dualstow wrote: ↑
Sat Nov 30, 2019 8:03 am
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.