Rick Ferri view on Moneymarket

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Neus
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Rick Ferri view on Moneymarket

Post by Neus »

So I read Rick Ferri's book: All about asset allocation, which is a really recommended book

There's one line that bothers me and later there's no further mention about it
Level one is the base of the pyramid. It is characterized by highly liquid cash and cash types of investment that are used for living expenses and emergencies. This money is typically in checking accounts, saving accounts, and money market funds.

This cash IS NOT PART of your long-term investment allocation, and you should not be overly concerned that your rate of return is low

Questions:
1) I suppose he's saying that this cash equivalent allocation is not counted in Bond allocation or Strategic asset allocation?
2) If so why not?
3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
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Re: Rick Ferri view on Moneymarket

Post by mikejuss »

Why would you consider cash a bond when it's...cash? I tend to agree with Rick, and don't much care myself about the rate of return on what little cash I have my checking account. I believe Rick is assuming your cash position is not a significant part of your portfolio.
Last edited by mikejuss on Tue Aug 09, 2022 10:31 pm, edited 1 time in total.
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Re: Rick Ferri view on Moneymarket

Post by KlangFool »

OP,

1) Do you plan to maintain a fixed percentage allocation to cash?

2) Do you plan to allocate a fixed amount to cash?

3) If you do not plan to allocate a fixed percentage, why do you include into your asset allocation?

4) If you do plan to allocate a fixed percentage, do you plan to rebalance? For example, when the stock market crashes, you actually reduce the amount allocated to cash.

I keep 2 years of expense in cash as my emergency fund (EF). It is a fixed amount. It is not part of my asset allocation. I do not rebalance my cash/EF.

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Re: Rick Ferri view on Moneymarket

Post by whodidntante »

Assuming OP quoted Rick fairly and accurately, I disagree with Rick's view on this topic. Thinking in buckets seems like a pointless complication to me. OP can disagree, also. If we agreed on every little point, imagine how boring discussion forums would be. :happy
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Re: Rick Ferri view on Moneymarket

Post by jjj_22 »

If your portfolio is large, the size of your monthly expenses and emergency fund will be so small that the fact that it's in cash doesn't make any difference.

If your portfolio is so small that your monthly expenses + emergency fund would make up a meaningful percentage of it, then if you loose your job and crash your car and need to deplete it, are are you really going to go and rebalance the rest because your fixed income allocation has swung way off? Probably not.

I think it's just practical advice for keeping liquid funds liquid since liquidity is their point, without trying to overoptimize everything.
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Re: Rick Ferri view on Moneymarket

Post by tibbitts »

Neus wrote: Tue Aug 09, 2022 10:23 pm 3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
If you include cash and money market in your allocation, you'll include it as a bond and increase your bond allocation accordingly. So if normally you'd be 60/40 and keep about 2% of the total amount separately in cash, including cash as a bond I'd guess you'd keep your allocation at roughly 58/42. I'm not seeing the difference. In theory you might want cash separate since you don't generally rebalance it etc. but realistically the percentage is likely to be small so it probably won't matter.
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Re: Rick Ferri view on Moneymarket

Post by Neus »

KlangFool wrote: Tue Aug 09, 2022 10:30 pm OP,

1) Do you plan to maintain a fixed percentage allocation to cash?

2) Do you plan to allocate a fixed amount to cash? I plan to allocate 12 month worth of living expense in cash (this 12 months of expense is calculated assuming no other income ie from rentals)

3) If you do not plan to allocate a fixed percentage, why do you include into your asset allocation? Because at
https://engaging-data.com/visualizing-4-rule/
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We can separate cash portion

So i'm thinking perhaps this tool is not available when Rick Ferri wrote the book so his opinion may change right now?

Basically, i want to understand why Rick Ferri recommends separating cash from SAA as this very important statement is not explained further


4) If you do plan to allocate a fixed percentage, do you plan to rebalance? For example, when the stock market crashes, you actually reduce the amount allocated to cash.
Fair point

I keep 2 years of expense in cash as my emergency fund (EF). It is a fixed amount. It is not part of my asset allocation. I do not rebalance my cash/EF.

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Re: Rick Ferri view on Moneymarket

Post by dcabler »

Neus wrote: Tue Aug 09, 2022 10:23 pm So I read Rick Ferri's book: All about asset allocation, which is a really recommended book

There's one line that bothers me and later there's no further mention about it
Level one is the base of the pyramid. It is characterized by highly liquid cash and cash types of investment that are used for living expenses and emergencies. This money is typically in checking accounts, saving accounts, and money market funds.

This cash IS NOT PART of your long-term investment allocation, and you should not be overly concerned that your rate of return is low

Questions:
1) I suppose he's saying that this cash equivalent allocation is not counted in Bond allocation or Strategic asset allocation?
2) If so why not?
3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
1. That would be my conclusion
2. Probably because he considers it likely to be a small overall portion of your investments - in other words, within rounding error meaning it's not worth your time to track it as part of an overall asset allocation.
3. Almost none unless #2 doesn't hold true for you. Then what it will do is effectively reduce the overall duration of the fixed income portion of your portfolio.

#2 holds true for me. This is just whatever cash I have in my checking account, which I always keep above a certain level. This is just daily expenses and enough there if I have to make a big purchase or instantly pay for some minor emergency. I also have credit cards as well with pretty high limits, so that can take care of most anything else. I don't hold an emergency fund, per se. Between what I keep in checking, what I can pay for with a cc, and the reality that it wouldn't take more than a couple of days to sell something in my taxable account and have it appear in my checking account, there really is no need for such a "bucket" or to keep up with it as part of an overall AA. IMO, AA percentages should be set with an axe, not a scalpel.
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Re: Rick Ferri view on Moneymarket

Post by UpperNwGuy »

I agree with Rick. I have always maintained a wall of separation between my long term investments and my short term savings. My asset allocation includes only my long term investments.
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Re: Rick Ferri view on Moneymarket

Post by PersonalFinanceJam »

Yes, I would concur with your understanding of what Rick wrote. I tend to disagree with the idea of a buckets approach as well because I think it reduces most people's ability to see the fungibility of money. It has been a while since I read the book, but I think the intended audience was people closer to the beginning of their savings journey. With that frame of reference what was written becomes an easy answer to a more complex discussion.

I think it's confusing to someone just starting out to tell them they should have an aggressive asset allocation consisting mostly of stocks and reconciling that with a cash emergency fund which could dwarf what they have in tax advantaged accounts. It's easier to say that cash fund doesn't count. Save the more complex stuff for a later time. A time when it's possible the readers portfolio is larger, more account types may be involved and the discussion would make more sense.

To answer your question, no I don't think it's going to cause any problems if you include this cash allocation in your overall asset allocation.
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Re: Rick Ferri view on Moneymarket

Post by Parkinglotracer »

Rick is a smart guy I admire but I think this is a minor detail. I include my MM in my fixed income asset allocation in retirement. I have 2.5% of my portfolio in a Vang MM account now earning 2%. In 1979 I had a MM yielding 13%. I use the money for spending, peace of mind, last minute deals, dr of credit bonuses, etc. My ready to spend money. It’s in a fixed Income asset. Contrarily, I could have had it in a long term bond fund that went down twenty some percent this year. I think in the end the influence on my portfolio return is negligible and the influence on my retirement mental health is positive.


Good points made above by personalfinancejam to whether this advice was intended for someone early in their investment journey.
Last edited by Parkinglotracer on Wed Aug 10, 2022 7:55 am, edited 1 time in total.
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Re: Rick Ferri view on Moneymarket

Post by AnnetteLouisan »

Following this with interest.
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Re: Rick Ferri view on Moneymarket

Post by nisiprius »

Part of the push toward more and more risk is the elimination of "cash" or "short-term reserves" as part of the investment portfolio. Before, lets say 2000 or so, virtually all discussions of recommended retirement savings portfolio always included all three major assets, stocks, bonds, and cash (or, if you prefer, equities, fixed income, and short-term reserves) within the investment portfolio, quite apart from any emergency fund.

I've documented this in the past, too lazy to find it now. But one "proof" of this is that up until about 2010, all of the Vanguard LifeStrategy funds included "short-term reserves". Whatever it was, exactly, it was not classified as "bonds" in the fund literature pie charts, which had all three slices. This was a cash or cashlike holding that was locked inside the fund, could not be spent separately, and wasn't available for emergencies. It was part of tuning the amount of risk in the portfolio.

My view is simple. The future is always uncertain, but I feel that everything depends on your expectations, plans, and hopes as to whether you are still going to be holding something all the way into retirement. By definition, an emergency fund might get spent. You might wish for the good luck of not needing it, but it is there to be used if needed. It is not money that is planned to be held into retirement. Therefore--and I think this is legitimate planning, not mental accounting--

1) if it is intended to be available for emergencies, even if you hope not to need it, it is not part of the investment portfolio.

2) if you have a serious plan and intention of just holding it and not spending it before retirement--it's not needed for emergencies--then it can be part of the investment portfolio even if it is "cash."

In other words, if have two years' expenses in cash, and you follow the random traditional vague guideline of "six month's expense for emergencies," then you could count six month's worth as the emergency fund, and eighteen months' worth as part of the investment portfolio. According to conventional wisdom since 2000, you wouldn't/shouldn't hold has as part of the investment portfolio, but everyone used to and a sane person still could.

In any case, calling something both an emergency reserve and also retirement savings is double-counting.
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Re: Rick Ferri view on Moneymarket

Post by Artsdoctor »

Separating out silos of money is "mental accounting." Where you put cash is up to you. I used to think of that term (mental accounting) as a negative but I've come to accept it if it gets you to where you want to go.

You have to ask yourself what you're hoping to accomplish with "asset allocation." Presumably, it's about meeting goals with a tolerance of risk you can accept. If you have money which is "investable," it's part of your investment portfolio. If you choose to have some of that investable money in cash, count it as part of your investment portfolio. If it's in your checking account or in some sort of an emergency stash which will never be invested, don't count it. And you might want to be clear in your own mind what "cash" is: is it just money markets? 4-week T-bills? 3-month T-bills?
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Re: Rick Ferri view on Moneymarket

Post by Neus »

jjj_22 wrote: Tue Aug 09, 2022 10:46 pm If your portfolio is large, the size of your monthly expenses and emergency fund will be so small that the fact that it's in cash doesn't make any difference.
If your portfolio is so small that your monthly expenses + emergency fund would make up a meaningful percentage of it, then if you loose your job and crash your car and need to deplete it, are are you really going to go and rebalance the rest because your fixed income allocation has swung way off? Probably not.
Good point

I think it's just practical advice for keeping liquid funds liquid since liquidity is their point, without trying to overoptimize everything.
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Re: Rick Ferri view on Moneymarket

Post by Mike Scott »

I think you need to reread the first part. He is talking about living expenses and emergency money. It's not really about money markets other than that may be one of the places you keep some liquid cash.
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Re: Rick Ferri view on Moneymarket

Post by quietseas »

Neus wrote: Tue Aug 09, 2022 10:23 pm
Questions:
1) I suppose he's saying that this cash equivalent allocation is not counted in Bond allocation or Strategic asset allocation?
2) If so why not?
3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
It's up to you to decide what you want to do. You don't need to listen to Rick or anyone else, and the FBI won't raid your basement if you include cash in your asset allocation. Feel free to do what's right for you. If you want to include 5 year CDs for example as fixed income inside your asset allocation you are free to do so. If you have $2M and keep $200K in a 0.05% checking account you are losing out on potential capital gains and dividend income had you put $150K of that $200K into your stock/bond allocation instead of keeping it in cash. However, you may have reasons you don't need to justify to anyone other than yourself, spouse, and maybe heirs on why you are holding a large block of cash. I think Rick is talking about a reasonable amount of cash checking account used to manage cash flow of income and expenses, or perhaps up to one year's expenses if you choose to bucket your accounts that way. I don't think he'd recommend most people hold 10% of assets in CDs, for example, but you might choose to.
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Re: Rick Ferri view on Moneymarket

Post by alluringreality »

The following is an excerpt of Chapter 1 from the Second Edition, which has a 2010 copyright:
Level one is the base of the pyramid. It is characterized by highly liquid cash and cash types of investments that are used for living expenses and emergencies. This money is typically in checking accounts, savings accounts, and money market funds. This cash is not part of your long-term investment allocation, and you should not be overly concerned that your rate of return is low. The amount to keep in cash varies with your circumstances. I recommend 3 to 4 months in cash if you are single, 6 to 12 months in cash if you have a family, and 24 months when you retire.
Neus wrote: Tue Aug 09, 2022 10:23 pm Questions:
1) I suppose he's saying that this cash equivalent allocation is not counted in Bond allocation or Strategic asset allocation?
That's the way I read it.
2) If so why not?
I would take the "don't overanalyze" suggestion to mean that he might agree with the general concept of an emergency fund. Emergency funds are a fairly common idea, for example it looks like Fidelity and Vanguard have related webpages. Often many people do not mix an emergency fund and investment portfolio, especially when starting out. He posts and replies on here from time to time, so it's always possible you might get a first-person opinion. It looks like he doesn't like the term Emergency fund.
https://www.fidelity.com/viewpoints/per ... -emergency
https://investor.vanguard.com/investor- ... gency-fund
https://mobile.twitter.com/Rick_Ferri/s ... 9543070721
3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
Cash-alternatives may provide a higher or lower return compared to bonds over a particular period. Recently near-term rates have been rising. Generally in a rising-rate environment, it's difficult to predetermine if rates at some point in the future might end up higher than current rates. Near-term rates are often fairly volatile, so rising near-term rates can potentially turn into flat or declining rates. Typically cash-alternatives are expected to pay less than bonds in a flat or declining rate environment. I haven't read the book to comment around how it discusses bond duration, although based on the following search result I'll guess intermediate could be suggested. Generally cash-alternatives and long-term bonds tend to have different risks and rewards, and many people end up choosing an intermediate duration for somewhat of a balance between the two extremes, although there are potentially other considerations like inflation-indexed bonds.
https://twitter.com/rick_ferri/status/1 ... 65?lang=en
Last edited by alluringreality on Wed Aug 10, 2022 10:25 am, edited 1 time in total.
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Re: Rick Ferri view on Moneymarket

Post by GAAP »

Neus wrote: Tue Aug 09, 2022 10:23 pm So I read Rick Ferri's book: All about asset allocation, which is a really recommended book

There's one line that bothers me and later there's no further mention about it
Level one is the base of the pyramid. It is characterized by highly liquid cash and cash types of investment that are used for living expenses and emergencies. This money is typically in checking accounts, saving accounts, and money market funds.

This cash IS NOT PART of your long-term investment allocation, and you should not be overly concerned that your rate of return is low

Questions:
1) I suppose he's saying that this cash equivalent allocation is not counted in Bond allocation or Strategic asset allocation?
2) If so why not?
3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
The highlighted uses are pretty much by definition not long-term and therefore not part of your long-term allocation. You can hope that the emergency needs never arise, but they are expected to arise at some point.

Whether or not you want a long-term allocation to cash or cash equivalents is another topic entirely.

How to fund an emergency fund beyond the first month is a third topic.
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Re: Rick Ferri view on Moneymarket

Post by PersonalFinanceJam »

nisiprius wrote: Wed Aug 10, 2022 8:29 am <snip>
In any case, calling something both an emergency reserve and also retirement savings is double-counting.
I disagree. The counter argument. I'm not going to tell my wife we can't save her life because we already blew through the emergency fund and that other pot of money was for retirement only. Having separate accounts is mental accounting, more over it's probably more akin to behavioral accounting. Trying to control for the human so they don't make too many mistakes. I don't think that's a horrible thing especially when a person might not have been tested and is just trying to figure all of this out.

However, there are far too many nuances pertaining to the individual and their situation to say whether including a cash account in or out of the overall portfolio should/could be done. Moreover, these situations can change over time. Trying to distill this down to a set of "rules" makes it easier to explain, but glosses over a whole bunch of other more personal aspects of saving/investing. It's probably not going to amount to much either way, but it's not law. If it were we'd have nothing to talk about here!
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Re: Rick Ferri view on Moneymarket

Post by Rick Ferri »

Neus wrote: Tue Aug 09, 2022 10:23 pm So I read Rick Ferri's book: All about asset allocation, which is a really recommended book

There's one line that bothers me and later there's no further mention about it
Level one is the base of the pyramid. It is characterized by highly liquid cash and cash types of investment that are used for living expenses and emergencies. This money is typically in checking accounts, saving accounts, and money market funds.

This cash IS NOT PART of your long-term investment allocation, and you should not be overly concerned that your rate of return is low

Questions:
1) I suppose he's saying that this cash equivalent allocation is not counted in Bond allocation or Strategic asset allocation?
2) If so why not?
3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
Cash for living expenses or down payment or a known upcoming large expense is not long-term investment assets. If you have a reserve fund that’s in short-term bond fund or I-bonds or CDs than that’s fine to count as part of your bond location.

Rick Ferri
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Re: Rick Ferri view on Moneymarket

Post by Neus »

Rick Ferri wrote: Wed Aug 10, 2022 10:38 am
Neus wrote: Tue Aug 09, 2022 10:23 pm So I read Rick Ferri's book: All about asset allocation, which is a really recommended book

There's one line that bothers me and later there's no further mention about it
Level one is the base of the pyramid. It is characterized by highly liquid cash and cash types of investment that are used for living expenses and emergencies. This money is typically in checking accounts, saving accounts, and money market funds.

This cash IS NOT PART of your long-term investment allocation, and you should not be overly concerned that your rate of return is low

Questions:
1) I suppose he's saying that this cash equivalent allocation is not counted in Bond allocation or Strategic asset allocation?
2) If so why not?
3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
Cash for living expenses or down payment or a known upcoming large expense is not long-term investment assets.
If you have a reserve fund that’s in short-term bond fund or I-bonds or CDs than that’s fine to count as part of your bond location.
Thank you Rick! This clears it up. My confusion is mainly regarding money market fund, as i think it's very close to short-term bond fund.

Great book, by the way, I think it should be #1 must-read book for bogleheads and mentioned more often in this forum, as it digs deep on emotional turbulence faced by AA that is too aggressive. I wish I read this book much earlier.


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Re: Rick Ferri view on Moneymarket

Post by Neus »

GAAP wrote: Wed Aug 10, 2022 10:25 am
Neus wrote: Tue Aug 09, 2022 10:23 pm So I read Rick Ferri's book: All about asset allocation, which is a really recommended book

There's one line that bothers me and later there's no further mention about it
Level one is the base of the pyramid. It is characterized by highly liquid cash and cash types of investment that are used for living expenses and emergencies. This money is typically in checking accounts, saving accounts, and money market funds.

This cash IS NOT PART of your long-term investment allocation, and you should not be overly concerned that your rate of return is low

Questions:
1) I suppose he's saying that this cash equivalent allocation is not counted in Bond allocation or Strategic asset allocation?
2) If so why not?
3) What negative effect should I expect if I include cash & money market into strategic asset allocation?
The highlighted uses are pretty much by definition not long-term and therefore not part of your long-term allocation. You can hope that the emergency needs never arise, but they are expected to arise at some point.
Good point :thumbsup

Whether or not you want a long-term allocation to cash or cash equivalents is another topic entirely.

How to fund an emergency fund beyond the first month is a third topic.
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Re: Rick Ferri view on Moneymarket

Post by NoRoboGuy »

I mention All About Asset Allocation here, and re-read parts of it quite often. I consider it a primary reference on the subject.
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