How do you invest the Cash portion?

[dualstow]

Nice

[Kbg]

Who knows what the future holds, jhogue.
It's very tempting to just have a large stock-heavy vp with zaftig dividends.

DWX foreign dividend stock ETF yielding 3.3% now. I own this one.

SCHD yields 3.18 (SEC yield) and no foreign currency risk...

[ochotona]

Who knows what the future holds, jhogue.
It's very tempting to just have a large stock-heavy vp with zaftig dividends.

DWX foreign dividend stock ETF yielding 3.3% now. I own this one.

SCHD yields 3.18 (SEC yield) and no foreign currency risk...

Yup, that's a good one too

[mathjak107]

no stock fund ever should be used as a proxy for cash and interest . dividends are not interest ...

they serve two different purposes ... stocks are stocks whether they distribute a piece of your share price back to you as a dividend or not . they are never a proxy for interest and the safety of cash instruments .

[dualstow]

no stock fund ever should be used as a proxy for cash and interest . dividends are not interest ...

they serve two different purposes ... stocks are stocks whether they distribute a piece of your share price back to you as a dividend or not . they are never a proxy for interest and the safety of cash instruments .

Totally agree. Not a proxy. All the same, I have cash in the vp that will probably become dividend stocks.
PP cash is sacrosanct with regard to both quality and proportion of the whole.

Even notes longer than 3-years don't belong in the pp cash section. They've got the quality, but they are just not cash.

[jhogue]

I haven’t bought a T-bill with a maturity longer than one year for several years now.

Unless you have some specific liability matching in mind, which would rather buy today?

-A one year Treasury bill at 1.64%, or ,
-A three year Treasury bill at 1.57%,.

[dualstow]

One of each, please.
Seriously, it depends on which way you think rates are going. I do in fact buy both.

[dualstow]

Looks like Ally checking's interest rate has dipped from 0.6% to 0.5%.

Vanguard treasury mm/VUSXX/Fund 0011 is down to 1.69% compounded.

[drumminj]

Even notes longer than 3-years don't belong in the pp cash section. They've got the quality, but they are just not cash.

What about a 5-year CD with a small early breakage penalty? Good as cash, no? (well, good as cash in any other bank account/instrument)

[dualstow]

I don't have a problem with it, even though I don't buy them. I guess I would have to try it to really know.
I would ask jhogue, though.

[jhogue]

drumminj,

I do not buy 5 year CDs. I buy Treasury-backed securities because safety and liquidity is more important for my HBPP Cash quadrant than yield.

More important than what I think, however, is what you think:

Why do you want to buy a 5 year FDIC-backed CD, which is illiquid (as you yourself described it) and not as safe as a T-bill?

[sophie]

One of each, please.
Seriously, it depends on which way you think rates are going. I do in fact buy both.

Good for you dualstow! Stick to your guns!

I never got the 3 year rolling ladder thing going. The I bonds I have are soaking up my "deep cash" permissible level, so I'm sticking to short maturities or treasury money market funds for the rest. If I had the deep cash space, I'd be super tempted to use CDs. You can wait to break them until a higher interest rate outweighs the 3 month interest penalty, and the face value isn't at risk. With a short term treasury though, you pretty much are stuck with holding to maturity because their value and bid-ask spread will erase any such interest rate arbitration.

[drumminj]

Why do you want to buy a 5 year FDIC-backed CD, which is illiquid (as you yourself described it) and not as safe as a T-bill?

I buy both, to be honest. For "deep cash", as folks tend to call it, I have some 5-yr CDs fetching > 3%. Yes, I'm chasing yield, but I can withdraw the money immediately (for a small penalty). It's a bit less accessible than cash in an FDIC-insured account, but for some of my cash, the difference in yield is worth it.

I also have a bunch of 13-week treasuries, cash in a bank account, and cash on hand. There's some risk with FDIC, but there's also risk with SIPC (possibly more?) if you're holding STTs with Fidelity, and there's risk with TreasuryDirect (as discussed on this forum).

Pick your poison!

[jhogue]

11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:

From CraigR’s FAQ:

"Q: Why a Treasury Money Market Fund and not something else with better yield?

A: Because you are not looking to take risk with your cash. Treasury Money Market Funds that are properly run are one of the most liquid investments you can own. There are no FDIC limits to worry about, no bank credit worthiness to worry about, and you will always be paid barring some extremely catastrophic event in the country. Chasing yield with your cash means you are taking on more risk and those risks can show up when you least expect (or want) them to."

The FDIC ran short of cash during the 2008-2009 financial crisis and had to be bailed out by Congress to the tune of $100 billion. That is a fact, not an opinion or a theory.

During that same time period, there was no interruption in the secondary market in T-bills.

Happy Thanksgiving to one and all.

[drumminj]

11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:

That's fair, and to be clear I'm not trying to convince anyone.

I disagree though that there are no "FDIC limits to worry about". Your MM funds are held by a financial institution (in "street name", possibly even?) which may become insolvent, halt withdrawls, etc. You have insurance issues there, no? Asking sincerely, is this less risky than FDIC?

Treasuries held directly? Sure. Treasuries held on your behalf? Less so. Treasury MM? Also has risks.

Again, not trying to convince anyone to do what I do -- just trying to be clear about the risks here in the margins.

[Pet Hog]

A general question, not addressed to anyone in particular: Isn't a treasury money market fund just a treasury ladder held by someone else on your behalf? If so, there's not magic to it. You can set up your own and cut out the middleman. And set the duration/maturity however you like. Personally, I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.

[dualstow]

I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.

I’m accumulating, too. But, imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

It’s not the same as a treasury mm, from which you can withdraw what you need and a share = $1. If you’re really going to go five years out, maybe you had better go with those CDs with low penalties.

[sophie]

I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.

I’m accumulating, too. But, imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

It’s not the same as a treasury mm, from which you can withdraw what you need and a share = $1. If you’re really going to go five years out, maybe you had better go with those CDs with low penalties.

Yep. And that, in a nutshell, is why I think savings bonds (any series) are also a bad choice.

Really? They're easy to liquidate and won't lose value. Even with the one year lockup and 3 month interest penalty if you sell before 5 years, I'd prefer them to > 1 year STTs for emergency cash withdrawals, which is why I've never found a place for treasury ladders.

[Pet Hog]

... imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

Can you give an example of such a situation? Because as a PP investor in the accumulation phase, my first response would be to pay for this sudden emergency with money from my emergency fund (not five-year treasuries), or with earnings from my job, or put it on a credit card. Ideally, I wouldn't touch my PP cash. Furthermore, as a PP investor I have several options, like selling appreciated stocks and potentially paying little (nothing?) in capital gains taxes. But let's say I have to suddenly liquidate all of my 25% cash component (and that includes five-year treasuries that I bought at 1.5% and now the interest rate is 10%**) -- well, I'd just suck it up and be grateful that I didn't have to go to a loan shark.## I'm not being facetious; I think as PP investors we have lots of options and can weather most storms.

**In such a high-rate environment, we'd also have high inflation, which would presumably boost stock and gold prices. Perhaps I'd be better off selling those assets. They are just as easy to liquidate as treasuries. So my response would depend on taxes and fees. That's why I asked for an example.

##Or maybe going to a loan shark would be smarter than selling my five-year treasuries! Again, many options for the PP investor.

[Pet Hog]

##Or maybe going to a loan shark would be smarter than selling my five-year treasuries! Again, many options for the PP investor.

Ah yes, PP investors' personality profiles certainly would be the type to use loan sharks.

I'll admit, there I was being facetious!

[dualstow]

... imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

Can you give an example of such a situation? Because as a PP investor in the accumulation phase, my first response would be to pay for this sudden emergency with money from my emergency fund (not five-year treasuries), or with earnings from my job, or put it on a credit card. Ideally, I wouldn't touch my PP cash.

A situation more specific than a sharp rise in interest rates plus some kind of catastrophe that would require cash? Use your imagination.

It does change things if you have an emergency fund that is separate from pp cash. I didn't really use to hold cash pre-pp, and now I've grown used to it. Like a lot of people who run this portfolio, though, I don't have a separate emergency fund of cash in addition to pp cash.

I was responding to

I have no problem with cash being defined as up to five-year treasuries/CDs

[sophie]

Yes, really. They won't lose value? Maybe not in the sense of the return of principal, but certainly in the sense of opportunity. And you are talking about I bonds. EEs are even worse.

What kind of opportunity do you mean?

I bonds are much better than CDs for me, because of the state/local tax exemption and tax deferral for the life of the bond. I'm not aware of any opportunities that would qualify as cash.

I think five year treasuries, CDs etc all have a place (if you're not a PP purist I guess, when it comes to the CDs). You still need a source of cash in its most liquid form. Like dualstow, I hold money markets and 4 week T bills as part of my cash allocation, not separately from the PP.

[Pet Hog]

I was responding to

I have no problem with cash being defined as up to five-year treasuries/CDs

And the rest of that sentence is, "but I'm in the accumulation phase." I think someone in the accumulation phase has greater risk-tolerance toward any changes in interest rates and/or emergencies and, therefore, can be a bit more aggressive with all aspects of the PP, but particularly with the cash component. Ergo, my tolerance toward five-year treasuries and CDs.

I'm still curious if anyone can provide an example of an emergency situation that would be problematic to the PP investor in the accumulation phase and holding five-year treasuries. I'll suggest my own. Consider a PP valued at $400,000, so $100,000 in cash with $20,000 in each of five rungs of a five-year treasury ladder, currently all yielding about 1.6%. The investor is in the accumulation phase and adds $500 every month. If interest rates suddenly spike to about 5% (gains of 3.4%-ish) -- after a terrorist attack, a state government default, or surprise presidential election result** -- and we approximate the dollar effect to be "duration multiplied by percentage change," then the one-year treasuries would decline by about 3.4% (maybe $700 of $20,000) and the five-years by about 17% (maybe $3400 of $20,000). An emergency strikes and this investor needs $20,000. Cashing out the one-year treasuries would come with a loss of $700, but that would be made up in a month or two with earnings from employment. If the emergency is for $100,000, then I suggest taking the money wisely from the portfolio as a whole## and not necessarily from the four- and five-year treasuries. With that spike in interest rates, 30-year treasuries would surely suffer badly, but maybe stocks and gold would be doing OK. Paying 10% capital gains tax (or maybe 0%) on the sale of $20,000 of stocks (maybe only $10,000 of which is capital gains, so $1000 in tax -- covered by two months of work) would be better than locking in a loss of $3400 when selling those five-year treasuries. The accumulation-phase PP investor should have options to weather a storm without having to resort to selling depreciated five-year treasuries.

**I suspect some of these surprises might cause investors to buy treasuries and lower their yields; feel free to consider a more appropriate disaster.

##Taking $100,000 from cash alone would necessitate rebalancing the whole PP, resulting in a similar tax effect as withdrawing equally from each of the assets.

[jhogue]

Pet Hog,
I disagree with your assumption that “someone in the accumulation phase has greater risk-tolerance” and therefore can be (ought to be?) more aggressive with their investments.

Consider a couple of real-world examples:

Example #1. 52 year old female (divorced, with 3 kids) came down with brain cancer. Got fired from her long-time nursing job because she could not work any more. Had to liquidate IRAs and 403b to meet monthly mortgage payments and medical bills before she died at age 56. I would not have suggested that she invest in 5 year CDs- or 5 year T-bills. Would you?

Example #2. 40 year old male working in the red-hot real estate market in Las Vegas before the financial crisis of 2008-2009. Lost his job when the local construction industry abruptly collapsed. Could not find another job in the area, and with his own house now under water, he stopped making mortgage payments. He subsequently lost the house, but not before his wife divorced him and took 50% of his retirement funds as well as alimony payments. I would not have suggested that he invest in 5 year CDs- or 5 year T-bills. Would you?

To be sure, not all emergencies are strictly financial in nature. Nevertheless, these examples illuminate why safety and liquidity must come before yield, particularly in Cash.

[jhogue]

EE bonds can be redeemed for more than their nominal value after one year. 5 year CDs cannot.

Which would be better in a really bad situation?

Snowing like hell in Minnesota. How is the weather in Chicago, Pugchief?