Allocating to Cash

Comments on “The Power of Holding Some Cash in a Portfolio,” by Brian Haughey, CFA, FRM, CAIA, in the March 2024 AAII Journal:

For my 40-year career, I was always 95% in stocks and never held a bond of any kind. Now that I am near retirement and three-month Treasury bills are paying north of 5%, I have been buying them. For me, this is a better value and safer insurance than buying put options to protect my investments from the inevitable bubble burst.
—Gregory M. from California

My early investments were generally split between stocks and bonds. When I started investing, long-term Treasurys were paying in the double digits—hard to turn down. As interest rates declined, I invested mostly in stocks. I have been buying some bonds in the last year or two. I have always kept a relatively large cash position. I think there were some studies years ago indicating that the allocations to stocks, bonds and cash were more important in determining returns than specific purchases.
—D.S. from Nebraska

I retired several years ago and have aligned my portfolio to generate an overall yield of 4%, with an allocation of 72% to equities, 25% to fixed income and 3% in money market funds. I take 5% annually from the portfolio, consisting of the 4% yield and 1% from capital gains. This is a somewhat more conservative variation on the Level3 investing strategy promulgated by AAII founder James Cloonan. But I am comfortable with the overall allocation, investment risks and ability to not only grow annual distributions but also provide a growing portfolio for eventual distribution to our children and charities.
—William H. from Indiana

At the end of 2023, my allocation was 79% to stocks and 21% in cash/certificates of deposit (CDs). I no longer hold any bonds or bond funds. The catch is that the percentages are no longer meaningful. I withdraw from cash to supplement my pension. So in a good year, the stock allocation goes up and the cash allocation decreases from the withdrawals.
—Al P. from New York

I retired almost 16 years ago. Currently, my wife and I are receiving pension checks and Social Security. According to my monthly brokerage statements, I am getting a 4% return on my investments, so I withdraw approximately $2,500 per month from the cash in that account. This allows me to pay my estimated taxes and my long-term care insurance without drawing from our pension and Social Security. Any cash left over at year-end is used to consider more investments.
—Bernard R. from Utah

We are retired. Our taxable account has target allocations of 70% to diversified equity index funds, 20% to tax-exempt bond funds and 10% in cash. To rebalance and maintain targets, most years we sell some equities resulting in large capital gains for long-held funds. Rather than letting the annual capital gain tax get too painful, we are edging toward a greater actual equity allocation, while bonds and cash become a smaller actual percentage. Our Roth IRA is 100% in equities and will go to our descendants.
—James F. from Florida

Withdrawal Rates in Retirement

Comment on “How Rebalancing Helps When Downturns Strike Early,” by Charles Rotblut, CFA, in the March 2024 AAII Journal:

In an efficient stock market, value and price are always equal. Sequence of returns risk is how “efficient market” believers describe the risk of lower future returns when the stock market is overvalued at the beginning of retirement. However, the U.S. stock market is mean reverting, with real long-term (30-year) average returns of approximately 6.7%. When the stock market is dramatically overvalued, as measured by either the cyclically adjusted price-earnings (CAPE) ratio or the Q ratio at the beginning of retirement, a retiree would be wise to use lower withdrawal rates since their stock holdings are likely overvalued and future returns could be lower than average and might not support a 4% withdrawal rate, as described by William Bengen.
—John L. from New Jersey