This question was posed by Richard L Rogers DDS
President- Maryland State Dental Association
I understand the % allocation to be invested in the market is a personal decision. At age 58, I have decided to become a DYI and am looking to be 62% invested and 38% ‘cash’. The question is, what to do with the cash position? Money Market or do you consider bonds or CD’s an alternative to this cash position? I am thinking it is a question about liquidity and having the ability to balance the portfolio during cycles but would like a clear opinion.
Monday Morning Millionaire Program Answer
Congratulations on becoming a DIY investor and on having your asset allocation in place! *
In the present environment, bonds are not a good place for your money. We are just coming off the lowest interest rates in history and as interest rates rise bond values drop. CD’s also are not a good place for your money because you need to hold them to maturity or pay a penalty for early withdrawal. As you say, liquidity is the issue. So, the money market is a good place to “keep your powder dry” even with the pitiful 0.4% annual return.
Markets fluctuate and revert to the mean. In rising markets, cash is trash. In dropping markets, cash is king. Renowned dentist L.D. Pankey, a graduate of the Benjamin Graham, Columbia University program which warren Buffett praises, was a highly effective investor. He recommended that investors keep half of their portfolio in cash. When the market drops 10%, he recommended that they use a third of that cash to buy stock bargains. Today, that would be a US market index ETF. The best three exchange traded funds (ETF’s) to track the S&P 500 are the S&P 500 ETF (symbol SPY), Vanguard S&P 500 (symbol VOO) and the iShares S&P 500 (symbol IVV).
History shows that 10 percent drops happen twice within three years. We just had one this February our core portfolio did well when the market rebounded. Follow this link to read an excellent article describing a variation on this subject.
The chart below shows the result of that approach is this February.
*Faber, Meb, A Quantitative Approach to Tactical Asset Allocation (February 1, 2013). The Journal of Wealth Management, Spring 2007. Available at SSRN: https://ssrn.com/abstract=962461
Our core portfolio, 4% annual growth line, the S&P 500, the TSX in US dollars