The Stock Market, Investments, and Investing Thread
(07-28-2019, 12:43 AM)RoadTo100 Wrote: Great thread --- personally I am in a phase of my career where I'm doing less consulting work (= earning less) and spending more on my fledgling online businesses.

Therefore, my net worth has been trending slightly negatively for the last year or so.

While I still maximally invest in my tax advantaged accounts each year (and have that money in various index funds + near-monopoly tech stocks), the rest of my money is sitting in a ~2.2% interest bearing savings account.

All told, I've probably got 2-3 years of living expenses in the savings account rather than in the market.

While this seems like a lot, is it? My worst-case scenario would be needing to sell investments during a downturn to pay for my life/business expenses. Is 2-3 years cash in the bank overdoing it? If so, how much would you keep "in cash" versus invested?

I write this as someone with skin in the game, and my take on it is this... Cash has two purposes:

1) Cash for living expenses and major purchases. We need cash to live, and everyone should have a cash savings buffer to cover living expenses in the event of a rainy day. The common wisdom is 3 - 6 months, but personally I'm more comfortable with a year... In you case two to three years sounds like a lot, but money is personal. I would also argue that it isn't a bad idea to set some aside in the event of an anticipated outlay (new roof, newer car, knee surgery, orthodontics etc).

This is separate from....

2) Cash as a portfolio position. When considering that inflation erodes cash's value, cash and cash equivalents (money market funds, CDs, etc) are historical long-term losers in a portfolio. So why hold cash at all? Simple: it's value typically erodes very slowly (i.e. it's non-volatile) and can be used to purchase other assets when their prices retrace. Maintaining a target percent cash allocation (like say 20%) and being disciplined can ensure a certain amount of volatility smoothing.

If stocks + bonds + gold increase in value to 90% of your portfolio making (your cash position 10%), then you sell the stocks + bonds + gold that have appreciated and you capture the gains. If stocks + bonds + gold decreases in value to 70% of your portfolio (making your cash position 30%), then you buy the assets that are at a relative discount.

What is the advantage of this approach? It enforces discipline. If stocks + bonds + gold tend to go up (as the economy tilts toward prosperity and inflation) then you will be doing the first kind of rebalancing more often: selling assets for cash when they're likely at a high point. When stocks + bonds + gold, go down, you will be less likely to panic and SELL EVERYTHING NOW, miss out on future appreciation, and you can reap the benefit of a buying opportunity.

Personally, I prefer to target 20% as a baseline cash allocation with rebalancing bands triggered at 15% and 25%. I may miss out on some gains in a bull market, but the ride down when the market takes a shit is a lot softer, it's a buying opportunity, and most importantly I won't be tempted to take the loser's bet of trying to time the market -- I remember demoralized colleagues in 2009 completely exiting the market and in hindsight that obviously was not a good decision.


So those are my thoughts on cash. As for logistics, a high interest savings account is fine for living expenses, but for actual cash position in the portfolio, I prefer to use a cash equivalent in a brokerage account in the form of short-term treasury ETFs, since they are interest bearing, safe, and highly liquid: 

iShares 1-3 Year Treasury Bond (SHY)

Vanguard Short-Term Treasury ETF (VGSH)

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RE: The Stock Market, Investments, and Investing Thread - by billydingdong - 07-28-2019, 04:44 PM

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