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The only cash I'm holding is in the funds I own. The Fund Managers strategically hold X amount of AUM in cash. Truth is I could never afford to hold cash. All I can afford to invest is invested. And together with my still-working wife, we are able to put her niece through university, offshore. We couldn't hope to do that, if she were Stateside. The domestic cost would be absurd, ridiculous and obscene... Plus, we're traveling a lot. Along with a host of "one-offs" that come up constantly. Part of THAT is due to her inability to plan ahead. But doing that on my own, "hiding" money, seems very much not the thing to do. So, I just don't.
@MFO Members: I have always recommended an emergency funds of six months worth of living expenses.
From the article:
"Most people are familiar with the idea of having an 'emergency fund' during one's working years—a pot of money (typically, equal to three to six months of living expenses) that can help with unexpected bills or, perhaps most important, tide you over if you lose your job."
If a function of emergency cash is to tide you over until you get your next job, how long until your next job in retirement?
Many people seem to conflate two questions: how much cash should I keep for an unexpected emergency, and how much cash should I keep in retirement to protect against sequence of returns risk?.
For example, I was reading an old WSJ column where a couple with adequate pension income asked about putting all their IRA money into an S&P 500 fund. The response was that given the situation, that would not be unreasonable.
The column didn't address what size emergency fund they might also want to keep. ISTM that they would have the same need as working people - a reserve for some unexpected expense that their cash flow (here, pensions) didn't cover.
For people without steady income streams that cover all expenses (i.e. typical retirees), it's a different question as to how much cash to keep. Buffett's 10% short term treasury/90% S&P 500 implicitly suggests 2.5 years of "near cash" (10% @ 4% drawdown/year). I'd be inclined to go a bit higher and/or use bonds as a second tier resource between cash and equity investments.
In retirement, my plan is a 3 year "withdrawal" bucket which would be mostly MM and CD's and possibly a short term bond fund. Replenish each year if the markets up. Wait to replenish if the market takes a nosedive. Nothing magical about 3 years, though I think that is about the average recovery time for a bear market.
I Keep one hundred thousand in my savings account and another one hundred thousand in my checking account. it gives me peace of mind that I have cash on hand to pay for home repairs, the purchase of new cars,etc.. I dont Finance any thing. I pay cash.
Much the same here. I, too, have ample cash to cover most upcoming expenses. I held off making a new vehicle cash purchase late last year because of the FOMC's uptick in rates. Still have not bought ... but, perhaps I will soon. I'm thinking better new vehicle deals are coming? Especially, if sales begin to decline and inventories are high as most dealers finance their inventory.
My portfolio generates more than enough income to meet my normal cash flow needs. My cash is held mostly should large sums should be needed for the unexpected and for investment purposes, when felt warranted.
”Nothing magical about 3 years, though I think that is about the average recovery time for a bear market.”
I borrowed @MikeM’s remark for illustration here, but my question applies to many others who have discussed their withdrawal plan (as relates to cash) in event of a bear market during the distribution phase of retirement.
If your equity heavy portfolio falls by 35% during a 3-year bear market while you draw from your cash reserves, do you really want to start selling your equitiy heavy portion as soon as the bear ends? Say your equity portion is still down 20-25% 3 years later after the bear market has “officially” ended. Having to withdraw funds (even though it’s now a bull market ) could still be problematic.
Looks like the average duration (from peak - to bottom - and back up to that level again) is about 5 years. Since that’s just an average, some of these periods during which you would have to either (1) sell depreciated equities & funds or (2) rely on your cash reserves might last considerably longer than 5 years.
After reading discussion, I would think the amount one needs to keep safe is determined by amount of "safe income" minus debits & what I would call maintenance, new car, furnace, frig, etc.. Different strokes for different folks ! Have a good weekend, Derf
If your equity heavy portfolio falls by 35% during a 3-year bear market while you draw from your cash reserves, do you really want to start selling your equitiy heavy portion as soon as the bear ends?
Yes.
Say your equity portion is still down 20-25% 3 years later after the bear market has “officially” ended. Having to withdraw funds (even though it’s now a bull market ) could still be problematic
Let's look at how we make use of three years of cash.
I'll go along with @MikeM here. One isn't going to start drawing from cash the instant the stock market drops from a peak. That might be daily noise or the beginning of a bear market, you don't know.
So what's the strategy for starting to draw on cash? Say we start once the market is in correction territory. That's down 10%. So money that we kept in the market instead of cash has dropped 10% from the peak. But the value has likely been flat if we look back a year from the beginning of the correction. That's figuring the market earns about 10% a year. This is especially likely since the market was going up before the correction began (by definition).
For clarity, let's call the time we start drawing cash T1 (market down 10%).
Now the market's 10% down, and we're beginning to draw on cash. Let's say the market drops another 30% from this point. All together, the market drops 10% followed by a 30% drop. So it's worth 90% x 70% = 63% of its peak value. That's a 37% drop, or about what @hank suggested.
We'll call the trough T2.
The average duration of a bear market (peak to trough) is about 22 months. Since we start using our cash reserve (of three years) only after we are already down 10%, we almost surely have at least another year's worth of cash past the trough T2 before we run out.
So let's see where our stock is in another year. So far, it's down 30% - it was flat from a year before the correction until T1 (when we started drawing cash), and the market dropped 30% from there. The average first year recovery after a bear market (T2 - trough) is nearly 50% (same link).
Put these together: 70% x 150% = 105%, i.e. 5% higher than where we started. And before running out of cash.
Of course each recovery is different. But what this shows is that by starting to draw on cash only upon entering correction territory one can expect to have enough cash left to hold on for at least a year, possibly a lot longer, after hitting bottom, to get back to that 10% down level.
Even though we lose a little (10%) value in the stock from the peak, we come out ahead over the longer term (since cash wouldn't have made money before the market peak). So we're usually better off keeping money in stock rather than cash. We just need enough to outlast the worst of the dip. Three years seems fine for that.
>> [@msf] Buffett's [mix] implicitly suggests 2.5 years of "near cash". I'd be inclined to go a bit higher and/or use bonds as a second tier resource between cash and equity investments.
Yeah, this to me is key to withstanding (= usually ignoring) all of these manufactured advice articles:
How many years of safe cashflow are you comfortable with projecting you need, meaning earning very little, and how many years of unlikely-to-dip bondy things after that? Not percentages of your total, only years' worth. 1, 2, 3, 4, what?
I just did major (for me) retirement rebalancing, trying this time to apportion more prudently b/w Roth and taxable, and wound up with 21% bondy-cash. More than 5y, gah.
A year and change is in MINT and non-earning dead cash (BoA savings). Better, 2y or more is in PCI, which can dip, but best of all it matches equity funds over certain stretches. The remainder is in PONAX and FRIFX. I can live with this, or so I say now, and will move amounts into MINT every few months to keep it at perhaps a year's worth.
I think the decision about the amount of cash or low volatility investments to hold is not much about a "right" answer but is highly individual. The average length of a bear market can be misleading. During the Depression and the beginning of this century there were 2 bad bear markets very close together. If an individual was disciplined and replenished their cash when the market reached its all-time highs again they were a lot better off than if they allowed their equity to run in hopes of recovering a bit for lost time. In the 1970s inflation was a killer and it took around 13 years before the purchasing power of an S&P 500 portfolio was back to equal. In most cases I'm aware of the "average" recovery time for bear markets doesn't include dividends, which helps, or inflation, which hurts.
I use a slightly more dynamic approach to my cash/low volatility investments:
- When I retired I made an estimate of the CAGR I'd need to achieve to cover basic living costs (non-discretionary) and "desired" living costs if I lived to various ages, including "forever", including a static 3% inflation rate. I settled on a goal that I thought was conservative, largely due to the inherent uncertainty. - As long as the S&P 500 is above its 200 day SMA I hold a minimum of 2 years of non-discretionary living costs in cash or effective equivalents. - If the S&P falls below its 200 day moving average (at the end of a month) my minimum cash & equivalents increases to the larger of 25% or 5 years of "desired" living cost PLUS "potential" costs like the out of pocket maximum on my health insurance plan or a new car if I'm getting close to needing that- things which my estimates of living costs didn't fully include but could have a fairly significant impact if they occurred. - Additionally, to the extent that I'm ahead of the CAGR I decided I'd like to target, the excess is invested more conservatively. That doesn't mean cash or equivalents, but lower correlations to the stock market. - Finally, I keep track of my expenses at a very high level just to make sure my original estimates and/or inflation assumptions aren't way out of line and I would make adjustments if needed but I was pretty conservative so hopefully that won't happen.
Comments
Regards,
Ted
"Most people are familiar with the idea of having an 'emergency fund' during one's working years—a pot of money (typically, equal to three to six months of living expenses) that can help with unexpected bills or, perhaps most important, tide you over if you lose your job."
If a function of emergency cash is to tide you over until you get your next job, how long until your next job in retirement?
Many people seem to conflate two questions: how much cash should I keep for an unexpected emergency, and how much cash should I keep in retirement to protect against sequence of returns risk?.
For example, I was reading an old WSJ column where a couple with adequate pension income asked about putting all their IRA money into an S&P 500 fund. The response was that given the situation, that would not be unreasonable.
The column didn't address what size emergency fund they might also want to keep. ISTM that they would have the same need as working people - a reserve for some unexpected expense that their cash flow (here, pensions) didn't cover.
For people without steady income streams that cover all expenses (i.e. typical retirees), it's a different question as to how much cash to keep. Buffett's 10% short term treasury/90% S&P 500 implicitly suggests 2.5 years of "near cash" (10% @ 4% drawdown/year). I'd be inclined to go a bit higher and/or use bonds as a second tier resource between cash and equity investments.
Aug 24, 2015 · In the average correction, the market fully recovered its value within an average of 10 months, according to Azzad Asset Management. The average bear market lasts for 15 months, with stocks .
Derf
Much the same here. I, too, have ample cash to cover most upcoming expenses. I held off making a new vehicle cash purchase late last year because of the FOMC's uptick in rates. Still have not bought ... but, perhaps I will soon. I'm thinking better new vehicle deals are coming? Especially, if sales begin to decline and inventories are high as most dealers finance their inventory.
My portfolio generates more than enough income to meet my normal cash flow needs. My cash is held mostly should large sums should be needed for the unexpected and for investment purposes, when felt warranted.
If your equity heavy portfolio falls by 35% during a 3-year bear market while you draw from your cash reserves, do you really want to start selling your equitiy heavy portion as soon as the bear ends? Say your equity portion is still down 20-25% 3 years later after the bear market has “officially” ended. Having to withdraw funds (even though it’s now a bull market ) could still be problematic.
Looks like the average duration (from peak - to bottom - and back up to that level again) is about 5 years. Since that’s just an average, some of these periods during which you would have to either (1) sell depreciated equities & funds or (2) rely on your cash reserves might last considerably longer than 5 years.
https://www.dividendgrowthinvestor.com/2008/07/average-durations-of-previous-bear.html
Different strokes for different folks !
Have a good weekend, Derf
I'll go along with @MikeM here. One isn't going to start drawing from cash the instant the stock market drops from a peak. That might be daily noise or the beginning of a bear market, you don't know.
So what's the strategy for starting to draw on cash? Say we start once the market is in correction territory. That's down 10%. So money that we kept in the market instead of cash has dropped 10% from the peak. But the value has likely been flat if we look back a year from the beginning of the correction. That's figuring the market earns about 10% a year. This is especially likely since the market was going up before the correction began (by definition).
For clarity, let's call the time we start drawing cash T1 (market down 10%).
Now the market's 10% down, and we're beginning to draw on cash. Let's say the market drops another 30% from this point. All together, the market drops 10% followed by a 30% drop. So it's worth 90% x 70% = 63% of its peak value. That's a 37% drop, or about what @hank suggested.
We'll call the trough T2.
The average duration of a bear market (peak to trough) is about 22 months. Since we start using our cash reserve (of three years) only after we are already down 10%, we almost surely have at least another year's worth of cash past the trough T2 before we run out.
So let's see where our stock is in another year. So far, it's down 30% - it was flat from a year before the correction until T1 (when we started drawing cash), and the market dropped 30% from there. The average first year recovery after a bear market (T2 - trough) is nearly 50% (same link).
Put these together: 70% x 150% = 105%, i.e. 5% higher than where we started. And before running out of cash.
Of course each recovery is different. But what this shows is that by starting to draw on cash only upon entering correction territory one can expect to have enough cash left to hold on for at least a year, possibly a lot longer, after hitting bottom, to get back to that 10% down level.
Even though we lose a little (10%) value in the stock from the peak, we come out ahead over the longer term (since cash wouldn't have made money before the market peak). So we're usually better off keeping money in stock rather than cash. We just need enough to outlast the worst of the dip. Three years seems fine for that.
Yeah, this to me is key to withstanding (= usually ignoring) all of these manufactured advice articles:
How many years of safe cashflow are you comfortable with projecting you need, meaning earning very little, and how many years of unlikely-to-dip bondy things after that? Not percentages of your total, only years' worth. 1, 2, 3, 4, what?
I just did major (for me) retirement rebalancing, trying this time to apportion more prudently b/w Roth and taxable, and wound up with 21% bondy-cash. More than 5y, gah.
A year and change is in MINT and non-earning dead cash (BoA savings). Better, 2y or more is in PCI, which can dip, but best of all it matches equity funds over certain stretches. The remainder is in PONAX and FRIFX.
I can live with this, or so I say now, and will move amounts into MINT every few months to keep it at perhaps a year's worth.
I use a slightly more dynamic approach to my cash/low volatility investments:
- When I retired I made an estimate of the CAGR I'd need to achieve to cover basic living costs (non-discretionary) and "desired" living costs if I lived to various ages, including "forever", including a static 3% inflation rate. I settled on a goal that I thought was conservative, largely due to the inherent uncertainty.
- As long as the S&P 500 is above its 200 day SMA I hold a minimum of 2 years of non-discretionary living costs in cash or effective equivalents.
- If the S&P falls below its 200 day moving average (at the end of a month) my minimum cash & equivalents increases to the larger of 25% or 5 years of "desired" living cost PLUS "potential" costs like the out of pocket maximum on my health insurance plan or a new car if I'm getting close to needing that- things which my estimates of living costs didn't fully include but could have a fairly significant impact if they occurred.
- Additionally, to the extent that I'm ahead of the CAGR I decided I'd like to target, the excess is invested more conservatively. That doesn't mean cash or equivalents, but lower correlations to the stock market.
- Finally, I keep track of my expenses at a very high level just to make sure my original estimates and/or inflation assumptions aren't way out of line and I would make adjustments if needed but I was pretty conservative so hopefully that won't happen.