OK to stay in cash if you have 40-50x annual expenses?

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Xpe
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by Xpe »

if you have 50x annual expenses, you could keep 10x annual expenses in cash and 40x annual expenses in TSM and if the market crashes, you can wait 10 full years for it to rebound before having to lock in any losses. or 10x in cash, 10x in bonds, and 30x in TSM.

there's just no point i can see in keeping it in cash or cash equivalents.
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Abe
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by Abe »

This is what Warren Buffett says about cash or what he calls currency based investments:

Investments that are denominated in a given currency include
money-market funds, bonds, mortgages, bank deposits, and other
instruments. Most of these currency-based investments are thought
of as “safe.” In truth they are among the most dangerous of
assets. Their beta may be zero, but their risk is huge.
Over the past century these instruments have destroyed the
purchasing power of investors in many countries, even as these
holders continued to receive timely payments of interest and
principal.
Slow and steady wins the race.
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unclescrooge
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by unclescrooge »

Xpe wrote:if you have 50x annual expenses, you could keep 10x annual expenses in cash and 40x annual expenses in TSM and if the market crashes, you can wait 10 full years for it to rebound before having to lock in any losses. or 10x in cash, 10x in bonds, and 30x in TSM.

there's just no point i can see in keeping it in cash or cash equivalents.
That's what I was thinking.

You could easily construct a well diversified portfolio yielding 2.5% and just live of the interest and dividends. For Ever.
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nisiprius
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by nisiprius »

I think there's some confusion here surrounding the word "cash" (as there often is). In part this is because investment companies want to convince people that there is something wrong with keeping your money in the bank.

Literal cash, physical currency, bundles of $100 bills in a safe deposit box is a fixed number of dollars and is subject to fairly serious inflation risk. Even 50 times annual expenses might be cutting it a little fine... in my opinion.

However, by "cash" people often mean "a holding that accumulates interest, but never goes down, has no volatility, and is easily liquidated... like a bank account, or savings bonds, or possibly bank CDs if you're confident that you actually can pay the penalty and make an early withdrawal if you need to.

In point of fact, bank accounts, have, in fact, come fairly close to keeping up with inflation. Bank interest isn't huge, but it isn't negligible, and has roughly matched inflation over time. I once posted an image of my 1982 bankbook, paying 13.602% API. If, by "cash," you mean "some of it in a checking account, a lot of it in the best savings account you could find with a little shopping around, and some of it in bank CDs," then I think, yes, 40-50x annual expenses should work.

For example, Vanguard's Monte Carlo nest egg calculator says "for U.S. cash reserve returns, we use the Ibbotson U.S 30-Day Treasury Bill Index from 1926 to 1977, and the Citigroup 3-Month Treasury Bill Index thereafter." So it is assuming an interest-earning asset, not physical currency. In their simulation, if I crank in 30 years, $1,000,000, $20,000/year = 2%, and 100% "cash," it shows me:

"Probability that your portfolio survives 30 years: 100%"
"Probability that your portfolio survives 40 years: 99%"
"Probability that your portfolio survives 50 years: 81%"

Since stock/bond portfolio SWR studies call the 4% rule "safe" when it has about a 95% survival rate for 30 years--actually only 93% for a 60/40 portfolio in Vanguard's simulator--I think a 99% survival rate for 40 years can also be called "safe."

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Last edited by nisiprius on Tue Jul 19, 2016 7:55 pm, edited 1 time in total.
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.
Tamales
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by Tamales »

Thanks for that nisiprius. I was in the process of trying to find some numbers for a spreadsheet. All I could find that goes back to 1960 which would approximate the interest from a bank account was a series called 30 day treasury, secondary market. That's what I include below as bank interest. When I compare that series to the 30d t-bill from the treasury website, for the years they overlap the secondary market rate is actually slightly less.

Anyway, here's the graph. Surprising to me how often a regular bank account has beat inflation (CPI) historically. Well, until recently anyway. So you'd think 5-yr CDs would fare even better (but data on those doesn't go back very far, and the "typical" APR reported in the bank surveys is (at least in recent years) far less than what you can get if you shop around.

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SQRT
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by SQRT »

Grt2bOutdoors wrote:
SQRT wrote:
Grt2bOutdoors wrote:When you have won the game , it is okay to stop playing.
Oft quoted. Might be smart for some, but if you enjoy the game (I do) why quit? Some above might also view this as throwing money away?
Some may say that, they enjoy the game, but then a black swan appears and as a former teacher of mine used to say "this isn't mickey mouse games, boys and girls". If you don't know what you are doing, you could take a very safe retirement and send it the way of the Titanic. "Don't take risk you aren't willing, able or need to take" - Larry Swedroe
Wiser words have never been spoken.
Agree. The financial crises of 2008-2009 was a pretty good test for me. Retired in 2006. I was about 150% in equities (margin loans, employee options). I was willing, able, and need was a personal judgement. Worked out just fine. Taking way less risk now though. Portfolio is still 100% equities but no debt or options. If you take the notional value of my pension, I have a 60/40 AA. Many ways to get where you're going.
hudson
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by hudson »

Shallowpockets wrote:If you have a cash position of 40-50x your annual expenses past >5 years that are documented so this is no guessing estimating game, is that OK?
Investor is retired, 62. Not taking SS or a small company pension yet.
What say the BHs?
There's lots of good advice here...maybe consider all of that...and continue to study...as you were going to do anyway.
Consider using the following...you're likely already there:
CDs...read Boglehead...Kevin M... search.php?author_id=14152&sr=posts
AAA/AA Bonds....Larry Swedroe (take a look at BMBIX... https://www.google.com/#sitesearch=bogl ... rg&q=bmbix )
Last edited by hudson on Sun Jul 24, 2016 7:53 pm, edited 1 time in total.
Rodc
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by Rodc »

OP needs to clarify at least two points before anyone can really provide a meaningful answer.

1) what do you mean by "cash" and is this literally cash with no interest or do you simply mean a very safe liquid investment paying some modest amount of interest?
2) what percent of your expenses will be covered by SS and pension? When you expect to take these would be helpful. If SS and pension alone cover expected needs and the "cash" will cover several years until SS and pensions start and then cover for the loss of purchasing power of the pension over time you have one situation. If SS and pension cover 5% of your income needs you have a very different situation.

Folks are making lots of assumptions about question 1, I expect likely wrong assumptions, and similarly for question 2.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Atgard
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by Atgard »

As others have said, if you've saved 50x annual expenses, there are a lot of things you "could" do and probably be OK, including keeping it all in cash, or lighting a $100 bill on fire every day just for fun. But I would not recommend doing either of those things.

If you're conservative, there are many relatively safe portfolios you can use that are actually safer than 100% cash, including:

10% cash (hopefully at least earning around 1% in a savings account)
65% bonds/TIPS/CDs/I-Bonds
25% stocks

You can also stick in some annuities, gold, real estate, etc. if you want. And you certainly have flexibility changing the exact percentages to suit your taste. But 100% cash is quite sub-optimal, and even 100% bonds or CDs is sub-optimal. But, like I said, you've pretty much won the game so you have a lot of flexibility in what you choose to do.
azanon
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by azanon »

Shallowpockets wrote:If you have a cash position of 40-50x your annual expenses past >5 years that are documented so this is no guessing estimating game, is that OK?
Investor is retired, 62. Not taking SS or a small company pension yet.
What say the BHs?
Can you make it doing that? Yeah probably sure, but do you really want to? You can add about 20% or so of diversified equities, and really boost return, with virtually no effect on inflation-adjusted standard deviation. I would view the 20-30% equities portfolio as the starting point for minimal risk (adjusted return), not 0% equities.
Van
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by Van »

I'm in the same situation with >50X annual expenses in liquid funds. However, I have chosen to be 20% in stock, 75% in bonds (all intermediate term; a mix of munis, treasuries and corporate) and 5% in cash. Even with that mix, I'm not sure I am doing much better than keeping up with inflation.

To each his own. I'm a very conservative person, and my mix does not keep me awake at night.
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Abe
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Re: OK to stay in cash if you have 40-50x annual expenses?

Post by Abe »

I too am essentially in this situation with >50 times annual expenses in cash if we describe cash as CD's, savings accounts, bank accounts, etc. In addition to that, I have about 30% of my investable assets in stocks plus some real estate and bonds. But getting to the OP's question, I'm not sure from your original post if you meant that all of your investable assets were in cash or if you have other investments in addition to that. At your age, I would say it's okay to stay in cash if you have 40-50x annual expenses, but I personally would not want everything in one asset class.
Slow and steady wins the race.
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