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Cash bucket options (short term needs). CD tents, Bond tents etc. dynamic situation.

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  • #61
    Originally posted by Dont_know_mind View Post

    If you duration match your bond ladder, there is only interest rate risk.
    if you duration match with TIPS, it takes away the interest rate risk.

    There is not much popularity with TIPS due to the bull market in nominal bonds the last 20 years+
    I am surprised they are not used more. They may become much more attractive if TIPS yields are positive again.

    The TIPS yield to me represents compensation for the risk of sovereign default and should be positive, as although this risk is low, it is definitely not zero.
    Yeah, reading about TIPS. It is something I am considering but I need to understand them better. I think I will include them, but I want to finish Harry's book and two other bond books I recently started.

    Comment


    • #62
      Originally posted by Dont_know_mind View Post
      It would be great to know what Harry thinks are the main driving factors for the change in TIPS yields over time
      Price and yield are on two sides of the same math equation. To ask what makes TIPS yields change is really asking what makes TIPS bond prices change. As in everything else, the price is based on the buyers' willingness to pay. What made your house's value go up by 20% last year? It's still the same house, same location, same number of bedrooms and bathrooms, ... but people are willing to pay more for it. What makes the same TIPS bond worth less now? Why are buyers willing to pay less than they were for the same TIPS bond last year? I don't think it's productive to try to find reasons and by extension try to predict changes by analyzing those reasons. We're only price takers.

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      • #63
        Originally posted by Harry Sit View Post
        Price and yield are on two sides of the same math equation. To ask what makes TIPS yields change is really asking what makes TIPS bond prices change. As in everything else, the price is based on the buyers' willingness to pay. What made your house's value go up by 20% last year? It's still the same house, same location, same number of bedrooms and bathrooms, ... but people are willing to pay more for it. What makes the same TIPS bond worth less now? Why are buyers willing to pay less than they were for the same TIPS bond last year? I don't think it's productive to try to find reasons and by extension try to predict changes by analyzing those reasons. We're only price takers.
        Good points Harry. That’s a valid POV. Overconfidence bias is a problem I have.

        With TIPS,
        - do you think their unpopularity (vs % investors who own nominal bonds) is because people think realised inflation is likely to be less than inflation breakevens at that point in time ? Or is it due to people just not interested them?
        - there was a spike in TIPS yields in Oct 2008. Do you recall what happened around that time and do you recall whether it shook out many TIPS individual investors?

        Comment


        • #64
          The way I look at TIPS , are a conservative way to protect the value of your money over the term of the bond. At maturity you will get back your money plus inflation adjustments along the way with minimal to no interest above it (other than covering for inflation). Other than holding for the duration, the volatility of the investment makes it less appealing.

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          • #65
            Update: I am increasing my “cash bucket” which is my antidote (hopefully) for SORR. I will retire completely in a few years. So far I am looking at:

            1. bond ladders (reading about bonds)

            2. cd ladders (purchased a few CDs, 1mo to 2 years)

            3. HY savings (Just got HY savings via Sofi)

            4. we have 70k in i-bonds which we plan to hold for at least 3 years perhaps longer.


            Here is my latest investigation:
            https://investor.vanguard.com/mutual.../profile/VWSTX

            VWSTX . Does anyone invest in a short term bond fund in taxable? Would this work similar to holding individual short term bonds or cash?

            Is it better to buy individual bonds? (in your opinion?)

            What other bond funds do people find useful for a taxable cash bucket?

            For those who favor CDs, what range (time to maturity) of cds you have in your tent or ladders?

            What kind of questions should one answer while in the process of intelligently building a “cash bucket” to fight SORR?

            Comment


            • #66
              admiral shares version:
              https://investor.vanguard.com/mutual...overview/vwsux

              Comment


              • #67
                Admittedly, a boring question, but does anyone use VWSUX or VWSTX as part of their taxable cash-like bucket for SORR prevention?

                If not now worries.

                Comment


                • #68
                  found this pdf file:
                  https://aaiila.org/wp-content/upload...t-Strategy.pdf

                  Comment


                  • #69
                    There is an interesting concept I came across, I can't recall the name for it, I will just make up one, call it "bond-equity equivalence". My understanding of it is that at high inflation rates (7-10% p.a), stocks and bonds will perform similarly (poorly).
                    I think there is not much juice to get inflation protection here as I think (but could be wrong about it) that medium term inflation expectations may have peaked.
                    However, real rates are still very negative, so cash is losing -5% pa.
                    And that is before taxation.

                    At high inflation rates, the tax drag on cash (and bonds) is large.
                    CGT is also higher at higher inflation rates but half the tax drag of interest or dividends.

                    There were 2 asset classes that did well in the high inflationary environment of the 1970's, namely real estate and commodities.
                    not sure if this will recur.

                    buffett said : ""Inflation swindles the bond investor ... it swindles the person who keeps their cash under their mattress, it swindles almost everybody,"
                    His classic 1977 fortune article on it:

                    http://csinvesting.org/wp-content/up...y-Investor.pdf

                    More recently:
                    https://nypost.com/2022/05/02/warren...ging-inflatio/

                    Buffet's advice on the best inflation protection available (you won't want to hear this):

                    “The best thing you can do is to be exceptionally good at something,” Buffett said.
                    “If you’re the best doctor in town, if you’re the best lawyer in town, if you’re the best whatever it may be… [people] are going to give you some of what they produce in exchange for what you deliver.”
                    “Whatever abilities you have can’t be taken away from you. They can’t actually be inflated away from you… So the best investment by far is anything that develops yourself, and it’s not taxed at all,” Buffett added.

                    (i.e don't retire)

                    Comment


                    • #70
                      Originally posted by Dont_know_mind View Post
                      There is an interesting concept I came across, I can't recall the name for it, I will just make up one, call it "bond-equity equivalence". My understanding of it is that at high inflation rates (7-10% p.a), stocks and bonds will perform similarly (poorly).
                      I think there is not much juice to get inflation protection here as I think (but could be wrong about it) that medium term inflation expectations may have peaked.
                      However, real rates are still very negative, so cash is losing -5% pa.
                      And that is before taxation.

                      At high inflation rates, the tax drag on cash (and bonds) is large.
                      CGT is also higher at higher inflation rates but half the tax drag of interest or dividends.

                      There were 2 asset classes that did well in the high inflationary environment of the 1970's, namely real estate and commodities.
                      not sure if this will recur.

                      buffett said : ""Inflation swindles the bond investor ... it swindles the person who keeps their cash under their mattress, it swindles almost everybody,"
                      His classic 1977 fortune article on it:

                      http://csinvesting.org/wp-content/up...y-Investor.pdf

                      More recently:
                      https://nypost.com/2022/05/02/warren...ging-inflatio/

                      Buffet's advice on the best inflation protection available (you won't want to hear this):

                      “The best thing you can do is to be exceptionally good at something,” Buffett said.
                      “If you’re the best doctor in town, if you’re the best lawyer in town, if you’re the best whatever it may be… [people] are going to give you some of what they produce in exchange for what you deliver.”
                      “Whatever abilities you have can’t be taken away from you. They can’t actually be inflated away from you… So the best investment by far is anything that develops yourself, and it’s not taxed at all,” Buffett added.

                      (i.e don't retire)
                      Yes. Income = great way to fight inflation.

                      At some point you will have “enough” and you can / should focus on the rest of life outside of medicine.

                      When I do this I will have a cash bucket and I will be ok with inflation hurting it. It will be a parachute/ seatbelt / insurance policy.

                      Comment


                      • #71
                        Originally posted by Lithium View Post
                        I switched from Ally to Sofi bank after I saw they were paying 1.25% with direct deposit.
                        Update on this thread for me:

                        1. Sofi bank now paying 1.25% with direct deposit (this is my HY savings account for liquid cash) 70k here. Adding to this.

                        2. Wife has cash in a savings account: roughly 70k in here. (she likes having total control over this, and I don't really care)

                        3. Short term CDs & treasury bonds Yielding roughly 2-3%; total 96k

                        4. I-bonds (not totally liquid, but safe) Yielding roughly 7-9%; total 70k

                        This gives a total of 70 + 70 + 96 +70 = 306k in "safe" taxable assets. 140k of which is cash available for spending immediately if needed.

                        This is my cash bucket. i am slowly growing it and plan on have roughly 300-500k when fully retired to combat SORR.

                        My "plan" is to have most of my investments in stocks (currently wife and I have 3 types of investments: Roth IRA money, Non-Roth IRA money, and taxable.

                        All have a decent amount and the total is over 5M, mostly in stock index funds. (High risk tolerance, hence the relatively large cash bucket for SORR)

                        Current spending is 80-120k per year. (paid for house and cars, no debt)

                        Given that 3.5% of 5M is 175k per year of spending I think we are getting very close to bullet proof financially and could stop working almost any time.

                        (also have some checking accounts but these are not counted in my plan, but they contain a total of 30-60k)

                        Currently working extra to add money to taxable stock index funds + cash bucket.

                        Anyone see any holes in my logic? Anyone else have a plan for SORR they would like to share?
                        Last edited by Tangler; 07-24-2022, 11:51 AM.

                        Comment


                        • #72
                          I’m not sure I understand the logic of keeping a cash bucket.

                          What is the threshold of a market drop for when you’ll start to use it? And at what point do you stop spending it and start selling equities?

                          In short, it seems to have the same pitfalls of market timing. It seems a lot simpler to me to just pick a fixed asset allocation and stick with it. I like the idea of de-risking before retirement with a bond tent or rising equity glidepath. When the market crashes, it means you are going to spend from whatever has dropped the least (which is usually bonds in a bear market).

                          The main difference is that when you are in the accumulation stage, it’s okay to be 100% equities, but prior to retirement (~5 years), you want to start de-risking your portfolio, and by the time you are no longer working and no longer have regular infusions of cash coming in, you probably want to have anywhere from 20-60% fixed income in your portfolio on Day 1 of retirement, when SORR is at its apex.

                          Comment


                          • #73
                            Originally posted by Lithium View Post
                            I’m not sure I understand the logic of keeping a cash bucket.

                            What is the threshold of a market drop for when you’ll start to use it? And at what point do you stop spending it and start selling equities?

                            In short, it seems to have the same pitfalls of market timing. It seems a lot simpler to me to just pick a fixed asset allocation and stick with it. I like the idea of de-risking before retirement with a bond tent or rising equity glidepath. When the market crashes, it means you are going to spend from whatever has dropped the least (which is usually bonds in a bear market).

                            The main difference is that when you are in the accumulation stage, it’s okay to be 100% equities, but prior to retirement (~5 years), you want to start de-risking your portfolio, and by the time you are no longer working and no longer have regular infusions of cash coming in, you probably want to have anywhere from 20-60% fixed income in your portfolio on Day 1 of retirement, when SORR is at its apex.
                            Not sure I see the logic of keeping $2.5m fixed income (50% of the invested balance) of a $5m portfolio. That is over 20 years of cash/bonds, just about the official life expectancy of a male. Ultra safe for sure, not investing at all. Not sure I see your logic either. Just how long do you expect SORR to last?

                            Comment


                            • #74
                              Originally posted by Lithium View Post
                              I’m not sure I understand the logic of keeping a cash bucket.

                              What is the threshold of a market drop for when you’ll start to use it? And at what point do you stop spending it and start selling equities?

                              In short, it seems to have the same pitfalls of market timing. It seems a lot simpler to me to just pick a fixed asset allocation and stick with it. I like the idea of de-risking before retirement with a bond tent or rising equity glidepath. When the market crashes, it means you are going to spend from whatever has dropped the least (which is usually bonds in a bear market).

                              The main difference is that when you are in the accumulation stage, it’s okay to be 100% equities, but prior to retirement (~5 years), you want to start de-risking your portfolio, and by the time you are no longer working and no longer have regular infusions of cash coming in, you probably want to have anywhere from 20-60% fixed income in your portfolio on Day 1 of retirement, when SORR is at its apex.
                              Thanks for the input!

                              My thoughts are as follows:

                              1. High risk tolerance. Ok with AA of 90-95% stocks, even in retirement. Not going to panic sell.

                              2. My plan to de-risk (eliminate SORR) is to keep 300-500k in cash / short term CDs / short term bonds / I-bonds in taxable. This is money I can spend if needed.

                              I might increase bond allocation (short and intermediate term) soon but I am waiting for interest rates to stabilize a little. Even so, I am not going to increase my bond allocation to more than 20%.

                              I know stock index funds are volatile. I accept it.
                              I will retire at an age between 50-55 and I need stocks to keep up with inflation.

                              When I retire early i will do as follows prior to RMDs and SS (prior to 70):

                              1. Bear market —> live off cash, avoid selling stocks

                              2. Bull market —> convert some stocks to cash to replenish cash spent during bear market

                              3. Strategic Roth conversions and use dividends to live off or buy more stocks or replenish cash

                              Market timing? Sure, kinda, but not market predictions. More market reaction & planning.

                              Prediction = fools errand

                              Reaction to changes & flexibility = intelligent behavior.

                              Thoughts? I do value your insight.

                              Comment


                              • #75
                                Originally posted by Tim View Post

                                Not sure I see the logic of keeping $2.5m fixed income (50% of the invested balance) of a $5m portfolio. That is over 20 years of cash/bonds, just about the official life expectancy of a male. Ultra safe for sure, not investing at all. Not sure I see your logic either. Just how long do you expect SORR to last?
                                Yes , that is the thing that bothers me with the traditional 60:40 (or 70:30) AA at retirement.

                                Too simple.

                                It does not account for a few things:
                                1. total amount (size of nest egg)
                                2. Location (taxable or Roth IRA or non-roth IRAs)
                                3. Age at retirement
                                4. Other income (pensions/ annuities/ rental income)
                                5. Expenses & yearly spending
                                6. Legacy goals


                                Take 1 above as you said.
                                1 = Size of portfolio.

                                if you have a 10M portfolio should you really drop to 60:40 at retirement and have 4M in bonds? Why would you need more than say 1-2M in bonds?
                                Especially if you only spend say 100-150k per year and retire at 55.

                                Why not instead of 4M in bonds have 500k in taxable cash and the rest in stocks?

                                Bear? Turn off news and spend from cash.

                                Tim, I like your cash bucket = gas tank analogy!

                                Keep some in the tank. Refill when it is getting low and times are good.

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