What is your trigger point to start spending from cash buffer?? + QE, Does it change the game?

BritishInvestor

GazzaBloom said:

Interesting article here on cash buffers from Abraham Okusanya, creater of the Timeline.app planning software

Cash Buffers, Sustainable Withdrawal and Bear Markets - Timeline app

The article suggest that cash buffers reduce a portfolio's sustainability. His suggestion for the optimum is a "Good cash buffer" portfolio:

• Good Buffer: this portfolio consists of a 60/30/10 in global equity, bond and cash. Withdrawals are only ever taken from cash, which is replenished if the cash allocation drops below 2%. The portfolio is rebalanced if the equity allocation is more than 10% up or down from the original allocation. This approach draws on earlier research (Okusanya, 2018 referenced above) which shows that implementing a cash buffer by reducing ONLY the bond allocation is a more effective strategy. 

Interesting that this was written before this years remarkable drop in bonds and stocks at the same time with bonds not acting as a hedge against the drop this time around.

You mean someone has actually bothered to crunch the data before coming to a conclusion? 

"Interesting that this was written before this years remarkable drop in bonds and stocks at the same time with bonds not acting as a hedge against the drop this time around."

Interesting in the sense that we've had far worse in the 1970s and Abraham would've included this in his analysis?

BritishInvestor

Linton said:

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Define "benefit".  My objective for investing in retirement is to be able to support steady inflation matching expenditure on a comfortable standard of living  and sufficient cash available at perhaps 1 year's notice for major one-off expenditures for the rest of my and my wife's life with minimal excitement, worry and effort.  Inheritance is not a factor. A % return beyond that necessary to achieve the required level of expenditure provides no benefit and therefore does not come into the equation.

What studies do you  suggest to show that something other than my strategy with
 
37% growth equity 
30% equity + bonds+infrastructure income funds
17% Wealth Preservation funds
16% Cash (mainly PBs)

 would better meet my objectives?

What studies do you  suggest to show that something other than my strategy with

"37% growth equity"

If you mean non "value" shares - this isn't something that has historically been optimal

https://www.dimensional.com/us-en/insights/an-exceptional-value-premium


"17% Wealth Preservation funds"

We don't have sufficient historical data so impossible to say (and some would exclude on that basis).

"infrastructure income funds"

Ditto

MacMickster

Sea_Shell said:

coyrls said:

zagfles said:

Linton said:

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Define "benefit".  My objective for investing in retirement is to be able to support steady inflation matching expenditure on a comfortable standard of living  and sufficient cash available at perhaps 1 year's notice for major one-off expenditures for the rest of my and my wife's life with minimal excitement, worry and effort.  Inheritance is not a factor. A % return beyond that necessary to achieve the required level of expenditure provides no benefit and therefore does not come into the equation.

What studies do you  suggest to show that something other than my strategy with
 
37% growth equity 
30% equity + bonds+infrastructure income funds
17% Wealth Preservation funds
16% Cash (mainly PBs)

 would better meet my objectives?

You seem to be missing the point. It's not about what balance of assets you have, or about having ready cash available for "major one-off expenditure". It's about having a variable "cash buffer" as an investment strategy, where the idea is you draw from the cash buffer at times when equities are considered "low" and top up the cash buffer at times equities are considered "high".

This is entirely equivalent to maintaining a constant asset allocation in your main portfolio but having a smaller side portfolio which you switch between equities and cash depending on the state of the market. Of course doing that makes it more obvious that you're trying to time the market...

Exactly, the cash buffer doesn't refer to savings or an emergency fund outside an investment portfolio, it is an asset class within the portfolio but not at a fixed percentage of the portfolio, it is increased and decreased depending on the market.  There is a lack of clarity under what market conditions it should be increased or decreased but the general principle seems to be that the cash buffer is used for income when the market is "down", to prevent selling equities at a "low" price but "down" and "low" are not defined, when the market is "up" equities are sold at a "high" price to replenish the buffer but "up" and "high" are also not defined.

That seems like a very blurred distinction to me.

Our cash is 10% of every bean we currently own, excluding house/car etc.

So is this a cash buffer, savings, emergency pot, or part of our portfolio?

Maybe I've just been using the wrong terminology, as to me it's just cash, available to us, alongside our other funds.

Like you, I don't consider myself to have a "cash buffer" but I do have cash.

Personally, I am spending cash at the moment rather than drawing from my pension or investments as, with the current inflation rates far exceeding interest rates on savings accounts, premium bonds etc then I want to reduce the level of cash that I hold.  This isn't part of some fancy strategy but merely a gut response to the different economic weather that we are currently experiencing.

GazzaBloom

BritishInvestor said:

GazzaBloom said:

Interesting article here on cash buffers from Abraham Okusanya, creater of the Timeline.app planning software

Cash Buffers, Sustainable Withdrawal and Bear Markets - Timeline app

The article suggest that cash buffers reduce a portfolio's sustainability. His suggestion for the optimum is a "Good cash buffer" portfolio:

• Good Buffer: this portfolio consists of a 60/30/10 in global equity, bond and cash. Withdrawals are only ever taken from cash, which is replenished if the cash allocation drops below 2%. The portfolio is rebalanced if the equity allocation is more than 10% up or down from the original allocation. This approach draws on earlier research (Okusanya, 2018 referenced above) which shows that implementing a cash buffer by reducing ONLY the bond allocation is a more effective strategy. 

Interesting that this was written before this years remarkable drop in bonds and stocks at the same time with bonds not acting as a hedge against the drop this time around.

You mean someone has actually bothered to crunch the data before coming to a conclusion? 

"Interesting that this was written before this years remarkable drop in bonds and stocks at the same time with bonds not acting as a hedge against the drop this time around."

Interesting in the sense that we've had far worse in the 1970s and Abraham would've included this in his analysis?

Yes he would have included 70s data, you are right! 

The analysis is for a 60/30/10 portfolio. I would like to see the same analysis for a 80/20 stocks/cash portfolio, see how that fares.

Linton

BritishInvestor said:

Linton said:

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Define "benefit".  My objective for investing in retirement is to be able to support steady inflation matching expenditure on a comfortable standard of living  and sufficient cash available at perhaps 1 year's notice for major one-off expenditures for the rest of my and my wife's life with minimal excitement, worry and effort.  Inheritance is not a factor. A % return beyond that necessary to achieve the required level of expenditure provides no benefit and therefore does not come into the equation.

What studies do you  suggest to show that something other than my strategy with
 
37% growth equity 
30% equity + bonds+infrastructure income funds
17% Wealth Preservation funds
16% Cash (mainly PBs)

 would better meet my objectives?

1)What studies do you  suggest to show that something other than my strategy with

"37% growth equity"

2) If you mean non "value" shares - this isn't something that has historically been optimal

https://www.dimensional.com/us-en/insights/an-exceptional-value-premium


"17% Wealth Preservation funds"

We don't have sufficient historical data so impossible to say (and some would exclude on that basis).

4) "infrastructure income funds"

Ditto

1) I dont say that 37% is optimal whatever optimal may mean.  I say I expect it to meet my objectives.  It actually comes about by allocating money to cash, WP and Income funds and the growth portfolio gets the rest, subject to being likely to be sufficient to meet objectives.  The % Income allocation is determined by the amount of dividend/interest income I want to receive. Cash is sufficient to cover at least 5 years total expenditure not covered by guaranteed income.  WP funds provide inflation adjusted cover for a further 5 years at least.  This ensures that the growth portfolio can focus on the long term without any need for bond ballast.

2) "Growth equity" is intended to signify that long term above inflation growth is the objective.  The allocations to countries, company size, sector and growth vs value is a second level decision. I am sympathetic to the arguments for value shares but over the past 10 years finding appropriate funds has not been too easy.  Recent events have shown that I need to try harder.

3) My research shows that funds like CGT have met their stated objective of medium term wealth preservation possibly for decades and I am happy to trust fund managers whose objectives match mine and whose asset allocations look appropriate.

4)  Infrastructure income funds are generally value oriented with guaranteed incomes rather different to bonds and general equity.   So they provide some income diversification.  My aim for Income is to get it from as many different sources as possible.

coyrls

Audaxer said:

Sea_Shell said:

coyrls said:

zagfles said:

Linton said:

coyrls said:

I don't think it's bad or stupid but I think the benefits are psychological, I don't know of any studies that have demonstrated any benefit in holding a cash buffer.

Define "benefit".  My objective for investing in retirement is to be able to support steady inflation matching expenditure on a comfortable standard of living  and sufficient cash available at perhaps 1 year's notice for major one-off expenditures for the rest of my and my wife's life with minimal excitement, worry and effort.  Inheritance is not a factor. A % return beyond that necessary to achieve the required level of expenditure provides no benefit and therefore does not come into the equation.

What studies do you  suggest to show that something other than my strategy with
 
37% growth equity 
30% equity + bonds+infrastructure income funds
17% Wealth Preservation funds
16% Cash (mainly PBs)

 would better meet my objectives?

You seem to be missing the point. It's not about what balance of assets you have, or about having ready cash available for "major one-off expenditure". It's about having a variable "cash buffer" as an investment strategy, where the idea is you draw from the cash buffer at times when equities are considered "low" and top up the cash buffer at times equities are considered "high".

This is entirely equivalent to maintaining a constant asset allocation in your main portfolio but having a smaller side portfolio which you switch between equities and cash depending on the state of the market. Of course doing that makes it more obvious that you're trying to time the market...

Exactly, the cash buffer doesn't refer to savings or an emergency fund outside an investment portfolio, it is an asset class within the portfolio but not at a fixed percentage of the portfolio, it is increased and decreased depending on the market.  There is a lack of clarity under what market conditions it should be increased or decreased but the general principle seems to be that the cash buffer is used for income when the market is "down", to prevent selling equities at a "low" price but "down" and "low" are not defined, when the market is "up" equities are sold at a "high" price to replenish the buffer but "up" and "high" are also not defined.

That seems like a very blurred distinction to me.

Our cash is 10% of every bean we currently own, excluding house/car etc.

So is this a cash buffer, savings, emergency pot, or part of our portfolio?

Maybe I've just been using the wrong terminology, as to me it's just cash, available to us, alongside our other funds.

Whereas someone needing to drawdown say 4% or more from their investments without a cash buffer, could be in trouble if there was a poor sequence of returns early on. I certainly wouldn't feel comfortable if I needed to drawdown 4% each year without having a cash buffer.

That's really my point.  If you are withdrawing at above a sustainable withdrawal rate, there is no evidence that a cash buffer will increase your chances of success, in fact, it is likely to reduce the chances of success.

GazzaBloom

Whereas someone needing to drawdown say 4% or more from their investments without a cash buffer, could be in trouble if there was a poor sequence of returns early on. I certainly wouldn't feel comfortable if I needed to drawdown 4% each year without having a cash buffer.

That's really my point.  If you are withdrawing at above a sustainable withdrawal rate, there is no evidence that a cash buffer will increase your chances of success, in fact, it is likely to reduce the chances of success.

Exactly, having a cash buffer is like saying "I don't believe that the Safe Withdrawal Rate I have set is actually Safe!

The concept of the SWR, if set correctly should negate the need for a cash buffer. Cash buffers are really a soother to calm the nerves during market downturns, but in the cold light of day they only serve to detract from portfolio performance and longevity.

Sea_Shell

GazzaBloom said:

Whereas someone needing to drawdown say 4% or more from their investments without a cash buffer, could be in trouble if there was a poor sequence of returns early on. I certainly wouldn't feel comfortable if I needed to drawdown 4% each year without having a cash buffer.

That's really my point.  If you are withdrawing at above a sustainable withdrawal rate, there is no evidence that a cash buffer will increase your chances of success, in fact, it is likely to reduce the chances of success.

Exactly, having a cash buffer is like saying "I don't believe that the Safe Withdrawal Rate I have set is actually Safe!

The concept of the SWR, if set correctly should negate the need for a cash buffer. Cash buffers are really a soother to calm the nerves during market downturns, but in the cold light of day they only serve to detract from portfolio performance and longevity.

I shall crunch some numbers excluding our cash altogether and see where we're at, at month end.

Linton

GazzaBloom said:

Whereas someone needing to drawdown say 4% or more from their investments without a cash buffer, could be in trouble if there was a poor sequence of returns early on. I certainly wouldn't feel comfortable if I needed to drawdown 4% each year without having a cash buffer.

That's really my point.  If you are withdrawing at above a sustainable withdrawal rate, there is no evidence that a cash buffer will increase your chances of success, in fact, it is likely to reduce the chances of success.

Exactly, having a cash buffer is like saying "I don't believe that the Safe Withdrawal Rate I have set is actually Safe!

The concept of the SWR, if set correctly should negate the need for a cash buffer. Cash buffers are really a soother to calm the nerves during market downturns, but in the cold light of day they only serve to detract from portfolio performance and longevity.

If you want to calculate an SWR include the cash buffer as part of the bond allocation.   The issue is about how you manage your retirement pot, not its size.  ISTM that one can make a much better use of the default  40% of a 60/40 allocation than simply put it into bonds.  My equity allocation is about 55% at the moment but I hold almost no bonds of the type that you would find in a VLS fund.  

As regards the safety of an  SWR would you really put a blindfold on when your 100% investment in VLS60 drops by 40% and say "what's the problem, I am within my SWR"?  

coyrls

If cash is part of the 40 of a 60:40 portfolio, it will be subject to defined rebalancing rules.  With a cash buffer there doesn't seem to be any defined rules as to when it should be drawn from and when it should be increased, other than when the market is "down" and when the market is "up".