cash as an underperform asset that could get rid of.

[sapperleader]

One of my favorite parts of PP's cash is how it fits with how most people handle money.  Instead of saying I have X in investments, Y in my emergency fund, and Z in checking/savings, you can just say I have whatever percent in cash.

Only time I think designating funds as a emergency fund outside of PP makes sense  is when you first start out and considering it part of your PP would lower your desired total amount of emergency fund. That is my two cents on the subject

[rickb]

So, maybe rather than a bogleheads style stocks/bonds allocation with age/100 in bonds, you might think about a "PP" where your cash allocation is (age/50)*.25 (with the other assets proportionally adjusted). 

Setting cash to (age/50)*.25 is probably a fine tweak.  At age 25 you'd be 12.5/29/29/29.  At age 50 you'd be 25/25/25/25.  At age 100 you'd be 50/17/17/17.  All of these will return essentially the same as 25/25/25/25 with 15/35 rebalance bands.  Whether a higher or lower cash allocation has a higher CAGR depends on what history you backtest and how many years your backtest covers - but higher cash allocation ALWAYS has less max drawdown. 

The future is unpredictable.  Whether more or less cash is beneficial over a period of even 20 years is unpredictable.  If your investing horizon is 20+ years less cash almost always wins.  But the amount of cash and the max drawdown are inversely proportional.  Basically, which is more important to you - higher expected CAGR (so less cash) or lower max drawdown (so more cash)?

Trust me, when you're 50+ minimizing max drawdown will be WAY more important to you than making 1-2% more per year.

[sophie]

Don't think increasing the cash allocation is really necessary.  Remember it's collecting dividends and interest also.  And in this thread, we explored safe withdrawal rates for the PP, and that cash bucket makes it remarkably safe compared to cashless portfolios:

http://gyroscopicinvesting.com/forum/ot ... or-a-myth/

[EdwardjK]

So, maybe rather than a bogleheads style stocks/bonds allocation with age/100 in bonds, you might think about a "PP" where your cash allocation is (age/50)*.25 (with the other assets proportionally adjusted). 

Setting cash to (age/50)*.25 is probably a fine tweak.  At age 25 you'd be 12.5/29/29/29.  At age 50 you'd be 25/25/25/25.  At age 100 you'd be 50/17/17/17.  All of these will return essentially the same as 25/25/25/25 with 15/35 rebalance bands.  Whether a higher or lower cash allocation has a higher CAGR depends on what history you backtest and how many years your backtest covers - but higher cash allocation ALWAYS has less max drawdown. 

The future is unpredictable.  Whether more or less cash is beneficial over a period of even 20 years is unpredictable.  If your investing horizon is 20+ years less cash almost always wins.  But the amount of cash and the max drawdown are inversely proportional.  Basically, which is more important to you - higher expected CAGR (so less cash) or lower max drawdown (so more cash)?

Trust me, when you're 50+ minimizing max drawdown will be WAY more important to you than making 1-2% more per year.

Rickb,

This is one of the more insightful and thoughtful comments I have read on these boards in a long time.

Ed

[LC475]

Setting cash to (age/50)*.25 is probably a fine tweak.  At age 25 you'd be 12.5/29/29/29.  At age 50 you'd be 25/25/25/25.  At age 100 you'd be 50/17/17/17.  All of these will return essentially the same as 25/25/25/25 with 15/35 rebalance bands.  Whether a higher or lower cash allocation has a higher CAGR depends on what history you backtest and how many years your backtest covers - but higher cash allocation ALWAYS has less max drawdown. 

Here's the thing, though; two things: 1) when one is age 25, your total savings is a lot less, and 2) at that stage of life your direction is not set, life is unpredictable, and you have all kinds of things that will come up that you'll need to buy.  Regarding 1), let's say even something small like new tires for the car comes up, you've got to pay it, there's a few hundred dollars, and that might be 25% of your savings right there!  Regarding 2), what if you decide to start a business, or change careers, or move to New Zealand, or get married and have a big wedding?  There's all kinds of life volatility in youthful years, and that life volatility means that you want some nest egg to carry you through the turbulence, also give you the confidence to take on more turbulence, turbulence that could pay off in big ways.

So I could make a good case that one should have more cash (%-wise) when young and starting out in life.

Money is a multi-tool.  It's not just good for one thing and one thing only: long-term CAGR.  That's a very narrow and incorrect way to view it.  It's also good for paying for weddings and tires and for funding new businesses and for fulfilling life dreams.  What if Steve Jobs at age 21 would have had all his money tied up in a tax-sheltered, 100% stock of course, portfolio?  Boy, his CAGR would have been sweet for the next 35 years.  True.  But.... then again.... maybe not all that sweet.

[LC475]

Setting cash to (age/50)*.25 is probably a fine tweak.  At age 25 you'd be 12.5/29/29/29.  At age 50 you'd be 25/25/25/25.  At age 100 you'd be 50/17/17/17.  All of these will return essentially the same as 25/25/25/25 with 15/35 rebalance bands.  Whether a higher or lower cash allocation has a higher CAGR depends on what history you backtest and how many years your backtest covers - but higher cash allocation ALWAYS has less max drawdown. 

Here's the thing, though; two things: 1) when one is age 25, your total savings is a lot less, and 2) at that stage of life your direction is not set, life is unpredictable, and you have all kinds of things that will come up that you'll need to buy.  Regarding 1), let's say even something small like new tires for the car comes up, you've got to pay it, there's a few hundred dollars, and that might be 25% of your savings right there!  Regarding 2), what if you decide to start a business, or change careers, or move to New Zealand, or get married and have a big wedding?  There's all kinds of life volatility in youthful years, and that life volatility means that you want some nest egg to carry you through the turbulence, also give you the confidence to take on more turbulence, turbulence that could pay off in big ways.

So I could make a good case that one should have more cash (%-wise) when young and starting out in life.

Money is a multi-tool.  It's not just good for one thing and one thing only: long-term CAGR.  That's a very narrow and incorrect way to view it.  It's also good for paying for weddings and tires and for funding new businesses and for fulfilling life dreams.  What if Steve Jobs at age 21 would have had all his money tied up in a tax-sheltered, 100% stock of course, portfolio?  Boy, his CAGR would have been sweet for the next 35 years.  True.  But.... then again.... maybe not all that sweet.

[barrett]

Here's the thing, though; two things: 1) when one is age 25, your total savings is a lot less, and 2) at that stage of life your direction is not set, life is unpredictable, and you have all kinds of things that will come up that you'll need to buy.  Regarding 1), let's say even something small like new tires for the car comes up, you've got to pay it, there's a few hundred dollars, and that might be 25% of your savings right there!  Regarding 2), what if you decide to start a business, or change careers, or move to New Zealand, or get married and have a big wedding?  There's all kinds of life volatility in youthful years, and that life volatility means that you want some nest egg to carry you through the turbulence, also give you the confidence to take on more turbulence, turbulence that could pay off in big ways.

So I could make a good case that one should have more cash (%-wise) when young and starting out in life.

Money is a multi-tool.  It's not just good for one thing and one thing only: long-term CAGR.  That's a very narrow and incorrect way to view it.  It's also good for paying for weddings and tires and for funding new businesses and for fulfilling life dreams.  What if Steve Jobs at age 21 would have had all his money tied up in a tax-sheltered, 100% stock of course, portfolio?  Boy, his CAGR would have been sweet for the next 35 years.  True.  But.... then again.... maybe not all that sweet.

This is one of those posts that I wish I had written.

[hoost]

^^Agreed. Very well stated.