Asset Allocation - Cash Position

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mrrentman
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Asset Allocation - Cash Position

Post by mrrentman » Sun Mar 03, 2019 2:43 pm

When reading about asset allocations and the various ratios like 60/40 for stocks/bonds, I'm unclear if that 40% is also supposed to include your cash position.
Does 40% of all my investable assets include both my bonds and my cash reserves?
Or is your cash position completely outside that 100% as an isolated amount?
Thanks

retiredjg
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Re: Asset Allocation - Cash Position

Post by retiredjg » Sun Mar 03, 2019 3:08 pm

It can depend and the answer is partially just how you prefer to do it.

Many people do not have a cash position at all in a retirement portfolio. So it would be 60% stocks and 60% bonds (or bond substitutes). And your emergency fund would be sitting on the side, likely in cash or cash equivalent, not counted as part of anything.

Or let's say you want to have some cash in your retirement portfolio - you can do that and the same 100% is divided up as 60%/35%/5% which is still 60% stocks and 40% in fixed income assets (the fixed income assets being the bonds and the cash together).

All of this is complicated by what people call "cash". Some people call CDs cash or cash equivalent but also count it as part of the bond side of the portfolio.

The point I'm making is that there a many ways of doing this and they are probably all "right".

To specifically answer your first sentence....the 40% would usually include your cash position unless it is your emergency fund or otherwise set aside for a special goal. And if your portfolio is large, you could even include those. I would not do it when your portfolio is small though. It throws everything off kilter.

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billthecat
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Re: Asset Allocation - Cash Position

Post by billthecat » Sun Mar 03, 2019 3:11 pm

mrrentman wrote:
Sun Mar 03, 2019 2:43 pm
When reading about asset allocations and the various ratios like 60/40 for stocks/bonds, I'm unclear if that 40% is also supposed to include your cash position.
Does 40% of all my investable assets include both my bonds and my cash reserves?
Or is your cash position completely outside that 100% as an isolated amount?
Thanks
To me, it's 40% "fixed income" not "bonds" so I figure it includes bonds, CDs, money market, cash, piggy bank, etc. I decided how much cash/MM I want (e.g., x no of years' expenses) and top up the fixed income allocation with bonds.
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ruralavalon
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Re: Asset Allocation - Cash Position

Post by ruralavalon » Sun Mar 03, 2019 4:44 pm

Welcome to the forum :) .

mrrentman wrote:
Sun Mar 03, 2019 2:43 pm
When reading about asset allocations and the various ratios like 60/40 for stocks/bonds, I'm unclear if that 40% is also supposed to include your cash position.
Does 40% of all my investable assets include both my both bonds, CDs and Amy other fixed income investments and my cash reserves?
Or is your cash position completely outside that 100% as an isolated amount?
In discussing asset allocation, I prefer the terminology "fixed income" rather than "bonds". To me asset allocation is equities/fixed income.

Fixed income would include bonds, bond funds, CDs, and any other fixed income investments such as savings accounts and money market funds if a part of the investable assets.

But I would not include any cash reserves (the "emergency fund", or a reserve for a home down payment) in the investable assets.

We do not have any cash or cash equivalents like CDs, savings accounts or money market fund in our investing portfolio or as part of our asset allocation.
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mrrentman
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Re: Asset Allocation - Cash Position

Post by mrrentman » Mon Mar 04, 2019 10:43 am

Thank you everyone.

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midareff
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Re: Asset Allocation - Cash Position

Post by midareff » Mon Mar 04, 2019 10:47 am

FWIW, we are retired and maintain a conservative portfolio. At this time roughly 48% equities, 50% FI and bank cash can run 2% to 4% with the others varying accordingly.

carol-brennan
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Re: Asset Allocation - Cash Position

Post by carol-brennan » Mon Mar 04, 2019 10:50 am

mrrentman wrote:
Sun Mar 03, 2019 2:43 pm
When reading about asset allocations and the various ratios like 60/40 for stocks/bonds, I'm unclear if that 40% is also supposed to include your cash position.
Does 40% of all my investable assets include both my bonds and my cash reserves?
Or is your cash position completely outside that 100% as an isolated amount?
Thanks
Any position that can fluctuate to the downside should not be considered part of "cash," IMO. Bonds can take a hit, too, especially when starting from the historically low levels of today. CDs and G fund (if you have access to TSP) are cash equivalents, not bonds.

https://www.wellsfargofunds.com/ind/inv ... rates.html
Last edited by carol-brennan on Mon Mar 04, 2019 10:54 am, edited 2 times in total.

dbr
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Re: Asset Allocation - Cash Position

Post by dbr » Mon Mar 04, 2019 10:52 am

midareff wrote:
Mon Mar 04, 2019 10:47 am
FWIW, we are retired and maintain a conservative portfolio. At this time roughly 48% equities, 50% FI and bank cash can run 2% to 4% with the others varying accordingly.
We are similar. Cash is distributed here and there as an inevitable result of the coming and going of money from various transactions. We also run around 2%-4% in such things as sweep and money market funds, bank cash, and so on.

I would certainly count all cash as part of assets and mostly as part of investments, including emergency funds, but I would not classify cash as a separate asset class.

dbr
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Re: Asset Allocation - Cash Position

Post by dbr » Mon Mar 04, 2019 10:54 am

carol-brennan wrote:
Mon Mar 04, 2019 10:50 am
mrrentman wrote:
Sun Mar 03, 2019 2:43 pm
When reading about asset allocations and the various ratios like 60/40 for stocks/bonds, I'm unclear if that 40% is also supposed to include your cash position.
Does 40% of all my investable assets include both my bonds and my cash reserves?
Or is your cash position completely outside that 100% as an isolated amount?
Thanks
Any position that can fluctuate to the downside should not be considered part of "cash," IMO. Bonds can take a hit, too, especially when starting from the historically low levels of today. CDs and G fund (if you have access to TSP) are cash equivalents.
True, but cash can easily be classified as part of "bonds" which is the more general category. Ironically "fixed income" is mostly neither fixed (the value can vary) nor income (it is assets not income). Of course the term originates with the idea that such assets deliver income that is fixed in annual amount, such as the coupon on a bond.

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goingup
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Re: Asset Allocation - Cash Position

Post by goingup » Mon Mar 04, 2019 11:07 am

mrrentman wrote:
Sun Mar 03, 2019 2:43 pm
Does 40% of all my investable assets include both my bonds and my cash reserves?
Mine does. Cash allocation is part of the 40% of our 60/40 portfolio.

You'll find opinions differ on this topic. For me, including cash in the 40% allocation keeps me thinking clearly about the risk/return decisions I'm making. You may also see posters claim to be in 100% equity portfolio (except for their 6-figure cash reserve). :wink:

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Wiggums
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Re: Asset Allocation - Cash Position

Post by Wiggums » Mon Mar 04, 2019 11:12 am

midareff wrote:
Mon Mar 04, 2019 10:47 am
FWIW, we are retired and maintain a conservative portfolio. At this time roughly 48% equities, 50% FI and bank cash can run 2% to 4% with the others varying accordingly.
We use the term fixed income instead of bonds for the reasons stated above. It better describes our other types of liquid assets.

you can do that and the same 100% is divided up as 60%/35%/5% which is still 60% stocks and 40% in fixed income assets (the fixed income assets being the bonds and the cash together). To specifically call out the 5% cash position,
Last edited by Wiggums on Mon Mar 04, 2019 11:15 am, edited 1 time in total.

drk
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Re: Asset Allocation - Cash Position

Post by drk » Mon Mar 04, 2019 11:14 am

goingup wrote:
Mon Mar 04, 2019 11:07 am
You'll find opinions differ on this topic. For me, including cash in the 40% allocation keeps me thinking clearly about the risk/return decisions I'm making. You may also see posters claim to be in 100% equity portfolio (except for their 6-figure cash reserve). :wink:
Exactly. I count cash as part of fixed income to help me avoid falling prey to mental accounting.

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goingup
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Re: Asset Allocation - Cash Position

Post by goingup » Mon Mar 04, 2019 11:25 am

Wiggums wrote:
Mon Mar 04, 2019 11:12 am
you can do that and the same 100% is divided up as 60%/35%/5% which is still 60% stocks and 40% in fixed income assets (the fixed income assets being the bonds and the cash together). To specifically call out the 5% cash position,
Yes, I call out the cash position separately, as you do.

pacodelostigres
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Re: Asset Allocation - Cash Position

Post by pacodelostigres » Mon Mar 04, 2019 11:29 am

We have a small six figure cash balance and don't count it as part of asset allocation. That's based on the money being set aside for several specific purposes: 30k for 529 contributions to be made within 3 years, 12k for home maintenance (mostly a new roof within five years), 40k for an emergency fund (job/medical), 5k self escrow for taxes and annual bills, a small rolling vacation fund, and a 20k and growing car fund for purchases to be made when our leases end in a year.

It's all in a high yielding savings account that's earning enough to basically offset inflation. We contribute monthly to the maintenance, vacation, escrow, and car funds.

If we were sitting on cash because I didn't want to buy bonds or equities, but it had no purpose, I'd lump it in with fixed income when doing retirement planning.

nesdog
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Re: Asset Allocation - Cash Position

Post by nesdog » Mon Mar 04, 2019 12:06 pm

Interesting answers.

In our case, I count items in MM mutual funds, or the brokerage holding accounts, as cash. (This doesn't mean any emergency funds). I've never included this as part of the traditional stocks/bonds breakout. So I describe our investments as 40/35/25, etc. I will have to consider if I'd move this to the bond side, as that would tilt the description as 40/60. Hmmmm

What does most of the literature suggest?
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badger42
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Re: Asset Allocation - Cash Position

Post by badger42 » Mon Mar 04, 2019 12:11 pm

I count cash as fixed income, and bucket it with CDs and short-ish term treasuries as within FI. But cash for us is a pretty minimal slush fund because anything else is invested, even if it's 6-month or 1-year treasuries for the short end.

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midareff
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Re: Asset Allocation - Cash Position

Post by midareff » Mon Mar 04, 2019 1:02 pm

Wiggums wrote:
Mon Mar 04, 2019 11:12 am
midareff wrote:
Mon Mar 04, 2019 10:47 am
FWIW, we are retired and maintain a conservative portfolio. At this time roughly 48% equities, 50% FI and bank cash can run 2% to 4% with the others varying accordingly.
We use the term fixed income instead of bonds for the reasons stated above. It better describes our other types of liquid assets.

you can do that and the same 100% is divided up as 60%/35%/5% which is still 60% stocks and 40% in fixed income assets (the fixed income assets being the bonds and the cash together). To specifically call out the 5% cash position,
I do not consider cash part of FI. In my post bonds and FI would be interchangeable and bank cash is separate.

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tennisplyr
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Re: Asset Allocation - Cash Position

Post by tennisplyr » Tue Mar 05, 2019 12:13 pm

I count it as part of my AA....stocks/bonds/cash.
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You Know What I Mean
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Re: Asset Allocation - Cash Position

Post by You Know What I Mean » Thu Mar 07, 2019 11:01 am

pacodelostigres wrote:
Mon Mar 04, 2019 11:29 am
We have a small six figure cash balance and don't count it as part of asset allocation. That's based on the money being set aside for several specific purposes: 30k for 529 contributions to be made within 3 years, 12k for home maintenance (mostly a new roof within five years), 40k for an emergency fund (job/medical), 5k self escrow for taxes and annual bills, a small rolling vacation fund, and a 20k and growing car fund for purchases to be made when our leases end in a year.

It's all in a high yielding savings account that's earning enough to basically offset inflation. We contribute monthly to the maintenance, vacation, escrow, and car funds.

If we were sitting on cash because I didn't want to buy bonds or equities, but it had no purpose, I'd lump it in with fixed income when doing retirement planning.
We do thing a bit differently than most people, somewhat similar to Paco.

Instead of the category Cash or Cash & Cash Equivalents, I made up a category (in Quicken) called Cash & Stable Value. As the name implies, that includes all cash and fixed-income securities that aren’t expected to go down in value: money market funds, TSP G Fund, CD’s held to maturity, Series EE and Series I Savings Bonds, individual TIPS held to maturity, etc. My current weighted interest rate for those assets is 3.58%, still above inflation and the yield (2.71%) for the Vanguard Total Bond Market Index Fund.

I don’t include “cash reserves” or emergency funds in my 60/40 allocation for our long-term portfolio. That is significant for us because it is a large amount, primarily to provide funds while deferring my Social Security retirement benefit from age 62 to age 70. By the way, that amount goes down every month as I get closer to 70. Cash reserves for us also include any unusually large one-time expenses that are planned, like a once-in-a-blue-moon vacation to take all the kids and grand-kids to Europe.

However, our 60/40 long-term portfolio also includes substantial Cash & Stable Value finds. I divide the 40% fixed income into 10% for nominal bond funds, 10% for TIPS funds, and 20% for Cash & Stable Value. So, that’s a lot of Cash & Stable Value. A likely advantage is that this portfolio may be a little more stable at times. However, it may not do as well as a typical 60/40 portfolio if TIPS and nominal bonds go up as stocks go down. That’s a risk I acknowledge.

I’m going to make up an example using large round numbers. If the total assets are $1,200,000 and $200,000 is needed for cash reserves (e.g., for deferring $25,000 Social Security benefits for 8 years), then the long-term portfolio is $1,000,000. So, that 60/40 long-term allocation would be:
$600,000 Stock funds & other risky assets
$100,000 Nominal intermediate-term bond funds
$100,000 TIPS funds
$200,000 Cash & Stable Value funds

Since there is another $200,000 needed/desired for cash reserves, the total for Cash & Stable Value would be $400,000. However, that is not static.

As I said earlier the need for cash reserves goes down every month in this example as the amount of “missing” Social Security benefits decreases with age. So, during annual re-balancing the cash reserves amount goes down by $25,000 every year in this example.

I’ve probably not made this very clear, but it’s actually easy to implement. Trivial, with a spreadsheet.

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