Am I holding too much cash?

[mitchm]

Hi all,

Long-time reader; first-time poster! Here's the quick rundown:

32, single renter with no dependents;  I gross ~48k/year in HCOL city and live on ~$2000-2200/month with a few thousand extra/year for vacations (I like to get very far away for as long as possible). No car.

Assets:
$57k in Vanguard index funds (most in regular account, some in Roth IRA that I am maxing yearly)
$33k worth of two stocks I inherited (big pharma :( )
$10k in work-sponsored 403b (contributing 2x/month for the maximum match)
$77k in checking accounts (Schwab investor checking, mostly)

Aside from getting my full employer match on the 403b, I am auto-investing ~$500/month into my Vanguard accounts but I still have what feels like a large amount of cash sitting in my checking accounts doing nothing. I am in theory interested in homeownership but because of extremely high home prices here and high property taxes, doesn't seem to make any sense. Am considering purchasing an e-bike but that's probably the largest purchase I expect to make in the foreseeable future. But I'm skeptical of dumping too much more money into stock/index funds at the moment.   

 For what it's worth, my ultimate goal isn't quite FIRE. I have a chronic health condition that requires very expensive medication ($5000/monthly), which  means high quality employer-sponsored insurance is a necessity, so my eventual goal is not necessarily to be able to retire straight up but to find a job I like that will let me work more flexible hours/remotely from a nice, cheaper city with more reasonable COL. I already do really like my job, so hoping it can be within the same organization.

Anyhow, any ideas about how much cash I should keep on hand and what to do with the rest of it? I like the idea of waiting for the markets to decline and THEN investing a lot of it, but I guess that's market-timing, isn't it?

[35andFI]

Hi, welcome to the forum.

Yes, you have too much in your checking account.
In my opinion, you have too much in cash as well but that’s going to be your call on what you’re comfortable with..
If you’re saving for a house purchase in the next 5 years or so it’s justifiable to be holding a lot in cash but not in a checking account making little to no interest.

At the very least, put all but about 1 months worth of expenses in a high yield savings account like Wealthfront (currently at 2.32% interest).

Even better, since you don’t feel comfortable investing it all at once, you can dollar cost average into your taxable account.

Yes, waiting for a dip would be timing the market.
Many people have been waiting for the dip and missed this whole bull market.

[mitchm]

Just opened a Wealthfront high-yield savings account, thanks! I actually didn't know there were accounts like this -- was thinking I would have to lock the money away in CDs to get 2+% interest. So, question: It seems like even 5-year CDs pay ~2.6% interest at most. Why would that be an attractive proposition if you can get a ~2% savings account and access the money whenever you want?

[35andFI]

You’re welcome, happy to help!

It seems like even 5-year CDs pay ~2.6% interest at most. Why would that be an attractive proposition if you can get a ~2% savings account and access the money whenever you want?

It’s not lol

CD’s were attractive a while ago but now the rates are so low it doesn’t make sense.

[nsmall]

Not sure you want your money locked up in a CD.  At least you are earning some interest and can buy something if there is an opportunity that looks appealing.  35andFI is speaking some truth. 

Keep asking questions.  What about some international index funds?  Do they seem cheap?  Please dont wait and wait and wait, you need a plan and I agree you have a lot of cash.

[beltim]

You’re welcome, happy to help!

It seems like even 5-year CDs pay ~2.6% interest at most. Why would that be an attractive proposition if you can get a ~2% savings account and access the money whenever you want?

It’s not lol

CD’s were attractive a while ago but now the rates are so low it doesn’t make sense.

The market expects interest rates to fall.  2.6% isn't much of a premium over 2.3% now, but would be a substantial premium if rates fell to 1% -- where they were a year ago.

[RWTL]

At first glance, I would have said that you are holding too much cash.  Since you are so young, you would be better to keep 10-20K in cash and invest the rest.  However....

You mentioned that you have a serious health condition that requires medication that costs $5000 per month - assuming without health insurance.  If you were to lose your job, you would need to reserve cash to pay for this.  Only you can decide how much risk you have in losing your job, what the benefits of the medication are, and how much to hold back for meds.

[mitchm]

At first glance, I would have said that you are holding too much cash.  Since you are so young, you would be better to keep 10-20K in cash and invest the rest.  However....

You mentioned that you have a serious health condition that requires medication that costs $5000 per month - assuming without health insurance.  If you were to lose your job, you would need to reserve cash to pay for this.  Only you can decide how much risk you have in losing your job, what the benefits of the medication are, and how much to hold back for meds.

Yep, that would be the cost if I was paying completely out of pocket. With the insurance I have now, my total cost is $40/month. I believe that if I lost my job I could keep my work insurance through COBRA for 18 months by paying the full premium (~350/month), so I guess I should hold onto at least $7500 or so in cash for that eventuality.

Re: the question of WHAT to actually invest the cash beyond my emergency savings...I've just been dumping everything into Vanguard's S&P 500 index fund because I don't feel as if I have the time or energy to figure out what else to invest in....

I guess in theory this might count as putting all my eggs in one basket...but I guess in this case at least it is more like 500 baskets? Beyond expense ratios, what should I really be looking for when choosing index funds?

[BicycleB]

You could look for:

fund(s) that have smaller stocks instead of the S&P 500; could grow more, provide diversification
VRTIX https://investor.vanguard.com/mutual-funds/profile/VRTIX

or even some international; diversifies again
VGTSX https://investor.vanguard.com/mutual-funds/profile/VGTSX

[35andFI]

VFIAX is great!

If you want to add some more diversification in, you could go with the popular VTSAX instead, which is Vanguards total U.S. stock market fund.

[RWTL]

VFIAX is great!

If you want to add some more diversification in, you could go with the popular VTSAX instead, which is Vanguards total U.S. stock market fund.

I'm also a fan of VFIAX.  And for institutional accounts VINIX.

[Dee18]

Just wanted to be sure you knew that the basis for inherited stocks is the value on the date of the original owner’s death.  If you inherited those recently, you could convert that stock to index funds with little capital gains.

[mitchm]

Just wanted to be sure you knew that the basis for inherited stocks is the value on the date of the original owner’s death.  If you inherited those recently, you could convert that stock to index funds with little capital gains.

Actually, the stocks were gifted to me a few years ago by a relative who is still living, but in increments of ~$15,000 (I believe they were not taxable this way). I'm anxious to get rid of them but made the mistake of not doing so sooner. For instance, I have 257 shares of BMY currently valued at around ~12,000, down $3000 from when I received. I'm not keen on holding individual stocks but also see no particular reason to sell at a loss just to put the money into index funds. My thought has been just to hold on until they recover and then sell and invest in index funds.

Does that logic seem sound?

[loganmhb]

I'm not keen on holding individual stocks but also see no particular reason to sell at a loss just to put the money into index funds. My thought has been just to hold on until they recover and then sell and invest in index funds.

Does that logic seem sound?

Another way to think about this: would you buy the stock at its current price if you didn't already own it? If not (and it sounds like the answer is no) you should sell it and buy index funds instead. The only difference between the two scenarios is your emotional attachment to the stock's previous value. There's no guarantee the stock will ever recover its peak value, let alone do so faster than an index fund would grow by the same amount.

[2Birds1Stone]

That logic is not sound. That is called anchoring and sunken cost fallacy.

You're anchored on what they were worth, forget they ever had a past value, only matters what comes next, and they could drop to nearly $0 as it's one company, indexing, while still riskier than other investments, will spread that risk. Your best bet is putting them in a balanced fund (50/50, 60/40 etc) until you figure out what you want your long term asset allocation to be.

I would figure out a personal investment policy and write it out, and most importantly, stick to it!

[mitchm]

Hmm yes that's good advice I should make a plan...just not really sure what my goal is besides "be comfortable/happy" so that makes it kind of tricky.

Re: balanced funds. Currently my entire portfolio aside from the stocks is in vanguard stock index funds. Is there a reason to buy a balanced fund, which from what I understand is just a mix of stocks and bonds, as opposed to just adding some purely bond funds to my portfolio?

[BicycleB]

Reasons on both sides; you call the play.

For balanced fund:
the higher % of stock is probably in your favor over time;
if you pay no attention, the balancing of the fund gives a mix of stability and returns.

Against balanced fund:
all-bond purchase gives you high security in the short term;
all-bond purchase gives you and asset that is clearly bond-like;
balanced fund will involve higher fees, and perhaps some errors, due to the management of the fund ("balancing" requires some work by the fund manager, which they charge for).