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FYI: (Click On Article At Top Of Google Search) When it comes to investing clients’ short-term cash, financial advisers now face an unusual quandary. Regards, Ted https://www.google.com/#q=short+term+investing+wsj
I am actively looking for these kinds of investments.
@Dex got me thinking about what he called "near cash". I interpret this "near cash" as the portion of my portfolio that is available to supplement yearly income and the occasional emergency. @Dex mentioned this amount should help bridge a four year time frame. Many MFOers ( @MJG and @davidmoran) admitted to not maintaining anywhere near four years of "near cash".
To me its the trickiest part of one's portfolio and is often an after thought. Cash earns next to nothing in MM funds. Laddered CDs provide a small return, yet locks up those funds for longer periods of time.
So where does one turn to secure a (2% - 4% return with little of no downside risk) that can weather market shocks, interest rates rising (inflation), and yet perform well if de-leveraging pressure persist (deflation)?
@Dex got me thinking about what he called "near cash". I interpret this "near cash" as the portion of my portfolio that is available to supplement yearly income and the occasional emergency. @Dex mentioned this amount should help bridge a four year time frame. Many MFOers ( @MJG and @davidmoran) admitted to not maintaining anywhere near four years of "near cash".
So where does one turn to secure a (2% - 4% return with little of no downside risk) that can weather market shocks, interest rates rising (inflation), and yet perform well if de-leveraging pressure persist (deflation)?
The length of time is determined by your risk tolerance and individual cash flow.
The downside risk evaluation is relative to your other investments. The point of the 'near cash' is so if your other investments take a hit - you don't have to sell them and take a big loss.
So, for an extreme example, if your other investment are vulnerable to a 50% hit your 'near cash' taking a 5+% hit at the same time would help to protect your portfolio survive.
A while back I bought into a income fund that is multi asset in nature. My thinking on this was a place to park money for the short term before it goes into cash instead. For example, if I keep 12 months cash available, I would have 3-5 years in this fund to temper any hiccups in the markets.
Anyone else use a similar strategy? It could be a form of bucket or sleeve investing of sorts.
A while back I bought into a income fund that is multi asset in nature. My thinking on this was a place to park money for the short term before it goes into cash instead. For example, if I keep 12 months cash available, I would have 3-5 years in this fund to temper any hiccups in the markets.
Anyone else use a similar strategy? It could be a form of bucket or sleeve investing of sorts.
Seems like a reasonable approach.
Instead of thinking that there might be market hiccups I try to plan on the hiccups happening during my draw down periods. I try to do this by using back testing (historical data). You can explore mutual fund MaxDD and recovery from Max DD here at MFO thanks to Charles' efforts using this tool here.
A website I visit to back test mutual funds is Portfolio Visualizer. I'm attempting to get a close approximation of future "MaXDD" (Maximum Draw Down) of different mutual funds or etfs (cash can be entered as CASHX). This site lets you enter your mutual funds as individual holdings (100%) or as a combination of fund percentages (which also must add up to 100%). When reviewing the results I pay close attention to this feature (which you have to hover over with your cursor to open...located next to the MaxDD results). It looks like this:
Max DD is expressed in a percentage and recovery time from MaxDD is expressed in a time frame it took the fund to overcome MaxDD (return to profitability for a buy and hold investor).
On a separate note:
I would argue that cash has a Max DD equal to inflation that can be measure in percentage and time. This might be the most misunderstood MaxDD...the buying power of cash. When you get down to it this is what we all are trying to do preserve or increase... buying power.
My portfolio often feels like a balloon that changes in size, but needs to at least overcome the deflationary pressures of inflationary leaks (the buying power of money).
@JohnC - Not sure what strategy I'm following - but I've come to like multi-asset funds more and more in recent years - specifically the TRP low-fee variety. I think of them more as "I don't know what the f* to do with this money" type funds. Won't make a lot. But won't lose a lot either.
RPSIX is one good example. It's a fine multi-asset income fund that might fit your needs. The semi & annual reports are exceptional at showing graphically how the fund is allocated, normally among 10-12 other funds. And, that's what you're buying: a broad collection of funds - but from people who know how to allocate and how to fine-tune along the way. (Anyone so interested can easily pull-up the reports for this fund on TRP's website.)
I differ from most here in not keeping a significant stash of cash for emergencies or unexpected needs. Other than the currently 18% overall portfolio allocation, viewed as ballast, there's nothing additional outside the normal budgeted living expenses. In our case, anyway, we're conservatively enough invested that a separate stash isn't necessary. We'll pull those unexpected expenses from across the total portfolio. It'll "ding" our returns a bit if taken at an ebb in the markets. However, holding lots of cash also dings you.
Am not recommending the above approach for others. Wouldn't be advisable for younger or more aggressively invested folks. ..... Have a good weekend.
"Near cash" for this house is always invested and working, but is not dedicated money for such a purpose. Dependent upon market circumstances, this money could be any combination of equity or bonds held in a portfolio. If and when the need would arise for a substantial amount of monies to be required "locally"; meaning a credit union account, a holding(s) would be sold and the proceeds would be electronically transferred to the local account and ready to use within a maximum of 2 business days. This "near cash" is not the same as "some cash" that is always part of a local c.u. account. Regards, Catch
I keep about two years of cash within my portfolio as a safety net plus the portfolio itself kicks off enough income to meet my current annual withdrawal needs. Any cash held above ten percent, for me, would be considered excess and held due market conditions. Therefore, I am presently 10% cash heavy due to market conditions at 20%. And, I could still raise another 15% within the cash area while remaining invested towards the low end of my asset allocation ranges for the income, growth & income, and growth areas by reducing equites from 50% to 40% and other from 10% to 5%. I think most every investor needs to know where they can best raise cash within their portfolio should they need to do so.
Thanks for those tips. I saved the Portfolio Visualiser to my bookmarks so I can check it out on the laptop. Thanks @bee.
@hank, That is exactly how this fund operates with the addition that it is unconstrained in where it can go and can do. I get a bit of emerging market debt which might be out of the conservative realm but overall it is very conservative. I figure I'll let the managers do the work as you said.
I hold a fair amount of "near cash" in RPHYX and RSIVX. Each one has returned a tad over two percent in the last year, the former is closed, but the latter is open. There has been a fair amount of discussion on the board about using this type of fund in lieu of MM or CDs. They throw off frequent distributions, so there's a tax consideration.
@JohnC, For cash sleeve here are my thinking: 1. Saving accounts pay little (actually negative after inflation) but they are flexible. 2. Short term investment grade bonds yield 1.5 - 1.6%. VFSUX and VSCSX for example. Minimal duration impact from rising rates. 3. Balanced funds yield > 2.5%. Prefer VWIAX, but higher risk with intermediate term bond exposure (65% in the fund).
@Sven, Good points. It just shows how far we will go to get some kind of return from our cash and near cash positions. The usual sources don't pay anything in this low rate environment. I'm willing to take a bit of risk to get somewhat of a decent return, and from many accounts so are others. This is where the bucket and sleeve systems work well.
I wonder if defined maturity bond indexes could be made to work in the mix? Not the HY varieties, but rather the corp bond varieties. They better allow for more discrete control of duration, and have reduced volatility, vis-a-vis conventional bond indexes of comparable maturities. Or would this lead to "being too cute by half," a bunch of extra work and not getting all that much more from it?
I'm thinking here of the BulletShare 0-3yr corp bond index (maybe combined with 0-3 and/or 0-5yr corp Ladder index). Something like that; pick the proportions for each.
update/add-on: conceptually, I would be looking at an allotment to these as a CD-substitute. I haven't checked out their yields; if they suck, then what would be the point? However, if they are equal or better, then advantage to the ETF; and, unlike the CD, you could redeem them whenever, if interest rates rose and you wanted to change course, without penalty (assuming the underlying index hadn't changed too much in value).
Well, after taking a deeper dive into the BulletShare idea, I'm finding data that would be pivotal in reaching a conclusion about them (MTM yields, granular look into exactly how they're structured) to be mysteriously hard to come by, including at the very site of the operation that is managing them. Hmm, call me suspicious. Anyone here ever looked for the hood of these new instruments and found it to pop?
Comments
@Dex got me thinking about what he called "near cash". I interpret this "near cash" as the portion of my portfolio that is available to supplement yearly income and the occasional emergency. @Dex mentioned this amount should help bridge a four year time frame. Many MFOers ( @MJG and @davidmoran) admitted to not maintaining anywhere near four years of "near cash".
To me its the trickiest part of one's portfolio and is often an after thought. Cash earns next to nothing in MM funds. Laddered CDs provide a small return, yet locks up those funds for longer periods of time.
So where does one turn to secure a (2% - 4% return with little of no downside risk) that can weather market shocks, interest rates rising (inflation), and yet perform well if de-leveraging pressure persist (deflation)?
The downside risk evaluation is relative to your other investments. The point of the 'near cash' is so if your other investments take a hit - you don't have to sell them and take a big loss.
So, for an extreme example, if your other investment are vulnerable to a 50% hit your 'near cash' taking a 5+% hit at the same time would help to protect your portfolio survive.
Anyone else use a similar strategy? It could be a form of bucket or sleeve investing of sorts.
Instead of thinking that there might be market hiccups I try to plan on the hiccups happening during my draw down periods. I try to do this by using back testing (historical data). You can explore mutual fund MaxDD and recovery from Max DD here at MFO thanks to Charles' efforts using this tool here.
A website I visit to back test mutual funds is Portfolio Visualizer. I'm attempting to get a close approximation of future "MaXDD" (Maximum Draw Down) of different mutual funds or etfs (cash can be entered as CASHX). This site lets you enter your mutual funds as individual holdings (100%) or as a combination of fund percentages (which also must add up to 100%). When reviewing the results I pay close attention to this feature (which you have to hover over with your cursor to open...located next to the MaxDD results). It looks like this:
At this website:
https://portfoliovisualizer.com/backtest-portfolio
Max DD is expressed in a percentage and recovery time from MaxDD is expressed in a time frame it took the fund to overcome MaxDD (return to profitability for a buy and hold investor).
On a separate note:
I would argue that cash has a Max DD equal to inflation that can be measure in percentage and time. This might be the most misunderstood MaxDD...the buying power of cash. When you get down to it this is what we all are trying to do preserve or increase... buying power.
My portfolio often feels like a balloon that changes in size, but needs to at least overcome the deflationary pressures of inflationary leaks (the buying power of money).
RPSIX is one good example. It's a fine multi-asset income fund that might fit your needs. The semi & annual reports are exceptional at showing graphically how the fund is allocated, normally among 10-12 other funds. And, that's what you're buying: a broad collection of funds - but from people who know how to allocate and how to fine-tune along the way. (Anyone so interested can easily pull-up the reports for this fund on TRP's website.)
I differ from most here in not keeping a significant stash of cash for emergencies or unexpected needs. Other than the currently 18% overall portfolio allocation, viewed as ballast, there's nothing additional outside the normal budgeted living expenses. In our case, anyway, we're conservatively enough invested that a separate stash isn't necessary. We'll pull those unexpected expenses from across the total portfolio. It'll "ding" our returns a bit if taken at an ebb in the markets. However, holding lots of cash also dings you.
Am not recommending the above approach for others. Wouldn't be advisable for younger or more aggressively invested folks. ..... Have a good weekend.
If and when the need would arise for a substantial amount of monies to be required "locally"; meaning a credit union account, a holding(s) would be sold and the proceeds would be electronically transferred to the local account and ready to use within a maximum of 2 business days.
This "near cash" is not the same as "some cash" that is always part of a local c.u. account.
Regards,
Catch
@hank, That is exactly how this fund operates with the addition that it is unconstrained in where it can go and can do. I get a bit of emerging market debt which might be out of the conservative realm but overall it is very conservative. I figure I'll let the managers do the work as you said.
1. Saving accounts pay little (actually negative after inflation) but they are flexible.
2. Short term investment grade bonds yield 1.5 - 1.6%. VFSUX and VSCSX for example. Minimal duration impact from rising rates.
3. Balanced funds yield > 2.5%. Prefer VWIAX, but higher risk with intermediate term bond exposure (65% in the fund).
@Bee, thanks for sharing your insights.
http://www.etf.com/sections/etf-issuer-perspective/defined-maturity-indexes-combining-best-attributes-bonds-and-funds?nopaging=1
https://indexes.nasdaqomx.com/Home/BulletShares?source=ETFcombs
I'm thinking here of the BulletShare 0-3yr corp bond index (maybe combined with 0-3 and/or 0-5yr corp Ladder index). Something like that; pick the proportions for each.
update/add-on: conceptually, I would be looking at an allotment to these as a CD-substitute. I haven't checked out their yields; if they suck, then what would be the point? However, if they are equal or better, then advantage to the ETF; and, unlike the CD, you could redeem them whenever, if interest rates rose and you wanted to change course, without penalty (assuming the underlying index hadn't changed too much in value).