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tony

How Much Cash Should You Keep In An Investment Account

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Most people, even those new to investing, know they need a heavy helping of stock in their investment portfolio to get the highest returns. Far fewer have any idea what portion of that portfolio should be allocated to cash or cash equivalents.

 

 

 

http://www.wsj.com/articles/how-much-cash-you-should-keep-in-an-investment-account-1462759222?mod=WSJ_Your_Money_3up

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Interesting article. Most buy and hold investors don't need much if any cash in the retirement portfolio. The article starts out equating cash with stable value funds, which seems like a mistake to me. Stable value funds that yield 2 or 3% are often used in a portfolio's bond component. When bond funds have yields of only 2 or 3%, and cash (MM funds) are paying almost nothing, it seems wrong to equate them.

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Yeah, even in retirement making distributions, I only hold a few thousand in MM accounts. The MM account is used as a receptor for dividends and capital gains distributions from other stock and bond funds that are paid out either quarterly or annually. That's the money I use to fund my retirement. But I also bypass the MM and take a small monthly distribution from my Total Bond Market Index fund in my after tax account.

 

The TBM index is up 3.8% ytd. I have almost half of my portfolio in this one fund.

 

Last year it was up only .4%. But so were the other bonds as Treasuries were up only 1.61% for 2015.

 

But bonds are not for growth, they are for stability. Equities are for growth.

 

I really don't buy the idea that bonds are risky, making people feel that their risk equates with equity risk. Nothing is further from the truth! Long term maturities and junk bonds do equate with equity risk according to Bill Bernstein's work, but not short term or intermediate term bonds. The pros like to say that when interest rates go up bond values will go down, but they never finish the point. Your bond fund will slowly over 2-7 years will be selling the lower interest bonds and buying those higher paying interest bonds. In the end, we all want higher paying bonds. But the catch is NOT to sell your bond fund during this transition period, that's when you might lose money.

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