Asset Allocation

[skives]

So not totally new to retirement investing but when talking about asset allocation and for this lets say my asset allocation should be 75% Stocks 10% Bonds and 15% Cash. What does it mean by cash? Does it mean cash on hand that I can get to or cash invested? If cash invested how do you just park cash in a retirement account? Does it mean like a ira savings account?

[Jluke]

For me Cash could be CDs, money market funds, savings accounts.

I think of cash as part of my Fixed Income category.

Hopefully someone else will
come along with a better answer

[corn18]

For me Cash could be CDs, money market funds, savings accounts.

I think of cash as part of my Fixed Income category.

Hopefully someone else will
come along with a better answer

That's as good an answer as any. I don't break out cash as a separate asset class. It is just fixed income. But I do hold cash outside of my asset allocation that is used for specific purchases.

1. EF
2. Car fund
3. Vacation fund
4. College fund
5. House down payment fund

These funds are not part of my 60/40 AA. I picked 60/40 for my retirement investments. I picked 0/100 for my savings I need for near/,id term purchases. That is how I handle the current near bear market. I still have the cash I need to pay for college, buy a new car, go on vacation and buy a house. And if I lose my job, I still have my EF. SO whatever happens to my retirement funds does not impact me short term.

You could say my AA is actually 50/50 if you include all of that savings. I would then say I am 50/30/20 with all of my savings and that is the asset allocation I am comfortable with. Whatever. There is only one acceptable AA for short term savings and that is cash, MM, short term treasuries, CD's. At least for me.

In summary:

60/40 for retirement
0/100 for short/mid term (<10 years) savings

[greenskeeper]

I'm 100% stocks since I started investing at 18, about 21 years ago. I'll still be 100% stocks for the next 20-25 years, then as retirement nears I'll start moving away from that.

[disneysteve]

Cash is physical cash (like an emergency stash), savings account, checking account, money market account, CDs. That can be outside or inside your retirement accounts. Your cash shouldn't be invested, because then it's no longer cash. So if you want a cash allocation in your retirement account, you can open a money market account or buy a CD.

[msomnipotent]

I consider any liquid investment as cash. I include precious metals as they are easily sold and CD's. I have to take into consideration any penalty I would have to pay if I sold the CD's early, and spot price minus 3% because I would sell to our coin shop if I needed quick cash.

[disneysteve]

I consider any liquid investment as cash. I include precious metals

Precious metals are not "cash". Just because something can be sold to get cash doesn't qualify. Cash is a something that has a stable value. It isn't affected by market conditions, interest rates, the latest headlines, etc. A dollar is a dollar. The value of your 1 oz. gold coin fluctuates on a daily basis, sometimes quite dramatically.

So for the purposes of asset allocation, stocks, bonds, precious metals, collectibles, and other physical assets shouldn't be counted as part of your cash allocation.

[msomnipotent]

Precious metals are not "cash". Just because something can be sold to get cash doesn't qualify. Cash is a something that has a stable value. It isn't affected by market conditions, interest rates, the latest headlines, etc. A dollar is a dollar. The value of your 1 oz. gold coin fluctuates on a daily basis, sometimes quite dramatically.

So for the purposes of asset allocation, stocks, bonds, precious metals, collectibles, and other physical assets shouldn't be counted as part of your cash allocation.

Well, it is to me. In the strictess sense, the coins we have are legal tender. I could take my pre-1965 coins to the store right now and buy whatever I wanted, just as we did in 1964. I just wouldn't get spot price for them. As for cashing out at spot price, I don't see it as any different from cashing out a CD. If you wait until it matures, you get more money. If you cash it out early, you lose money by paying a penalty. Interest rates vary, too. If I really wanted to get nitpicky about it, I would list the coins at face value instead of spot price since they are legal tender, but I choose to list them at spot price for our records. Perhaps it is because we actually had to go and cash in all of our PM's and CD's and everything when we nearly went broke. The PM's were much easier to cash out than the CD's.

So for our purposes, the cash in our wallets is listed first, PM's second, then assets in the banks.

[~bs]

precious metals aren't cash unless you're just counting their face value. They are an investment asset that has different mechanisms that selling real estate, stocks, or other investment assets.

Don't forget to pay taxes on your precious metal conversion to cash. The IRS taxes it at 28%

"Investments in precious metals, such as gold, silver and platinum, are similar to other investments in that your holdings are capital assets, according to the Internal Revenue Service. The money you make or lose is a capital gain or loss."

[msomnipotent]

precious metals aren't cash unless you're just counting their face value. They are an investment asset that has different mechanisms that selling real estate, stocks, or other investment assets.

Don't forget to pay taxes on your precious metal conversion to cash. The IRS taxes it at 28%

"Investments in precious metals, such as gold, silver and platinum, are similar to other investments in that your holdings are capital assets, according to the Internal Revenue Service. The money you make or lose is a capital gain or loss."

Actually, that isn't entirely true. If I sold at a loss, I wouldn't owe anything. If I sold within a year for a profit, I would owe short term capital gains which is my regular tax rate (oddly enough, it was at 28% until this tax year). If I sold for a profit after a year, it would be taxed at my marginal tax rate up to 28%. It isn't automatically 28%.

As I have said, I consider it as liquid as cash and count it as cash for my purposes. You guys can do whatever you want, of course.

[disneysteve]

I consider it as liquid as cash

That may be true but that wasn’t the question. Skives asked what counts as cash in an asset allocation. Stocks and mutual fund shares are easily liquidated too but they don’t count as cash any more than gold does.

[msomnipotent]

That may be true but that wasn’t the question. Skives asked what counts as cash in an asset allocation. Stocks and mutual fund shares are easily liquidated too but they don’t count as cash any more than gold does.

This is just tedious, so this is the last I have to say about this. As I have already stated before, PM's count as cash for me in my asset allocation. The question was "what counts as cash" and I answered. The question wasn't "What does disneysteve consider cash". The question was open to all of us. I don't care that you disagree with me because I disagree with things that you post as well. I just don't argue about it.

[disneysteve]

I apologize if it came across as arguing. Certainly not my intent. I think we're confusing "cash" and "liquid assets". They are similar but not the same particularly when talking about asset allocation.

Stocks, bonds, mutual funds, and precious metals are all liquid assets as they can quickly and easily be converted to cash, as you pointed out.

Real estate, land, and collectibles are illiquid assets as it can take quite a bit of time to convert them to cash and you may lose some of their value especially if you need to liquidate them in a hurry.

[scfr]

[QUOTE=skives;n699977If cash invested how do you just park cash in a retirement account?[/QUOTE]

When you say retirement account, are you referring to tax-deferred retirement accounts (401ks, IRAs, etc)? I am going to assume that since your original post was about retirement investing.

Some funds (for example target date retirement funds) include a "cash and cash equivalents" component. That is one way cash could be considered "parked" in a retirement account. So I would disagree with the statement that mutual fund shares don't count as cash. I would say that a portion of them might, depending on what funds you own.

As you mentioned, you can also open an IRA account at a bank or credit union. You could "park" money there, not only in a savings account but also in a CD.

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Re cash as part of asset allocation (not only retirement investing):

Personally, when I calculate my AA, what I count as cash is cash "parked" in retirement accounts and cash outside of retirement accounts (savings/checking, CDs, cash in my wallet ... even gift cards, unredeemed CC cash rewards, and deposit on balance with the utility company!). My way is not for everyone.

Treasuries are the grey area for me. Currently all my Treasuries are bonds or TIPS, so I count them as bonds. In the past I have owned T-Bills, which I would count as cash. There are also Treasury Notes, which I would probably count as cash but I'm not 100% sure (not going to burn any brain cells figuring that one out unless I actually decide to own some in the future).

Are you sorry you asked?
Actually, it's a great question, and as you can see there is not only one way of answering.

[disneysteve]

I would disagree with the statement that mutual fund shares don't count as cash. I would say that a portion of them might, depending on what funds you own.

That's true. A mutual fund might hold some portion of assets in cash. The problem there is that you can't selectively access that cash. You would have to liquidate shares so you'd be affecting your stock and/or bond allocation at the same time.

Ultra-short bonds may be considered cash equivalents, so if you have a bond fund with an average maturity of 90 days or less, I think most would count that as a cash holding.