pascalwager wrote: ↑
Sat Mar 07, 2020 6:10 pm
Well that's good - I was picturing a stockpile (or cash pile, as it were), but 2% falls easily into rounding error territory. Even when I actively rebalance I never hit my 60/40 target exactly, because I get the end-of-day mutual fund price
My advice to anyone else with more significant amounts of cash on the sidelines is simply: treat it as a zero-duration bond - i.e. part of a fixed income portfolio. Having 'cash' in whatever form isn't bad, as long as it's either a small amount or part of a larger plan.
So, even 20% cash (recommended for retirees by Jonathan Clements) could be reasonable as long as it was part of the overall portfolio and part of the rebalancing process? Assume, for example, a 60/20/20 portfolio.
Also, do you intend to maintain your 60/40, high-discipline rebalancing in retirement, including rebalancing through bear markets?
I absolutely believe that cash can be a substantial part of a rational, long-term AA. I use 'bonds' as shorthand for 'fixed income,' but my 40% non-equities portion contains between 5% and 10% in cash (savings, money markets, etc...), rules for which are laid out in my IPS.
Basically, I have an intermediate duration fixed-income target and achieve that through a combination of fixed-income assets. One can also argue cash belongs in its own third category (e.g. 60/20/20), but I treat it as essentially like a highly liquid, zero-duration bond. Using your example, for instance, I could be 20% Long-Term Treasuries and 20% cash (i.e. barbell approach) which would balance to an intermediate duration.
My problem is that a lot of people say they are 100% stocks but aren't
, then say 'OK now I'm going to invest my cash!'
as if they have some separate pile of money just waiting on the sidelines, doing ... nothing, I guess? To my mind, that's just a form of mental accounting. In reality, perhaps that person is 80/20 stocks/cash and they should own up to that allocation, whatever it is, and factor it into their plan.
Maybe their plan is fluid, and allows for some market timing, a shifting ratio or whatever. Regardless, having parameters is a helpful way to stay on course, whatever course that may be and however flexible it may be, rather than making emotional decisions. Even if their plan is 'I will keep between 0% to 20% in cash depending on conditions,' well, I wouldn't recommend it, but at least it takes everything into account.
(It may go without saying, but: the one thing I don't count in this is emergency funds and short-term savings. If you have cash for that then suddenly go to invest it, something is wrong with your plan, in my opinion, because if you need the cash, you can't afford to invest it. And if you can invest it, it should be in your portfolio. In the above discussion I am only talking about asset allocation for one's primary, long-term portfolio).
As to your latter question: yes, I rebalance either when bands are tripped or I notice the market moving significantly and feel like logging in - again, playing within self-set rules that allow for some flexibility on that front. I have an undefined retirement date so it's hard to create a glide path, but 60/40 seems conservative enough for now and I will likely start ratcheting it down to 50/50, then maybe 40/60 as time goes on. However, when that time comes, I aim to plan it out well in advance, and won't be making any short-term changes based on market sentiments.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe