Understanding Cash Will Make You a Happier Investor (Tyler)

Discussion of the Cash portion of the Permanent Portfolio

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dualstow
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Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Fri May 12, 2017 5:36 pm

https://portfoliocharts.com/2017/05/12/ ... estor/amp/

The quote about all-cash vs all-stock in Canada is a bombshell!
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by barrett » Fri May 12, 2017 7:17 pm

That's great, Tyler. And thanks Dualstow for posting. First thing on my agenda for Monday morning is to get over my damn cash inertia (DCI) and build a two-year treasury ladder in my IRA.

What do most folks on here do with cash if they only have, say, a few thousand bucks in cash in any given account. Put it in SHY? I don't like its .15% expense ratio but maybe I'm just being penny wise and pound foolish. Any other good options?
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Fri May 12, 2017 7:23 pm

Are these accounts that you aren't adding to, and will never have more than a few thousand?
By the way, I don't think SHY is so bad.
Barrett texting to his daughter : TYTL TTYL = (I'm busy with my) two-year treasury ladder, talk to you later.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by barrett » Fri May 12, 2017 7:41 pm

That's a good question. Yes, for the most part they are smaller retirement accounts that are unlikely to see much in the way of future contributions. In our retirement accounts we only hold about 10% in cash (much of our PP cash is outside these accounts).

But over several accounts the cash adds up, even at 10%. I've just been really lazy about optimizing our cash portion, figuring it's only a few bucks here and there. But the correct way to look at it is what the cash can generate over the next 40 years or so. Plus, as Tyler pointed out in the linked article, invested cash can really help soften the blow to LTTs in a rising rate environment.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Fri May 12, 2017 8:26 pm

I was frustrated with accounts like that, like a Traditional IRA that I didn't want in the first place, In the end, I used up all the cash by buying mutual fund shares (not cash-related at all), leaving only US$500 or less in a money market account.

I keep cash in taxable where have room.

When I reread Harry's older books with examples of 5% interest, I shake my head and smile wistfully.

...but read the article, yeah. Keeps up with inflation. I didn't believe it when MG said it. Now I do.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by Tyler » Fri May 12, 2017 8:45 pm

You're fast Dualstow. I swear you posted that less than 5 minutes after I did! :)

Yeah, the new international data has helped me start to challenge some of my old assumptions. One of the first is the role of cash in a portfolio, as I was sorta surprised how well Tbills track inflation not only in the US but also in other countries. I'm starting to realize that perhaps some of our traditional Permanent Portfolio theory needs a small update, and cash deserves a lot more credit for inflation protection than it typically receives. Gold gets all the headlines when the SHTF, but cash is a much more reliable ballast in times when inflation causes rising rates.

BTW, I'm working on a post about SWRs in other countries. Canada is just the tip of the iceberg, and international investing is a lot more varied than most people assume.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Fri May 12, 2017 8:51 pm

Yeah, that keylogger I put in your laptop has really helped me get a jump on things.

It's pretty cool when an unloved asset becomes somewhat more beloved. And one that's so easy to hold and free to trade.

Well, I'm looking forward to the new international data!
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by sophie » Fri May 12, 2017 9:36 pm

Thank you Tyler! My favorite line has to be the very first one, about investors who tend to overthink. That's pretty much everyone on this forum :) Of all the PP's assets, cash was the hardest one to get used to. After all, "cash is trash", and nearly all portfolios in Bogle-land ignore it completely. Even the PP book gave it short shrift, describing it as a sinkhole for interest and dividends, and "dry powder" for buying down assets. I seriously resisted it at first. Now it's my favorite asset.

Barrett, I have the same issue, retirement accounts with small amounts of cash. If they're at a brokerage that lets you autoroll Treasuries, buy a T bill the next time an auction comes around and set it to autoroll. The duration you pick doesn't really matter - I went with 3 months in one account and 6 months in another. Otherwise, as dualstow says there's nothing wrong with SHY.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by barrett » Sat May 13, 2017 7:37 am

sophie wrote:Barrett, I have the same issue, retirement accounts with small amounts of cash. If they're at a brokerage that lets you autoroll Treasuries, buy a T bill the next time an auction comes around and set it to autoroll. The duration you pick doesn't really matter - I went with 3 months in one account and 6 months in another. Otherwise, as dualstow says there's nothing wrong with SHY.
Thank you, Sophie. My issue with SHY is that expense ratio. If SHY is yielding 1%, then 15% of the income generated is going to the brokerage firm. But it's a silly psychological block for me. I miss out on a few hundred dollars a year in interest because I object to the expense ratio.

I do like the idea of just buying a T-Bill or two for smaller cash balances. That strategy should also work well in the drawdown phase with just a touch of planning.

Fidelity will also let you autoroll an entire treasury ladder but only after it "matures." So, for example, with a two-year ladder, I would have to manage the reinvesting myself for the first two years. Then, if it is set up properly, it can be switched to autoroll. I haven't done this myself... it's just what one of their reps told me a couple months ago when I was looking into a treasury ladder.

I used to love cash as an asset. When I first had a few bucks to invest in 1981, I put it in a money market fund that was getting 16%. Even throughout the early aughts I had a largish (for me) cash position in my Fidelity account that was cranking out around 5% a year. From 2000 to 2002 my lazy cash outperformed stocks.

Lastly, it's been mentioned in this thread (or maybe it was in Tyler's piece) that cash offers some inflation protection. I always think of it as providing some deflation protection as well. Obviously it's not as powerful as long-duration treasuries when deflation strikes, but it should hold its value better than either stocks or gold.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Sat May 13, 2017 8:02 am

Maybe you could buy a 2-yr in one account, and one year into that, buy a 2-yr in another?
In these cramped accounts, I'd probably just buy a 1yr bill in each and autoroll.

I have a "legacy" holding in Vanguard's admiral treasury money market. I mean, sometime around the crash of 2008-9 I sold down to a few thousand $. They closed the fund to new investors for a while, but let holders maintain their holdings, even without the 50K minimum.(no smaller investor class, like all of Vanguard's other funds have).
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Sat May 13, 2017 8:14 am

Or for a low 1.21 0.71% ER you could buy PRTBX. O0
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by sophie » Sat May 13, 2017 9:40 am

barrett wrote: 1) Fidelity will also let you autoroll an entire treasury ladder but only after it "matures." So, for example, with a two-year ladder, I would have to manage the reinvesting myself for the first two years. Then, if it is set up properly, it can be switched to autoroll. I haven't done this myself... it's just what one of their reps told me a couple months ago when I was looking into a treasury ladder.

2) ...but it should hold its value better than either stocks or gold.
1) How annoying of Fidelity, if that's true. What's the point of a ladder tool then? If you want a two-year ladder and expect to collect more cash in the next year, just buy the two year now with autoroll, then a year from now buy more two-years (or whenever you collect enough cash). You'll eventually get a working ladder. But that's unnecessarily complicated...I vote to just buy the 1 years with autoroll and calling it a day.

2) A very telling comment! As volatility of stocks and gold comes with the investing territory, if you are shying away from possible drawdowns (no pun intended) maybe you're someone who needs to have a lot of assets in cash. Harry Browne said that a 100% treasury bill portfolio is perfectly acceptable for people who aren't prepared for the downsides of investing, and its returns are not far below those of the PP (as Tyler points out). US savings bonds would be great to include along with the Treasuries.
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