Gyroscopic Investing

Craig recommends only a small portion of savings bonds in the cash component of the PP, and I have to confess that I cannot bring myself to go to 25% cash. I am overweighted in Ibonds, to which I am addicted due to their "two-for-one" role as an inflation fighter and protector against deflation, as they can never decline in value.

I just cannot face putting a full 25% in cash when the return is below the inflation rate.

Does anyone else share my cash phobia at this time?

Cash is losing to inflation or just barely beating it most of the time. It's never going to be a big winner, but that's not its function; it's there to dampen volatility and server as an easy withdrawal bucket.

Don't forget these other roles. I-bonds are hard to sell quickly, so you can't really use them as an emergency fund or a pool of funds to buy discounted assets with. It also makes rebalancing a little more difficult, and you have to use some tax trickery to buy more than 5k per year.

Pointedstick wrote: It also makes rebalancing a little more difficult, and you have to use some tax trickery to buy more than 5k per year.

The limit is actually 10k per year, see http://www.treasurydirect.gov/indiv/res ... angeqa.htm.

When we've discussed this in the past, the consensus seemed to be that Ibonds were probably fine, as long as you had something else more liquid available too, in case you needed it emergently.

Pointedstick wrote: Cash is losing to inflation or just barely beating it most of the time. It's never going to be a big winner, but that's not its function; it's there to dampen volatility and server as an easy withdrawal bucket.

Here is another point that I think cash-phobes forget: Cash is the other asset that provides a positive real interest rate in a deflationary environment. When/if I mess with the 4x25 allocation, I like to keep 50% in the cash + LTT  "deflationary bucket." Agree?

I mainly see cash as a way of mitigating the effect of rising interest rates because that puts pressure on all of the other asset classes while explicitly benefiting cash. I-bonds don't exactly do that so I don't think it's a perfect sub. However, you are getting a subsidized free lunch with I-bonds real yield over a hundred basis points higher than the equivalent TIP trading in the free market.

It's hard to argue against taking a free lunch.

I have been writing stuff for years about the role of Ibonds in the cash part of the PP.

I say use as many Ibonds in the cash piece as you can, so long as you still have enough liquidity for your other needs.