Author Topic: cash % in asset allocation?  (Read 8783 times)

sol

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cash % in asset allocation?
« on: September 24, 2013, 04:17:16 PM »
For people who consider their emergency funds or other cash accounts as part of their overall asset allocation, what's your rationale for deciding how much to keep in cash?

Do you keep a fixed percentage of your total net worth in cash (2%? 5%?) and so increase the cash balance as your net worth rises?

Do you keep a fixed dollar amount in cash (6 months living expenses?  a year?) and so decrease the percentage allocated to cash as your net worth rises?

I'm considering making some adjustments to my allocation and was hoping for some suggestions.

matchewed

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Re: cash % in asset allocation?
« Reply #1 on: September 24, 2013, 04:57:30 PM »
I personally keep a fixed amount in cash (about 4k or about three months living expenses if I shutdown any savings/Roth IRA contributions/Vanguard Investments). Outside of that I've taken to having my Roth IRA as the next source for an emergency fund. The contributions I've made to it are large enough to support me for at least a year if I lost my job. Now if the economy tanked I'd still probably have just as much as I contributed since I started it in 2008 when the Recession hit. Fortunate timing but I'll let it support me.

My philosophy behind this has already been touched on in my last sentence but I'll explain a bit further. My after tax savings are in general big enough right now to support me taking several years off of work. Given that I don't see a real reason to not rely on them if an emergency comes up. That way more of my dollars are working towards growing my net worth. Then again I'm really comfortable with a higher level of risk and don't have much other than my net worth to lose, I live a fairly lean lifestyle.

Just my take.

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Re: cash % in asset allocation?
« Reply #2 on: September 24, 2013, 05:15:57 PM »
I look at cash as working capital.  I own multiple rentals, so the "business" of rentals needs some pretty substantial reserves, independent of my other investments.  I set aside a fixed amount for an emergency fund separate from the rentals.   I also have cash awaiting investment opportunities, and that amount fluctuates as opportunities appear.  My cash accounts are therefore not an allocated percentage of my assets.

MKinVA

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Re: cash % in asset allocation?
« Reply #3 on: September 24, 2013, 05:32:02 PM »
I only keep emergency funds in cash (six months or so). But if you are saving cash for a specific future event, then I put it in laddered CDs so some is available every nine months or year.

Thespoof

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Re: cash % in asset allocation?
« Reply #4 on: September 24, 2013, 05:57:18 PM »
I have 6 months of expenses saved. I keep one month's expenses in cash in a safe, one month in my chequing account (that way I pay no fees), one month in my savings account, and the rest in my TFSA. I don't like to have a ton of cash lying around not working for me. TFSA is ideal because if I need the extra money that may not be covered by my cash reserves I can always pull it from my TFSA. I used to keep it all in cash, but that seemed silly when that money could be working for me.

arebelspy

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Re: cash % in asset allocation?
« Reply #5 on: September 24, 2013, 06:09:25 PM »
For people who consider their emergency funds or other cash accounts as part of their overall asset allocation, what's your rationale for deciding how much to keep in cash?

Do you keep a fixed percentage of your total net worth in cash (2%? 5%?) and so increase the cash balance as your net worth rises?

Do you keep a fixed dollar amount in cash (6 months living expenses?  a year?) and so decrease the percentage allocated to cash as your net worth rises?

I'm considering making some adjustments to my allocation and was hoping for some suggestions.

I think the answer to your question depends on why you are holding the cash.

If it's to live on and ride out a bad marker, the latter.

If it's for a certain AA for rebalancing purposes, the former.

Think about why you want the cash, and the answer should become clear.
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avonlea

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Re: cash % in asset allocation?
« Reply #6 on: September 24, 2013, 07:59:43 PM »
I think arebelspy makes a good point.  Each person/family needs to consider what types of emergencies they might face and prepare for them accordingly. 

Since we are a one income household with two young children, we like to play it safe by keeping one year's expenses in cash reserves.  Some might say this is too conservative, but we want to ensure that whatever emergency occurs, we have enough money and time to weather the storm and/or ease into the transition with as little shaking up of our kids' lives as possible.

Since we have that amount saved already, we now just invest all extra funds each month, except for a specified amount that covers yearly trips and items that get paid annually (ex. Homeowners insurance).

sol

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Re: cash % in asset allocation?
« Reply #7 on: September 24, 2013, 10:34:34 PM »
Think about why you want the cash, and the answer should become clear.

I don't especially want cash at all, other than to have enough to cover day to day cashflow.  But I do have a checking account, and it does have more than one month of expenses in it, and Mint and Vanguard both include that checking account as part of my total assets.  So in addition to stocks and bonds, some small percent of my net worth is currently sitting in a checking account.  Listed as cash in my asset allocation.

I don't even especially feel the need for an emergency fund anymore.  We have enough invested (at our chosen stock/bond split) in our taxable account that we could live for good long while even in a market collapse.  Years, probably, available on three day's notice by selling mutual fund shares.

But it feels silly to keep your checking account bouncing off of zero every month if you have millions of dollars in total assets.  Surely there is value in keeping some cash buffer around, but I haven't yet decided if that buffer should be a fixed amount or if it should grow along with my net worth.

Example 1:  struggling consumerist schmuck lives paycheck to paycheck.  He needs to build a few months of emergency fund before he can start investing.  His asset allocation is essentially 100% cash at first.

Example 2:  Warren Buffet is worth 50 billion dollars but has low expenses.  Do you think his checking account has more than $500 in it to cover his groceries and gas money?

Everyone else is on some continuum between those two, and I don't think it's a straight line. 

msilenus

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Re: cash % in asset allocation?
« Reply #8 on: September 25, 2013, 01:28:49 AM »
But it feels silly to keep your checking account bouncing off of zero every month if you have millions of dollars in total assets.  Surely there is value in keeping some cash buffer around, but I haven't yet decided if that buffer should be a fixed amount or if it should grow along with my net worth.

Why does it feel silly?  If I could easily do that, I happily would.  It would mean my money was working for me at maximum efficiency.  Keeping that in sync with DW about spending is bothersome, so we have a safe buffer.  That's a fixed dollar amount.

Stay as lean as you can rationalize, IMO.  It doesn't sound like you have a compelling reason not to.

Frankies Girl

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Re: cash % in asset allocation?
« Reply #9 on: September 25, 2013, 02:51:38 AM »
We try to keep a fixed amount of cash, but I've been lax lately about sweeping the excess over into investments.

I'm not sure that in our case it would make sense to have a percentage of our total assets, since the amount would continue to grow over time, and since we haven't increased our spending along with our assets, that would be extra money would be that much more money that isn't working. We also take into consideration that we have credit that would cover most emergencies. As long as we have cash that we could pull out within a day (since we could tap additional funds in under 3 days), having a set amount seems the best course of action for us.

arebelspy

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Re: cash % in asset allocation?
« Reply #10 on: September 25, 2013, 06:08:20 AM »
Think about why you want the cash, and the answer should become clear.

I don't especially want cash at all, other than to have enough to cover day to day cashflow.  But I do have a checking account, and it does have more than one month of expenses in it, and Mint and Vanguard both include that checking account as part of my total assets.  So in addition to stocks and bonds, some small percent of my net worth is currently sitting in a checking account.  Listed as cash in my asset allocation.

...
Surely there is value in keeping some cash buffer around, but I haven't yet decided if that buffer should be a fixed amount or if it should grow along with my net worth.

Your first paragraph clearly answers this.  Fixed amount.
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avonlea

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Re: cash % in asset allocation?
« Reply #11 on: September 25, 2013, 06:16:40 AM »
But it feels silly to keep your checking account bouncing off of zero every month if you have millions of dollars in total assets.  Surely there is value in keeping some cash buffer around, but I haven't yet decided if that buffer should be a fixed amount or if it should grow along with my net worth.

Example 1:  struggling consumerist schmuck lives paycheck to paycheck.  He needs to build a few months of emergency fund before he can start investing.  His asset allocation is essentially 100% cash at first.

Example 2:  Warren Buffet is worth 50 billion dollars but has low expenses.  Do you think his checking account has more than $500 in it to cover his groceries and gas money?

Everyone else is on some continuum between those two, and I don't think it's a straight line.


With your "schmuck" example, I completely identify. We originally saved a couple of month's worth of expenses and then started investing, but that was before we had kids and went down to one income.  Once that occurred, we continued investing but also started building up the savings a little bit at a time, too--so yeah, not an all-or-nothing mentality (Actually, we started both investing and saving a lot more. I stopped believing the  "truth" from our friends that the company match for investing was enough).  When we hit a year's worth of expenses in savings, we decided that was enough and we could focus on investing and paying off the house--no way you'd ever convince my hubby paying off the house was not a good idea. :)

A bit of a side note: Cash doesn't have to be in just a checking account.  Most of ours is in an online savings account and a CD.  Those accounts don't make very much in interest, I admit, but it's better than nothing.

I'm not sure that in our case it would make sense to have a percentage of our total assets, since the amount would continue to grow over time, and since we haven't increased our spending along with our assets, that would be extra money would be that much more money that isn't working.

Same for us.
« Last Edit: September 25, 2013, 06:33:58 AM by avonlea »

Kriegsspiel

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Re: cash % in asset allocation?
« Reply #12 on: September 25, 2013, 04:03:45 PM »
Why does it feel silly?  If I could easily do that, I happily would.  It would mean my money was working for me at maximum efficiency.  Keeping that in sync with DW about spending is bothersome, so we have a safe buffer.  That's a fixed dollar amount.

Stay as lean as you can rationalize, IMO.  It doesn't sound like you have a compelling reason not to.

What does 'efficiency' mean, in this context?

msilenus

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Re: cash % in asset allocation?
« Reply #13 on: September 25, 2013, 04:57:20 PM »
Maximal resource utilization; idle resources minimized.

DocLago

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Re: cash % in asset allocation?
« Reply #14 on: September 25, 2013, 05:02:19 PM »
I'm of the mindset, based on prior experiences, no "emergency" requires money right now.  So if I can put that 6 months of emergency fund in something that I can pull from if I need to, even if I have to pay a fee, it seems more worthwhile to me.   I keep about 1k in my house, 1k in my checking and the rest working. 
It's hard to think of an emergency that I don't have a few days to cover, or at the very worst case that I cant pay with a credit card right now, and pay off the card when the cash becomes liquid.   Just my thoughts.

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Re: cash % in asset allocation?
« Reply #15 on: September 25, 2013, 06:11:07 PM »
I think Mr. Buffett keeps quite a bit of cash on hand for the right investment opportunities.  It may not be in a drawer or his checking account, but he's prepared to take advantage of almost any opportunity that comes his way.

dragoncar

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Re: cash % in asset allocation?
« Reply #16 on: September 25, 2013, 06:34:07 PM »
I think Mr. Buffett keeps quite a bit of cash on hand for the right investment opportunities.  It may not be in a drawer or his checking account, but he's prepared to take advantage of almost any opportunity that comes his way.

Right, I think we should distinguish between emergency/operating funds and cash portion of AA meant for investment/rebalancing/"dry powder".

I've posted this before, but I'll put it down again cause its relevant:



http://gawker.com/5816865/meet-the-guy-with-100-million-in-his-savings-account


Surely if you are keeping dry powder for investments, that can double as an emergency fund.

But if your chosen AA is 0% cash, I think you should have enough liquid cash to easily cover a month of expenses, meaning the spendiest month in recent history.  It may take up to a week or two for brokerage sales to settle and ACH to be credited.

arebelspy

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Re: cash % in asset allocation?
« Reply #17 on: September 25, 2013, 09:29:47 PM »
Right, I think we should distinguish between emergency/operating funds and cash portion of AA meant for investment/rebalancing/"dry powder".

I thought I did that in my first post in the thread.

That is exactly the key distinction you have to sort through.

If you want cash for living expenses, it won't raise as your net worth does (it'll just fluctuate as your living expenses do - I.e. with inflation), being a shrinking percentage of your net worth.  If you want cash as part of your asset allocation for rebalancing purposes, it will rise with with your net worth, being a stead percent of net worth.

As I said, once you figure out why you're keeping the cash, the answer instantly becomes quite clear.

Y'all seem to be making this more complicated than it needs to be.  :P
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Re: cash % in asset allocation?
« Reply #18 on: September 25, 2013, 09:39:56 PM »
My cash allocation varies because my asset allocation is somewhat elastic.  Right now, I'm accumulating cash because I can't find any really good places to put it to work.  I make my regular donations to the stock market and have done a round of capital improvements on the rentals but I don't see any really compelling opportunities right now.

arebelspy

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Re: cash % in asset allocation?
« Reply #19 on: September 25, 2013, 09:47:06 PM »
My cash allocation varies because my asset allocation is somewhat elastic.  Right now, I'm accumulating cash because I can't find any really good places to put it to work.  I make my regular donations to the stock market and have done a round of capital improvements on the rentals but I don't see any really compelling opportunities right now.

Yeah, my cash is much higher than I'd like, ideally, but that's part of my investment plan (as I'm searching for good real estate opportunities), so it's not an AA or living expenses thing, and is "planned," even if not desired.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.