Excess cash and inflation - what to do?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
renegade06
Posts: 595
Joined: Sat Jan 12, 2019 2:00 pm

Excess cash and inflation - what to do?

Post by renegade06 »

I’m concerned that the cash I’m holding is being eroded by inflation… but I’m not sure what to do (if anything) about it.

My wife and I have about $350k in cash which is 10% of my overall portfolio. It is sitting in a “high yield” savings account that isn’t yielding anything close to inflation. part of this $$ is emergency fund and part I am keeping for a down payment for a home in a HCOL area. We aren’t sure if we are going to buy a single family house in the next year or just stay in our townhouse for another couple of years. I’m 46, wife is early 30s.
I’ve maxed out our I bonds this year and plan to put in another $10k early in Jan 2022.

Any thoughts on whether or not its smart to keep this much in cash? Are there better alternatives for this $$ without taking too much risk?
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Excess cash and inflation - what to do?

Post by 000 »

You could always just buy TIPS.

VTIP and SCHP are sample funds.

Of course if we experience unexpected deflation you would have preferred (slightly) to not have done so.
Topic Author
renegade06
Posts: 595
Joined: Sat Jan 12, 2019 2:00 pm

Re: Excess cash and inflation - what to do?

Post by renegade06 »

Thank you - I will check those out.
Topic Author
renegade06
Posts: 595
Joined: Sat Jan 12, 2019 2:00 pm

Re: Excess cash and inflation - what to do?

Post by renegade06 »

000 wrote: Fri Dec 03, 2021 8:21 pm You could always just buy TIPS.

VTIP and SCHP are sample funds.

Of course if we experience unexpected deflation you would have preferred (slightly) to not have done so.
Would you mind explaining the potential downside of this course of action (if I put say, $250k in SCHP)?
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Excess cash and inflation - what to do?

Post by dbr »

renegade06 wrote: Fri Dec 03, 2021 8:58 pm
000 wrote: Fri Dec 03, 2021 8:21 pm You could always just buy TIPS.

VTIP and SCHP are sample funds.

Of course if we experience unexpected deflation you would have preferred (slightly) to not have done so.
Would you mind explaining the potential downside of this course of action (if I put say, $250k in SCHP)?
Even a short TIPS fund will have variable return with possible losses if inflation goes away and real interest rates increase in the short run. I suppose if a loss of a few percent is acceptable if things don't work out then more likely than not you would be ahead getting the inflation compensation compared to cash. In the space of a year it is a few percent either way.

Als, keep in mind if the saving is for a home within a year or two from now the risk is not general inflation but rather real estate appreciation in your target location.
carminered2019
Posts: 1939
Joined: Fri Jun 21, 2019 7:06 pm

Re: Excess cash and inflation - what to do?

Post by carminered2019 »

pay off the current mortgage.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Excess cash and inflation - what to do?

Post by 000 »

renegade06 wrote: Fri Dec 03, 2021 8:58 pm Would you mind explaining the potential downside of this course of action (if I put say, $250k in SCHP)?
Two main downsides come to mind:

TIPS have interest rate risk just like nominal bonds, except that TIPS move based on real CPI rates not nominal USD rates. So, if you end up needing the money sooner than the duration, your bonds might have lost value if real rates increased. SCHP has a 7.7 year duration so there is plenty of interest rate risk and I would not consider it a totally safe holding if you might need the money sooner than that.

TIPS are a small portion of the bond market and have often been less liquid than nominal Treasuries during crashes. In addition, if the crash is deflationary in nature, the CPI adjustment on your TIPS will go downward and your TIPS will be worth less in nominal USD terms.

You really have to think of it all in terms of CPI returns, not nominal USD returns. If you cannot handle nominal USD volatility, TIPS are not for you.

Additionally, if the primary purpose of the holding is to purchase a house it is real estate inflation not general inflation that matters, as dbr noted. There have been some previous threads on this subject, but if one is really worried about real estate price inflation there are residential REITs, even those that focus on single family homes. Here's a recent one. The bogleheads were not enthused about the idea of putting even a small portion of downpayment money into REITs. :twisted:
Topic Author
renegade06
Posts: 595
Joined: Sat Jan 12, 2019 2:00 pm

Re: Excess cash and inflation - what to do?

Post by renegade06 »

Thanks so much for the thoughtful explanation. I learned a lot. Bonds are still hard for me to wrap my head around. This is very helpful and much appreciated.
User avatar
GMCZ71
Posts: 559
Joined: Sat Oct 13, 2018 8:05 am
Location: McMinnville, Or

Re: Excess cash and inflation - what to do?

Post by GMCZ71 »

Tmobile bank 1% and HmBradley 3% with some hoops are some choices.
Any Debt -cars or student loans that can be paid off then monthly payments back into the downpayment fund.
Pay down mortgage but get Heloc set up to pull from for a down payment later.
John | * Friends and family and money | * What you recommend will have periods of underperformance. You will be blamed. | * You avoid the suspicion of "self-serving." by Taylor Larimore
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: Excess cash and inflation - what to do?

Post by Robot Monster »

renegade06 wrote: Fri Dec 03, 2021 10:20 pm Thanks so much for the thoughtful explanation. I learned a lot. Bonds are still hard for me to wrap my head around. This is very helpful and much appreciated.
My recommendation would be to first understand how an individual TIPS bond behaves. Then imagine you bought a bunch of individual TIPS bonds with various durations and rates -- that's basically what a fund is.

You might actually consider buying individual TIPS, either at auction, or the secondary market.
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: Excess cash and inflation - what to do?

Post by hudson »

renegade06 wrote: Fri Dec 03, 2021 8:19 pm I’m concerned that the cash I’m holding is being eroded by inflation… but I’m not sure what to do (if anything) about it.

My wife and I have about $350k in cash which is 10% of my overall portfolio. It is sitting in a “high yield” savings account that isn’t yielding anything close to inflation. part of this $$ is emergency fund and part I am keeping for a down payment for a home in a HCOL area. We aren’t sure if we are going to buy a single family house in the next year or just stay in our townhouse for another couple of years. I’m 46, wife is early 30s.
I’ve maxed out our I bonds this year and plan to put in another $10k early in Jan 2022.

Any thoughts on whether or not its smart to keep this much in cash? Are there better alternatives for this $$ without taking too much risk?
Inflation is a concern.
Savings is probably optimal.
Inflation protect products would be tempting.
Either choice would be smart.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Excess cash and inflation - what to do?

Post by 000 »

renegade06 wrote: Fri Dec 03, 2021 10:20 pm Thanks so much for the thoughtful explanation. I learned a lot. Bonds are still hard for me to wrap my head around. This is very helpful and much appreciated.
Just wanted to follow up and say that if you might need to use these funds at any time, both SCHP and VTIP have durations in the multiple year range (7.7 and 2.6 years respectively) so putting it all into either would be taking on some amount of duration risk (duration is the measure of the expected movement of the fund in response to a one percentage point movement in rates; we would expect a sudden one point increase in short term real rates to lead to a 2.6% temporary decline on VTIP). If that is a concern one could mix with cash or buy shorter term TIPS on the market.
PennyWise7
Posts: 115
Joined: Mon Nov 16, 2020 8:13 pm

Re: Excess cash and inflation - what to do?

Post by PennyWise7 »

Check out VG life strategy fund VASIX the 20% stock 80% bond portfolio for income investors seems more appropriate than a tip fund. I am considering the same for the same reason. No decision though yet, need to observe it further.

https://investor.vanguard.com/mutual-fu ... file/VASIX

Product summary
The LifeStrategy Funds are a series of broadly diversified, low-cost funds with an all-index, fixed allocation approach that may provide a complete portfolio in a single fund. The four funds, each with a different allocation, target various risk-based objectives. The Income Fund is the most conservative and seeks to provide current income and some capital appreciation. The fund holds 80% of its assets in bonds, a portion of which is allocated to international bonds and 20% in stocks, a portion of which is allocated to international stocks. Investors with a short- to medium-term time horizon who can accept modest movement in share price may wish to consider this fund. Please note: The Lifestrategy funds are subject to the risks of their underlying funds.
Topic Author
renegade06
Posts: 595
Joined: Sat Jan 12, 2019 2:00 pm

Re: Excess cash and inflation - what to do?

Post by renegade06 »

PennyWise7 wrote: Sat Dec 04, 2021 4:04 pm Check out VG life strategy fund VASIX the 20% stock 80% bond portfolio for income investors seems more appropriate than a tip fund. I am considering the same for the same reason. No decision though yet, need to observe it further.

https://investor.vanguard.com/mutual-fu ... file/VASIX

Product summary
The LifeStrategy Funds are a series of broadly diversified, low-cost funds with an all-index, fixed allocation approach that may provide a complete portfolio in a single fund. The four funds, each with a different allocation, target various risk-based objectives. The Income Fund is the most conservative and seeks to provide current income and some capital appreciation. The fund holds 80% of its assets in bonds, a portion of which is allocated to international bonds and 20% in stocks, a portion of which is allocated to international stocks. Investors with a short- to medium-term time horizon who can accept modest movement in share price may wish to consider this fund. Please note: The Lifestrategy funds are subject to the risks of their underlying funds.
Thanks, Pennywise. I'd appreciate you sharing your thoughts when you make a decision. My wife saw a house today that she liked so my decision might be made for me already ha ha
tejas24478
Posts: 4
Joined: Tue Jul 20, 2021 9:53 pm

Re: Excess cash and inflation - what to do?

Post by tejas24478 »

How about investing all of the money in to a all weather portfolio of Ray Dalio? Would that not be less risky with reasonable return compare to all US stocks or all bonds or TIPS etc?
Cash is loosing value fast due to inflation. Stock market is all time high and though no one knows what would happen, probability of it correcting or crashing can not be ignored. Housing market is also in the same situation as stocks so some people might want to wait for another 6 months to see in which direction it moves.
Looking at all of these, I was wondering if Ray Dalio type of all weather portfolio might work the best which is designed for all situations. Any thoughts?
Post Reply