to a question on his clients’ allocation:

Dr. William Bernstein: Well, I try not to talk too much about what we do with clients--it's just a confidentiality and a privacy matter. But I've always felt that people should be taking risks on the stock side and not on the bond side. At the end of the day, there are really only two assets. There are risky assets and there are riskless assets, and then there is an exchange rate between them.
With all due respect to Dr. Bernstein, whom I admire, I don’t think there are any riskless assets.
New Providence
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Re: Cash in lieu of bonds

Post by New Providence »

I was 100% equities for many years, but am getting sick and tired of the boom/bust cycle of the past 20 years. The most annoying part is when the volatility is manufactured for the benefit of the billionaires.

As I'm not getting any younger, I'm moving some of my allocation to bonds and cash. Bonds won't cut it, so small percentage is now in pure cash.
tibbitts
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Re: Cash in lieu of bonds

Post by tibbitts »

50ismygoal wrote: Wed Jun 17, 2020 10:27 am Tibbits, I see a lot of posters suggesting moving from bond funds to “cash” is a mistake, but this paper really explains why “cash” might be a good move for those of us who don’t want our principal to drop, even temporarily, on the “safe” side of our asset allocation.
Well a lot of us like to make a big fuss about things that don't matter much, and this is one of those. Obviously nobody likes to see their principal drop, not with stocks or with bonds (we do always have the hoping-for-a-crash crowd, but outside of them), but people have been worried about the "near certainty" of rising rates for how many years now?
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djmbob
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Re: Cash in lieu of bonds

Post by djmbob »

Was doing some re-allocation of my 92yo mom's Vanguard TIRA into cash as I have placed her on the waitlist to move from independent to assisted living in her retirement complex.

Also looked at her Vanguard Variable Annuity and looked up the details on the Money Market there (really do not like the holdings... over 40% in Yankee!! When I decided to look at the footnote for the SEC yield which reads
The seven-day yield for the Vanguard Variable Annuity - Money Market Portfolio is –0.05%. The yield of the Portfolio becomes negative when returns from the underlying investments are not high enough to cover the costs of providing the annuity contract.
Needless to say, I didn't exchange any funds into that!!

Cheers,
Ray
Lee_WSP
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Re: Cash in lieu of bonds

Post by Lee_WSP »

tibbitts wrote: Fri Jun 19, 2020 10:16 am
50ismygoal wrote: Wed Jun 17, 2020 10:27 am Tibbits, I see a lot of posters suggesting moving from bond funds to “cash” is a mistake, but this paper really explains why “cash” might be a good move for those of us who don’t want our principal to drop, even temporarily, on the “safe” side of our asset allocation.
Well a lot of us like to make a big fuss about things that don't matter much, and this is one of those. Obviously nobody likes to see their principal drop, not with stocks or with bonds (we do always have the hoping-for-a-crash crowd, but outside of them), but people have been worried about the "near certainty" of rising rates for how many years now?
It'll happen eventually, but they can still go down in the meantime.
Oregano
Posts: 133
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Re: Cash in lieu of bonds

Post by Oregano »

Robot Monster wrote: Wed Jun 17, 2020 12:57 pm I have the majority of my portfolio in cash. I fear two things:
1. Negative interest rates on money markets.
2. The Fed letting inflation shoot above the 2% target while keeping rates at zero or below.

I have about 12% of my portfolio in TIPS that could (will?) do better than cash under the above conditions.
If those are your two fears, why do you have your portfolio primarily invested in one of the worst possible assets if your fears come true?
Robot Monster
Posts: 1528
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Location: New York

Re: Cash in lieu of bonds

Post by Robot Monster »

Oregano wrote: Fri Jun 19, 2020 5:09 pm
Robot Monster wrote: Wed Jun 17, 2020 12:57 pm I have the majority of my portfolio in cash. I fear two things:
1. Negative interest rates on money markets.
2. The Fed letting inflation shoot above the 2% target while keeping rates at zero or below.

I have about 12% of my portfolio in TIPS that could (will?) do better than cash under the above conditions.
If those are your two fears, why do you have your portfolio primarily invested in one of the worst possible assets if your fears come true?
Because those aren't my only two fears. I'm going to have fears about tail risks no matter how I invest, there is no escaping it. I should still be relatively okay even if my cash fears do happen...I'll bleed a lot but won't die, unless we have permanent -2% interest and permanent above 2% inflation...

That said, I suppose I could have more TIPS...it's a serious *hold my nose* thing with these negative yields... "5-Year TIPS Reopening Gets Real Yield Of -0.766%, Lowest Since 2013" ...what fun!
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
KlangFool
Posts: 17738
Joined: Sat Oct 11, 2008 12:35 pm

Re: Cash in lieu of bonds

Post by KlangFool »

Robot Monster wrote: Sat Jun 20, 2020 8:30 am
Oregano wrote: Fri Jun 19, 2020 5:09 pm
Robot Monster wrote: Wed Jun 17, 2020 12:57 pm I have the majority of my portfolio in cash. I fear two things:
1. Negative interest rates on money markets.
2. The Fed letting inflation shoot above the 2% target while keeping rates at zero or below.

I have about 12% of my portfolio in TIPS that could (will?) do better than cash under the above conditions.
If those are your two fears, why do you have your portfolio primarily invested in one of the worst possible assets if your fears come true?
Because those aren't my only two fears. I'm going to have fears about tail risks no matter how I invest, there is no escaping it. I should still be relatively okay even if my cash fears do happen...I'll bleed a lot but won't die, unless we have permanent -2% interest and permanent above 2% inflation...

That said, I suppose I could have more TIPS...it's a serious *hold my nose* thing with these negative yields... "5-Year TIPS Reopening Gets Real Yield Of -0.766%, Lowest Since 2013" ...what fun!
Robot Monster,

<<I'll bleed a lot but won't die, unless we have permanent -2% interest and permanent above 2% inflation...>>

We do not need that to cause problems for you. One-time hyperinflation is good enough to wipe out your cash.

<<That said, I suppose I could have more TIPS...it's a serious *hold my nose* thing with these negative yields... "5-Year TIPS Reopening Gets Real Yield Of -0.766%, Lowest Since 2013" ...what fun!>>

If we hit hyperinflation, do you trust the government to report it correctly and help you in TIPS?

Balance is the key. At most, keep up to 5 years of expense in CASH. And, not more than that. If the crisis/problem lasted for more than 5 years, you do not need to worry about money. It is in the territory of Gold and Silver.

I know that I know nothing. Hence, I do not take an extreme position in any asset class. I would have 2 years of expense in CASH. The rest of my money is 60/40. I keep a very small amount of money in Gold/Silver.

KlangFool
Oregano
Posts: 133
Joined: Fri Nov 22, 2019 9:30 pm

Re: Cash in lieu of bonds

Post by Oregano »

Robot Monster wrote: Sat Jun 20, 2020 8:30 am
Oregano wrote: Fri Jun 19, 2020 5:09 pm
Robot Monster wrote: Wed Jun 17, 2020 12:57 pm I have the majority of my portfolio in cash. I fear two things:
1. Negative interest rates on money markets.
2. The Fed letting inflation shoot above the 2% target while keeping rates at zero or below.

I have about 12% of my portfolio in TIPS that could (will?) do better than cash under the above conditions.
If those are your two fears, why do you have your portfolio primarily invested in one of the worst possible assets if your fears come true?
Because those aren't my only two fears. I'm going to have fears about tail risks no matter how I invest, there is no escaping it. I should still be relatively okay even if my cash fears do happen...I'll bleed a lot but won't die, unless we have permanent -2% interest and permanent above 2% inflation...

That said, I suppose I could have more TIPS...it's a serious *hold my nose* thing with these negative yields... "5-Year TIPS Reopening Gets Real Yield Of -0.766%, Lowest Since 2013" ...what fun!
Consider using the Permanent Portfolio. Much more practical at addressing your fears than sitting in cash.
Robot Monster
Posts: 1528
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: Cash in lieu of bonds

Post by Robot Monster »

KlangFool wrote: Sat Jun 20, 2020 8:56 am
Robot Monster wrote: Sat Jun 20, 2020 8:30 am
Oregano wrote: Fri Jun 19, 2020 5:09 pm
Robot Monster wrote: Wed Jun 17, 2020 12:57 pm I have the majority of my portfolio in cash. I fear two things:
1. Negative interest rates on money markets.
2. The Fed letting inflation shoot above the 2% target while keeping rates at zero or below.

I have about 12% of my portfolio in TIPS that could (will?) do better than cash under the above conditions.
If those are your two fears, why do you have your portfolio primarily invested in one of the worst possible assets if your fears come true?
Because those aren't my only two fears. I'm going to have fears about tail risks no matter how I invest, there is no escaping it. I should still be relatively okay even if my cash fears do happen...I'll bleed a lot but won't die, unless we have permanent -2% interest and permanent above 2% inflation...

That said, I suppose I could have more TIPS...it's a serious *hold my nose* thing with these negative yields... "5-Year TIPS Reopening Gets Real Yield Of -0.766%, Lowest Since 2013" ...what fun!
Robot Monster,

<<I'll bleed a lot but won't die, unless we have permanent -2% interest and permanent above 2% inflation...>>

We do not need that to cause problems for you. One-time hyperinflation is good enough to wipe out your cash.

<<That said, I suppose I could have more TIPS...it's a serious *hold my nose* thing with these negative yields... "5-Year TIPS Reopening Gets Real Yield Of -0.766%, Lowest Since 2013" ...what fun!>>

If we hit hyperinflation, do you trust the government to report it correctly and help you in TIPS?

Balance is the key. At most, keep up to 5 years of expense in CASH. And, not more than that. If the crisis/problem lasted for more than 5 years, you do not need to worry about money. It is in the territory of Gold and Silver.

I know that I know nothing. Hence, I do not take an extreme position in any asset class. I would have 2 years of expense in CASH. The rest of my money is 60/40. I keep a very small amount of money in Gold/Silver.

KlangFool
Okay, I guess I will come out and admit I do have a psychological aversion to the high volatility of stocks and longer duration bonds. I do worry about the cash killing hyperinflation scenario, and yes, I could see the argument for having more stocks(including reit)/gold/commodities in my portfolio and not rely whole-hog on TIPS. I think maybe I'd accept putting in the bare conceivable minimum in stocks/etc. (I see Oregano recommended the permanent portfolio with 25%
in stocks and another 25% in precious metals...I simply can't stomach the volatility in that.)

I'm 46. What is the bare conceivable minimum dollar amount of stocks/etc that you think that I need?

(I'm unsure why I need longer duration bonds...though maybe I need to think through implications of a deflationary environment.)
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
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