Can cash be your friend?

[frommi]

Dividends can be cut.

Cash doesn't drag anything down if you already have as much stocks as you want.

Cash can be worth zero if your country/bank defaults. I will always have my money in cash producing assets and not in cash itself. Change my mind, but that is what has worked in preserving buying power over hundreds of years.

[conwy]

Cash can be worth zero if your country/bank defaults.

If that happens, what makes you think they can't / won't seize your stocks?

Change my mind, but that is what has worked in preserving buying power over hundreds of years.

Hundreds yes, agree with you there. But how about over 10s of years?

The short-term also matters because you need to survive the short-term in order to benefit from the long-term.

I think you need cash and stocks, not just stocks.

[jacob]

This all makes me think that a lot of the stories told about the stock market, even where backed up by over a century of historical data, have some significant "this-century" biases. Especially, it seems like the long periods of poor returns (e.g. the crash of the 1920s) are glossed over, as if future similar periods would have equally predictable end-points, when in fact, there's no way to prove such a thing (as many footnotes quietly admit, historical returns do not predict future returns).

At the risk of starting yet another asinine "investment war", I'd agree (also with WFJ) that the stories generally told within the FIRE movement backs this up. When I pointed out that the investment advice/explanations that is generally given is often rather simplistic, another FIRE community leader responded that "You know that and I know that, but they [the audience] don't [care to] know that."

The problem with detailed advice or caveats is that FIRE has gone mainstream, which means that only a minority of the movement is still interested in how the economy works in relation to the financial markets. The majority just wants a quick and easy fire&forget-strategy (pun intended).

This majority consequently sets the narrative and the tone of the investment conversation. This also spills over into the ERE forums.

To be fair to the standard FIRE investment advice. For rookie investors, the greatest risk is not market risk but investor-risk (their own behavior) like whipsawing themselves or chasing new strategies, because they heard something on the interwebs but never acquired the context or domain knowledge to interpret it. In that regard, posting "soothing meditation"-sessions on youtube (I'm not making this up) when the market drops or referring to a 3% drop as a fire sale (pun again) is actually a step up from typical retail investing behavior like trading gamestonks, selecting mutual funds based on recent performance, or taking taxi-driver advice to get in at the top and out at the bottom.

A side-effect is that discussions about other strategies get pushed out. That's fine, though, they still exist elsewhere, but you wont find them in abundance on FIRE forums. Even if many people on those forums actually practice them personally, they eventually just don't care to squabble with people whose main locus revolves around the investor-risk problem. It's similar to dieting. The main failure-mode beginners have is lack of commitment and lack of consistency and self-discipline. An "okay strategy executed with discipline" is usually better than an "great strategy executed without discipline". Of course a "great strategy executed with discipline" is even better, but that requires solving the discipline problem first. As such advice on optimal nutrition is not useful in an audience that still struggles with following a meal plan. Once you consider the audience, it becomes clear why a simple plan is better, because it gives people fewer options for second-guessing themselves.

An unfortunate side-effect is that this does punt (defer discussions) on the market risk. However, most people in the FIRE movement are still in the accumulation phase, where this matters less. Again, since the majority sets the narrative, this is something people are expected to figure out for themselves eventually.

[frommi]

Its mind blowing that people save for 10-20 years and not really care to know something about how investing/financial market work. I mean there was a threat not long ago about someone blowing up because of this. The people invested in index funds think they are immune to this already because they did a two day research on how to invest. Especially those that just aim for a 4% withdrawal rate are in for a rude awakening someday in the future.

If that happens, what makes you think they can't / won't seize your stocks?

Because the law prevents that? You think that "cash" is the holy grail, but in reality you are just lending money to someone else. You get interest as a return, but you also carry the risk of default. At a bank account some of that is protected by the FDIC.

I think you need cash and stocks, not just stocks.

Thats fine, just hold one year of expenses in cash, but thats what 3 or 4% of your assets? Anything more than 10-20% and you risk lowering your long term withdrawal plan to the point where it wont be enough. Just play around with FIRE calculators and you will realize that.

[prudentelo]

Investment "knowledge" has one of the worst ratio of signal to noise of any "science"

Plus noise deliberately hidden as signal

On the time scale to test investment hypotheses, world tends to change, investors tend to die

[frommi]

Investment "knowledge" has one of the worst ratio of signal to noise of any "science"

Plus noise deliberately hidden as signal

On the time scale to test investment hypotheses, world tends to change, investors tend to die

Your post is just confirmation. You better never learn, so if something goes wrong with your plan you can always blame others or the markets or the future or ....

[WFJ]

Interesting, but not sure I understand - when you say "50/50" or "0/100", are you saying you sell 50% to 100% of your stocks and hold cash during a non-working mini-retirement, then build it back up by working after it's depleted?

This seems kind of scary but maybe you found a way to make it work for you? I imagine there could be some tax efficiencies.

I'm thinking of planning my life in 3-month intervals - each 3 months living off the investment income of the prior 3 months, supplementing it with occasional 3-month periods of work for periods where I realise a net loss in my portfolio.



Indeed.

Also I find it odd that the financial independence community so often frames big market drawdowns as just a psychological game. But in fact, no matter how psychologically "prepared" you are, you still need some cash after all, to pay for rent and/or groceries! So your minimum yearly expenditure will force you to sell stocks from a 100% stock portfolio. This isn't psychology, it's math and physics.

Cash isn't a mere psychological safety buffer for someone with weak conviction, it's likely a physical necessity for anyone who wants to be able to pay their bills during a massive drawdown, and whose stock holdings aren't in the multiple millions of dollars.

Yes, I sell most investments, try to minimize taxes, but have no problem paying 15% LTCG. Was really hoping the bull market ran until 2023 when income would be $0 and could get 0% LTCG for the first bulk of LTCG, but sold when the market changed in mid-January. I sell, not out of some kind of value maximization strategy, but knowing that while enjoying freedom, I may find other opportunities (business/education) or want to prolong my free time and don't want market conditions to determine the date of return to the real world. Part of it may also be that I travel internationally and don't want to observe accounts while overseas. Also without a job, it can be difficult to secure an apartment lease with stocks as assets, most want to see 12 months of cash without income.

Cash = flexibility to me, while stocks = some time commitment. If there is a chance money in the markets may be needed in 10-ish years, I sell. Since there's a possibility of pursuing new career ($$$) or start/buy a business ($$$$$$$$) stocks are sold when ERE'd. If pressed, this might be a "Real Options Maximization Strategy", although I've never crushed it with any of the options pursued with cash, cash (really short duration Bills/CDs) is mostly used for leisure.

This was also not a "Strategy" crafted in some lab, but an ex-post report of what has happened. I did plan on having multiple careers and knew that more cash would provide more opportunities for career switching. It may have worked due to the timing and not robust to other time periods. Don't really expect this strategy to work for others in other time periods.

[prudentelo]

Your post is just confirmation. You better never learn, so if something goes wrong with your plan you can always blame others or the markets or the future or ....

The post wasnt intended to persuade people to do or not do a thing. Just some things that seem true.

[WFJ]

When I pointed out that the investment advice/explanations that is generally given is often rather simplistic, another FIRE community leader responded that "You know that and I know that, but they [the audience] don't [care to] know that."

An unfortunate side-effect is that this does punt (defer discussions) on the market risk. However, most people in the FIRE movement are still in the accumulation phase, where this matters less. Again, since the majority sets the narrative, this is something people are expected to figure out for themselves eventually.

I've very new to the message board community (1 yr), only joined to crowdsource an ACA solution (learned premiums and credits are more volatile than the stock market making planning almost impossible). Assume above is why most of the retirement forums revert to some kind of "60/40-4% till I die" chant, which is probably better than nothing, but fraught with MAJOR pitfalls which are attacked when casually identified. There may also be some cognitive dissonance where telling people they have financial cancer is worse than letting them just live their lives and die quickly. Like telling an alcoholic to stop drinking or morbidly obese person to use more calories than they consume, one is wasting their time and energy.

Also assume many life lessons can only be learned the hard way, through painful first-hand experience, rather than by wisdom of others.

[steveo73]

Just live of dividends/interest alone, problem solved. No need for cash. cash just drags down your long term expected return.

How high are your dividend payments ? I live in Australia and we've had a bumper payout. It's about 3% of our portfolio. We are spending more than 3%.

The issue is that I'd have to get to a 3% WR to be able to use dividends. I'd add our dividend payout has been much better this year compared to last year.

So the dividend approach can work but it's a bit stupid because you need to have a big portfolio relative to spending. Once you have a large portfolio you can do whatever you want so long as you have a high stock component.

[steveo73]

Its mind blowing that people save for 10-20 years and not really care to know something about how investing/financial market work.

I agree. I read Jacob's post and I couldn't respond to it because it's wrong on so many different levels.

Has anyone figured out Jordan Peterson yet ? I'll tell you what good old JP does. He creates stupid arguments that state nothing. He sort of implies that he is so smart and he is right but he doesn't come outright and actually state something. He completely twists reality and utilizes stupid straw man arguments. He backs this up with a lot of words. It's an alphabet soup of BS.

That is the best way to describe Jacob's post.

If you don't understand that cash can play a role in your portfolio you don't have a clue. No amount of words can change that.

If you don't understand MPT and the benefit of index funds you don't have a clue. No amount of words can change that.

If you want to choose a different path and you can point out the flaws in your approach then maybe your approach is right for you. This has nothing at all with being smart or being educated and knowing better. It's a personal choice that will more than likely lead to under performance. No amount of words can change that.

The people invested in index funds think they are immune to this already because they did a two day research on how to invest. Especially those that just aim for a 4% withdrawal rate are in for a rude awakening someday in the future.

You are doing the same thing. You and Jacob create these stories in your head which I think are a desperate attempt to try and make out you know better but you don't. That is the kicker.

I invest in index funds because I'm educated on investing. I use a 5% WR because I'm well educated on the topic.

I wouldn't make this a discussion on trading experience because we did that in another thread and it was clear that some posters who thought they were experienced were exceptionally inexperienced,

Because the law prevents that? You think that "cash" is the holy grail, but in reality you are just lending money to someone else. You get interest as a return, but you also carry the risk of default. At a bank account some of that is protected by the FDIC.

You either don't understand the issue or you are not trying to understand the issue. I don't know why but again it's hilarious in the context of you discussing this issue as if you understand it.

The op got this one right. There is a time and place for utilizing cash (or bonds) in your portfolio.

I suggest you read Big ERN's whole spiel. Maybe read McClung's book as well.

Thats fine, just hold one year of expenses in cash, but thats what 3 or 4% of your assets? Anything more than 10-20% and you risk lowering your long term withdrawal plan to the point where it wont be enough. Just play around with FIRE calculators and you will realize that.

Read the stuff above and try and understand the issue. Then come back and discuss this.

[steveo73]

Investment "knowledge" has one of the worst ratio of signal to noise of any "science"

100% correct.

[steveo73]

Assume above is why most of the retirement forums revert to some kind of "60/40-4% till I die" chant, which is probably better than nothing, but fraught with MAJOR pitfalls which are attacked when casually identified. There may also be some cognitive dissonance where telling people they have financial cancer is worse than letting them just live their lives and die quickly. Like telling an alcoholic to stop drinking or morbidly obese person to use more calories than they consume, one is wasting their time and energy.

What are those MAJOR pitfalls ?

Do you know what cognitive dissonance is ?

I'll give an example. A poster on this thread is stating that other people will need to lower their WR due to having some cash. That person I think believes they know better. That person doesn't understand the concept of a diversified portfolio across asset classes and I assume doesn't understand SORR. If you understood MPT you would understand that having some cash (or bonds) can actually lead to an increased WR rather than a decreased WR.

Another poster is stating that advice is too simplistic with the inference it's too easy for them. That poster has previously stated their investment experience and it's highly inexperienced.

It's almost like people don't know what they are talking about but believe they are experts. That to me is cognitive dissonance.

[AxelHeyst]

Steveo, I find myself wanting to disagree with whatever it is you're saying because the way you argue your points is so offputting. I'm completely inexperienced on this topic and so have nothing to contribute, and I say that also to communicate that I'm not writing this post because I disagree with your views on investing.

I'm writing this post because I come to this forum to learn and sometimes engage in fruitful, civil disagreements and discussions on the internet... And every time you post in a thread, my heart sinks, because I know chances are good that's the spiritual death of whatever discussion was being had.

You post in such a way as to rile people up emotionally, become distracted from the valuable discourse, and eventually get too pissed off to post with quality or integrity, so they leave the thread. That's what really gets at me - if you were just a bit rude or curt maybe but the conversation carried on all right anyway, I'd keep my thoughts to myself and carry on.

But you actually do damage to the conversations here. Only people who are up for a playground brawl will continue to engage in one of these threads that you post this way in - everyone else groans and leaves. The way you post is unnecessary, toxic, and I wish you'd stop doing it.

If you're interested in a discussion about how to have civil discourse on the internet, I'm sure we could arrange a thread on it. Not sarcasm. I doubt you're actually trying to kill discussions on purpose and maybe you arent sure why all these threads die. We could chat about it, if you'd like.

[conwy]

Agree with AxelHeyst, it would be good if SteveO could convey these arguments in a slightly friendlier tone.

[macg]

Agreed. I end up just skipping the posts or eventually totally ignoring the thread because of this, regardless of whether the thread is of interest.

[WFJ]

OP, yes, I use cash as my friend in many market and living conditions. My cash position varies from nearly 0% when large paychecks are coming in, well over 50% Cash (short duration CDs, Bills) when large paychecks are not coming in. Call it "lifestyle timing" and not market timing.

4% Pitfalls
Sample vs Population, Shape of distribution (volatility assumption, normal vs skewed), fat tails, Point estimate vs confidence intervals, SORR vs run probability, extrapolation beyond 30 years. There are others, but these come to mind. Below are short explanations for the first two, the others require longer explanations and probably some stats training or someone with extensive bookie/gambling experience. Please start separate thread if anyone wants explanation of these as they are way off OP topic. Jacob's observation is probably the most accurate as the first few times I saw the 4% rule, I thought it was a joke, like a 4 hour workweek or some other self-help garbage. My book, "the 3 hour and 59 minutes work week" will be hitting Amazon soon and will be available for podcast interviews revealing my secrets shortly. This was my impression of the 4% rule.

Sample vs population
The 4% rule assume all possible market returns are contained in the sample period. There will never be a year or sequence worse/better than was experienced in the last 100 years. This is equivalent to assuming if Martians landed on earth in a random spot and collected the height/weight/IQ (some human characteristic) of the first 100 humans they captured (or land randomly on 100 spots and capture the first human they encountered, better but more expensive sampling technique and increases the probability of Martians being captured). The Martians then proudly claim something like "We collected 100 human samples of height/weight/IQ, this represents the entire range of this human characteristic. We will never experience a taller/shorter, heavy/light, smart/dumb, human based on our sample of 100 people". Obviously, this assumption about human characterizes is false, it's just as false when observing market returns. Pointing out this simple flaw in the 4% rule makes some people angry.

Shape of distribution
The 4% rule assume returns are normally distributed and not skewed. Once this assumption is tweaked, all 4% withdrawal strategies fail, regardless of allocation. If returns are left skew, even for a few years (five years seems to do the trick), this busts all 4% portfolios. If volatility is slightly increased, this also busts all 4% portfolios. There is a 0% probability future returns will be normally distributed, there is a non zero probability that there won't be a period of left skew market return or periods of elevated volatility. For 4% to work, the opposite needs to be true.

[frommi]

Thanks WFJ
The trinity study was done in 1998, and the average dividend yield on the S&P500 over that timeframe was ~4%. So for most of that time you could just live on dividends from the index. 20 year bond yields were also above 4%. Right now the dividend yield on the S&P500 is 1.5% and bond yields are also much lower than historically. I would argue that at the current point in time you need at least double the amount of money to live of the S&P500/bonds as the trinity study would suggest, so we are at a 2% WR if you want to be safe.
The alternative is to look for better investment strategies. (And no, any portfolio that has only index funds or bond funds in them probably cant work for this, because the underlying expected returns wont change) (and pls dont mention crypto or gold now, inflation adjusted expected returns for these assets are also zero in the long run)

[conwy]

Thanks WFJ and frommi for your insights.

It seems to me that allocations are very dependent on *when* you want to spend the money.

Money you want to spend 10+ years from now needs to be in stocks to beat inflation.
Money you want to spend over the next 10 years may need to be in cash, to avoid sequence of returns risk.

All of the above can probably be moderated by frugality and part-time work.

[frommi]

I can agree with your statement conwy and I probably have to flex my standpoint
For people that invest in stocks the common way via an index fund on the S&P500 at times of high valuation a high cash allocation is smart even though it is market timing.
My approach to the problem (and to avoid market timing) is to invest my money into businesses and real estate that provide enough cashflow/owner earnings today to sustain my current lifestyle and where its very reasonable that the cash flow/earnings/rents from these businesses are stable and can grow with inflation. Lots of stocks/businesses in the S&P500 don't match that profile. I think that i dont need a lot of cash for this approach because i get so much cashflow into my pocket that withdrawals dont really suppress my future earnings/cashflow.