How Much Money Should You Keep in Cash?

  • Following the 4% rule is not enough when accumulating wealth.
  • The recent market decline brought on by the pandemic requires around a third more index fund shares to be sold to maintain spending patterns if you are in retirement and are fully invested at all times.
  • How much money you should keep in cash depends on where you are in the wealth building cycle. How close you are to retirement, or if you are in retirement, determines the appropriate level of cash that should be held.
  • The 4% rule fails too often if not coupled with appropriate cash levels.

 

Rules of thumb are an easy way to quickly see where you stand financially. Once you reach 25X your spending in liquid net worth (the 4% rule presented as a multiple of spending) you are assumed to have enough to retire under the 4% rule, regardless your age.

However, as we are seeing with the current market turmoil, the simple rule of thumb has one fatal flaw. If you reached your 25X goal a few months ago and decided this was the time to step away from traditional labor, you now face a withdrawal rate from your index funds a third higher than expected. This will reduce the account value early in the distribution phase, lowering the total amount you can get from the investment over your lifetime.

Another rule of thumb is to keep 6 months of spending in cash in case you become unemployed. Under a normal job loss or economic decline this would be a reasonable policy to follow. Unemployment insurance can provide additional cushion to the 6-month cash reserve.

Black Swan events (unexpected negative economic events such as the housing crisis or pandemic) throw the whole rule of thumb out the window. Black Swan events do not happen often, but they do occur every decade or so. Looking back at U.S. history, it seems something always happens every decade to knock the markets lower and slow economic activity. The 2010s are the only decade to avoid that fate and 2020 seems to be making up for the oversight.

Black Swan events are impossible to plan for, but you can manage your investments with the understanding something unknown will shake the market’s confidence every so often.  You can prepare contingencies to deal with unexpected market breaks, or take your chances and hope you get lucky… this time.

 

Determining Your Proper Cash Level

One of the hottest topics of discussion in consulting sessions with clients involves how much liquid net worth be held in cash. Emails and even social media requests from followers press on how much cash is the right amount of cash to keep on hand as a percent of investable money.

The 4% rule doesn’t consider a cash position. It just assumes you take 4% every year from your portfolio to live. If the market declines, the 4% rule says you either need to cut back on spending or risk running out of money before death. Cutting spending enough isn’t always possible. And when markets are down many goods and services become cheaper so you should be stocking up at these times.  The 6-months cash rule also falls short in many cases. A down market can last for years and selling at a low to fund living expenses is a painful exercise.

Where you are on your journey to retirement determines the amount of cash you keep on hand. Many times readers of this blog, and those who follow me on social media, think I am timing the market when I carry a substantial cash position. But that isn’t true. I have no desire, nor skill, at timing the market and do not waste any time trying to do so. I do, however, increase my cash position when the sun is shining and decrease my cash position when it rains. This isn’t a timing issue. As I near retirement and have substantial financial resources, I have no desire to maximize my returns. I already made it. No room for heroes anymore.

You are probably at a different part of the wealth creation cycle. Maybe you are older and well into retirement, collecting a pension and Social Security. Or just starting out.

The advice I give clients is based on their specific facts and circumstances. I will give you the same advice here based on where you are on your journey to retirement, early or otherwise. I will finish with my advice to clients already in retirement. You can use these guidelines to prepare for your retirement. Knowing the appropriate way to invest at each stage of the wealth creation cycle is helpful; looking to the next step in advance can be very motivating, knowing you will have plenty of financial resources once you do retire.

Before we start I need to define some terminology. When I say cash I mean money market accounts, bank deposits and CDs. Everything else is invested, meaning broad-based index funds, most notably Vanguard’s S&P 500 Index Fund (VFINX or VOO for the ETF) or the Vanguard Total Stock Market Fund (VTSAX). 

 

Starting Out: When you start out you have the fewest resources. Time is your best friend, however. The sooner you get money invested the sooner it can start growing. And time invested determines your level of wealth. Cash reduces the level of wealth years down the road, but keeps an unexpected expense from turning into a disaster that sends you back to square one. It is a delicate balancing act between investments and cash.

The problem with too low a level of cash is twofold. First, any minor emergency (flat tire, furnace repair, medical bill) and your financial plan is in crisis. Second, job loss or disability can destroy all the work done to-date.

Starting out is the riskiest place financially. By default you will be closer to the red line; income and savings are generally lowest when you are young and starting out. Six months of spending in cash is probably impossible. And if your employer matches contributions to your retirement account you need to find a way to contribute at least to the matching level.

If you are at day 1 you want to take a page from Dave Ramsey’s book (and workbook). His Baby Step #1 is to get $1,000 into a bank account for emergencies. It’s a good plan I agree with. If you have an employer retirement plan with matching, try to invest at least to the matching level as well. A good way to start is by adding $50 every paycheck or per month to your emergency fund until it reaches $1,000. When an unexpected bill shows up you have the funds to deal with the issue. Then start adding $50 or so each pay period to restore the emergency fund to at least $1,000.

The balancing act would be reasonable if all you had to worry about is building a reserve while you are earning starting wages. Add to that the expenses of starting out (furniture, transportation, home furnishings), a mortgage or rent and it can quickly become overwhelming. 

There is one advantage you have when starting out; you are young. With youth comes resilience. Starting a family, paying down a mortgage, building a retirement fund while working many hours to achieve these goals takes the vigor of youth. It can also wear you down.

Regardless your level of energy, financial problems can wear you out. That is why even a modest emergency fund, Dave Ramsey style, can be such a powerful tool to keep you on track. The real risk is job loss, medical issues and disability before you build your finances to a level where you can withstand larger financial assaults.

That leads us to the next level.

 

Building Wealth: You will spend more time at this level than the starting out phase. A $1,000 emergency fund really isn’t enough, especially as you grow older and medical bills have a greater chance of messing up your plans. Job loss is a strong possibility at least once in your working career. The 6-months of living expenses rule now comes into play. The truth is, 6 months still isn’t adequate. An extended economic decline can put you into a bad position where you are tempted to add more debt or tap into a retirement fund to pay for day-to-day expenses.

In the wealth building phase you want to secure your finances to withstand as much as possible. Many people don’t keep an official emergency fund once they build a modest net worth. (This accountant never had any funds earmarked for unexpected expenses.) However, that doesn’t mean you don’t have a tidy stash of money tucked away to get you through an income drought.

These are the priorities in the wealth building phase:

  • Pay down and eliminate debt
  • Build a cash reserve for surprise expenses and to tide you through a reduction in income
  • Grow your retirement savings
  • Invest outside your retirement account (non-qualified accounts)

There is no fast way to accomplish these goals, but there is an easy way. Consistency wins the race. Paying a bit extra each mortgage payment will eliminate the mortgage years early; every paycheck should add to your retirement fund in good or bad stock markets automatically; merge your emergency fund into your other non-qualified investments and make investments automatic.

I use Vanguard. You can use Vanguard or any similar investment house. Retirement and non-qualified investments will grow as the years peal away. The tax advantages of retirement plans are the best deal in America for the middle class. Adding to your retirement funds with each paycheck is about the easiest and most painless way to dollar-cost-average there is.

Once you fill your retirement account it is time to build some non-retirement funds. Non-qualified investments can be an appropriate surrogate for an emergency fund. A modest $1,000 worked when you were starting out. As you build your wealth $1,000 is inadequate; you are no longer interested in borrowing money to buy a car or anything else for that matter. You need larger sums of liquid money to replace a car or repair a roof. Investing in a broad-based index fund is the perfect way to grow your non-qualified monies. 

This is where common sense comes in. As you grow your non-qualified account some money will be held in a money-market fund or bank deposit. When a planned, budgeted or surprise bill shows up you will have the resources to pay the expense immediately. To reach this financial position you need to add consistently, just like with your retirement account. You can make the investment automatic in your non-qualified account, the same as with your retirement account. Set up automatic investing with monthly contributions. Part of each payment should go into the index fund and some into the cash portion of the account. When the stock market is acting like the world is about to end again, put most of the new money into the index fund. If you are uncomfortable with the high level of the stock market, put most (not all) of the new money into the cash account. It isn’t a crime to have a lot of cash! Sleeping well is better.

If the economy sours you can always move cash into the index fund. Once you determine your income is not at risk and will remain steady or climb, you can lower the cash position. This is more art than science. There is no exact level of cash you must have. Rather, if you feel uncomfortable, there is nothing wrong with sitting on the sidelines. In fact, the more wealth you have the less likely you want to be 100% in equities all the time. Cash is always nice because it gives you the opportunity to invest when the right investment comes along. It is hard to buy a cheap income property if you can swing the purchase. And cash is always available for spending needs without worry about selling in a bear market.

My point is that you decide what is best for you. Almost everyone should have at least some portion of their portfolio in equities in the wealth building phase. The first goal should be to increase your liquid funds to around 6 months of expenses. This should provide an adequate cushion if things go south. Then get serious about growing investment accounts.

The greater your wealth the better able you are to weather a storm. As your non-qualified account grows, the 6 months of living expenses in cash are supplemented by dividends if the need become great enough. Dividends and capital gains should be reinvested into your index funds. However, rather than selling an investment when the market is down, consider diverting dividends and capital gains distributions into your cash account when the cash account begins to deplete. This will provide added cushion while you decide the best financial move if a recession hits the family income stream.

 

Nearing, Entering and in Retirement: The last phase of your financial life is when you approach, enter and are in retirement. The following advice works regardless the age you retire. Early retirement still requires a proper financial plan. My clients pay me a lot of money to tell them what you are about to read.

The 6-month rule is nowhere near acceptable once you enter retirement. Side hustle income, pension and Social Security keep cash flowing into the budget, but your maximum earning years are now part of history. And besides, even if you can go back to work, is that really the goal here? The goal now is to structure your finances to keep your financial life simple with as low a level of risk as possible.

There might be times when you still add to investments once you enter retirement. We will assume retirement is a consumption of wealth phase. This doesn’t mean your accounts lose value! Your level of consumption can, and ideally should, be lower than the rate of the investment growth. 

Outside cash, investments will fluctuate in value. Only the fluctuating investments provide a potential acceptable return. Cash provides a low, or even no, return and is earmarked for expenditures in the relatively near future. Selling index funds at or near market highs and consuming cash when index funds are not at a high is an easier strategy than you might think. 

Market timing is a sucker’s game. Dollar-cost-averaging when you were growing your wealth was not a market-timing call. The opposite behavior when consuming your wealth is also not market timing.

The stock market is always climbing with short down periods lasting from a few months, to a few years, to rarely a decade or longer. Selling at a market high does not mean the market will not be higher in the future. What I am saying is that selling at or near a current market high is easy to do. Look at the index level. Is it at or near a high? Then it is an appropriate time to sell if it meets the criteria discussed below.

Your cash position in retirement needs to be at least two years of spending! Preferably 3-4 years of spending. With 4 years of spending in your cash account you have plenty of money available to live without consideration for the economy or stock market levels. If the market declines, use the cash account to fund spending. If the market is at or near a high you can sell enough to cover your needs on a monthly or some other schedule. You can rebuild the cash position when the market returns to new highs if the cash account becomes depleted.

When the stock market has one of those wonderful moments where it predicts yet another zombie apocalypse, you have several options. Rather than reinvesting dividends and capital gains distributions, you can divert those to your cash account instead. This effectively stretches your cash account to cover more than 4 years of market decline. Only as a last resort would you be forced to sell below a market high and/or cut back on spending.

The stock market rarely goes down and stays down for more than 4 years. Anything is possible. With dividends mixed in, your cash position can extend to 6-7 years or more, depending on the amount of your investments in index funds. Virtually all situations become background noise then as you enjoy your retirement.

 

As you can see, a simple rule that works for everyone does not exist. When you are starting out it is unlikely you have the resources to have even 6 months of liquid cash available to cover a job loss or serious expense. The goal is to move from that risky early position to a more stable and secure level. Eventually you will reach that 6-months cushion. But then you need to keep pushing because your needs will change as you approach retirement. 

The more wealth you accumulate, the more comfortable you become with cash earning a meager return. Many people lose interest in remaining 100% invested all the time once they enter the 7-digit net worth arena. As the 7 figures keep climbing, cash looks better and better. Of course, virtually everyone should have some invested in an equity index fund at all ages. What I want to impress upon you is that in the early days of your wealth accumulation journey you will be nearly 100% invested all the time with a modest sum available for an emergency. As you approach and enter retirement it is not uncommon to have 20% of more of your investable funds in cash. Find your comfort level and enjoy the well-deserved retirement you worked so hard to attain.

 


 

 

More Wealth Building Resources

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Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

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Keith Taxguy

28 Comments

  1. Chris on March 31, 2020 at 10:21 pm

    What is your take on D. Ramsey’s approach of stopping all investing while saving for a 6 month emergency fund?

    • Keith Taxguy on April 1, 2020 at 7:14 am

      Chris, for the record, I was an ELP for taxes with Dave for many years until I couldn’t take on more new clients. When it comes to building the 6 months of reserves account I take a multi-pronged approach. I still want to add to my work retirement account to the matching level if possible with the remainder going to the 6 months emergency fund. Sometimes I also recommend some go into the index fund and some into the emergency fund. It doesn’t have to happen all at once unless there is a reason to focus on the emergency fund only, ie. medical issues or disability.

      • Chris on April 6, 2020 at 5:03 pm

        Thank you. I just don’t get how its a good idea to give up a match of 8% to fully fund a emergency fund. This is not the only baby step that makes me scratch my head. We have a 3 month emergency fund and will throw the remaining funds beyond my match at it until we get 6 months.

        • Keith Taxguy on April 6, 2020 at 5:06 pm

          Chris, of course I would take the match. Facts and circumstances prevail. If I have a match to 8% I would take it and find a way to get another $50 in the emergency fund or non-qualified account.

  2. Josh on April 1, 2020 at 12:27 am

    This is strong advice. Clearly, when SHTF cash is a contender for your best friend next to food, shelter, and ammo. Avoiding selling off your productive assets is key. Dividends are a source of cash though, so really we are talking about the 2% rule, so to speak. You need assets to produce at least 2% growth while paying your 2% dividend.

    I do prefer to look at reserves in terms of “cash and cash equivalents,” meaning short term notes that at least earn interest. I also think it is smart to consider gold as part of that amount. There is no certainty that everyone will accept your home currency, but gold (or silver) are accepted worldwide, and valued just the same. You can sell some of your gold and turn it into euro’s or yen, or USD. So it is like an international cash equivalent. It also protects you from inflation, which can happen in times of recession. We may very well see some inflation here soon, with production and supply issues on certain items. We use OneGold rather than physical or etf holdings. If the stock markets close for a few months you can still access your money, in addition to your bank cash. You can also redeem for physical if you want.

    I also look at our available credit as a source of short term capital if we need to stretch our cash. We can keep the cash in our bank, and spend on the cards for up to 30 days. We can always eat some interest once or twice if we need to get through a rough spell. It’s a modest cost for an extra month or two if we need to wait for dividends to arrive or banks to open.

  3. Jim on April 1, 2020 at 1:05 am

    Do you have your series 7 license? I’m wondering when the SEC will come calling… I wouldn’t recommend anyone getting their teeth pulled by an auto mechanic. Lol.

    • Keith Taxguy on April 1, 2020 at 7:22 am

      Jim, your comment is confusing. At first I thought it was one of those wonderful spam comments coming out of India, but an IP lookup shows you in Anaheim. So I’l address your comment the best I can.

      First, I had a Series 7 in the past and talked about my time as a security salesman in prior blog posts. Also ran a hedge fund for over a decade; our returns beat the market every year. I also still advise large hedge funds periodically. Don’t know why the SEC will come calling; maybe you can elaborate. Finally, I have no idea what teeth and auto mechanics means, but I can tell you I am no auto mechanic.

    • Steve Dye on April 3, 2020 at 6:48 pm

      What?!? (WT*) The series 7 license is a joke. Mostly sales people not real advisers with knowledge and experience. Keith’s knowledge is worth more then most all series 7 licensed people combined. Just because some politician with an IQ of 80 (yes this is redundant) says this dumb test is needed to sell securities does not mean they can provide good advise. You need to leave this site and never come back. Go read yahoo news.

  4. Winnie on April 1, 2020 at 6:22 am

    Thank you for writing this. This is another great post, so many gems here! I will bookmark this and read this for years to come. I wish more of my female friends would read this. In my experience, women, more so than men, tend to not plan for retirement until it’s too late.

    • Keith Taxguy on April 1, 2020 at 7:24 am

      Winnie, this post is similar to conversations with clients on a regular basis. Talking about cash levels isn’t sexy so nobody talks about it. But people ask, especially when they reach retirement. My hope is this will provide a valuable guide for all my readers. Thank you for the kind words.

  5. Stephanie on April 1, 2020 at 7:23 am

    I believe, based on recent comments from Nassim Taleb, a global pandemic is NOT a
    black swan event, as they can be predicted to happen at some time, in some fashion, with nearly 100% certainty. He calls this pandemic a white swan event.

    • Keith Taxguy on April 1, 2020 at 8:25 am

      Stephanie, I discussed this in a prior post, saying this pandemic isn’t the Black Swan event, or at least not the one to worry about; the oil collapse is. People still don’t get how devastating the oil price decline will be to the economy when we are the world’s largest producer of oil.

      • William on April 3, 2020 at 7:16 pm

        Keith, how will you position yourself for the oil collapse if it does occur?

        • Keith Taxguy on April 3, 2020 at 9:05 pm

          William, oil prices have collapsed in my opinion. As for positioning, I will spend less filling my car. I have no intentions of buying futures, ETFs or oil company shares. I do think the oil price decline will harm U.S. shale firms and reduce long-term U.S. oil production. I’m not sure there is a re-positioning needed.

          Regardless where oil prices are, my gut says the conversion to electric vehicles and renewable resources is going to continue moving forward. The Saudi-Russia price war might be the tantrums of a dying industry.

  6. Bob on April 1, 2020 at 7:58 am

    I find the contrasts between markets fascinating. It seems in the US when the economy tanks things become cheaper? Is that really so, because in our country things become more expensive. This is because it’s imported, priced in USD and our currency weakens because of risk aversion as well as fuel which is linked to usd. So holding more cash just means it is eroded quicker due to inflation. So you actually need to quickly invest more cash into equities, especially those in USD as your local currency gets eroded quickly and products become more expensive.

    On the cash returns, how do you ensure that your portfolio as a whole keeps up with inflation ie can handle inflation and swr if so much is in cash? In my case I need to grow the portfolio at 10% to compensate for 6% inflation plus 4% swr. If I have 5 years of cash, then I need the share portfolio to be 25 years worth as well to keep pace with inflation.

    I know your blog is US focused, but I find the differences very interesting. As always a great article too, thanks.

    • Keith Taxguy on April 1, 2020 at 8:31 am

      Everything doesn’t get cheaper in the U.S. either when the market declines, but some things do, so there is an opportunity to stock up on some items.

      I want to thank you for your comment, Bob. I wrote post from a very U.S centric viewpoint and knew it when I wrote it. I am also aware many people outside the U.S. read the blog. It was a conscious choice to write this as I did. I couldn’t see a way to write this post to be more inclusive of other countries. For example, my stock market comments are relevant to the U.S. market, but readers from Japan might take exception to those words since they ring hollow in their case. I pray readers will forgive the presentation of this material with only the U.S. audience in mind.

      As for cash returns, they have not kept up with inflation for a very long time and I don’t see that changing.

  7. james luntz on April 1, 2020 at 9:23 am

    I would love to hear your thoughts about using contributions inside a RothIRA for rainy day savings. When someone is starting out in building their emergency fund, they could be entirely in low risk options. Then, they could start to invest in broad based index funds once they get above this threshold – much the same way most HSA accounts work (after you have $1,000 in cash, you can invest any amount above that). I realize it’s hard to get started and waiting for the 5-year mark to be able to get those contributions back is a bit of a challenge, but it seems to me after that it would have relatively few pitfalls.

    maybe a winning strategy is: build liquid savings first, then after hitting cash savings target invest in RothIRA equities each year and let it brew. Finally, after fifth year, you can start to bring down cash-on-hand as seasoned Roth contributions come available for rainy-day while simultaneously moving that portion to extremely conservative holdings within the Roth.

    • Keith Taxguy on April 1, 2020 at 10:24 am

      James, at some point I considered my Roth account a source of funds for several things. It was an emergency fund of the absolute last resort. It was also a quasi investment account for college savings (kids got scholarships so dad didn’t foot much of the bill).

  8. Marcy P Hart on April 1, 2020 at 2:35 pm

    What is your opinion of stable value funds and brokerage (i.e. Vanguard) money market accounts as places to hold your cash? I know they are not FDIC insured. I do have about 1 year in bank checking & savings accounts that are insured, but I keep another 10-15% in SVF and Vanguard Prime MMA.

    • Keith Taxguy on April 1, 2020 at 3:19 pm

      Marcy, I keep most of my cash in Vanguard’s Prime MM Fund. I have a smattering elsewhere, but Prime is where I keep mine.

  9. Dr. Jeff Anzalone on April 2, 2020 at 1:19 pm

    Keith:

    You could sell this paragraph for thousands of dollars yet you chose to give it away:

    “Your cash position in retirement needs to be at least two years of spending! Preferably 3-4 years of spending. With 4 years of spending in your cash account you have plenty of money available to live without consideration for the economy or stock market levels. If the market declines, use the cash account to fund spending. If the market is at or near a high you can sell enough to cover your needs on a monthly or some other schedule. You can rebuild the cash position when the market returns to new highs if the cash account becomes depleted.”

    Thanks for helping us weather this storm we’re in!

  10. JR on April 4, 2020 at 9:18 am

    On the flip side, wouldn’t you agree that reevaluating (discretionary/non-discretionary) expenses is merited post COVID-19? “Are you still planning that blah, blah to blah, blah, Mr./Mrs. Smith?” He asked rhetorically.

  11. The Family Escapes on April 6, 2020 at 7:10 pm

    This was an interesting read. We have recently retired (tell me about sequence of returns!!).

    We have 2 years worth of cash to cover situations like this. I am sure this will be more than enough to weather this recession, but it’s not easy to see the market plunge!!

  12. ol1970 on April 10, 2020 at 7:58 am

    Thank you for writing this, probably the best common sense financial advice article I’ve read in the last 5 years! I’ve always held too much cash for and been chastised for doing so by the “financial experts”. Hopefully this will trickle down to other bloggers and they will quit giving people bad advice.

    I think when there are a lot of people in that $1M-$4M net worth that got there through market gains and they are conditioned to keep the pedal to the medal. Others who accumulated high net worths by very large incomes/business ownership I’ve noticed keep a huge cash cushion. Once you pass the $5M mark you tend to not want to lose it, once you cross 8 figures you really don’t care about returns at all anymore. Unless you have a spending problem or desire to have your name on buildings at your favorite university’s gymnasium.

  13. Andy on April 14, 2020 at 9:25 am

    Great article Keith,

    We keep 6 months cash but we’re working to increase to 1 year and more as we get older. We didn’t have a lot invested in 2008 but this last crash I was staying the course. The 6 months cash helped but I would have felt better with a 1 year cash stash. With this current rally (not sure why it’s rallying) I’m still glad I stayed the course. The exposure therapy from this last crash will make it a lot easier to stay the course in the future. I would like to stress that the exposure therapy from the crash was HUGE! There is a big difference on just thinking you can handle it compared to actually experiencing it.

    At Vanguard we have VTSAX and VTIAX in taxable brokerage and VTWAX (Vanguard Total World) in our IRA’s. We’re world market cap allocation for equities. We’re agnostic when it comes to U.S. vs international equity indexes. We’ll add total world bond when we hit our goal.

  14. Pat Saperstein on April 28, 2020 at 5:06 pm

    Excellent post but I’m wondering why you don’t mention bonds. My investment advisor has me in about 20% bonds, 70% equities and holding around 10% in cash depending on the time period. Also, my smaller newish 401k was in a target date fund with a similar allocation. Can you count your bond holdings as part of your cash stockpile, or are they too difficult to sell?

    • Keith Taxguy on April 29, 2020 at 8:30 am

      Bond fund are easy to sell while some bonds can be difficult to sell. I didn’t cover bonds because they pay such a small amount and if interest rates climb bonds will get killed (the longer the term before maturity the bigger the decline in the bond’s value). Short-term bond funds might be an option for some money, especially if money market accounts go to zero. The truth is I have never been a big fan of bonds, though I have owned minor amounts in the past and currently hold 1 Treasury TIPS (to see how it worked and was applied to tax returns).

      • Josh on April 29, 2020 at 4:01 pm

        Bond funds have differing maturities, and so short term (1-3 year) would be the closest to cash, but you can probably buy ultra short term funds. Short term bond funds (buy a dirt cheap ETF like BSV), will offer very stable value over time, with volatility in the price of the etf by maybe 1-3% up or down in any given year. The yield paid though, at last check, is not worth the possibility of any downside. The yield today looks to be about 0.20%-0.85% depending on BSV, depending on the website. The average coupon on the fund is 2.3%! That means people have bought this fund price up to the point where the actual yield is a fraction of the face value coupon. I would not take any risk on short term treasuries (to begin with), especially now. Put your money into a high yield savings account like American Express person savings at 1.5% yield and zero risk of downside, FDIC insured.

        Long bonds on the other hand, are always an interesting investment, but should not be considered as low-risk. They are lower risk than stocks, and tend to work inverse to the stock market. Stocks go down, bonds go up. I like long bonds as a diversifier to stocks, gold, reits, etc. So the 20% bonds inside your 401k are likely intermediate or long bonds (make sure they are!). Long bond funds like BLV (vanguard long bond etf), have 50% treasuries/50% corporate debt. That is the one to own. Corporate bonds are less volatile than treasuries as they react much less to interest rate changes, but they do have default risk (which treasuries do not). So BLV has both, giving you the higher yield and stability of investment grade corporates, but with some more volatility from treasuries for good or bad.

        Unlike Keith, I like long bonds as an insurance policy that pays a modest yield above the risk-free cash rate (which is zero today).

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