Cash, the most complex PP Asset

[TripleB]

I started drafting a response in another thread and thought this justified its own.

Amazing how complicated the cash portion can get....

From my vantage point, the cash portion is by far the most complex due to the number of suitable options and opportunities for legitimate "juicing" of additional yield on a basis that exceeds risk. i.e. IBonds, if used correctly, are nearly as risk-free as t-bills for significantly higher return.

There's no "special" gold coins costing less than fair market value that the US mints and sells in limited maximum quantities per year to citizens. There's no "special" long term bonds or stocks that are issued at below market value in small quantities per year.

There's no "special" gold/LT Bond/stock fund offered in the Federal TSP, like the G-Fund for cash, which offers significantly higher than market return, with near-equal risk attributes to t-bills, to federal employees.

There's no "special" health savings account that shields taxes and lets you efficiently invest in gold, stocks, or bonds. Yes, you can get an HSA brokerage account but they have such high fees relative to the short annual contribution caps, that it's inefficient. You can, however, drop cash into an FDIC/NCUA insured HSA, expense-free, and typically at rates that exceed fair market value (i.e. Alliant currently offers about 20% higher yield on HSA savings over regular savings and used to offer double the yield on HSA accounts before interest rates dropped across the board)

The government doesn't have a "free" insurance program to cover your gold coins up to $250k in the bank. (I realize FDIC isn't "free" but the cost is low, invisible to the end user, and impossible to bypass... i.e. you can't get a bank to offer you USD non-FDIC savings account for 0.02% higher return to compensate you for the FDIC fee).

If you follow the t-bill strategy then cash is the asset that requires the largest turnover. You can hold stocks and gold coins forever. You can hold a 30 year t-bond for 10 years (and still follow the PP guidelines). With T-bills you need to rotate through them every 1 month to 1 year, depending on how you structure a ladder. More turnover means more time to manage it.

When interest rates are low, like now, most mutual funds close their doors to new Treasury MMF investors, due to the yield not meeting the expenses to run the fund. There will likely never be a case where a long-term treasury bond fund, index stock fund, or Gold ETF stops accepting new investors.

Also, cash is the biggest wildcard. 100% of its gains are taxed at nominal tax rates. In times of low interest rates such as now, the most tax-efficient thing to do is put all of your cash in taxable. However, in times of higher interest rates, the most tax-efficient thing is for all of your cash to be in tax-sheltered. Since moving around assets between sheltered and non-sheltered accounts typically triggers a capital gain in another asset, that confounds the issue.

Even if you stick with a true T-Bill ladder and do nothing "fancy," it's going to require more frequent rebalancing than the other assets, thus making Cash, the most complex PP asset.

[cabronjames]

TripleB, excellent post!

I'd add another factor, what is a rule of thumb, on the max portion of your Cash that is not US Treasury assets?  iirc orthodox HBPP rules state all of your Cash should be UST assets.  Yet the first most liquid layer of an emergency fund, is undoubtedly a FDIC/NCUA  deposit account, that allows checkwriting & debit card on-demand access.  Furthermore, some Rewards Checking accounts at local non-2B2F FDIC/NCUA banks offer 3%+ yield up to a limit of $10-25K, so it is practical to combine to meet need for debit card account access with a Rewards Checking account.  afaict I Bonds & Rewards Checking are currently the best yielding type of Cash accounts, as such it's tempting to use the Rewards Checking perhaps beyond the actual emergency cash fund requirement.  I suppose an appropriate approach would be to buy I Bonds, & if exceeding the I Bond limit, then also EE Bonds.  Once the I Bond have been held for 13+ months & are thus redeemable, scale back the deposit account to 1-2 months emergency expenses, on the idea that the I Bond could be redeemed to replenish the deposit account if needed within less than 1 month (10 business days?).  Is this a decent approach to take?

Another common type of non-UST Cash is the Stable Value Fund in a 401K.  The downsize is that a Stable Value Fund has credit risk from the fund manager, & possibly from an insurer the fund manager hires.  However, for those without Brokerage Window choice, many 401K fund lists are limited and have NO 30 yr T-Bond or Gold asset.  For those whose 401K is larger than the combo of Roth IRA + taxable, considering the Stable Value Fund as Cash, along with say a the 401k's US stock index fund as Stock, is the only method of implementing the PP asset alloc.