What does it mean to have X years of expenses in cash/fixed-income?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
rgs92
Posts: 2503
Joined: Mon Mar 02, 2009 8:00 pm

What does it mean to have X years of expenses in cash/fixed-income?

Post by rgs92 » Thu Mar 26, 2020 10:14 am

Many people here have mentioned that they are in good shape because they have 5 or 10+ years of living expenses in cash or safe fixed income assets.
Are they talking about their fixed income allocation in their portfolio, or a separate account?

I was thinking that you shouldn't think of the fixed income part of your whole portfolio's allocation as safe assets to use in a downturn, because spending those for an extended period would completely distort your allocation, making it too stock heavy.

I'm thinking it would only make sense to have a separate (many year?) rainy day fund, or just withdraw expenses according to your asset allocation to maintain your A/A to a constant ratio. (And of course, that could get very expensive to just put a million dollars aside in cash for safekeeping.)

Thanks.
Last edited by rgs92 on Thu Mar 26, 2020 10:16 am, edited 1 time in total.

jebmke
Posts: 10249
Joined: Thu Apr 05, 2007 2:44 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by jebmke » Thu Mar 26, 2020 10:16 am

rgs92 wrote:
Thu Mar 26, 2020 10:14 am
Are they talking about their fixed income allocation in their portfolio
typically, this is what they mean; bucketeers might use separate buckets.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Topic Author
rgs92
Posts: 2503
Joined: Mon Mar 02, 2009 8:00 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by rgs92 » Thu Mar 26, 2020 10:17 am

Well then, I think they are fooling themselves. Is that true more or less? You can't just go ahead an spend all of your bond/cash assets and sleep at night as your stock allocation goes through the roof.

You are effectively market timing. Yes/No? Thanks.

jjface
Posts: 2729
Joined: Thu Mar 19, 2015 6:18 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by jjface » Thu Mar 26, 2020 10:19 am

For those who are spending from their portfolio - In a falling market the stock % is falling so naturally you would need to sell bonds to get back to your AA. So most will find they are selling bonds for expenses anyway. No need to bucket a separate "safe" allocation (though I do usually have a small buffer in my checking account anyway). Asset allocation is a simple but powerful tool.

alex_686
Posts: 5626
Joined: Mon Feb 09, 2015 2:39 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by alex_686 » Thu Mar 26, 2020 10:25 am

rgs92 wrote:
Thu Mar 26, 2020 10:17 am
Well then, I think they are fooling themselves. Is that true more or less? You can't just go ahead an spend all of your bond/cash assets and sleep at night as your stock allocation goes through the roof.

You are effectively market timing. Yes/No? Thanks.
The correct term is “mental accounting”. It is a “cognitive load” mental error. People take complex issues and oversimplify. Without getting into too much detail you are in the ballpark of the error. This type of error is very hard to correct but tends to do little damage.

User avatar
WoodSpinner
Posts: 1273
Joined: Mon Feb 27, 2017 1:15 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by WoodSpinner » Thu Mar 26, 2020 10:32 am

OP,

I humbly disagree.

You just need to shift your mindset and think about it as 2 portfolios. One for liabilities and one for growth.

The fact that my expenses for the next 10 years are covered means I don’t have to worry so much about the AA and risk I take with the other portion.

The goals for the portfolio are usually very different rent in Retirement than during accumulation.

Seems to be working just fine for us

WoodSpinner

jebmke
Posts: 10249
Joined: Thu Apr 05, 2007 2:44 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by jebmke » Thu Mar 26, 2020 10:35 am

rgs92 wrote:
Thu Mar 26, 2020 10:17 am
Well then, I think they are fooling themselves. Is that true more or less? You can't just go ahead an spend all of your bond/cash assets and sleep at night as your stock allocation goes through the roof.

You are effectively market timing. Yes/No? Thanks.
Some people have an intentional plan to have their equity allocation increase as they age through retirement. That is my plan.
When you discover that you are riding a dead horse, the best strategy is to dismount.

KlangFool
Posts: 15475
Joined: Sat Oct 11, 2008 12:35 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by KlangFool » Thu Mar 26, 2020 10:39 am

rgs92 wrote:
Thu Mar 26, 2020 10:17 am
Well then, I think they are fooling themselves. Is that true more or less? You can't just go ahead an spend all of your bond/cash assets and sleep at night as your stock allocation goes through the roof.

You are effectively market timing. Yes/No? Thanks.
rgs92,

You are thinking in the wrong way. The reason why some people like me think this way has to do with the stock going down to zero, we still need the money to feed our family.

If the stock is going up, why do we need to spend our FI/Bond?

By the way, I have both: 1 1/2 year of EF that is not in my allocation and 5 to 8 years in my FI/Bond as part of my AA.

KlangFool

KlangFool
Posts: 15475
Joined: Sat Oct 11, 2008 12:35 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by KlangFool » Thu Mar 26, 2020 10:42 am

OP,

If your stock drops down to almost zero and takes X years to recover, what are you going to use to feed your family? You would need X+ years of expense in cash/FI to do that.

KlangFool

User avatar
watchnerd
Posts: 5274
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by watchnerd » Thu Mar 26, 2020 10:43 am

rgs92 wrote:
Thu Mar 26, 2020 10:17 am
Well then, I think they are fooling themselves. Is that true more or less? You can't just go ahead an spend all of your bond/cash assets and sleep at night as your stock allocation goes through the roof.

You are effectively market timing. Yes/No? Thanks.
We use a bond barbell (see sig).

The short end is in short TIPS/ MM. It has about 5-6 years of living expenses.

This gives us tax optionality.

It also allows us to lower the weighted average duration of the bond barbell and hedge deflation vs inflation.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

JBTX
Posts: 5968
Joined: Wed Jul 26, 2017 12:46 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by JBTX » Thu Mar 26, 2020 10:54 am

alex_686 wrote:
Thu Mar 26, 2020 10:25 am
rgs92 wrote:
Thu Mar 26, 2020 10:17 am
Well then, I think they are fooling themselves. Is that true more or less? You can't just go ahead an spend all of your bond/cash assets and sleep at night as your stock allocation goes through the roof.

You are effectively market timing. Yes/No? Thanks.
The correct term is “mental accounting”. It is a “cognitive load” mental error. People take complex issues and oversimplify. Without getting into too much detail you are in the ballpark of the error. This type of error is very hard to correct but tends to do little damage.
I keep hearing about mental accounting and "errors". You acknowledge the financial impact is small. It would seem also that having a liquid "bucket" of cash and other short term marketable fixed income may also be convenient and efficient. Having a cash /excess bond allocation in your tax advantaged account and then having to sell stocks in taxable during an emergency, and rebalance out cash in your tax deferred accounts does require some degree of administrative burden. Maybe not huge, but there may be capital gains issues, tax rate timing issues, TLH, TGH, etc to deal with. Types of issues you may prefer not to deal with in times of emergency. Imagine needing funds now and the stock market is going up and down 10% in a day. Or imagine a loved one dies. There is a soft cost of time and mental energy of dealing with that. I think referring to it as a mental "error" is inaccurate and condescending.

Topic Author
rgs92
Posts: 2503
Joined: Mon Mar 02, 2009 8:00 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by rgs92 » Thu Mar 26, 2020 11:19 am

Thanks for the comments. I didn't mean to recommend bucketing. I was just saying, if you are not bucketing, it's dangerous to just count on your fixed income allocation for expenses for a long period.

Let's hypothetically assume a plausible non-gloom-and-doom scenario of a stable stock market (+/-10% say) for several years, but still hanging out well below its all time highs (like 20% down from them).

During that time you spend down your 40% fixed income allocation because you "think/feel" it's still low.
Then you are sitting there with an 80-90% stock allocation AND you are older. Isn't that a hazardous situation?

It seems to be the complete opposite of re-balancing to me.

(I don't think there is anything in Firecalc to do a success/failure estimate to model an extended draw-down of just fixed income for an extended time. I have no idea how a Monte Carlo simulation would look for this.)

Doesn't everybody want to go to sleep at night knowing they have, say, a 60/40 asset allocation at all times? (Or at least maintain your re-balancing bands?) And wouldn't spending your fixed income funds violate this and possibly screw up a stay-the-course plan?

(Maybe the answer is to actually plan on spending according to your asset allocation regardless of stock or bond prices... Not sure.)

Am I thinking wrong about this? Thanks for any feedback.
Last edited by rgs92 on Thu Mar 26, 2020 11:27 am, edited 6 times in total.

Willmunny
Posts: 75
Joined: Mon Jun 16, 2014 6:35 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by Willmunny » Thu Mar 26, 2020 11:19 am

Some people are not comfortable with only having a %stocks/%bonds allocation in their IPS. I am one of them. There is a risk, perhaps a small one, that equities could have an extended period of decades without recovering to a previous top. Just because it always has in the past 100+ years of the US does not mean it always will. Assuming that it will is, in my opinion, what Larry Swedroe was referring to when he wrote about confusing the highly probable for the certain.

So some, like me, have an IPS that says the bond portion of my portfolio will be the greater of: (1) e.g., 33% of my overall portfolio; or (2) x number of years of after tax living expenses. However it does have the potential to minimize the extent of your rebalancing into equities during a significant market decline. I am comfortable with assuming that trade off (and knowing that if markets behave like they have in the US for over 100 years, I will have sacrificed some return).

The peace of mind and insurance against deep risk helps me sleep at night and stay the course with my plan. I am willing to increase my savings rate to pay for this "insurance" in the (perhaps likely)event the US market continues, throughout my lifetime, to behave like it has over the past 100 years.

I don't see this as market timing or mental accounting, but if one wants to apply that label, it won't talk me out of staying the course.

User avatar
Sandtrap
Posts: 9707
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by Sandtrap » Thu Mar 26, 2020 11:24 am

rgs92 wrote:
Thu Mar 26, 2020 10:14 am
Many people here have mentioned that they are in good shape because they have 5 or 10+ years of living expenses in cash or safe fixed income assets.
Are they talking about their fixed income allocation in their portfolio, or a separate account?

I was thinking that you shouldn't think of the fixed income part of your whole portfolio's allocation as safe assets to use in a downturn, because spending those for an extended period would completely distort your allocation, making it too stock heavy.

I'm thinking it would only make sense to have a separate (many year?) rainy day fund, or just withdraw expenses according to your asset allocation to maintain your A/A to a constant ratio. (And of course, that could get very expensive to just put a million dollars aside in cash for safekeeping.)

Thanks.
Anything "in" or "outside" of portfolio holdings that is "bond like" or "cash like", IE: checking accounts, savings accounts, MM, CD's, Bonds, Treasuries, cash in a mattress, cash in a suitcase, etc. that can be used to pay baseline living expenses per year ( = "X" ).
Thus, 25X = 25 years worth of annual living expenses.

Practically speaking, if one had an allocation of 40/60 but there was also a certain amount in banks, sweep accounts, etc, that is not in that allocation, the it could be skewed more toward "fixed".
So, it's more accurate to quote IE: 30/60/10 with 10 being cash, so it's actually 30/70 with the "fixed" being 70.

j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

User avatar
TheTimeLord
Posts: 7213
Joined: Fri Jul 26, 2013 2:05 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by TheTimeLord » Thu Mar 26, 2020 11:33 am

WoodSpinner wrote:
Thu Mar 26, 2020 10:32 am
OP,

I humbly disagree.

You just need to shift your mindset and think about it as 2 portfolios. One for liabilities and one for growth.

The fact that my expenses for the next 10 years are covered means I don’t have to worry so much about the AA and risk I take with the other portion.

The goals for the portfolio are usually very different rent in Retirement than during accumulation.

Seems to be working just fine for us

WoodSpinner
Exactly.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

User avatar
TheTimeLord
Posts: 7213
Joined: Fri Jul 26, 2013 2:05 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by TheTimeLord » Thu Mar 26, 2020 11:42 am

jebmke wrote:
Thu Mar 26, 2020 10:35 am
rgs92 wrote:
Thu Mar 26, 2020 10:17 am
Well then, I think they are fooling themselves. Is that true more or less? You can't just go ahead an spend all of your bond/cash assets and sleep at night as your stock allocation goes through the roof.

You are effectively market timing. Yes/No? Thanks.
Some people have an intentional plan to have their equity allocation increase as they age through retirement. That is my plan.
+1

To me once you secure your retirement with a certain level of safe fixed income, in combination with SS, pensions and annuities, it gives you the ability to take the rest and invest it any way you want between 0%-100% equities. So no I don't have any concern about my "stock allocation goes through the roof". Kinda hoping it does.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

JBTX
Posts: 5968
Joined: Wed Jul 26, 2017 12:46 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by JBTX » Thu Mar 26, 2020 11:47 am

rgs92 wrote:
Thu Mar 26, 2020 10:14 am
Many people here have mentioned that they are in good shape because they have 5 or 10+ years of living expenses in cash or safe fixed income assets.
Are they talking about their fixed income allocation in their portfolio, or a separate account?

I was thinking that you shouldn't think of the fixed income part of your whole portfolio's allocation as safe assets to use in a downturn, because spending those for an extended period would completely distort your allocation, making it too stock heavy.

I'm thinking it would only make sense to have a separate (many year?) rainy day fund, or just withdraw expenses according to your asset allocation to maintain your A/A to a constant ratio. (And of course, that could get very expensive to just put a million dollars aside in cash for safekeeping.)

Thanks.
Some different perspectives:

1. Expressing your "safe" assets (however you define them) may be a way expressing what you have available if the bottom falls out. It doesn't necessarily mean you plan to draw them down.

2. If the bottom falls out, your asset allocation changes and stock percentage decreases. Spending down "safe" assets may be a way to allocate assets back to preferred allocation.

3. If you are in retirement, but before social security, it may make sense to draw down safe assets and hold on to stocks until you get to social security.

User avatar
Wiggums
Posts: 2857
Joined: Thu Jan 31, 2019 8:02 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by Wiggums » Thu Mar 26, 2020 11:51 am

WoodSpinner wrote:
Thu Mar 26, 2020 10:32 am
OP,

I humbly disagree.

You just need to shift your mindset and think about it as 2 portfolios. One for liabilities and one for growth.

The fact that my expenses for the next 10 years are covered means I don’t have to worry so much about the AA and risk I take with the other portion.

The goals for the portfolio are usually very different rent in Retirement than during accumulation.

Seems to be working just fine for us

WoodSpinner
I never thought of it that way, but we do the same thing. We have money set aside that is safe (not lose value) and then our portfolio. It works well for us and we never worry about our investments.

dknightd
Posts: 2150
Joined: Wed Mar 07, 2018 11:57 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by dknightd » Thu Mar 26, 2020 11:57 am

JBTX wrote:
Thu Mar 26, 2020 11:47 am
3. If you are in retirement, but before social security, it may make sense to draw down safe assets and hold on to stocks until you get to social security.
That is my plan. I hope it works out. Likely it will
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

Topic Author
rgs92
Posts: 2503
Joined: Mon Mar 02, 2009 8:00 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by rgs92 » Thu Mar 26, 2020 11:59 am

Sorry for speaking rhetorically, but I assumed that systematically withdrawing from your portfolio by selling stock/bonds/cash regardless of market conditions was consistent with NOT timing the market. It is basically dollar cost averaging on the way out.

(And the equivalent of saying that avoiding selling stocks in a downturn for regular payments IS timing the market.)

For instance, if you had your entire portfolio in a target fund or balanced index fund, would you not continue to draw from that monthly for expenses?

Staying the course I thought meant being consistent, neither selling or buying large parts of your portfolio in a downturn (or an upturn). It means regular buying and selling in any market.

I'd like to hear feedback from members who are are committed to staying the course in all markets.

Thank you again.

bgf
Posts: 1309
Joined: Fri Nov 10, 2017 9:35 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by bgf » Thu Mar 26, 2020 12:18 pm

op, you are right.

take current conditions for example. stocks are down substantially, so bond allocations have risen.

i lose my job and now need to dig into savings. first checking (most liquid), then savings, then finally my taxable account.

i sell my bond funds for next month's expenses. but why? just because i planned to do so ahead of time? why'd i make that plan then? because bonds are less volatile? well, but that still requires the hidden assumption that we'd rather sell less volatile bonds than stocks after stocks have dropped 30%. why? do we know thats optimal? maybe after selling my bonds, stocks drop another 30% and bonds rise 5%. now what have i done? maybe that doesn't happen. maybe stocks rebound 30%. who knows?

the point is by selling an allocation not equal to your portfolio allocation, you're making a bet. stocks and bonds are equally liquid (not in the trading sense but in the practical sense of selling and transferring to checking for spending.)

seems like you should just sell in proportion to your allocation and that should be your plan from the start.

this is easy to do if you own a balanced fund mainly because you have no other option.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

dknightd
Posts: 2150
Joined: Wed Mar 07, 2018 11:57 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by dknightd » Thu Mar 26, 2020 12:22 pm

rgs92 wrote:
Thu Mar 26, 2020 11:59 am
For instance, if you had your entire portfolio in a target fund or balanced index fund, would you not continue to draw from that monthly for expenses?
I guess I'd have to continue to draw down for monthly expenses. Then cut down on my spending. Then file for bankruptcy.
Instead I have enough cash like things to cover me to SS. And a small annuity. Together those will likely provide enough. My other investments are discretionary. I have two buckets. One to survive. One to waste (or have fun with), or pass on for somebody else to do what they want with.
Pick your own plan. There is no right answer.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

RugbyNerd
Posts: 4
Joined: Sun Mar 01, 2020 7:50 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by RugbyNerd » Thu Mar 26, 2020 12:25 pm

I have wondered similarly to this.

You have 12 months of expenses as an emergency fund, say in cash. Unfortunately for you, the markets are down and you lose your job. Six months later, you have not found work and you have spent half this fund. At what point do you sell assets to rebuild your cash reserves? Do you let it fall all the way, or do you start selling after a couple of months to keep your safest assets relatively constant?

Topic Author
rgs92
Posts: 2503
Joined: Mon Mar 02, 2009 8:00 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by rgs92 » Thu Mar 26, 2020 12:29 pm

Thanks for the replies.
I have been reading the many dramatic and volatile threads started by people who were panic-selling their entire equity positions (or trying to be a hero and investing large amounts at the bottom).

But for most people, investing is a gradual business of investing and withdrawing a little at a time over a lifetime.

Curiously, there have been few threads about this process which is the most common challenge people face in personal finance.

dknightd
Posts: 2150
Joined: Wed Mar 07, 2018 11:57 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by dknightd » Thu Mar 26, 2020 12:31 pm

RugbyNerd wrote:
Thu Mar 26, 2020 12:25 pm
I have wondered similarly to this.

You have 12 months of expenses as an emergency fund, say in cash. Unfortunately for you, the markets are down and you lose your job. Six months later, you have not found work and you have spent half this fund. At what point do you sell assets to rebuild your cash reserves? Do you let it fall all the way, or do you start selling after a couple of months to keep your safest assets relatively constant?
you work harder to find a new job
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

Murgatroyd
Posts: 357
Joined: Sun Jan 21, 2018 8:23 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by Murgatroyd » Thu Mar 26, 2020 12:46 pm

Unsaid in the discussion above is the interest and dividend effect of a large “fixed” allotment. It replenishes itself rather quickly. Our example, three years into early retirement living off of investments only. Our fixed assets have been contributing about 45% of our annual spending. So we are not draining the principal as rapidly. Of course, the 45% will likely soon be 35% due to dividend reductions, but still, we are not draining that group of assets on a 1 to 1 basis.

So, roughly, when I retired we had about 10x spending fixed. Now, 3 years later, it’s about 9x.

User avatar
watchnerd
Posts: 5274
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by watchnerd » Thu Mar 26, 2020 12:50 pm

rgs92 wrote:
Thu Mar 26, 2020 11:19 am
Thanks for the comments. I didn't mean to recommend bucketing. I was just saying, if you are not bucketing, it's dangerous to just count on your fixed income allocation for expenses for a long period.

Let's hypothetically assume a plausible non-gloom-and-doom scenario of a stable stock market (+/-10% say) for several years, but still hanging out well below its all time highs (like 20% down from them).

During that time you spend down your 40% fixed income allocation because you "think/feel" it's still low.
Then you are sitting there with an 80-90% stock allocation AND you are older. Isn't that a hazardous situation?
You don't have to burn down your bonds, necessarily.

You can spend from both stocks / bonds in a way that maintains your AA.

Yes, that might lead to selling stocks at a loss, or at smaller gains. But that's one of the judgment calls one makes.

What you prefer to do depends a lot on tax consequences, too.

Money is fungible, but when a portfolio is smaller, it has to come from somewhere.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

TonyDAntonio
Posts: 497
Joined: Thu Mar 03, 2016 8:32 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by TonyDAntonio » Thu Mar 26, 2020 12:58 pm

Like many things you have to experiment and find what works for you. I have decided to have many years of cash-like investments so I don't have to sell stocks low to live on. Heck, I don't even have to spend this "cash" to live on yet due to dividend, pension and small job income. Plus, we haven't even started SS. So I guess I have belt, suspenders and another belt. It allows me to have a pretty high stock percentage plus two individual stocks (just for the dividends) and no bond funds and not freak out when the market tanks. The threads on this site in 2008/2009 are good to read if you want to get an idea about "just rebalance on the way down" strategies. Yes, they work. But folks were freaked out and talking about plan Bs. That made an impact on me.

BW1985
Posts: 1878
Joined: Tue Mar 23, 2010 6:12 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by BW1985 » Thu Mar 26, 2020 1:02 pm

rgs92 wrote:
Thu Mar 26, 2020 10:14 am

I was thinking that you shouldn't think of the fixed income part of your whole portfolio's allocation as safe assets to use in a downturn, because spending those for an extended period would completely distort your allocation, making it too stock heavy.

Thanks.
I don't see why this is a problem, one could always rebalance again when stocks are up. Bear markets don't last forever.
Last edited by BW1985 on Thu Mar 26, 2020 1:03 pm, edited 1 time in total.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

User avatar
watchnerd
Posts: 5274
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by watchnerd » Thu Mar 26, 2020 1:02 pm

RugbyNerd wrote:
Thu Mar 26, 2020 12:25 pm
I have wondered similarly to this.

You have 12 months of expenses as an emergency fund, say in cash. Unfortunately for you, the markets are down and you lose your job. Six months later, you have not found work and you have spent half this fund. At what point do you sell assets to rebuild your cash reserves? Do you let it fall all the way, or do you start selling after a couple of months to keep your safest assets relatively constant?
You don't usually rebuild your investment portfolio until you have a new job.

And you do what you need to survive.

People unemployed for long periods, or sometimes perpetuity, often end up raiding their 401ks, IRAs, to survive.

Lots of stories from 2008 about older workers, especially, who burned down their retirement accounts while looking for new work.

This is one of the reasons why, at 49, we have no debt, no mortgage and a 5-6 years of living expenses in cash equivalents and enough liquid assets in taxable to last all the way to social security, if need be.

If things get bad enough, we may forced to retire early whether we like it or not.
Last edited by watchnerd on Thu Mar 26, 2020 1:05 pm, edited 1 time in total.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

MrDrinkingWater
Posts: 149
Joined: Tue Dec 23, 2014 11:30 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by MrDrinkingWater » Thu Mar 26, 2020 1:05 pm

I think many members do a mental accounting that provides a very lengthy delay before rebalancing back to their desired Asset Allocation (AA) by holding off selling stocks until after they have determined that a market correction has completed.

Perhaps it is very hard for them to write down their exact and complete rule in the Investment Policy Statement (IPS), thus making it hard to explain what they are doing to others. But, they know what they want to do, and that is the important thing.

As the market is generally going level or generally going up, perhaps their IPS stipulates that these members invest in a way that keeps them at an AA that is 60% stock, 30% bond, and 10% cash. Perhaps their IPS documents stipulate that their 30% bond and 10% cash portion of their portfolio will be equal to X years of living expenses, where 5<= X <= 10, until a market correction starts to occur. These members will try their best to not sell stocks throughout the downward correction period.

In my mind, these members commit to having a 60/30/10 AA during good times, but they are willing to let their AA "float" during bad times to something like 90/5/5 before selling stocks.

Maybe this helps you think through what others are doing.

RugbyNerd
Posts: 4
Joined: Sun Mar 01, 2020 7:50 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by RugbyNerd » Thu Mar 26, 2020 1:44 pm

watchnerd wrote:
Thu Mar 26, 2020 1:02 pm
RugbyNerd wrote:
Thu Mar 26, 2020 12:25 pm
I have wondered similarly to this.

You have 12 months of expenses as an emergency fund, say in cash. Unfortunately for you, the markets are down and you lose your job. Six months later, you have not found work and you have spent half this fund. At what point do you sell assets to rebuild your cash reserves? Do you let it fall all the way, or do you start selling after a couple of months to keep your safest assets relatively constant?
You don't usually rebuild your investment portfolio until you have a new job.

And you do what you need to survive.

People unemployed for long periods, or sometimes perpetuity, often end up raiding their 401ks, IRAs, to survive.

Lots of stories from 2008 about older workers, especially, who burned down their retirement accounts while looking for new work.

This is one of the reasons why, at 49, we have no debt, no mortgage and a 5-6 years of living expenses in cash equivalents and enough liquid assets in taxable to last all the way to social security, if need be.

If things get bad enough, we may forced to retire early whether we like it or not.
Yes, sorry if I was unclear. I was talking about maintaining an emergency fund of a certain size in the jobless scenario, not rebuilding the investment portfolio. My thought is that if you spend down most of your emergency fund to meet monthly expenses, your cash could get dangerously low. You might have an unexpected medical bill, for example, which would require you to sell investments immediately, possibly at the most inopportune time. Your need for ready cash doesn't decrease, so it would be prudent to sell some assets preemptively.

Obviously you do what you have to depending on the situation. I'm just trying to think of strategy ahead of time.

User avatar
WoodSpinner
Posts: 1273
Joined: Mon Feb 27, 2017 1:15 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by WoodSpinner » Thu Mar 26, 2020 2:13 pm

bgf wrote:
Thu Mar 26, 2020 12:18 pm
op, you are right.

take current conditions for example. stocks are down substantially, so bond allocations have risen.

i lose my job and now need to dig into savings. first checking (most liquid), then savings, then finally my taxable account.

i sell my bond funds for next month's expenses. but why? just because i planned to do so ahead of time? why'd i make that plan then? because bonds are less volatile? well, but that still requires the hidden assumption that we'd rather sell less volatile bonds than stocks after stocks have dropped 30%. why? do we know thats optimal? maybe after selling my bonds, stocks drop another 30% and bonds rise 5%. now what have i done? maybe that doesn't happen. maybe stocks rebound 30%. who knows?

the point is by selling an allocation not equal to your portfolio allocation, you're making a bet. stocks and bonds are equally liquid (not in the trading sense but in the practical sense of selling and transferring to checking for spending.)

seems like you should just sell in proportion to your allocation and that should be your plan from the start.

this is easy to do if you own a balanced fund mainly because you have no other option.
You are free to manage your finances anyway you want.

There are many Retirement strategies that don’t hold a fixed AA.

Some only rebalance from stocks to bonds, never the other way. As I said earlier, much depends on your goals and risk circumstances.

For instance, I have an overall 55/45 portfolio (liability and growth portions).

Within the 45% I hold 10 years of expenses (should be enough to fund entire retirement).

There are remaining funds in the 45% beyond my 10 year’s of expenses. Those become part of the Growth Portfolio. This allows two way rebalancing up to a certain limit. Once the bonds are gone from the growth, the only rebalancing I am allowed is if stocks go up and I rebalance to bonds.

At some point the overall portfolio balance may change, but my process and risk (e.g. ability to hit my Retirement goals) doesn’t.

WoodSpinner

dbr
Posts: 32108
Joined: Sun Mar 04, 2007 9:50 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by dbr » Thu Mar 26, 2020 2:16 pm

In any case a portfolio of any size (20-25-30 years expenses) and moderate asset allocation (40/60-60/40) already holds a minimum of 8 years in fixed income and a maximum of 18 years. I always get a little lost on the concept here.

User avatar
watchnerd
Posts: 5274
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by watchnerd » Thu Mar 26, 2020 2:18 pm

RugbyNerd wrote:
Thu Mar 26, 2020 1:44 pm


Yes, sorry if I was unclear. I was talking about maintaining an emergency fund of a certain size in the jobless scenario, not rebuilding the investment portfolio. My thought is that if you spend down most of your emergency fund to meet monthly expenses, your cash could get dangerously low. You might have an unexpected medical bill, for example, which would require you to sell investments immediately, possibly at the most inopportune time. Your need for ready cash doesn't decrease, so it would be prudent to sell some assets preemptively.

Obviously you do what you have to depending on the situation. I'm just trying to think of strategy ahead of time.
The bigger your EF, the less likely you are to have to sell investments.

That insurance is worth a lot in bad times, but has an opportunity cost of 'cash drag' in good times.

You have to figure out what the right balance is for you.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Topic Author
rgs92
Posts: 2503
Joined: Mon Mar 02, 2009 8:00 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by rgs92 » Thu Mar 26, 2020 2:28 pm

Thanks everyone. I see it's best to not be to formulaic or doctrinaire. I recall a Taylor Larimore comment about when skies are sunny for your portfolio, you loosen the purse strings a bit more, and the opposite in stormy times.
I appreciate all the food for thought.

User avatar
David Jay
Posts: 7796
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by David Jay » Thu Mar 26, 2020 2:37 pm

rgs92 wrote:
Thu Mar 26, 2020 10:14 am
I was thinking that you shouldn't think of the fixed income part of your whole portfolio's allocation as safe assets to use in a downturn, because spending those for an extended period would completely distort your allocation, making it too stock heavy.
Someone else said it in the thread but you may have missed it. If there is a big downturn, your stock percentage has been dramatically reduced. So spending safe assets is rebalancing, that is - bringing one's stock percentage back up to the percentage called out in your IPS.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

alex_686
Posts: 5626
Joined: Mon Feb 09, 2015 2:39 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by alex_686 » Thu Mar 26, 2020 2:43 pm

JBTX wrote:
Thu Mar 26, 2020 10:54 am
I think referring to it as a mental "error" is inaccurate and condescending.
I prefer precision and clarity in writing. "Mental Accounting" has been defined as a "Mental Error" in the literature for the better part of 60 years. As you say, there is a soft cost in computational cost here - hence it is classified in the "cognitive load" sub-category. If you don't like the working definition, get it changed.

JBTX
Posts: 5968
Joined: Wed Jul 26, 2017 12:46 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by JBTX » Thu Mar 26, 2020 3:06 pm

alex_686 wrote:
Thu Mar 26, 2020 2:43 pm
JBTX wrote:
Thu Mar 26, 2020 10:54 am
I think referring to it as a mental "error" is inaccurate and condescending.
I prefer precision and clarity in writing. "Mental Accounting" has been defined as a "Mental Error" in the literature for the better part of 60 years. As you say, there is a soft cost in computational cost here - hence it is classified in the "cognitive load" sub-category. If you don't like the working definition, get it changed.
A non monetary cost in time or attention is not an error.

I understand that in some cases "mental accounting" may in fact be the result of a faulty cognitive process. But not necessarily in all cases. It may be deliberate based upon real time and attention costs.

I feel like some people throw it around as demonstration of their supposed intellectual acumen.

User avatar
9-5 Suited
Posts: 508
Joined: Thu Jun 23, 2016 12:14 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by 9-5 Suited » Thu Mar 26, 2020 3:12 pm

If one is a strict rebalancer who views the entire portfolio holistically, then "number of years of expenses in fixed income" is just a descriptive fact about the current portfolio, but subject to massive change. If equities crash, this person is obligated (again assuming he is a strict rebalancer) to use the fixed income to buy equities, therefore reducing his number of years of expenses in fixed income.

So you kinda have to choose. Are you trying to maintain a number of years expenses in fixed income as a strategy, or is it a descriptive fact subject to change based on implementing your actual strategy.

User avatar
9-5 Suited
Posts: 508
Joined: Thu Jun 23, 2016 12:14 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by 9-5 Suited » Thu Mar 26, 2020 3:16 pm

JBTX wrote:
Thu Mar 26, 2020 3:06 pm
I feel like some people throw it around as demonstration of their supposed intellectual acumen.
Definitely true, though I think it cuts both ways. Some people get overly defensive about accusations of mental accounting, when its totally fine to just say "yeah, I'm not a cyborg, so flippin what?" There are a lot of little shortcuts and heuristics that aren't 100% logical or mathematically correct that help us get through life every day.
Last edited by 9-5 Suited on Thu Mar 26, 2020 3:17 pm, edited 1 time in total.

alex_686
Posts: 5626
Joined: Mon Feb 09, 2015 2:39 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by alex_686 » Thu Mar 26, 2020 3:17 pm

JBTX wrote:
Thu Mar 26, 2020 3:06 pm
alex_686 wrote:
Thu Mar 26, 2020 2:43 pm
JBTX wrote:
Thu Mar 26, 2020 10:54 am
I think referring to it as a mental "error" is inaccurate and condescending.
I prefer precision and clarity in writing. "Mental Accounting" has been defined as a "Mental Error" in the literature for the better part of 60 years. As you say, there is a soft cost in computational cost here - hence it is classified in the "cognitive load" sub-category. If you don't like the working definition, get it changed.
A non monetary cost in time or attention is not an error.

I understand that in some cases "mental accounting" may in fact be the result of a faulty cognitive process. But not necessarily in all cases. It may be deliberate based upon real time and attention costs.

I feel like some people throw it around as demonstration of their supposed intellectual acumen.
Language is agreed by consonances. I have had discussions on this board why a "Mortgage Back Security" is not a "Asset Backed Security" even though it is a asset backed security. MBS came first, then ABS. A quirk in the evolution of language.

The consonances is that this is a "error". Don't complain about it - do something to change the consonances.

curmudgeon
Posts: 2000
Joined: Thu Jun 20, 2013 11:00 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by curmudgeon » Thu Mar 26, 2020 3:17 pm

rgs92 wrote:
Thu Mar 26, 2020 11:19 am
Doesn't everybody want to go to sleep at night knowing they have, say, a 60/40 asset allocation at all times? (Or at least maintain your re-balancing bands?) And wouldn't spending your fixed income funds violate this and possibly screw up a stay-the-course plan?
Certainly not everybody. I think I calculated our asset allocation once, out of curiosity, but it's not relevant to my investment decisions. I know that there is a fairly vocal component on the board that are all about asset allocation (and IPS), but that doesn't encompass the entire world of thoughtful investors. My fixed income investments and dividends are sufficient to carry us through comfortably until we plan to claim SS at age 70. It was always my plan to largely spend that FI down during that period, but especially in case of a downturn. At age 70, SS will provide the fixed income, and equities will continue to provide the gravy.

Not everyone can do this. We trimmed down fixed expenses at retirement, downsizing, paying off mortgage, and avoiding other big financial commitment. We also reaped the benefits of aggressive investing during our working years, resulting in substantially more saved than our "needs" require.

dbr
Posts: 32108
Joined: Sun Mar 04, 2007 9:50 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by dbr » Thu Mar 26, 2020 3:19 pm

9-5 Suited wrote:
Thu Mar 26, 2020 3:12 pm
If one is a strict rebalancer who views the entire portfolio holistically, then "number of years of expenses in fixed income" is just a descriptive fact about the current portfolio, but subject to massive change. If equities crash, this person is obligated (again assuming he is a strict rebalancer) to use the fixed income to buy equities, therefore reducing his number of years of expenses in fixed income.

So you kinda have to choose. Are you trying to maintain a number of years expenses in fixed income as a strategy, or is it a descriptive fact subject to change based on implementing your actual strategy.
Yes, exactly so. The one observation is that very often the strict rebalancer has more than the typical "years in fixed income" before and after rebalancing.

A different approach is to just lock up the income producing assets in a TIPS ladder or to purchase an annuity. In that case a large fraction of the portfolio is used up, but the remainder is assumed to go to 100% stocks. In this scheme one talks about 25x ones "basic" expenses being in the "liability" portfolio and one's "discretionary" expenses being in the "risk" portfolio. The LMP approach strikes me as having a certain consistent logic to it more so than just an arbitrary "x years in fixed income." That doesn't mean I advocate the LMP. That is a different conversation.

dbr
Posts: 32108
Joined: Sun Mar 04, 2007 9:50 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by dbr » Thu Mar 26, 2020 3:23 pm

9-5 Suited wrote:
Thu Mar 26, 2020 3:16 pm
JBTX wrote:
Thu Mar 26, 2020 3:06 pm
I feel like some people throw it around as demonstration of their supposed intellectual acumen.
Definitely true, though I think it cuts both ways. Some people get overly defensive about accusations of mental accounting, when its totally fine to just say "yeah, I'm not a cyborg, so flippin what?" There are a lot of little shortcuts and heuristics that aren't 100% logical or mathematically correct that help us get through life every day.
Mental accounting is an error and worth pointing out if the result is the investor doing something that is actually contrary to their own purposes as they see them or is part of contradictory thinking on their part that will or might cause a problem. A different level is when the alternative to said mental accounting is more effective or more astute thinking about something. It is to be granted that a person may not need to be all that effective or astute to get along just fine. However, anyone should still be willing to consider doing something a better way, if it is a better way for a reason.

JBTX
Posts: 5968
Joined: Wed Jul 26, 2017 12:46 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by JBTX » Thu Mar 26, 2020 3:26 pm

alex_686 wrote:
Thu Mar 26, 2020 3:17 pm
JBTX wrote:
Thu Mar 26, 2020 3:06 pm
alex_686 wrote:
Thu Mar 26, 2020 2:43 pm
JBTX wrote:
Thu Mar 26, 2020 10:54 am
I think referring to it as a mental "error" is inaccurate and condescending.
I prefer precision and clarity in writing. "Mental Accounting" has been defined as a "Mental Error" in the literature for the better part of 60 years. As you say, there is a soft cost in computational cost here - hence it is classified in the "cognitive load" sub-category. If you don't like the working definition, get it changed.
A non monetary cost in time or attention is not an error.

I understand that in some cases "mental accounting" may in fact be the result of a faulty cognitive process. But not necessarily in all cases. It may be deliberate based upon real time and attention costs.

I feel like some people throw it around as demonstration of their supposed intellectual acumen.
Language is agreed by consonances. I have had discussions on this board why a "Mortgage Back Security" is not a "Asset Backed Security" even though it is a asset backed security. MBS came first, then ABS. A quirk in the evolution of language.

The consonances is that this is a "error". Don't complain about it - do something to change the consonances.
I am. 8-)

User avatar
9-5 Suited
Posts: 508
Joined: Thu Jun 23, 2016 12:14 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by 9-5 Suited » Thu Mar 26, 2020 3:30 pm

dbr wrote:
Thu Mar 26, 2020 3:23 pm
9-5 Suited wrote:
Thu Mar 26, 2020 3:16 pm
JBTX wrote:
Thu Mar 26, 2020 3:06 pm
I feel like some people throw it around as demonstration of their supposed intellectual acumen.
Definitely true, though I think it cuts both ways. Some people get overly defensive about accusations of mental accounting, when its totally fine to just say "yeah, I'm not a cyborg, so flippin what?" There are a lot of little shortcuts and heuristics that aren't 100% logical or mathematically correct that help us get through life every day.
Mental accounting is an error and worth pointing out if the result is the investor doing something that is actually contrary to their own purposes as they see them or is part of contradictory thinking on their part that will or might cause a problem. A different level is when the alternative to said mental accounting is more effective or more astute thinking about something. It is to be granted that a person may not need to be all that effective or astute to get along just fine. However, anyone should still be willing to consider doing something a better way, if it is a better way for a reason.
Completely agree with you that it is always worth pointing out. It just can get really pedantic at times, such as the common debates about whether to include debt as an offset to fixed income in an AA or including one's home value as an asset. I fall strictly on the "real truth" side of those debates, but I think plenty of people will be perfectly successful in life acting in way inconsistent with that cosmic truth. I just mean they should stop trying to argue they are factually correct and just acknowledge they are simplifying their lives with a few potentially useful to them, but technically incorrect assumptions.

MathIsMyWayr
Posts: 1444
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by MathIsMyWayr » Thu Mar 26, 2020 4:45 pm

David Jay wrote:
Thu Mar 26, 2020 2:37 pm
rgs92 wrote:
Thu Mar 26, 2020 10:14 am
I was thinking that you shouldn't think of the fixed income part of your whole portfolio's allocation as safe assets to use in a downturn, because spending those for an extended period would completely distort your allocation, making it too stock heavy.
Someone else said it in the thread but you may have missed it. If there is a big downturn, your stock percentage has been dramatically reduced. So spending safe assets is rebalancing, that is - bringing one's stock percentage back up to the percentage called out in your IPS.
Assume your AA is a:b, e.g., 600k:400k, and the equity drops x%, e.g., 20%. If you spend the same x% of fixed income asset, e.g., 80k, you will regain the original AA, e.g., 480k:320k. If the equity drops another 10%, your final AA will be 432k:288k after spending 32k from the fixed asset.

MotoTrojan
Posts: 9121
Joined: Wed Feb 01, 2017 8:39 pm

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by MotoTrojan » Thu Mar 26, 2020 5:10 pm

rgs92 wrote:
Thu Mar 26, 2020 10:17 am
Well then, I think they are fooling themselves. Is that true more or less? You can't just go ahead an spend all of your bond/cash assets and sleep at night as your stock allocation goes through the roof.

You are effectively market timing. Yes/No? Thanks.
Just because they track it this way, doesn’t mean they would draw it down necessarily. AA is a personal decision anyways. Some say 60/40, others 30/70, others 90/10. X years in bonds with rest in equity is just another form.

bgf
Posts: 1309
Joined: Fri Nov 10, 2017 9:35 am

Re: What does it mean to have X years of expenses in cash/fixed-income?

Post by bgf » Thu Mar 26, 2020 6:15 pm

WoodSpinner wrote:
Thu Mar 26, 2020 2:13 pm
bgf wrote:
Thu Mar 26, 2020 12:18 pm
op, you are right.

take current conditions for example. stocks are down substantially, so bond allocations have risen.

i lose my job and now need to dig into savings. first checking (most liquid), then savings, then finally my taxable account.

i sell my bond funds for next month's expenses. but why? just because i planned to do so ahead of time? why'd i make that plan then? because bonds are less volatile? well, but that still requires the hidden assumption that we'd rather sell less volatile bonds than stocks after stocks have dropped 30%. why? do we know thats optimal? maybe after selling my bonds, stocks drop another 30% and bonds rise 5%. now what have i done? maybe that doesn't happen. maybe stocks rebound 30%. who knows?

the point is by selling an allocation not equal to your portfolio allocation, you're making a bet. stocks and bonds are equally liquid (not in the trading sense but in the practical sense of selling and transferring to checking for spending.)

seems like you should just sell in proportion to your allocation and that should be your plan from the start.

this is easy to do if you own a balanced fund mainly because you have no other option.
You are free to manage your finances anyway you want.

There are many Retirement strategies that don’t hold a fixed AA.

Some only rebalance from stocks to bonds, never the other way. As I said earlier, much depends on your goals and risk circumstances.

For instance, I have an overall 55/45 portfolio (liability and growth portions).

Within the 45% I hold 10 years of expenses (should be enough to fund entire retirement).

There are remaining funds in the 45% beyond my 10 year’s of expenses. Those become part of the Growth Portfolio. This allows two way rebalancing up to a certain limit. Once the bonds are gone from the growth, the only rebalancing I am allowed is if stocks go up and I rebalance to bonds.

At some point the overall portfolio balance may change, but my process and risk (e.g. ability to hit my Retirement goals) doesn’t.

WoodSpinner
i dont think you addressed my point at all. i never said anything about fixed allocations or glidepath. all i said is that when you do withdraw, you withdraw according to your allocation.

you can do whatever you want, but you didnt address what i actually said. you can have 10 years of expenses in bonds and still withdraw 55/45...
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

Post Reply