Cash is a terrible long-term investment

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ucla-engineer
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Re: Cash is a terrible long-term investment

Post by ucla-engineer »

Tom_T wrote: Fri Sep 01, 2023 4:56 am
blimp wrote: Fri Sep 01, 2023 2:07 am I agree with the video. A 0% cash allocation is appropriate.

I'm not sure why people think 5% interest on a high-yield savings account when inflation is 7% is a good return. A negative real return is horrible as you are losing purchasing power.

If you are a long-term investor, temporary drops in the value of bond funds due to rising interest rates aren't very significant.
Inflation rate is 3.2% as of July, so 5% provides a real return, not a loss.
Depending on the tax rate, it can still be a small real loss.
birdy
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Re: Cash is a terrible long-term investment

Post by birdy »

To enjoy a balanced portfolio, cash in the form of CD ladders and Bonds is a necessary component. A savings account for emergencies is a necessary part of insuring that one emergency does not cause the inability to pay rent/mortgage payments/car transportation. I don't know what the latest recommendations are for how many months of expenses to keep in cash, but I usually kept 3-6 months. I chose good funds at Vanguard as my grounded portfolio and have never looked back! Cash is appropriate and needed to have that balanced portfolio everyone strives for. This has made me a multi-millionaire. birdy
LeslieSmiley
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Re: Cash is a terrible long-term investment

Post by LeslieSmiley »

birdy wrote: Sun Sep 10, 2023 2:21 pm To enjoy a balanced portfolio, cash in the form of CD ladders and Bonds is a necessary component. A savings account for emergencies is a necessary part of insuring that one emergency does not cause the inability to pay rent/mortgage payments/car transportation. I don't know what the latest recommendations are for how many months of expenses to keep in cash, but I usually kept 3-6 months. I chose good funds at Vanguard as my grounded portfolio and have never looked back! Cash is appropriate and needed to have that balanced portfolio everyone strives for. This has made me a multi-millionaire. birdy

And I'd like to add one more, to prevent you from having to sell stock/bond at a loss during market downturn.
balbrec2
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Re: Cash is a terrible long-term investment

Post by balbrec2 »

UpperNwGuy wrote: Fri Sep 01, 2023 6:06 am
SquawkIdent wrote: Fri Sep 01, 2023 5:57 am How did you feel last year when the market lost 20%, bonds lost 13% and inflation was about 7%? What happened to your buying power?

... losses can’t pay my bills. And selling low is something I try to avoid. Having some cash on hand allows me to not do that.
Buying power? Are you paying your monthly bills out of your investment portfolio?

I don't care if my stock or bond holdings lose value over the course of a year, or two years, or even a longer period. They will regain their lost value over the long-term, and I'm a long-term investor.
Many retirees do actually rely to some extent on their portfolios for cash flow to pay monthly expenses.
If you are still accumulating, you probably aren't concerned with this (cash equivalents) aspect of portfolio management.
StillGoing
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Re: Cash is a terrible long-term investment

Post by StillGoing »

The maximum safe withdrawal rate (MSWR) for different duration fixed income (FI) and stock allocation for a 30 year retirement is given in the following graph (data drawn from the Simba spreadsheet, analysis was restricted to 1926 onwards because of issues with some of the FI data before then - particularly bills and long term treasuries - even 1926 is probably pushing the boundaries a bit). STT are short treasuries with maturities of 1 to 3 years, TBM is total bond market (although actually intermediate term treasuries of 3 to 10 year maturities prior to about 1976), and LTT are long term treasuries (maturities greater than 10 years). Inflation adjusted withdrawals and rebalancing were annual.

Image

The following points can be made
1) For stock allocations greater than 85%, there was not a lot of difference between the various FI holdings, although bills produced the worst outcome.
2) For stock allocations of about 50% to 85%, the MSWR for STT, TBM, and Bills (in that order) were all over 4% with differences within the errors associated with historical data. The MSWR for LTT was well below that of the other FI.
3) For stock allocations below about 50%, TBM had the highest MSWR, with STT in second place except for stock allocations below about 20%. Bills gave the lowest MSWR at all stock allocations below about 40%.

So, for those in the decumulation phase, bills gave an acceptable performance provided the stock allocation was above 50%. A more detailed look at the effect of duration, including duration glide paths, on SWR can be found at viewtopic.php?t=412851

Without getting into an argument as to whether 'bills' can be conflated with 'cash', I note that in one sense, fixed income can be considered as a spectrum of maturities ranging from long (bonds at 10 years plus), intermediate (notes with maturities from 1 to 10 years), bills (issued maturities of 4 to 52 weeks), and cash (maturity of zero). It is not necessarily straightforward where bank deposit accounts fit into this description (the following uses UK descriptions which are different to US conventions)

Current account: Usually paying zero interest (but there are exceptions) and money can be spent/withdrawn using direct debits, cheques (now rarely used in the UK), debit cards, and electronic wallets (with access times ranging from instant to a few hours to a few days).
Easy access savings: Usually paying interest at or below the bank rate. Access is usually (but not always) by transfer to current account (typically a few hours to next day).
Notice savings: Pay greater interest than easy access but at the expense of having to wait 30, 90, or 120 days to be able to access the money.
Fixed term, fixed rate savings (confusingly often known as fixed rate bonds): Available with maturities from about 6 months to 5 years with interest rates generally similar to or higher than those available on conventional bonds (an illiquidity premium - in the UK accounts of this type generally allow no access before maturity except in the event of death or terminal illness).

Interestingly (at least to me), an unpublished comparison of the historical (1951 onwards) rates available from UK fixed term savings accounts, bills, and long term bonds found that the savings rate interest was roughly equal to 0.9*(CBG)+1.1 (where CBG was a 70/20 combination of bills/long term gilt yields - this rather odd proportion gave the best fit). In other words, when gilt and bond yields were low, savings accounts had better yields and vice versa. The annualised real geometric return was about 1.9% for savings compared to 1.7% for bonds (these were 20 year maturities), and 1.1% for bills.

cheers
StillGoing
seajay
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Re: Cash is a terrible long-term investment

Post by seajay »

StillGoing wrote: Fri Oct 06, 2023 3:56 am Image
Interesting to see the degree of left shift of TBM. Applying bond principles of buying near the peak of the steepest part of the curve and 4% was a reasonable fit.

By eye and for 4% ...

33% stock for the TBM line
43% stock for STT
50% stock for T-Bill
72% stock for LTT

You might have expected TBM to perhaps be midway between STT/LTT around 57% stock, but instead that was left shifted to just 33% stock. A form of free-lunch.
minimalistmarc
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Re: Cash is a terrible long-term investment

Post by minimalistmarc »

blimp wrote: Fri Sep 01, 2023 2:07 am I agree with the video. A 0% cash allocation is appropriate.

I'm not sure why people think 5% interest on a high-yield savings account when inflation is 7% is a good return. A negative real return is horrible as you are losing purchasing power.

If you are a long-term investor, temporary drops in the value of bond funds due to rising interest rates aren't very significant.
I’ve put 10% into cash in my taxable accounts. In the U.K. a non earner can earn 17.5k a year in interest tax free. The cash is in my wife’s name. I’d need to get 10% to earn the same. It also avoids the headache of reporting for capital gains purposes. I admit to a little bit of market timing. We might need the cash but if there was a market wobble it’ll go back into equities.
Last edited by minimalistmarc on Fri Oct 06, 2023 8:16 am, edited 2 times in total.
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markgardner
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Re: Cash is a terrible long-term investment

Post by markgardner »

blimp wrote: Fri Sep 01, 2023 2:07 am I agree with the video. A 0% cash allocation is appropriate.
A 0% cash allocation might be appropriate for the risk portion of your portfolio and if there is mental accounting of short-term and long-term assets in the portfolio. Otherwise, selling stocks in a depressed market to raise cash for emergencies, etc. is a permanent loss of capital and invites longevity risk.
rkhusky
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Re: Cash is a terrible long-term investment

Post by rkhusky »

StillGoing wrote: Fri Oct 06, 2023 3:56 am The maximum safe withdrawal rate (MSWR) for different duration fixed income (FI) and stock allocation for a 30 year retirement is given in the following graph (data drawn from the Simba spreadsheet, …
Is there a consistent year (or time period) between the different FI products that constrained the MSWR?
StillGoing
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Re: Cash is a terrible long-term investment

Post by StillGoing »

rkhusky wrote: Fri Oct 06, 2023 6:53 am
StillGoing wrote: Fri Oct 06, 2023 3:56 am The maximum safe withdrawal rate (MSWR) for different duration fixed income (FI) and stock allocation for a 30 year retirement is given in the following graph (data drawn from the Simba spreadsheet, …
Is there a consistent year (or time period) between the different FI products that constrained the MSWR?
The short answer to that question is 'sometimes'...

The longer answer is as follows. As always with MSWR graphs (when there is sufficient resolution in stock allocation) each region with a different gradient in MSWR graph corresponds to a different start year for thew worst case. This is more clearly shown in the following graph where the retirement start year in which the minimum in SWR occurred is plotted as a function of stock allocation for different duration fixed income (FI).

Image

In the above graph, several regions can be identified:
1) for high stock allocations to worst year was 1929, although the transition to that year was dependent on the duration of FI.
2) Where the stock allocation was between 55% and about 80 to 85%, the worst case was either 1966 or 1969
3) For stock allocations between about 20% and 55%, the start year that led to the worst SWR was highly dependent on FI duration. For LTT it was 1965 or 1966 throughout, for Bills and STT it was 1937 throughout, while for TBM it was 1937 for stock allocations between 25% and 35% and 1966 for 35-64%.
4) For stock allocations below about 20%, the worst case year for shorter durations clustered around 1941 or 1937, while, except for allocations below 5%, the worst case for LTT occurred in 1946.

While I note that a more detailed analysis is at viewtopic.php?t=412851, the percentage of retirements from 1926 onwards (this is a different period from that used in the other thread) that were ranked 1 (best) to 4 (worst) for each of the FI types are given in the following table (edit: for 50% stock allocation, 30 year retirement):

Code: Select all

	Rank			
	1	2	3	4
Bills	0	22	18	60
STT	40	13	46	0
TBM	21	57	22	0
LTT	39	7	13	40
While the MSWR using Bills was acceptable, it is noteworthy that they were ranked last in 60% of historical cases, and never gave best outcome. On the other hand, LTT was worst in 40% of cases, but also best in just under 40%. STT and TBM were never worst and were sometimes best.

Historically, in retirement, while holding 100% of fixed income in very short duration instruments (AFAIK, the bill returns in the Simba spreadsheet for the period covered here are for 3 or 6 months), gave a better MSWR than long duration instruments (i.e., over 10 years with LTT), generally the outcomes were not as good as holding the short end of intermediate (i.e., 1 to 3 years with STT) or the longer end of intermediate (i.e. 3 to 10 years with TBM).

In my view, provided 'cash' is used as a synonym for fixed income with a duration shorter than 3-6 months, these results confirm the statement in the topic title (at least from the perspective of a retiree using inflation-adjusted withdrawals).

cheers
StillGoing
Last edited by StillGoing on Sat Oct 07, 2023 12:07 pm, edited 1 time in total.
rkhusky
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Re: Cash is a terrible long-term investment

Post by rkhusky »

StillGoing wrote: Sat Oct 07, 2023 2:16 am
rkhusky wrote: Fri Oct 06, 2023 6:53 am
StillGoing wrote: Fri Oct 06, 2023 3:56 am The maximum safe withdrawal rate (MSWR) for different duration fixed income (FI) and stock allocation for a 30 year retirement is given in the following graph (data drawn from the Simba spreadsheet, …
Is there a consistent year (or time period) between the different FI products that constrained the MSWR?
The short answer to that question is 'sometimes'...

The longer answer is as follows. As always with MSWR graphs (when there is sufficient resolution in stock allocation) each region with a different gradient in MSWR graph corresponds to a different start year for thew worst case. This is more clearly shown in the following graph where the retirement start year in which the minimum in SWR occurred is plotted as a function of stock allocation for different duration fixed income (FI).

...
Thanks.
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Charles Joseph
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Re: Cash is a terrible long-term investment

Post by Charles Joseph »

Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
+1. It amazes me how people lose any semblance of common sense when it comes to cash.
Retired June 2023
Yvy
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Re: Cash is a terrible long-term investment

Post by Yvy »

Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
+1
Tom_T
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Re: Cash is a terrible long-term investment

Post by Tom_T »

Charles Joseph wrote: Tue Nov 07, 2023 5:41 pm
Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
+1. It amazes me how people lose any semblance of common sense when it comes to cash.
There are always a number of dogmatic posts here that make it seem like you are committing a terrible investing sin if you aren't maximizing your portfolio at all times.
Target2019
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Re: Cash is a terrible long-term investment

Post by Target2019 »

Tom_T wrote: Wed Nov 08, 2023 5:45 am
Charles Joseph wrote: Tue Nov 07, 2023 5:41 pm
Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
+1. It amazes me how people lose any semblance of common sense when it comes to cash.
There are always a number of dogmatic posts here that make it seem like you are committing a terrible investing sin if you aren't maximizing your portfolio at all times.
At this time I am satisfied to have/use a CASH position that pays higher interest than 3 years ago.

Some are in a transition period, and figuring out buckets, how much additional one needs, and so on.

I never found comfort on the maximizing portfolio couch. Since we're decumulating, 11-12% in cash works fine for now. If that breaks some hard rule, so be it.
seajay
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Re: Cash is a terrible long-term investment

Post by seajay »

tennisplyr wrote: Fri Sep 01, 2023 6:37 am Sometimes investing is not about making money, it's about sleeping well at night.
Some may be content with just the return of their inflation adjusted money. Since 1871 US, 1896 UK, thirds each hard cash, precious metal, US stock, 3.333% 30 year SWR (return of inflation adjusted money via yearly installments), NO failures (calendar year granularity). Deposit the cash (T-Bills) and you might have additionally spent the interest that provided, or left it as 'savings' - in which case there was a very high probability that after 30 years of 3.333% SWR you had more than half of your inflation adjusted start date portfolio value still available.

Whether you sleep well at night however is subjective :)
Image

Bank runs are infrequent, but not rare, periodically occur so over a period of 30 years that risk is increased, Can be quite sociable though, nice to meet up with others sharing a common interest
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bikeeagle1
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Re: Cash is a terrible long-term investment

Post by bikeeagle1 »

LeslieSmiley wrote: Sun Sep 10, 2023 2:28 pm
birdy wrote: Sun Sep 10, 2023 2:21 pm To enjoy a balanced portfolio, cash in the form of CD ladders and Bonds is a necessary component. A savings account for emergencies is a necessary part of insuring that one emergency does not cause the inability to pay rent/mortgage payments/car transportation. I don't know what the latest recommendations are for how many months of expenses to keep in cash, but I usually kept 3-6 months. I chose good funds at Vanguard as my grounded portfolio and have never looked back! Cash is appropriate and needed to have that balanced portfolio everyone strives for. This has made me a multi-millionaire. birdy

And I'd like to add one more, to prevent you from having to sell stock/bond at a loss during market downturn.
Exactly. This is why I have a portion of my retirement accounts allocated to scaling in and out of SPY, depending on overbought/oversold conditions. The funds pulled out are kept in cash and then re-invested at lower prices. Since I only do this with 20% of the total of my accounts, and the fixed buy-and-hold portion is at about 50/50 stocks and bonds, the result is that my over all AA fluctuates between 40/60 and 60/40.

Right now, I am at about 44/56 overall (11/9/2023).
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JoMoney
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Re: Cash is a terrible long-term investment

Post by JoMoney »

Huh... I'm just going to leave this here:
Image
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
garlandwhizzer
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Re: Cash is a terrible long-term investment

Post by garlandwhizzer »

Claudia Whitten wrote: ↑Fri Sep 01, 2023 5:09 am
Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that
1+

I'll add one more appreciative post to the many that others have already been made. Thanks, Claudia, for injecting some common sense. The answer to cash allocation does not come from long term data mining spit out by a computer that Mr. Felix offers. MMFs/cash offer ultimate stability, ultimate safety and instantly liquidity to meet living expenses or emergencies at any time, even when both stocks and bonds are in bear markets like now. It's an individual decision whether or not to include them in fixed income but it's hard for me to understand, given the current deep and persistent bear market in bonds, why many still advocate avoiding cash/MMF. Buffett's entire fixed income portfolio remains in very short term Treasuries instruments. He's not an idiot and neither is Bernstein who prefers short term to long term nominals.

Fixed income allocation is primarily not about maximizing returns. That is the job of equity which does much better at it long term. Instead fixed income allocation is more about providing a safe reliable port in the severe storm, and the ultimate in safety--MMF, cash--has the lowest long term expected returns as one would expect. The key word there is "expected" which is derived by computer analysis of multi-decade periods. There are many critical things that those computer programs ignore--accidents, loss of job, health emergency, need to sell bonds before maturity during an inflationary cycle, divorce, lawsuit, etc.. Those things may alter an investors need for safe liquid money and the timing of it. An allocation to MMF/cash is the ultimate in safety. For me emotionally and financially they are worth far more than the theoretical reduced long term return that longer term nominals offer. This is particularly true when you're in the withdrawal phase when you need a source of stable value for redemptions. If inflation hits at such at time, like now, both stocks and bonds lose considerable principal value and you wind up selling at fire sale prices. So ultimately it may provide emotional relief, ability to sleep at night, and in the end cost you nothing because you avoided selling risker assets at lousy prices. Buffett keeps huge cash reserves, not to sleep at night, but to have a totally safe totally liquid asset available to buy quality risk assets at fire sale prices in bear markets. Very short duration Treasuries have ultimately made him much more money than investing in long term nominals.

Garland Whizzer
rkhusky
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Re: Cash is a terrible long-term investment

Post by rkhusky »

I am not anywhere close to Warren Buffet, so there is no sense investing like him.

I have had no issue selling stocks or bonds to fund living expenses. It takes the same amount of time for Vanguard to send me money from stock funds as from bond funds as from MM funds.

I don’t look at what the markets are doing, I just look at my AA to determine what to sell. The former would only be anchoring on the past, which is a common cognitive bias.

The extra that I have gained over the years from having bonds instead of cash has more than made up for the little that I have lost recently due to selling bonds. It might have been different if I had to sell my entire bond portfolio during the past year or so.
Cubs Fan
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Re: Cash is a terrible long-term investment

Post by Cubs Fan »

after hours today I purchased $50,000.00 of BND (Vanguard Total Bond Fund) because:
1. I needed to rebalance back to 60/40.
2. Cash is not a good place to keep more than my emergency fund.
3. If interest rates are lowered, BND may increase in value over the long term.
wait until next year!
dknightd
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Re: Cash is a terrible long-term investment

Post by dknightd »

I guess it depends on how you define "long term."
For now, I define it as over 5-10 years. Some might use 5 years, some might use 10 years, some might think long term is longer than that. Perhaps 20-50 years, or longer.

I currently have probably too much cash (or cash like things). About 10 years. I probably only need 5 years. But I'm OK with that. I like "money in the bank". It is an investment in my happiness. I'm happiest when I can pay my bills and still splurge occasionally. More than once I would have had to decline an opportunity if I I did not have the money to pay for it.

When I was working my money in the bank was mostly in my ability to work. And a few months in cash like things. But things have changed. I no longer want to work for money.

This year my "money in the bank" earned about 5%. Inflation was about 4%. Of course next year could be different.

Edit: It is almost funny. When I was a kid long term was next week.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
rockstar
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Re: Cash is a terrible long-term investment

Post by rockstar »

So much of this criticism is based on historical data, where t bills paid near zero for a decade. I would agree that buying a negative real yielding asset is bad. I don’t know what that has to do with today, where the yield curve is inverted and you can buy positive real yielding assets without taking any interest rate risk.

It appears that today if you’re going out on the yield curve, you’re hoping for two things: yields to drop and to lock in rates.

It seems more prudent to look at the YTM and make decisions based on current conditions, rather than past one.
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gammalaser
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Re: Cash is a terrible long-term investment

Post by gammalaser »

If anything, the reinvestment risk associated with holding short term investments may be increasing by the day. If Fed decide to cut rates, we move to declining rate environment, and tomorrow we can wake up with cash and short term yielding less than longer term bond. While those holding longer term bond today will be less affected tomorrow regardless if rate stay the same or drop.
rockstar
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Re: Cash is a terrible long-term investment

Post by rockstar »

gammalaser wrote: Wed Jul 10, 2024 12:46 pm If anything, the reinvestment risk associated with holding short term investments may be increasing by the day. If Fed decide to cut rates, we move to declining rate environment, and tomorrow we can wake up with cash and short term yielding less than longer term bond. While those holding longer term bond today will be less affected tomorrow regardless if rate stay the same or drop.
If rates go down, equities make even more sense. And it’s tough to throw new money at near zero real YTMs unless it’s an emergency fund. So how far out do you go in duration?
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Re: Cash is a terrible long-term investment

Post by Dottie57 »

Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
Very much agree.
nyejos11
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Re: Cash is a terrible long-term investment

Post by nyejos11 »

What percentage of portfolio to keep in cash as dry powder vs intermediate treasuries?
seajay
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Re: Cash is a terrible long-term investment

Post by seajay »

nyejos11 wrote: Wed Jul 10, 2024 1:28 pm What percentage of portfolio to keep in cash as dry powder vs intermediate treasuries?
How long is a piece of string.

Someone concerned about bail-in's/counter party risk might be content to start with thirds each in hard cash dollars, physical gold, stocks. Two thirds literally in-hand. Broadly gold might offset inflation (i), cash loses to inflation (-i) stocks might 2i. Combined initial average = i. Spend the cash first and that transitions to 50/50 stock/gold after perhaps 8 years (cash all spent), averaged 17% cash for the first 8 years, no cash for the subsequent 22 years, overall time averaged 6% cash. During the first 8 years when cash was being spent stock/gold might have gained 50% real (5.2%/year), end with 100% of the inflation adjusted portfolio value still available.

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hudson
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Re: Cash is a terrible long-term investment

Post by hudson »

nyejos11 wrote: Wed Jul 10, 2024 1:28 pm What percentage of portfolio to keep in cash as dry powder vs intermediate treasuries?
There are no right answers.
My plan is half duration matched TIPS, one fourth short treasuries/CDs, and one fourth intermediate Ts/CDs.
All of the above depend on the payouts.
I guess some of the above could be dry powder, but not for buying stocks.

Dry Powder defined (https://www.investopedia.com/terms/d/drypowder.asp)
Dry powder is a slang term referring to marketable securities that are highly liquid and considered cash-like. Dry powder can also refer to cash reserves kept on hand by a company, venture capital firm or individual to cover future obligations, purchase assets or make acquisitions. Securities considered to be dry powder could be Treasuries or other short-term fixed income investment that can be liquidated on short notice in order to provide emergency funding or allow an investor to purchase assets.
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Re: Cash is a terrible long-term investment

Post by AnnetteLouisan »

Dottie57 wrote: Wed Jul 10, 2024 1:09 pm
Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
Very much agree.
Agree / it depends on the circumstances of ones life and as we all know, those can differ greatly. Liquidity has a value, often a significant one.
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Re: Cash is a terrible long-term investment

Post by Firemenot »

nyejos11 wrote: Wed Jul 10, 2024 1:28 pm What percentage of portfolio to keep in cash as dry powder vs intermediate treasuries?
The concept of cash as “dry powder” implies market timing. Sometimes that can work, but usually not. The psychology of it is tricky as you are always looking for a further drop before deploying.
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Re: Cash is a terrible long-term investment

Post by Tib »

AnnetteLouisan wrote: Wed Jul 10, 2024 2:52 pm
Dottie57 wrote: Wed Jul 10, 2024 1:09 pm
Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
Very much agree.
Agree / it depends on the circumstances of ones life and as we all know, those can differ greatly. Liquidity has a value, often a significant one.
More agreement. There’s a lot to be said for cash. I’m 60/40, with the 40 almost entirely in the Vanguard settlement fund, VMFXX, which currently yields over 5.2%. Having my fixed income in that fund provides convenience, simplicity, a big emergency fund, a stable source for both periodic withdrawals and rebalancing, comfort during terrible years such as 2022, and some protection from what I worry about most: a rebound within a year or two of high inflation. What’s the price I’m paying for these benefits? StillGoing’s graph indicates that for a 60/40 portfolio, cash has returned only about 15bps less per year than BND and short-term Treasuries.
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Re: Cash is a terrible long-term investment

Post by nyejos11 »

Couldn’t the concept of bonds as dry powder also be considered market timing even if you are selling them to buy stocks to get back up to your AA? Same as doing it with cash?
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Re: Cash is a terrible long-term investment

Post by pascalwager »

From reading David Swensen, 100% of a retiree's estimated living expenses should be covered by cash as follows.

The cash for each year of retirement would be gradually accumulated over a ten-year period by partially liquidating the risk portfolio. (It's a kind of decumulation ladder.) If you plan to retire at age 65, then you would need to begin the process at age 55.
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Re: Cash is a terrible long-term investment

Post by BirdFood »

nyejos11 wrote: Wed Jul 10, 2024 5:16 pm Couldn’t the concept of bonds as dry powder also be considered market timing even if you are selling them to buy stocks to get back up to your AA? Same as doing it with cash?
Well, if you'd have bonds anyway, I'd say no. Because you'd have them anyway, and you're selling them in response to an event in the past, not in the context of a prediction about events in the future.
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Re: Cash is a terrible long-term investment

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Dottie57 wrote: Wed Jul 10, 2024 1:09 pm
Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
Very much agree.
After rebalancing in 12/2021, Cash carried me thru 2022 and most of 2023 without having to sell stocks or bonds at a distressed level ... SWAN.
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Re: Cash is a terrible long-term investment

Post by Dottie57 »

CRC_Volunteer wrote: Thu Jul 11, 2024 4:50 pm
Dottie57 wrote: Wed Jul 10, 2024 1:09 pm
Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
Very much agree.
After rebalancing in 12/2021, Cash carried me thru 2022 and most of 2023 without having to sell stocks or bonds at a distressed level ... SWAN.
I too was glad to have cash and not sell.
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Re: Cash is a terrible long-term investment

Post by goodenyou »

Discussing cash as an investment, on its face, seems odd to me.
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Re: Cash is a terrible long-term investment

Post by rockstar »

goodenyou wrote: Fri Jul 12, 2024 10:07 am Discussing cash as an investment, on its face, seems odd to me.
You’re making over 5% nominal with no interest rate or credit risk.
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Re: Cash is a terrible long-term investment

Post by TBillT »

Who might disagree with that is Gary Shilling (30-yr TBond king) and me. Since 1980 it has been possible to play the reduction of interest rates all the way to near zero. Many in workplace 401k in years ago had lucrative fixed income plays. That declining interest rate play is not present at the moment of course to the same degree. But never say never. Depends too on definition of cash, but I like MMF when non-zero.
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Re: Cash is a terrible long-term investment

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rockstar wrote: Fri Jul 12, 2024 10:12 am
goodenyou wrote: Fri Jul 12, 2024 10:07 am Discussing cash as an investment, on its face, seems odd to me.
You’re making over 5% nominal with no interest rate or credit risk.
Yes I am. And I have significant re-investment interest rate risk. Its the price you pay for peace of mind.
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Re: Cash is a terrible long-term investment

Post by rockstar »

goodenyou wrote: Fri Jul 12, 2024 10:23 am
rockstar wrote: Fri Jul 12, 2024 10:12 am
goodenyou wrote: Fri Jul 12, 2024 10:07 am Discussing cash as an investment, on its face, seems odd to me.
You’re making over 5% nominal with no interest rate or credit risk.
Yes I am. And I have significant re-investment interest rate risk. Its the price you pay for peace of mind.
But with that piece of mind, I’m currently 87% in equities.
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Re: Cash is a terrible long-term investment

Post by goodenyou »

rockstar wrote: Fri Jul 12, 2024 10:26 am
goodenyou wrote: Fri Jul 12, 2024 10:23 am
rockstar wrote: Fri Jul 12, 2024 10:12 am
goodenyou wrote: Fri Jul 12, 2024 10:07 am Discussing cash as an investment, on its face, seems odd to me.
You’re making over 5% nominal with no interest rate or credit risk.
Yes I am. And I have significant re-investment interest rate risk. Its the price you pay for peace of mind.
But with that piece of mind, I’m currently 87% in equities.
That is a valid strategy. Similar to the strategy of purchasing an annuity with the ability to take more risk. It has been shown that investors who purchase annuities can have larger terminal portfolio values if they choose to take more risk with more equities. Some do because they have peace of mind that their dignity floor is "never" in jeopardy. I also look at cash as an insurance policy or buffered asset. Those come at a cost that may be offset with more equities.
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Re: Cash is a terrible long-term investment

Post by rockstar »

goodenyou wrote: Fri Jul 12, 2024 10:34 am
rockstar wrote: Fri Jul 12, 2024 10:26 am
goodenyou wrote: Fri Jul 12, 2024 10:23 am
rockstar wrote: Fri Jul 12, 2024 10:12 am
goodenyou wrote: Fri Jul 12, 2024 10:07 am Discussing cash as an investment, on its face, seems odd to me.
You’re making over 5% nominal with no interest rate or credit risk.
Yes I am. And I have significant re-investment interest rate risk. Its the price you pay for peace of mind.
But with that piece of mind, I’m currently 87% in equities.
That is a valid strategy. Similar to the strategy of purchasing an annuity with the ability to take more risk. It has been shown that investors who purchase annuities can have larger terminal portfolio values if they choose to take more risk with more equities. Some do because they have peace of mind that their dignity floor is "never" in jeopardy. I also look at cash as an insurance policy or buffered asset. Those come at a cost that may be offset with more equities.
If your portfolio is big enough, you’ll have multiple years of expenses in the 10% bucket. I’m a little bit over 2x approaching 3x. If my portfolio doubles, I will have more than 4x expenses in cash like. Unless we have another loss decade, that should be plenty to ride out most down turns.

And to get around the eventual rate drops, I’m continuing to buy I Bonds to set a floor on inflation for cash like.
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Re: Cash is a terrible long-term investment

Post by gammalaser »

The message from Ben isn't that cash is bad. He is talking about accumulators taking money out of the market for various reasons and making market timing moves based on short term interest rates and nowadays another reason could be the "inevitable correction". IMO, It doesn't mean having short term bonds is bad or anything like that, but for an accumulator, the focus of the portfolio as a whole should generally focus on long term growth, including what it takes to make sure you can stick with the portfolio over time (which could mean having an appropriate buffer of cash so that you can stick to your AA after a downturn)
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Re: Cash is a terrible long-term investment

Post by abuss368 »

There are a couple of old sayings with regards to cash which both have merit:

* “Cash is King”

* “Cash is Trash”

I look at cash for short term needs and insurance.

Anything more, in an effort to define “enough” is based on how much is needed to sleep well at night.

Best.
Tony
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Re: Cash is a terrible long-term investment

Post by soretired »

rockstar wrote: Fri Jul 12, 2024 10:12 am
goodenyou wrote: Fri Jul 12, 2024 10:07 am Discussing cash as an investment, on its face, seems odd to me.
You’re making over 5% nominal with no interest rate or credit risk.
But with reinvestment risk.
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Re: Cash is a terrible long-term investment

Post by YeahBuddy »

True, but sometimes I wish I had more of it !
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Re: Cash is a terrible long-term investment

Post by adave »

I am happy to keep cash around, but I don't let it go over 5% of my total portfolio. I held a lot of cash earlier this year but slowly dumped it in the market, glad I did. Currently at 3.5% cash which feels fine to me for now.
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Re: Cash is a terrible long-term investment

Post by MoneyIsTime »

A few key phrases for me stood out:

The title was specific, and I agree with the noted caveats:
Cash is a terrible long-term investment.. emphasis on “long-term”

Also:
gammalaser wrote: Fri Jul 12, 2024 8:58 pm The message from Ben isn't that cash is bad. He is talking about accumulators taking money out of the market for various reasons...
Agreed, I am retired, so my situation requires I keep spending cash on hand, as I have zero job income.

Plus I have TIPS/CD ladders, so really not “cash” per se.

As Warren Buffet says, "always keep some powder dry" (aka keep some cash on hand). Markets will have down-turns, so be prepared.

My AA reflects this: Long-Term: Stocks. Medium-Term: Bonds. Short-Term: Cash
“You are free to do whatever you like. You need only face the consequences.” — Sheldon B. Kopp | | AA 60/40 = Stock/Bond+Cash. MFJ, Ages 60/59, Retired 6/2023, Still figuring out retirement
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