what to do with cash?

[We be free if we try]

I'm more-or-less FI and more-or-less about to be RE'd (not to quibble over details.) Current AA is 50% stock (85/15 domestic / int'l), 5% bonds (longstanding individual purchases), and 45% cash or brokerage money market sweeps (?). Planning on letting the 50% stock AA glide up to 60% over the next couple years, probably by doing nothing. But not sure what to do with the large amount of cash. I might buy a house in a year or two (renting now). Should I put 2/3 of it in a total market bond fund (BND) or just let the large amount of cash sit there, since it's hard to imagine that bonds will make money in the next year or 2?
Thanks!

[JAYSLOL]

How much of the cash will you need for a house?  You planning to buy outright or put down a deposit and invest the rest?

[shinn497]

How big of a downpayment? Personally I say to get as big of a downpayment as possible. Make your interest rate as small as possible. Pay off as soon as possible. Get as much money in the stock market as possible.

[We be free if we try]

So, my life has changed radically in the last 12 months (1 divorce, 2 family deaths, moved, a new partner, transition to FI and mostly RE - all in 2020). I’m not sure whether or when I will buy a house - depends on the numbers - in my part of the Bay Area it would eat up too much of the nest egg unless I rent out part of it, or end up co-purchasing, or move out of my fantastic-for-me location, so the house piece is really an unknown.

Right now, however, I’m sitting on almost half my next egg in cash, due to my conservative AA and glide path (which I prefer, to not have it all in the stock market), but not sure what to do with it over the next year or so while I get my bearings. Put most in a total bond market fund, or just leave in “high-interest” savings accounts? I’d prefer not to lose money, and can see how bonds might do that in the near term. On the other hand, I’d like it to earn slightly better than .5%, or 0%. Thoughts on this?

[vand]

Permanent Portfolio is always my default suggestion for these type of quandries. It's one of the lowest risk portfolios but has very good risk adjusted returns.
You may want to tweak your allocation once you have been running with the PP strategy for a while, and that is absolutely fine. I feel the advantage of the PP is that the theory behind it is rock solid, and it has the long term track record to back it up.

[ChpBstrd]

Think the stock market is too pricey? Sell a put way out of the money on SPY to expire next December (380 days). Sell the December 16, 2021 put at the $275 strike for about $9.19 per share, a 3.34% return on your cash unless the S&P is about 25% lower next Dec. than it is today. If you were forced to buy the SPY at 25% off, there’s a very good chance you could exit that position for a profit by selling a covered call, because volatility (key driver of options prices) would be through the roof in that outcome. But then again you might be wise to hold if you got the shares that cheaply. Getting the shares cheaply would eliminate a lot of SORR, of course.

There are also preferred stock funds yielding about 5-6% but these can experience a lot more volatility than bond funds and a lot less upside than stocks.

If these ideas seem like exotic risks to take with one’s safe funds, consider what will happen to the price of BND (avg weighted duration 6.56 years) or LQD (13.77 years) or TLT (19 years) if interest rates rose one or 1.5 percent. The answers for an immediate 1% increase in rates are about -5.9%, -11.2%, and -14.4% respectively. TLT could lose 20% if rates rose 1.5%. And these instruments yield just a hair over 2%.

[joleran]

If these ideas seem like exotic risks to take with one’s safe funds, consider what will happen to the price of BND (avg weighted duration 6.56 years) or LQD (13.77 years) or TLT (19 years) if interest rates rose one or 1.5 percent. The answers for an immediate 1% increase in rates are about -5.9%, -11.2%, and -14.4% respectively. TLT could lose 20% if rates rose 1.5%. And these instruments yield just a hair over 2%.

Convexity is rearing up and ready to strike.  Bonds are (potentially) more volatile than they've been in nearly 80 years.  Might be a great holding or they might collapse hard - not what they are typically intended for!

The problem is "everyone" knows this.  How does it all play out?  I will wait and see with a tiny percentage of bond holdings and much more in cash and alternatives that I would love to have in bonds if they paid above inflation rates.  Maybe bond holders will continue to surprise, but the train stops eventually.

[We be free if we try]

Thanks all. Chpbstrd, I wish I had the understanding required to buy a put, but that’s pretty out of my league for now. Not sure where this leaves me, except that perhaps taking small steps and not doing too much may be right for right now.

[Dicey]

I have a slightly contrarian view, and I also live in the Bay Area, FWIW. DH and I flip houses occasionally, so we keep a lot of dry powder on hand. We also watch the RE market constantly, searching for our next project. (This is a hobby, we're FI/RE.) We are a year out from our last project, with nothing on the horizon. We're just letting the money sit. Yup. We're FI without that money, so a bit of inflation isn't going to kill us. Prices in our specific area are bat-shit crazy at the moment and not getting better. Raw material prices are through the roof and everything's backordered. Not fun, so we're just going to wait it out.

I'm guessing you're in The City. The pandemic is proving that people can WFH successfully and that it's easier to do with a little more space, so folks are packing up and heading out to where the living is easier. Vacancy rates in SF are rising and prices are flattening.

I'd suggest a few things:

1. Look into bank bonuses. You can easily make a very decent return on your cash with a little patience, follow-up and a spreadsheet to keep you organized. https://forum.mrmoneymustache.com/share-your-badassity/bank-account-churning-how-to-make-$1600-in-a-year-by-being-organized/


2. Go read the entire DPOYM thread. Ask them all of your questions, they don't bite. https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/


3. I highly recommend the explanation of mortgages in an old-ish book called "Ordinary People, Extraordinary Wealth" by Ric Edelman. It's probably available free from your library. You only need to read the first chapter, so don't buy the book.


4. Finally, start tracking the market. The saying that all Real Estate is local is more true in SF than almost anywhere else. Take a year or so to figure out what you want and where you want it. It's okay to keep renting for a while longer.


People believe that SF real estate only goes up. Not true. After the Loma Prieta quake in '89, things were going for a song. This pandemic might cause an equivalent shift in the market. Study, learn, keep your powder dry. That way, you'll know when the timing/deal is right.

Buying the wrong house or even overpaying for a good house will cost you a hell of a lot more money than you will lose to inflation by sitting on your cash until you're positive which way you want to go.

Finally, you have been through a hell of a lot in a year, plus the pandemic. Give yourself permission to coast while you work out a new equilibrium. Best of luck to you!

[BoostJunky]

I have a slightly contrarian view, and I also live in the Bay Area, FWIW. DH and I flip houses occasionally, so we keep a lot of dry powder on hand. We also watch the RE market constantly, searching for our next project. (This is a hobby, we're FI/RE.) We are a year out from our last project, with nothing on the horizon. We're just letting the money sit. Yup. We're FI without that money, so a bit of inflation isn't going to kill us. Prices in our specific area are bat-shit crazy at the moment and not getting better. Raw material prices are through the roof and everything's backordered. Not fun, so we're just going to wait it out.

100% Correct here, I run a local real estate Brokerage and material prices are insane. Also the market jumped 10% this year over last, horrific time to buy a house unless you find a steal for an investment. I feel bad for anyone who bought in the last 6 months, they will be in real trouble unless they plan to hold.