Is Cash Trash? The Purpose of Cash

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zaboomafoozarg
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Re: Is Cash Trash? The Purpose of Cash

Post by zaboomafoozarg » Thu Mar 08, 2018 10:55 am

nisiprius wrote:
Wed Mar 07, 2018 7:59 pm
zaboomafoozarg wrote:
Wed Mar 07, 2018 7:16 pm
Some say that cash is trash,
some say it's king.
From what I've tasted of the bear,
I think that "cash is king" is fair.
But after 10 years of the bull,
I feel like I should probably
exchange my bank account in full
for equities
'cause cash is dull.
Bravo! Bravo!
Haha thanks, I think it might be the best poem I've written since sixth grade :D

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Re: Is Cash Trash? The Purpose of Cash

Post by dkturner » Thu Mar 08, 2018 11:19 am

Doc wrote:
Thu Mar 08, 2018 9:32 am
Call_Me_Op wrote:
Thu Mar 08, 2018 8:14 am
Differentiating cash from bonds is really splitting hairs. I like 1 year t-bills right now. Over 2% yield and as safe and liquid as you can get. I use these instead of money market funds or short-term bond funds.
I know what you mean but the statement can lead to confusion. We might avoid some of that confusion if we sticked to actual definitions of various US Treasury obligations.

From Treasury Direct:

Treasury bills are short-term securities maturing in one year or less. https://www.treasurydirect.gov/instit/m ... tbills.htm

Treasury notes are interest-bearing securities that have a fixed maturity of not less than 1 year and not more than 10 years from date of issue. https://www.treasurydirect.gov/instit/m ... tnotes.htm

Treasury bonds are interest-bearing securities with maturities over 10 years. https://www.treasurydirect.gov/instit/m ... tbonds.htm

One of the problems with these definitions is that when we say a bond has less than one year left to maturity it is considered "cash" by accounting standards.

Another problem is that we all use "bonds" to refer to any fixed income security regardless of its duration.
Doc, you left out Treasury Floating Rate Notes. They are auctioned off every month. How would you classify them? :?:

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Re: Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Thu Mar 08, 2018 11:44 am

Doc wrote:
Thu Mar 08, 2018 9:32 am
Call_Me_Op wrote:
Thu Mar 08, 2018 8:14 am
Differentiating cash from bonds is really splitting hairs. I like 1 year t-bills right now. Over 2% yield and as safe and liquid as you can get. I use these instead of money market funds or short-term bond funds.
I know what you mean but the statement can lead to confusion. We might avoid some of that confusion if we sticked to actual definitions of various US Treasury obligations.
Agreed! And based on your post, I’ll modify my previous post to say that a 1-year T-bill is considered cash while a 5-year bond with 1-year left to maturity is considered a note. Clear as mud.
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Re: Is Cash Trash? The Purpose of Cash

Post by GibsonL6s » Thu Mar 08, 2018 12:54 pm

I hold some cash because there could be a situation where even the low or negative return on cash could have it be the best performing asset in one's portfolio.

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Thu Mar 08, 2018 1:35 pm

dkturner wrote:
Thu Mar 08, 2018 11:19 am
Doc, you left out Treasury Floating Rate Notes. They are auctioned off every month. How would you classify them?
I never even thought about them. Didn't pay attention when they came into existence.

The Treasury calls them notes and the initial term is 2 years which is consistent with the "note" nomenclature. But the rate is index to a 13 wk Treasury.

I don't know what to call them. If the coupon is really indexed to the 13 wk Bill I guess I'd consider them maybe a 26 week bill ladder????

It look like the spreads about 10 bps for 25 50. Don't think I'm going to buy any.

Hey Rick, bail us out please.
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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Thu Mar 08, 2018 1:40 pm

Rick Ferri wrote:
Thu Mar 08, 2018 11:44 am
Doc wrote:
Thu Mar 08, 2018 9:32 am
Call_Me_Op wrote:
Thu Mar 08, 2018 8:14 am
Differentiating cash from bonds is really splitting hairs. I like 1 year t-bills right now. Over 2% yield and as safe and liquid as you can get. I use these instead of money market funds or short-term bond funds.
I know what you mean but the statement can lead to confusion. We might avoid some of that confusion if we sticked to actual definitions of various US Treasury obligations.
Agreed! And based on your post, I’ll modify my previous post to say that a 1-year T-bill is considered cash while a 5-year bond with 1-year left to maturity is considered a note. Clear as mud.
It's a five year note, Rick. :D

Really thick mud.
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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Thu Mar 08, 2018 4:52 pm

Call_Me_Op wrote:
Thu Mar 08, 2018 8:14 am
Differentiating cash from bonds is really splitting hairs. I like 1 year t-bills right now. Over 2% yield and as safe and liquid as you can get. I use these instead of money market funds or short-term bond funds.
Yes, but individual T-bills are considered cash.

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Re: Is Cash Trash? The Purpose of Cash

Post by raven15 » Fri Mar 09, 2018 9:51 pm

Since we are all making up our own definitions of cash I 'll add mine. Cash is risk free in nominal terms and I can spend it in Walmart within the hour. Everything else is investments.
It's Time. Adding Interest.

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Re: Is Cash Trash? The Purpose of Cash

Post by radiowave » Fri Mar 09, 2018 11:03 pm

raven15 wrote:
Fri Mar 09, 2018 9:51 pm
Since we are all making up our own definitions of cash I 'll add mine. Cash is risk free in nominal terms and I can spend it in Walmart within the hour. Everything else is investments.
Love it, nice and simple. So if I can get "it" out of an ATM machine that counts as cash too?

And I count my T-Bills and 1 yr CDs as bonds. At least that's what I do on my spreadsheet
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Re: Is Cash Trash? The Purpose of Cash

Post by raven15 » Fri Mar 09, 2018 11:46 pm

radiowave wrote:
Fri Mar 09, 2018 11:03 pm
raven15 wrote:
Fri Mar 09, 2018 9:51 pm
Since we are all making up our own definitions of cash I 'll add mine. Cash is risk free in nominal terms and I can spend it in Walmart within the hour. Everything else is investments.
Love it, nice and simple. So if I can get "it" out of an ATM machine that counts as cash too?

And I count my T-Bills and 1 yr CDs as bonds. At least that's what I do on my spreadsheet
I only post if I can add something new and insightful to the conversation. In this forum all the intelligent and nuanced replies are generally filled long before I check in, so I'm stuck with whatever is left :-)
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Re: Is Cash Trash? The Purpose of Cash

Post by tennisplyr » Sat Mar 10, 2018 7:34 am

Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
Functionally very true, psychologically it helps you sleep at night.
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Re: Is Cash Trash? The Purpose of Cash

Post by Call_Me_Op » Sat Mar 10, 2018 7:43 am

pascalwager wrote:
Thu Mar 08, 2018 4:52 pm
Call_Me_Op wrote:
Thu Mar 08, 2018 8:14 am
Differentiating cash from bonds is really splitting hairs. I like 1 year t-bills right now. Over 2% yield and as safe and liquid as you can get. I use these instead of money market funds or short-term bond funds.
Yes, but individual T-bills are considered cash.
In my view, cash and bonds are one in the same. Cash can be considered a zero duration bond. I don't see the point in considering them to be fundamentally separate asset classes. It just leads to all of the confusion evident in this thread.

A T-bill that matures in 1 year is (essentially) a zero-coupon bond with a duration of a bit less than 1 year. It can certainly be "considered" cash, but it's not quite cash (because its value fluctuates or equivalently, because it has non-zero duration). It effectively converts to cash as it matures.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Is Cash Trash? The Purpose of Cash

Post by bling » Sat Mar 10, 2018 10:13 am

Call_Me_Op wrote:
Sat Mar 10, 2018 7:43 am
In my view, cash and bonds are one in the same. Cash can be considered a zero duration bond. I don't see the point in considering them to be fundamentally separate asset classes. It just leads to all of the confusion evident in this thread.
agreed.

do people consider US stocks the same as international stocks or emerging markets? or do they fall just fall under the equities allocation of your portfolio? i think the same thing applies to cash. it's not a bond by definition (e.g. couple payments), but i think it definitely falls under the bond portion of the your portfolio.

----

my definition of cash is same-day access. if you can't use it immediately to buy something then it has to be an investment. under this definition, i hold very little "cash". my checkings account averages $500 a month.

i also don't have a dedicated "emergency fund" (i have an emergency plan), because there are very few emergencies (0 if you are a law abiding citizen) that require same-day access to cash.

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Re: Is Cash Trash? The Purpose of Cash

Post by Lauretta » Sat Mar 10, 2018 10:19 am

Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
If you live in the Eurozone, where shorter term investment grade bonds have negative yields, I think that cash makes more sense than bonds; so I have a large portion of my portfolio in cash (and in structured products guaranteeing one's capital)
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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Sat Mar 10, 2018 10:38 am

bling wrote:
Sat Mar 10, 2018 10:13 am
... my definition of cash is same-day access. if you can't use it immediately to buy something then it has to be an investment. under this definition, i hold very little "cash". my checkings account averages $500 a month.
That's fine. But that has absolutely nothing to do with Rick's original point.
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
I don't think that very many of us consider what's in our checking accounts as part of our investment portfolio.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Is Cash Trash? The Purpose of Cash

Post by bling » Sat Mar 10, 2018 3:31 pm

Doc wrote:
Sat Mar 10, 2018 10:38 am
bling wrote:
Sat Mar 10, 2018 10:13 am
... my definition of cash is same-day access. if you can't use it immediately to buy something then it has to be an investment. under this definition, i hold very little "cash". my checkings account averages $500 a month.
That's fine. But that has absolutely nothing to do with Rick's original point.
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
I don't think that very many of us consider what's in our checking accounts as part of our investment portfolio.
what i'm doing with my cash is a consequence of agreeing completely with OP's proposition. all of my income is "waiting to be invested", therefore i hold little cash at given time. the other side of the spectrum would be accumulating a large amount of cash to spend (whether it be emergency funds, house down payment, car, etc.).

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Re: Is Cash Trash? The Purpose of Cash

Post by dbr » Mon Mar 12, 2018 9:30 am

Doc wrote:
Sat Mar 10, 2018 10:38 am
bling wrote:
Sat Mar 10, 2018 10:13 am
... my definition of cash is same-day access. if you can't use it immediately to buy something then it has to be an investment. under this definition, i hold very little "cash". my checkings account averages $500 a month.
That's fine. But that has absolutely nothing to do with Rick's original point.
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
I don't think that very many of us consider what's in our checking accounts as part of our investment portfolio.
True. Just another example of the pointlessness of most discussions about cash. I don't consider either current credit card balance or potential credit card limit as cash either. As to Rick's original point, I still don't know what the point is.

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Re: Is Cash Trash? The Purpose of Cash

Post by dkturner » Mon Mar 12, 2018 12:22 pm

dbr wrote:
Mon Mar 12, 2018 9:30 am
Doc wrote:
Sat Mar 10, 2018 10:38 am
bling wrote:
Sat Mar 10, 2018 10:13 am
... my definition of cash is same-day access. if you can't use it immediately to buy something then it has to be an investment. under this definition, i hold very little "cash". my checkings account averages $500 a month.
That's fine. But that has absolutely nothing to do with Rick's original point.
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
I don't think that very many of us consider what's in our checking accounts as part of our investment portfolio.
True. Just another example of the pointlessness of most discussions about cash. I don't consider either current credit card balance or potential credit card limit as cash either. As to Rick's original point, I still don't know what the point is.
With regard to Rick Ferri’s point I believe he is simply saying that, historically, short-term bonds have not been particularly volatile in their total returns and have provided higher total returns than money market accounts/funds. That being the case they should constitute the emergency reserve of choice for the average Boglehead, who won’t attempt to take advantage of the, current, rapidly rising yields on money market instruments to achieve a short-term higher total return.

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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Thu Mar 15, 2018 2:39 am

As Rick says, cash may be waiting to be invested (on stocks) or spent. But cash is already an investment if it's earning interest, even if the interest is less than inflation. If kept in your home safe, then it's not an investment.

Interest-earning cash is an investment, and as such, should be considered a part of one's portfolio. Vanguard includes cash in the "short-term reserves" portion of the portfolio (short-term reserves, bonds, and stocks).

Cash in a checking account, if not earning interest, would not be an investment.

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Re: Is Cash Trash? The Purpose of Cash

Post by SGM » Thu Mar 15, 2018 4:25 am

Schwab sweep account is getting .12% up to $1MM vs. currently 1.4% in a money market account. Neither is anything to brag about. Above $1MM the sweep account gets .3%. Why would you keep much money in cash? Consider probate and a large estate account. I am advising the executor to use the money market account prior to disbursement of funds to the heirs. This is a better use of cash than the decedent's FA who kept the cash in the sweep account. :oops:

Neither the money market or the sweep account is an investment. Probate will take about 6 months so there are not a lot of choices.

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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Thu Mar 15, 2018 3:23 pm

SGM wrote:
Thu Mar 15, 2018 4:25 am
Schwab sweep account is getting .12% up to $1MM vs. currently 1.4% in a money market account. Neither is anything to brag about. Above $1MM the sweep account gets .3%. Why would you keep much money in cash? Consider probate and a large estate account. I am advising the executor to use the money market account prior to disbursement of funds to the heirs. This is a better use of cash than the decedent's FA who kept the cash in the sweep account. :oops:

Neither the money market or the sweep account is an investment. Probate will take about 6 months so there are not a lot of choices.
The 1.4% MM account might well be something to brag about, if you want a very low duration investment as part of your portfolio. (I have a 1.55% bank savings account, and might brag a little more.)

Cash is defined as having a maturity of 0 to 1 years. If you strongly desire a very low maturity component as part of your portfolio, then you may be willing to live with a small negative real return. What's more important, the duration or the return? This is an individual decision.

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Re: Is Cash Trash? The Purpose of Cash

Post by Rick Ferri » Fri Mar 16, 2018 5:02 pm

For the record, I have a few months cash in a checking account and emergency cash is in a short-term bond index fund. The emergency money is “waiting to be spent” although it may never be spent. I don’t expect much return if any from this money over taxes and inflation, but that’s not the point.
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Re: Is Cash Trash? The Purpose of Cash

Post by smectym » Fri Mar 16, 2018 11:36 pm

For some, at a given intersection point of life expectancy and net investable assets, there’s no point in taking on more equity or long-term bond risk, so it makes sense to funnel new income and earnings into cash or short-term bonds. Perhaps there are objections to this approach if one takes into account the interests of expectant heirs, but even in that case, if the equity component of the estate is large as an absolute number, and heirs enjoy step-up in basis, then if they also inherent an outsized chunk of cash and cash equivalents, that’s not so bad. And if they’re incensed about it, they’ll know which board on which to come and vent

Smectym

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Re: Is Cash Trash? The Purpose of Cash

Post by Crushtheturtle » Fri Mar 16, 2018 11:55 pm

Why does one need cash and/or bonds to be set aside for undefined future needs if one has large unrealized gains from equity shares purchased years ago? Asking for a friend.
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Re: Is Cash Trash? The Purpose of Cash

Post by smectym » Sat Mar 17, 2018 12:17 am

Crushtheturtle wrote:
Fri Mar 16, 2018 11:55 pm
Why does one need cash and/or bonds to be set aside for undefined future needs if one has large unrealized gains from equity shares purchased years ago? Asking for a friend.
Crushtheturtle, one potential argument for cash accumulation vs. an equity position with significant unrealized capital gains is that cash functions as a brute force hedge against a major downdraft in equity prices. The strategy is currently gaining appeal as the yield on cash is rising. Note that the strategy has a certain boglehead-friendly component: it doesn’t involve a “market-timing” call to sell ones current equity position on the hunch, or even the well-founded observation, that equities have had a nose-bleeding run of history-mocking proportions since SPX 666. The boglehead-anathema component, I suppose, is that electing to divert new income and earnings to cash as opposed to more stocks could be construed as some sort of implicit market-timing. I’ll take that bullet.

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Re: Is Cash Trash? The Purpose of Cash

Post by james22 » Sat Mar 17, 2018 1:01 am

Optionality, optionality, optionality.

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Re: Is Cash Trash? The Purpose of Cash

Post by pascalwager » Sat Mar 17, 2018 4:45 pm

Crushtheturtle wrote:
Fri Mar 16, 2018 11:55 pm
Why does one need cash and/or bonds to be set aside for undefined future needs if one has large unrealized gains from equity shares purchased years ago? Asking for a friend.
Cash and bonds can be used/spent down in early retirement to reduce sequence of returns risk. Anyway, that's what a friend told me.

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Re: Is Cash Trash? The Purpose of Cash

Post by Mingus » Sat Mar 17, 2018 8:44 pm

hilink73 wrote:
Sun Mar 04, 2018 12:37 pm
Rick Ferri wrote:
Sun Mar 04, 2018 12:26 pm
People often ask what purpose cash has in a portfolio. Cash serves two purposes; it’s either waiting to be invested or it’s waiting to be spent.

Rick Ferri
Big, if true.
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Re: Is Cash Trash? The Purpose of Cash

Post by Call_Me_Op » Sun Mar 18, 2018 7:16 am

Rick Ferri wrote:
Fri Mar 16, 2018 5:02 pm
For the record, I have a few months cash in a checking account and emergency cash is in a short-term bond index fund. The emergency money is “waiting to be spent” although it may never be spent. I don’t expect much return if any from this money over taxes and inflation, but that’s not the point.
By the way, Rick, happy to see you posting again. Your 2006 edition of "All About ASSET ALLOCATION" is standard bathroom reading in my house.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Is Cash Trash? The Purpose of Cash

Post by bck63 » Sun May 26, 2019 7:35 am

Rick Ferri wrote:
Sun Mar 04, 2018 1:24 pm
The yield curve it typically steep on the short end. Rather than holding cash as a fixed allocation to reduce volatility, I’d prefer to hold a short-term bond fund and pick up the extra yield.
It is validating for me to read this from Mr. Ferri, as I peruse posts about cash. I have started doing exactly this with my cash. I use the Fidelity short term treasury and short term bond funds. I alternate contributions to each of them periodically, to avoid round trip violations when I need the money. I always have near-immediate access to one of them (24-48 hours). I do keep $2,000 in a MMF for ATM needs, cash transfers to kids for gifts, etc (they only want money), and small day-to-day purchases. I replenish this on paydays as needed. The rest is invested for extra yield.

I hate cash.

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Sun May 26, 2019 7:40 am

bck63 wrote:
Sun May 26, 2019 7:35 am
Rick Ferri wrote:
Sun Mar 04, 2018 1:24 pm
The yield curve it typically steep on the short end.
I hate cash.
Today's yield curve is not typical.
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Re: Is Cash Trash? The Purpose of Cash

Post by bck63 » Sun May 26, 2019 7:55 am

Doc wrote:
Sun May 26, 2019 7:40 am
bck63 wrote:
Sun May 26, 2019 7:35 am
Rick Ferri wrote:
Sun Mar 04, 2018 1:24 pm
The yield curve it typically steep on the short end.
I hate cash.
Today's yield curve is not typical.
I was quoting post from Mr. Ferri from 3/2018 as I looked through posts on what people do with cash. I'm still comfortable with keeping reserves I'll need in a couple of years (cars, future vacations) in a short-term bond fund instead of a bank account or MMF.

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Re: Is Cash Trash? The Purpose of Cash

Post by Aptenodytes » Sun May 26, 2019 9:21 am

It it were obvious there wouldn't be so many people disagreeing with it. I've always thought there was a lot of magical thinking about cash, and I saw Rick's post as saying 'stick to reality.'
samsoes wrote:
Sun Mar 04, 2018 3:19 pm

The original post is just an obvious statement. Nothing more, nothing less, nothing actionable.

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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Sun May 26, 2019 9:48 am

bck63 wrote:I was quoting post from Mr. Ferri from 3/2018 as I looked through posts on what people do with cash. I'm still comfortable with keeping reserves I'll need in a couple of years (cars, future vacations) in a short-term bond fund instead of a bank account or MMF.

Code: Select all

Date    1 Mo	2 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr
5/24/19	2.37	2.38	2.35	2.39	2.33	2.16	2.1	2.12
Your short term (Treasury) fund is earning less than a 4 week T-bill

This is not typical. It is not 3/2018.
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Re: Is Cash Trash? The Purpose of Cash

Post by goodenyou » Sun May 26, 2019 9:50 am

I erroneously believed that I could more reliably predict the direction of bond markets than equity markets based on predicted interest rate direction. With historically low interest rates and an economy seeming to improve, interest rates appeared to have no place to go but up. Therefore, cash as a substitute for bonds appeared to be a good strategy. Cash appeared to be a decent asset allocation for 2108, especially with the interest rate hike teaser in late December. What I subsequently learned is that I am as bad at predicting stock market direction as I am bond market direction. IMO, cash should be held for short term needs that are sensitive to preservation of principle (emergency fund, purchase of items with a 5 year horizon). I have leaned that (long term) cash is an expensive and misleading insurance policy for volatility.
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Re: Is Cash Trash? The Purpose of Cash

Post by bck63 » Sun May 26, 2019 10:21 am

Doc wrote:
Sun May 26, 2019 9:48 am
bck63 wrote:I was quoting post from Mr. Ferri from 3/2018 as I looked through posts on what people do with cash. I'm still comfortable with keeping reserves I'll need in a couple of years (cars, future vacations) in a short-term bond fund instead of a bank account or MMF.

Code: Select all

Date    1 Mo	2 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr
5/24/19	2.37	2.38	2.35	2.39	2.33	2.16	2.1	2.12
Your short term (Treasury) fund is earning less than a 4 week T-bill

This is not typical. It is not 3/2018.
The short term bond index fund (FNSOX) current SEC yield is 2.52.

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vineviz
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Re: Is Cash Trash? The Purpose of Cash

Post by vineviz » Sun May 26, 2019 10:32 am

Aptenodytes wrote:
Sun May 26, 2019 9:21 am
It it were obvious there wouldn't be so many people disagreeing with it. I've always thought there was a lot of magical thinking about cash, and I saw Rick's post as saying 'stick to reality.'
samsoes wrote:
Sun Mar 04, 2018 3:19 pm

The original post is just an obvious statement. Nothing more, nothing less, nothing actionable.
Indeed, the obsession with cash is one I don’t personally understand. Especially for a so-called emergency fund, which has an indeterminate time horizon.

For much of recent history, an emergency fund in 100% cash has consistently lost purchasing power. Even a mild accommodation of the reality that most investors face would dictate a much more prudent approach to accommodate inflation.

Even an emergency fund with 90% in iShares 1-3 Year Treasury Bond ETF (SHY) and 10% in iShares S&P Small-Cap 600 Growth ETF (IJT) would have a fighting chance of keeping up with inflation while being incredibly unlikely to ever have a nominal drawdown exceeding 4%.

If you normally have an emergency fund with 6 months of spending, you could do worse than bump it to 6.25 months and invest in a 50/50 combo of Vanguard LifeStrategy Income Fund (VASIX) and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Doc
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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Sun May 26, 2019 10:36 am

bck63 wrote:
Sun May 26, 2019 10:21 am
Doc wrote:
Sun May 26, 2019 9:48 am
bck63 wrote:I was quoting post from Mr. Ferri from 3/2018 as I looked through posts on what people do with cash. I'm still comfortable with keeping reserves I'll need in a couple of years (cars, future vacations) in a short-term bond fund instead of a bank account or MMF.

Code: Select all

Date    1 Mo	2 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr
5/24/19	2.37	2.38	2.35	2.39	2.33	2.16	2.1	2.12
Your short term (Treasury) fund is earning less than a 4 week T-bill

This is not typical. It is not 3/2018.
The short term bond index fund (FNSOX) current SEC yield is 2.52.
Your short term (Treasury) fund is earning less than a 4 week T-bill.

You are conflating term risk with credit risk. If you want to earn more dollars by increasing your credit risk that's fine but it is no longer risk free cash.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

bck63
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Re: Is Cash Trash? The Purpose of Cash

Post by bck63 » Sun May 26, 2019 10:45 am

Doc wrote:
Sun May 26, 2019 10:36 am
bck63 wrote:
Sun May 26, 2019 10:21 am
Doc wrote:
Sun May 26, 2019 9:48 am
bck63 wrote:I was quoting post from Mr. Ferri from 3/2018 as I looked through posts on what people do with cash. I'm still comfortable with keeping reserves I'll need in a couple of years (cars, future vacations) in a short-term bond fund instead of a bank account or MMF.

Code: Select all

Date    1 Mo	2 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr
5/24/19	2.37	2.38	2.35	2.39	2.33	2.16	2.1	2.12
Your short term (Treasury) fund is earning less than a 4 week T-bill

This is not typical. It is not 3/2018.
The short term bond index fund (FNSOX) current SEC yield is 2.52.
Your short term (Treasury) fund is earning less than a 4 week T-bill.

You are conflating term risk with credit risk. If you want to earn more dollars by increasing your credit risk that's fine but it is no longer risk free cash.
I am willing to take some increased credit risk for increased yield in the short-term fund for money I will need in 2-3 years. As Vanguard states about its own short-term bond index fund, "Investors with a short-term savings goal who are willing to accept some price movement may wish to consider this fund."

I do hear you about credit risk though. It's not really an accurate comparison with a treasury-only fund. Overall, however, it's been very safe. But...you are right. There is no free lunch. Increased yield = increased risk. No way around it.

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willthrill81
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Re: Is Cash Trash? The Purpose of Cash

Post by willthrill81 » Sun May 26, 2019 10:47 am

vineviz wrote:
Sun May 26, 2019 10:32 am
Aptenodytes wrote:
Sun May 26, 2019 9:21 am
It it were obvious there wouldn't be so many people disagreeing with it. I've always thought there was a lot of magical thinking about cash, and I saw Rick's post as saying 'stick to reality.'
samsoes wrote:
Sun Mar 04, 2018 3:19 pm

The original post is just an obvious statement. Nothing more, nothing less, nothing actionable.
Indeed, the obsession with cash is one I don’t personally understand. Especially for a so-called emergency fund, which has an indeterminate time horizon.

For much of recent history, an emergency fund in 100% cash has consistently lost purchasing power. Even a mild accommodation of the reality that most investors face would dictate a much more prudent approach to accommodate inflation.

Even an emergency fund with 90% in iShares 1-3 Year Treasury Bond ETF (SHY) and 10% in iShares S&P Small-Cap 600 Growth ETF (IJT) would have a fighting chance of keeping up with inflation while being incredibly unlikely to ever have a nominal drawdown exceeding 4%.

If you normally have an emergency fund with 6 months of spending, you could do worse than bump it to 6.25 months and invest in a 50/50 combo of Vanguard LifeStrategy Income Fund (VASIX) and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX).
While I'm not as opposed to cash in the form of T-bills or a high yield savings account as you seem to be, I agree that taking on a little volatility seems very likely to be worthwhile. When we had more of a need for emergency funds, we kept 2/3 of it in Vanguard's Wellesley Income fund. Considering that in its nearly 50 years, the maximum nominal drawdown it experienced was about 20%, I agree that it would make good sense to 'overfund' one's EF by perhaps 25% and invest it in such a fund.

From 1977-current (data available in PV), a portfolio of 85% short-term Treasuries and 15% TSM had nearly identical volatility and maximum drawdown to one with 100% STT, but the former had a 1% higher nominal return, which equated to a 41% higher real return.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

mmcmonster
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Re: Is Cash Trash? The Purpose of Cash

Post by mmcmonster » Sun May 26, 2019 10:50 am

jebmke wrote:
Sun Mar 04, 2018 1:07 pm
My entire portfolio is liquid. I can convert it to cash in 24 hours and move it to my bank in another 24 hours. In fact, I don't count anything as being in my portfolio that can't make this trip in that short of time. That is why I never counted real estate or even vested stock options.
I'm the same way. Outside of my retirement accounts, all my investments are in a taxable account and essentially liquid within a week. Anything that needs faster money can be dealt with via credit cards.

One of my good friends scoffed at this a decade ago. Now he's envious as he's wondering about the long term liquidity for his various properties as he's approaching retirement.

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willthrill81
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Re: Is Cash Trash? The Purpose of Cash

Post by willthrill81 » Sun May 26, 2019 10:52 am

mmcmonster wrote:
Sun May 26, 2019 10:50 am
jebmke wrote:
Sun Mar 04, 2018 1:07 pm
My entire portfolio is liquid. I can convert it to cash in 24 hours and move it to my bank in another 24 hours. In fact, I don't count anything as being in my portfolio that can't make this trip in that short of time. That is why I never counted real estate or even vested stock options.
I'm the same way. Outside of my retirement accounts, all my investments are in a taxable account and essentially liquid within a week. Anything that needs faster money can be dealt with via credit cards.

One of my good friends scoffed at this a decade ago. Now he's envious as he's wondering about the long term liquidity for his various properties as he's approaching retirement.
Real estate's liquidity depends a lot on the strength of the local market. Around here, you can sell a home and get cash in hand in under 60 days easily, maybe as few as 30 days. That's pretty liquid as far as I'm concerned. However, a decade ago, many areas of the country were seeing homes sit for months with no activity at all. That being said, we bought our first home in the upper Midwest in July of 2009, and the home was on the market less than a week.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

bck63
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Re: Is Cash Trash? The Purpose of Cash

Post by bck63 » Sun May 26, 2019 11:02 am

vineviz wrote:
Sun May 26, 2019 10:32 am
Aptenodytes wrote:
Sun May 26, 2019 9:21 am
It it were obvious there wouldn't be so many people disagreeing with it. I've always thought there was a lot of magical thinking about cash, and I saw Rick's post as saying 'stick to reality.'
samsoes wrote:
Sun Mar 04, 2018 3:19 pm

The original post is just an obvious statement. Nothing more, nothing less, nothing actionable.
Indeed, the obsession with cash is one I don’t personally understand. Especially for a so-called emergency fund, which has an indeterminate time horizon.

For much of recent history, an emergency fund in 100% cash has consistently lost purchasing power. Even a mild accommodation of the reality that most investors face would dictate a much more prudent approach to accommodate inflation.

Even an emergency fund with 90% in iShares 1-3 Year Treasury Bond ETF (SHY) and 10% in iShares S&P Small-Cap 600 Growth ETF (IJT) would have a fighting chance of keeping up with inflation while being incredibly unlikely to ever have a nominal drawdown exceeding 4%.

If you normally have an emergency fund with 6 months of spending, you could do worse than bump it to 6.25 months and invest in a 50/50 combo of Vanguard LifeStrategy Income Fund (VASIX) and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX).
Oh great. Now I have something else to think about. :happy That sounds like a good idea. The only problem is, what happens if the stock portion plummets when I need it? Just take out of the TIPS fund? At Fidelity, what about 10/90 in index funds? Total Market/Treasury?

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vineviz
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Re: Is Cash Trash? The Purpose of Cash

Post by vineviz » Sun May 26, 2019 11:34 am

bck63 wrote:
Sun May 26, 2019 11:02 am
Oh great. Now I have something else to think about. :happy That sounds like a good idea. The only problem is, what happens if the stock portion plummets when I need it? Just take out of the TIPS fund?

Sure, just like any portfolio: withdraw first from assets that are below their target weight.
bck63 wrote:
Sun May 26, 2019 11:02 am
At Fidelity, what about 10/90 in index funds? Total Market/Treasury?
I’m sure that’d be fine. Ideally the stock fund would be relatively tax-efficient ( I’d probably use an ETF with a low dividend yield) but the important thing is to not overcomplicate it: add an extra 5% to the emergency fund to allow for slightly more volatility plus include slightly longer bonds and a small allocation to stocks to offset inflation.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

fujiters
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Re: Is Cash Trash? The Purpose of Cash

Post by fujiters » Sun May 26, 2019 4:17 pm

bck63 wrote:
Sun May 26, 2019 11:02 am
vineviz wrote:
Sun May 26, 2019 10:32 am
Aptenodytes wrote:
Sun May 26, 2019 9:21 am
It it were obvious there wouldn't be so many people disagreeing with it. I've always thought there was a lot of magical thinking about cash, and I saw Rick's post as saying 'stick to reality.'
samsoes wrote:
Sun Mar 04, 2018 3:19 pm

The original post is just an obvious statement. Nothing more, nothing less, nothing actionable.
Indeed, the obsession with cash is one I don’t personally understand. Especially for a so-called emergency fund, which has an indeterminate time horizon.

For much of recent history, an emergency fund in 100% cash has consistently lost purchasing power. Even a mild accommodation of the reality that most investors face would dictate a much more prudent approach to accommodate inflation.

Even an emergency fund with 90% in iShares 1-3 Year Treasury Bond ETF (SHY) and 10% in iShares S&P Small-Cap 600 Growth ETF (IJT) would have a fighting chance of keeping up with inflation while being incredibly unlikely to ever have a nominal drawdown exceeding 4%.

If you normally have an emergency fund with 6 months of spending, you could do worse than bump it to 6.25 months and invest in a 50/50 combo of Vanguard LifeStrategy Income Fund (VASIX) and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX).
Oh great. Now I have something else to think about. :happy That sounds like a good idea. The only problem is, what happens if the stock portion plummets when I need it? Just take out of the TIPS fund? At Fidelity, what about 10/90 in index funds? Total Market/Treasury?
Why not I bonds?
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

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Doc
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Re: Is Cash Trash? The Purpose of Cash

Post by Doc » Sun May 26, 2019 5:33 pm

fujiters wrote:
Sun May 26, 2019 4:17 pm
Why not I bonds?
1) I bonds protect you from unexpected inflation. Cash is by definition a short term asset. It is not plausible that unexpected inflation will occur in the short term.

2) I bonds "tanked" in '08. Cash did not.

I-bonds may have a place in your portfolio. But a substitute for cash is not one of those places.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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gmaynardkrebs
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Re: Is Cash Trash? The Purpose of Cash

Post by gmaynardkrebs » Sun May 26, 2019 5:58 pm

The greatest value of cash is its tremendous optionality. No other investment can compare in this regard, Warren Buffet appreciates cash in a way that few other investors do, and has benefited immensely. I hear many investors brag that they are "fully invested" as if that is courage, instead of ignorance.

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Re: Is Cash Trash? The Purpose of Cash

Post by Ferdinand2014 » Sun May 26, 2019 11:16 pm

My portfolio uses a barbell approach with stocks (S&P 500 index fund) at one end and cash (100% T-bills) at the other end. I follow Warren Buffett’s investing thought process in this way. I do not liability match with a bonds duration. I view my investing horizon and needs as a repeated series of short horizons in the near future of 1-3 years (cash) and everything else in the fuzzy way off horizon (stocks). This provides a margin of safety, inflation protection, a larger portion of equity space and simplicity. If interest rates rise much above 4-4.5% for a 10 year treasury bond at current stock valuations, I might reconsider extending my duration. At 2.4 % for the 10 year it doesn’t make much sense to me though.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: Is Cash Trash? The Purpose of Cash

Post by gmaynardkrebs » Mon May 27, 2019 10:42 am

Ferdinand2014 wrote:
Sun May 26, 2019 11:16 pm
My portfolio uses a barbell approach with stocks (S&P 500 index fund) at one end and cash (100% T-bills) at the other end. I follow Warren Buffett’s investing thought process in this way. I do not liability match with a bonds duration. I view my investing horizon and needs as a repeated series of short horizons in the near future of 1-3 years (cash) and everything else in the fuzzy way off horizon (stocks). This provides a margin of safety, inflation protection, a larger portion of equity space and simplicity. If interest rates rise much above 4-4.5% for a 10 year treasury bond at current stock valuations, I might reconsider extending my duration. At 2.4 % for the 10 year it doesn’t make much sense to me though.
Are you 50/50 stocks/tbills?

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Re: Is Cash Trash? The Purpose of Cash

Post by Ferdinand2014 » Mon May 27, 2019 11:28 am

gmaynardkrebs wrote:
Mon May 27, 2019 10:42 am
Ferdinand2014 wrote:
Sun May 26, 2019 11:16 pm
My portfolio uses a barbell approach with stocks (S&P 500 index fund) at one end and cash (100% T-bills) at the other end. I follow Warren Buffett’s investing thought process in this way. I do not liability match with a bonds duration. I view my investing horizon and needs as a repeated series of short horizons in the near future of 1-3 years (cash) and everything else in the fuzzy way off horizon (stocks). This provides a margin of safety, inflation protection, a larger portion of equity space and simplicity. If interest rates rise much above 4-4.5% for a 10 year treasury bond at current stock valuations, I might reconsider extending my duration. At 2.4 % for the 10 year it doesn’t make much sense to me though.
Are you 50/50 stocks/tbills?
About 85/15 at the moment. My IPS states an X amount of cash (T-bills) equal to at least 2 years of expenses if I am unable to work. In addition, I will add to that anticipating future larger lumpy expenses like a new roof or car. The rest gets put into 2 separate S&P 500 funds (my SEP and my DW 403b). I do not rebalance. The percent will vary based on lumpy expenses, 2 year budget estimate ( which has been going down as my debt has been paid off), market returns from the S&P 500, etc. I anticipate increasing the cash minimum to maybe 5 years when both my DW and I are retired in the next 15 plus years.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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