Cash in the Strategic Asset Allocation?

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Topic Author
Swiss Bee
Posts: 92
Joined: Mon Dec 07, 2020 10:03 am

Cash in the Strategic Asset Allocation?

Post by Swiss Bee »

Good day fellow investors :moneybag

I am thinking about my strategic asset allocation (SAA) and would appreciate your advice. I am neither including my fully funded emergency fund (cash) nor the property I live in in the SAA, as I don’t consider them investments.

Now when it comes real investments, would you recommend having a certain percentage in cash? E.g.

- 60% rental property
- 25 % stocks/bonds
- 10% cash (?!)
- 5% gold and alternatives

Or would you rather eliminate cash in this SAA and allocate it to other asset classes? I am really not sure why cash should be included in a SAA, unless you try to time the market (which is not my intention).

Many thanks in advance, Bogleheads 🙏
Valuethinker
Posts: 49027
Joined: Fri May 11, 2007 11:07 am

Re: Cash in the Strategic Asset Allocation?

Post by Valuethinker »

Swiss Bee wrote: Fri Jan 21, 2022 1:20 am Good day fellow investors :moneybag

I am thinking about my strategic asset allocation (SAA) and would appreciate your advice. I am neither including my fully funded emergency fund (cash) nor the property I live in in the SAA, as I don’t consider them investments.

Now when it comes real investments, would you recommend having a certain percentage in cash? E.g.

- 60% rental property
- 25 % stocks/bonds
- 10% cash (?!)
- 5% gold and alternatives

Or would you rather eliminate cash in this SAA and allocate it to other asset classes? I am really not sure why cash should be included in a SAA, unless you try to time the market (which is not my intention).

Many thanks in advance, Bogleheads 🙏
Many people count their cash allocation as being in their emergency funds pool.

Cash has optionality. It has no interest rate risk. In recent years bank deposits have, sometimes, paid higher yields than government bonds.

Rental property is something else again because it has location specific risk & it is illiquid. I would only count my equity in the properties (in truth I'd probably discount that).

"gold and alternatives" covers a host of sins. If you want portfolio insurance, then gold is believed by some to have that quality (see the William Bernstein piece on Efficient Frontier web pages about it - the most patient asset).

"alternatives". Always worth reading Larry Swedroe's stuff about "the good, the bad and the ugly". If one is not a US citizen or taxpayer, then the Private Equity investment trusts listed on the London Stock Exchange may be worth a look. Although that sector overall looks like it is suffering from having raised too much money.
Spgold
Posts: 85
Joined: Fri May 10, 2019 4:52 am

Re: Cash in the Strategic Asset Allocation?

Post by Spgold »

Swiss Bee wrote: Fri Jan 21, 2022 1:20 am Good day fellow investors :moneybag

I am thinking about my strategic asset allocation (SAA) and would appreciate your advice. I am neither including my fully funded emergency fund (cash) nor the property I live in in the SAA, as I don’t consider them investments.

Now when it comes real investments, would you recommend having a certain percentage in cash? E.g.

- 60% rental property
- 25 % stocks/bonds
- 10% cash (?!)
- 5% gold and alternatives

Or would you rather eliminate cash in this SAA and allocate it to other asset classes? I am really not sure why cash should be included in a SAA, unless you try to time the market (which is not my intention).

Many thanks in advance, Bogleheads 🙏
In today’s environment where bond yields are that low (and even negative) you could consider this 10% cash as part of your fixed income allocation.

That way your AA could be looked as
60% RE
35% stocks / fixed income
5% gold and alternatives
tubaleiter
Posts: 247
Joined: Tue Mar 09, 2021 11:58 am

Re: Cash in the Strategic Asset Allocation?

Post by tubaleiter »

I include cash as part of overall fixed income, currently at 21% of my asset allocation (ramping up 1% a year), with the other 79% in equities.

However, that cash also constitutes my emergency fund, there's no separate bucket of cash for emergencies. I'm at the point where I'm comfortable with that - 21% of my portfolio would be enough to fund my living expenses for several years. Of course, if there was both a fall in equities prices AND simultaneously a personal emergency requiring me to draw on the fixed income allocation, some of that money would be going into rebalancing back to 79/21 (selling cash/bonds to buy equities) and some to fund living expenses, so it wouldn't last as long. Worst case, I'd also need to sell some equities - that scenario is far enough out on the tail of probabilities that I accept the risk of potentially having to sell devalued equities in an unlikely prolonged personal emergency.

But that works for my personal risk tolerance, only you can decide what helps you sleep at night. I would say that if you have significant cash set aside for an emergency fund, I don't see the need for additional cash in your asset allocation, UNLESS you have some cash as part of fixed income because you can find cash interest rates that beat bonds.
Topic Author
Swiss Bee
Posts: 92
Joined: Mon Dec 07, 2020 10:03 am

Re: Cash in the Strategic Asset Allocation?

Post by Swiss Bee »

Many thanks, Spgold and tubaleiter. That’s an excellent way of looking at it 🙏
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