$80k sitting in cash b/c scared of high-flying stock mkt -- punch me?

[Guy Incognito]

Have had $80K sitting in cash for last 2 weeks b/c I'm scared of this high-flying market.  And I could certainly see this persisting for months or longer unless I do something about it.. 

I'm not out of the market entirely to be sure, as I still have $415K in ETFs across taxable and retirement accounts.  Also have a $157k mortgage at 3.5%, but no other debts.

All that said, someone pls yell at me and tell me I'm being stupid/wussy for having close to 20% of my savings just sitting in checking earning 0.01%.  Maybe this will get me off the dime and make me do something smarter.  And would be glad to hear thoughts from others who may be concerned about stock market valuations.

Academically, I suppose that I know attempts at market timing are stupid (and yet that's what I'm doing...).  I also know that I could at the least get a 3.5% return by paying down the mortgage, but would hate to do that when the rate is so low.  I also know that there are other investment options (real estate)...but I've never done anything with my savings other than the stock market, and I know that I know little/nothing about real estate, so I'd prob screw that up.

Thanks for any feedback to my rambling note.  Love this site.

[arebelspy]

What is your written AA?

If you don't have 20% allocated to cash (which some do, or more, see: Permanent Portfolio), then here you go:

[Joet]

why not a middle road and put $20k into savings bonds right now [10k Ibonds, 10K eebonds] per SS# in your household [so 40k w/spouse] and then take the other 40k and slap it into an equity index fund via DCA [S&P 1600 is a bit high imo to dump it into tomorrow, most likely you can buy in around 1560 in the next week or two]
As everyone [hopefully] knows, EE bonds are a screaming deal right now. State tax free and 3.56% guaranteed return [via the doubling in 20 years provision]

of course, standard caveat regarding market timing and all that
your current AA sounds to be around ~85% equities? a little high no? Are some of those ETF's in bonds?

IMO a 75% equity allocation is sufficiently risky once you have half a million to play with, the risks just arent worth it at that point. Plus in a recession [the chances for another recession are always 100%] you'll be able to re-balance nicely with a 25% current allocation to bonds.

Speaking for myself, I stress out in the time between say selling equities in a brokerage account, waiting for funds to clear, the xfer, and then the repurchase in the new account. This bothers me so much that I actually will take a temporary option position or otherwise do a 'pre-balance' to maintain not my AA rather my equity exposure through the transaction.
[I realize I have a problem]. But those 'really good' market days REALLY ANNOY me when I have a xfer in progress. I have to xfer funds about 1x/year via my 401k to a Roth for instance. I have a well thought out protocol for this event [that takes like a week with all the players]. heh. :(

[Guy Incognito]

Haha, thanks for the punch. 

I don't have a written AA, but if I had to write down the AA i've always used since I've started working, it's: 100% equities.

Of my investments (so excluding my cash), they are split as follows:
55% - Small Cap Value ETFs
29% - Intl Small Cap ETF
14% - S&P500 Index Fund
2% - Stocks

I realize that my "I'm too conservative" thread might be shifting to an "I'm too aggressive/risk exposed"... but (1) I believe in the long term performance of small-caps and value stocks, and (2) I'm 31, so the volatility risk seemed reasonable when I made the investments.

I guess my recent move into more cash is a bit contradictory with that thesis above...

meh

[arebelspy]

I guess my recent move into more cash is a bit contradictory with that thesis above...

Yes.

So you need to sit down and do some thinking about what kind of investor you are, your philosophy on market timing, your preferred investing timing strategies (dollar cost, value averaging, whatever), etc.

[Mr Mark]

I think a small allocation of bonds gives similar returns with less volatility, so you could put 20% into Vanguard Wellesley fund, which at 60% bonds would autobalance with the equities and give you an overall 12% - 88% mix. Still uber-aggressive. (Damn tablet autospell)

But borrowing money at 3% or so after tax to hold that much as cash is pretty damn stupid alright! PUNCH

[innkeeper77]

Not exactly on topic, but if you are in the habit of having relatively large cash reserves on hand, even at times, I would STRONGLY recommend a new bank for the majority of those funds. For example, my (main) bank is Ally, where I have 0.4% interest on my checking account, and 0.84% interest on my savings account. A couple of dollars a month really is a lot nicer than what I was getting before (In my 0.01% account)- I mostly have that money there to pay rent every month.

I am a student, so my total funds are MUCH MUCH lower than yours, but it still seems to me that with a simple new bank you could "make" (AKA lose less to inflation) a decent amount over a number of years with a new bank- for only a little bit of setup time.

[the fixer]

I've been pondering something similar, but nowhere near as extreme as you. I have a pretty aggressive AA with 90% equities, 8% bonds, and 2% cash, but lately I've been hesitant to make my equity investments because the market is so high.

What I think this means is that my risk tolerance is not what I thought it was (or maybe it's changed). You and I both need to come up with an AA that we can be comfortable with in good times and bad. I might go up to 16% bonds, 4% cash. As for you, if you truly don't want to put another penny in equities right now, try a 20% bond allocation. The yield on bonds is at least better than what you're getting in your checking account. There are some people that talk of a "bond bubble," but if this forecast is accurate you get the pleasure of rebalancing: selling some high-priced equities to buy then-cheaper bonds.

[Cecil]

The market is low, not high!

It's only a couple percent higher than it was 6 years ago, and 13 years ago. When is the last time there's been a similar closing price of the S&P across a 13-year span?

[GreenGuava]

I've been pondering something similar, but nowhere near as extreme as you. I have a pretty aggressive AA with 90% equities, 8% bonds, and 2% cash, but lately I've been hesitant to make my equity investments because the market is so high.

That's generally what it means, yes. 

Just as food for thought for those staying out due to the market being at an "all time high": first, how many times has the S&P 500 (or whatever other market barometer you choose to use) hit an all-time high?  And how would you have fared with your asset allocation had you stayed in then?  Furthermore, do you think some deterministic market timing plan (which is what this "stay out: it's at an all time high" argument is) will work?

[Joet]

The market is low, not high!

It's only a couple percent higher than it was 6 years ago, and 13 years ago. When is the last time there's been a similar closing price of the S&P across a 13-year span?

Never studied the bear benchmark? It took 30+ years to get to par, for an investment in 1929

[brewer12345]

I guess my recent move into more cash is a bit contradictory with that thesis above...

Yes.

So you need to sit down and do some thinking about what kind of investor you are, your philosophy on market timing, your preferred investing timing strategies (dollar cost, value averaging, whatever), etc.

+1.  Right now, you are described by the following: "I don't now where I am going, but I am on my way!"

That might be OK for a life journey, but it is a poor way to run an investment portfolio.  You really need to do some navel-gazing on what your goals are, how much risk you are willing to stomache, what risks you have to take to meet your goals and periodically revisit all of this as it changes over time.  Your cash position might be too high, too low, or just right.  Until you have a roadmap you really have no way of knowing.

I am holding a big wad of cash as well, but it has nothing to do with the equity market.  I am at my target level for equities (~65%).  The cash is a portion of my fixed income allocation.  But then, I know what I want my portfolio to look like and I make changes on the fly to ensure it stays that way.

[the fixer]

BTW I'm nowhere near the situation of the OP... I'm still buying in my 401k and I just bought about $3000 of VTSAX. I'm sticking to the plan, but starting to ponder if I'm overexposed to equities. I'm going to stop working for a pre-retirement this summer and a bit more stability in my assets would be a good thing to have. This is also coming as part of a move; we're selling all our stuff and moving into a van. At the end of this we'll probably want to rent an apartment, so we'll need money for a deposit and furniture. Maybe even another car at the end of the year. All that further increases my need for stability.

But the details of my situation are not really relevant here... the point is the need to modify one's AA manifests itself as a deep-down discomfort with what you're doing.

[Guy Incognito]

All the comments are super helpful.  As an aside, I haven't made a post on an internet message board in 5+ years, and having done so here, it's amazing to see all the strangers willing to jump in and help with my issue.  This is really a cool site/community...

The responses have helped make it clear to me that I don't really have a clear AA plan, and that I need to get one together ASAP so that I have a portfolio that I can feel comfortable with, in good times and bad.  Brewer12345 is right to classify me as -- "I don't know where I am going, but I am on my way!" Far too lax an attitude to have on something that's so important as to my ER plans... 

Anyway, I know that I need to decide on what I want my portfolio to look like, and need it to be one that I can stick too regardless of mkt volatility. Gonna 'invest' some serious time for thought on the matter of AA this weekend- 

[arebelspy]

Good for you - most people given that advice aren't willing to follow through.

Let us know what you come up with.

[idjces]

Some of my thoughts on the high market:

pro-dip:
Huge gains recently
May approaching

pro-gains:
Dollar cost averaging investors
Superannuation funds regularly investing (9% of everybody's pay here in Aus, plus the individual contributions. Though not all this money will head into stocks)
The opportunity cost of alternative investments is still relatively low. Mortgage/deposit/bond rates are low, so although stock valuations could be considered high, they'll still likely go higher when the alternative is say 2% interest (50x earnings?).

I brought in earlier this week, i'd prefer to wait a for a cheaper price, but the alternatives are few, and here in Aus, rate increases don't look likely anytime this year.
Not saying i believe in timing the market either, but i don't think it's smart to pay a high price purely because someone else is willing to pay it. I believe that's called speculation?


Edit: Seems Joshua Kennon made a post today (yesterday?) with his thoughts on your question, see the later half of:
http://www.joshuakennon.com/why-i-never-bought-an-index-fund-but-think-they-are-probably-your-best-bet/

[happy]

This is one of those threads where I have another "uhuh" moment. Thats why I hang around here. The problem is my AA is all wrong, which I've known some time. But 2 years ago, pre-MMM, I didn't think I would be retiring for another 15 years or more and paid no heed. So I've borrowed ARS big face punch and duly self administered. 

I have a written financial plan and written financial goals, but I need to delve deeper now and create some sort of written investment plan and figure out what allocation I really want.

[arebelspy]

This is one of those threads where I have another "uhuh" moment. Thats why I hang around here. The problem is my AA is all wrong, which I've known some time. But 2 years ago, pre-MMM, I didn't think I would be retiring for another 15 years or more and paid no heed. So I've borrowed ARS big face punch and duly self administered. 

I have a written financial plan and written financial goals, but I need to delve deeper now and create some sort of written investment plan and figure out what allocation I really want.

Anyone, like happy, who's going to sit down and try to work an AA (well done!) keep in mind you'll have two major phases: accumulation, and ER.

I'd personally start by calculating my time to FIRE (aka how long my accumulation phase will be) and then how long my ER will be, and then start my introspection on each of those separately.

YMMV, and for a sufficiently long ER, you'll want to be fairly aggressive with your AA even after FIRE, not just in accumulation, IMO, but it's something to consider.

Also that sentence had lots of acronyms.

[matchewed]

Also that sentence had lots of acronyms.

AKA ATSHLOA?

[arebelspy]

I don't know that acronym.


(Just kidding.  Well played.)

[JasonK]

Well, you're market timing as you know.  No good. 

I'd recommend doing a lot of thought / research, develop an AA as wisely suggested, and diversifying the portfolio a bit.  For example, if you buy Vanguard funds consider:

REIT (US) - VGSLX
REIT (Global) - VGXRX
Total Bond Market - VBTLX
Inflation Protected Securities - VIPSX
High Yield Corporate Bond - VWEHX
Sector funds (energy, healthcare, etc)

My point is, if you identify some new funds you want to invest it (maybe some you feel are undervalued right now), you put the money in play, diversify, and feel good about it.  Right now it doesn't sound like you will feel 'good' about adding to your current investments.

[happy]

YMMV, and for a sufficiently long ER, you'll want to be fairly aggressive with your AA even after FIRE, not just in accumulation, IMO, but it's something to consider.

Yes, this is what I figured out last night. Mine will not really be ER, just earlier than I previously thought. Even so  I am planning for 40-45years of retirement if I am so lucky to live to 100. So plenty of time to have some good amount of the stache in  equities. The whole point of this thread of course is, just how much? Don't know the answer yet, but I'm thinking at this point I will be a touch more aggressive than the standard advice, at least in the next 5-10 years.

[arebelspy]

YMMV, and for a sufficiently long ER, you'll want to be fairly aggressive with your AA even after FIRE, not just in accumulation, IMO, but it's something to consider.

Yes, this is what I figured out last night. Mine will not really be ER, just earlier than I previously thought. Even so  I am planning for 40-45years of retirement if I am so lucky to live to 100. So plenty of time to have some good amount of the stache in  equities. The whole point of this thread of course is, just how much? Don't know the answer yet, but I'm thinking at this point I will be a touch more aggressive than the standard advice, at least in the next 5-10 years.

I recommend anywhere from 80-90% for someone ERing at age less than 50 if they are able to not look at the market and can stomach a drop.  YMMV, that's where I've gotten with my navel-gazing (as brewer so eloquently put it).

[Joet]

wow, imo the earlier you ER the more important it is to evaluate the risk of a market collapse and necessarily should exercise more caution than normal. Certainly never more risky than bonds = age-10, maybe approaching 50-60% equity as you pass 40-50 and staying in that range.

Trading bonds/fixed income for equities is short-sighted yield chasing without properly evaluating risk.

Usually the only times that people start recommending higher and higher levels of equity exposure are in times like 1999 [pre dotbomb], 2007 [pre great recession], and I suppose now of course. Pre... who knows [knock on wood]. Sure yields arent good on fixed income/bonds these days. That doesnt mean you respond to that by increasing your risk profile.

JMHO. Highly personal decision of course.5

[arebelspy]

Oh goodness, joet. High equity position leads to successful ER due to the greater returns.

Please go play with FIRECalc for a few hours.

If you don't have enough equities, inflation will kill you. (Indeed, it is the number one cause of ER failure in FIRECalc, not market drops).

[Joet]

Your position seems to be "why not 100% equities", or "why not 120%, or 150%" as over time, aka leverage ... equities have in fact beaten every other asset class [in the long run]. The reason we don't do this, is risk. "everyone knows in the long run, equities outperform fixed income/bonds". Indeed.

The difference between "in the long run" and a risk-averse FI/ERE portfolio is not being in the situation where a market downturn has shattered your plans.

An individual may be perfectly happy with 100% equities [indeed, as a 1999 investor in tech most likely was as well], that doesnt mean such a high allocation has any superior advantage in mitigating risk.

"The markets can stay irrational longer than you can stay solvent"

The problem is: there is no way to backtest your particular FI/ERE/portfolio. All you can do is remove undo risk. This is actually pretty easy to quantify.

perhaps google efficient frontier portfolio allocation , risk management, etc.

http://www.bogleheads.org/forum/viewtopic.php?t=1005
has an interesting convo on the topic. Only for very young investors (20s) would 90% equities ever really make sense. Note how backtesting shows that 90% equities has never lied on the efficient frontier in the 20th century.

Funny thing about volatility, and comparing that to expected returns over a lifetime.
My crystal ball doesn't tell me what future inflation rate(s) will be, unfortunately. However portfolios that include TIPs are quite prepared for such a thing.
Not sure whose study you are quoting as inflation killing most portfolios, everything I've read suggests that its investor behavior: buying high, selling low, etc., failing to match market performance in their equities, etc

For someone perhaps that "early retires", but is actually still working [like I guess everyone on this forum], sure, high equities can probably work [say up to 75%], JMHO.

[arebelspy]

Absolutely one can kill their returns by market timing. That aside, I disagree with most of your post.

I'd encourage anyone wanting to go heavily in lower risk assets to assess their actual risk over a long retirement due to their inability to generate the necessary returns. Play with FIRECalc for hours, until you understand what various stock/bond mixes do to retirement success.

[Tyler]

Firecalc is not an all-inclusive investing oracle.  It has its limitations.  I also recommend learning about other assets it doesn't account for (TIPS, gold, etc) as they can also help with things like inflation without going all-in on stocks. 

It's a wonderful baseline, but Firecalc is no substitute for a financial adviser / investment education. 

[GreenGuava]

Arebelspy and Joet:  the point I believe both of you are getting towards (both correctly) is that asset allocation is about risk tolerance, and a lower risk asset allocation generally leads to lower returns.  This is fine if one's retirement is, say, 20 years for the 'usual' model (retire at 65, die around 85).  Note that I mean "20 years of retirement" not "retiring in 20 years."

If one's risk appetite is such that you can't handle a high equity allocation - I believe most of the general population over-estimates their risk tolerance, but I think most of us here are better able to make a truly informed decision - then aiming for a lower equity allocation at FI, coupled with a lower SWR, is probably the way to go.  For those who need this, it may entail postponing retirement (in any sense of the word, as one will still need to work for the additional money to have such an allocation prior to being able to stop) or transitioning into retirement via part-time work (acknowledged as somewhat need-based).

I'm of the mind that it's better to underestimate one's risk tolerance - maybe that's because I knew way too many people who over-estimated theirs in 2007, and sold out in 2008/2009 and still aren't back in;  this is a dangerous situation regardless of when, or even if, one intends to retire.

[arebelspy]

Well said, GreenGuava.

If one has a lower risk appetite and wants to do a low amount of equities (60% or less, IMO), they need to plan an appropriately lower SWR, as lower equities historically have lead to more risk in terms of portfolio failure (regardless of it leading to lower beta, the lower returns do you in).

Definitely figure out your risk tolerance and then set the appropriate SWR.

[brewer12345]

It is worth noting that equity allocations above 65% have not produced materially higher SWRs over a lengthy withdrawal period according to firecalc.  Accordingly, I try to be at about 65% equities and I work hard to reduce the risk posed by what is IMO a dangerously overvalued bond market - CDs, closed end funds, I bonds and plain old cash.  I also do some merger arbitrage funds as a stand-in for fixed income.

[keepingmobens]

As everyone [hopefully] knows, EE bonds are a screaming deal right now. State tax free and 3.56% guaranteed return [via the doubling in 20 years provision]

Am I missing something here? On the treasury website, they list the return of EE bonds at a 0.20% rate, and specify that paper EE bonds used to be sold at half the face value, but electronic EE bonds are now sold at full face value, plus you can only buy a maximum of 10K worth per year. Not a very big stash amount, unless maybe you are just starting out. How are you getting the 3.56% return?

[Joet]

read closer: guaranteed to double in 20 years. Worked backwards that's 3.56% APY

Yes the 0.2% rate is a strong disincentive to hold in the first 5 years or so, starts looking better and better the longer you hold and the longer interest rates havent "gone back up as everyone knows they invariably must" :)

Which, incidentally is better than a 30-yr bond currently [and this is only 20]. AKA this is the best long-term 'bond' deal currently.

[keepingmobens]

read closer: guaranteed to double in 20 years.

Where does it say that? From what I could tell, paper EE bonds used to work that way, but they stopped issuing paper bonds, and now only issue electronic bonds. They specify that with electronic bonds, they are now bought at full face value, (no doubling), so the only "benefit" would be the 0.20% interest.

[Joet]

Electronic bonds are sold at face value (not half of face value). They start to earn interest right away on the full face value. Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond.  If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference.

http://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eeratesandterms_eebondsissued052005andafer.htm

you can always call and ask them to verify, of course [many have over on bogleheads forum]

[keepingmobens]

got it, thanks