Several years ago, regular reader and guest author Vagabond MD wowed us with the fact that he happily sat on a half a million dollars in cash.
Well, he didn’t literally sit on that much cash, nor did he keep it under his mattress as he hyperbolically claimed, but he did indeed have that much money invested in cash equivalents.
I checked in with the good doctor for an update at a time when holding cash was looking rather brilliant as the stock market had (at the time) given up over 30% of its value in a matter of weeks. Was he still figuratively sitting on a $500,000 pile of greenbacks?
Nope. One million dollars now.
I’ll let him tell you why in this followup piece, followed below by the original post that generated a great deal of conversation the first time around.
Sitting on One Million Dollars in Cash
It has been over three years since I guest posted the Top 5 Reasons This Physician Hold $500,00 in Cash. There were 110 comments and responses to the post, and when PoF features it on his Twitter feed, there is usually a response or two.
Despite that a large cash position is an anathema to many in the personal finance blogosphere, quite a few respondents outed themselves in the comments for also having large cash positions, or at least believing in it.
I am going to double down on the idea. Literally. As of today, I have $1,048,000 in cash – in CDs, high yield savings accounts, and money markets – all in taxable accounts.
[Once again, my wife would have me add that there is very little money in the house, a few hundred bucks and some Euros, probably less than when I wrote about cash last time.]
Why the Large Cash Position?
To review, my reasoning for holding so much cash summarized in the previous blog post including the following:
- Recessions happen
- Fear of locking in losses
- Why Play a Game You’ve Already Won?
- Interest Rates Are on the Rise
- Following a Three Bucket Strategy
Most of this reasoning holds true for me today. Has anyone noticed a recession lately? Of course, and this one has affected physicians significantly more than the previous two. In 2008, in the teeth of the Great Recession, I had my highest earning year ever as a physician; in 2020, I am furloughed and have no work income. It’s nice to have a substantial cash cushion so that an absence of professional income will not affect my lifestyle anytime soon.
The “game” was largely won in 2017, when I wrote about holding a lot of cash. We had hit our number and had enough to retire. Since then, from March, 2017 to May, 2020, our nest egg (net worth excluding home value) has increased over 30%.
Our margin of victory has continued to expand despite our growing cash position. Note that the cash position comprises 10-15% of our nest egg. Otherwise, our investment portfolio is approximately 60:40 (stocks:bonds).
As for interest rates, they did indeed rise, and then they fell again, and this turns out not to be much of a factor. Currently, bond rates are extremely low, the lowest in decades, and locking in those rates seems even less advantageous.
And I still have the bucket strategy (or bond tent) mindset, having set aside 5+ years of living expenses in safe, liquid assets. Who knows if or when I will return to work? My wife is still working, and we are continuing to add to the nest egg in her 401k plan and in our taxable accounts.
What Has Changed?
What else has changed since 2017? We are both three years closer to retirement, and I might be retired very soon, and not exactly on the timetable I anticipated. We have learned that my wife’s corporate job, the one with the pension and retiree health coverage, is also more stable than my doctor job and should be the one we hold onto longer, all things being equal.
We considered a partial move requiring a second home purchase and carrying two houses for a period of time, but this idea has been shelved. We have recalculated our annual living expenses upward, especially with both children in college (hopefully!) this fall.
One problem with the large cash position is how and where to hold it. FDIC protection becomes a consideration, and while our joint marital trust is excellent for asset protection, it limits where the cash can go. Ally (“high yield” savings interest rate – 1.15% as of June 2020) accepts trust accounts, but Marcus (1.05% in June 2020) does not.
Vanguard accepts trusts and unlimited cash into their money market funds, but the yields are currently very low (under 0.5% on the municipal and treasury money market funds). We had a 4 year CD at our local bank at 1.76% which matured this spring, and the renewal rate offered was 0.65%.
Cash is (Still) Not Trash!
A sizable cash position still has some value. Yes, maybe it looks dumb to some, holding a lot of cash…until you really need it! Like stocks, bonds, real estate, and perhaps alternatives, cash has a place in your portfolio, at the very least for emergencies, maybe for investing opportunities, for shocks in the economy, and to smooth the financial transition into retirement.
When you do not need or want to take risk, it has a way of piling up, especially if you are still working and not spending or investing all money that is inbound. For some, like myself, it reduces the worry of what happens next. And you now know who can afford to buy the first round at the next WCICon.
Top 5 Reasons I Kept a Half Million Dollars Under My Mattress*
[* my wife asked me to add here that we really do not keep any money under the mattress. None at all. Really.]
It is personal finance dogma to maintain a liquid (i.e. cash) emergency fund which would be expected to cover three to six months of living expenses in the event of job loss, illness, or other personal or financial catastrophe.
While this is considered by many to be the first thing that you do in your financial plan, before contributing to 401(k) accounts or 529 plans, many are woefully unprepared for what life throws at us on a fairly regular basis . A well-publicized 2016 survey revealed that the majority of people could not manage a $500 surprise car repair without going into debt, let alone being let go from work.
On the other hand, there are many in the personal finance blogosphere who scoff at the idea of a 3-6 month cash cushion. There are other alternatives to resorting to idle cash, including tapping your home equity line of credit, selling investments from a taxable account, and invading the Roth IRA.
Why leave three to six months of expenses, thousands of dollars, in a lowly savings account (currently yielding 1% or less) when you can have the money at work in the stock market, in real estate, in your business, or somewhere else (anywhere else) where the expected returns are much greater? I am going to tell you why.
But first, i would like to dispel some of the hyperbole in the title. My current cash cushion is not $500,000, but, as I demonstrated to my wife last week, it is $475,000, which I would expect to cover 5 years of living expenses in the event of a sudden, unexpected dual job loss. Second, not all of the money is in savings account or in one bank, but it is distributed in two online banks, one local bank, and two brokerage accounts, in checking, savings, and money market accounts and in CDs. (If you add in the very liquid savings bond position, the total would be north of the $500k.)
On to the reasoning…
1. Recessions happen
We have lived through two major recessions in our professional lives, 2000-2002 and 2007-2008. In both cases, we had countless friends in “good, stable jobs” that lost these “good, stable jobs” and witnessed the financial and personal carnage that this wrought upon them.
Like my CPA friend who was previously a Comptroller for a Fortune 500 Company who, after a seven year period of unemployment beginning in 2008, now does part time bookkeeping for a solo law practice.
Or my IT friend, an executive in an international financial firm who was forced to train Indian software engineers to replace him as his US-based job was eliminated and moved abroad after the tech meltdown. Neither of these guys saw it coming. I do not see it coming either, and I do not generally do well with carnage— it’s not in my DNA.
2. Fear of Locking in Losses
It is very likely that when there is another financial upheaval, some of the other assets that you own will lose their value and or their liquidity. It happened in the early 00’s and again in the late 00’s.
Do you really want to be forced to tap your Roth IRA when the S&P 500 fund in it is down 50%? Or sell your house or investment property when no one can get a mortgage loan to buy it? Both are great ways to lock in a loss.
3. Why Play a Game You’ve Already Won?
William Bernstein, the esteemed neurologist and author, said in his book, The Ages of the Investor: A Critical Look at Life-cycle Investing, “When you’ve won the game, why keep playing it?”
The gist is that if you have enough saved to live in retirement, reduce the risk you take with your portfolio, especially later in life and as you approach retirement. In personal finance parlances we often talk about “The Number”—how much of a nest egg you need to call it quits on the day job.
Is it a big number pulled from the sky like $1 Million, $5 million, $10 million or $100 million? Is it a multiple of annual living expenses like 25x in the Trinity study or a more conservative and ambitious 33x? “The Number” is a rather elusive concept, but even while we are working, we are presently a bit north of our Number, by about, say, $500,000. Having a large cash position pays homage to Dr. Bernstein’s concept by taking some chips off the table.
4. Interest Rates Are on the Rise
Interest rates are likely rising in the next few years, after a prolonged period at historic lows. Janet Yellin largely promised this in December. As interest rates go up, the value of your bond holdings will decrease. In this environment, is it really crazy to have a chunk of your fixed income allocation where there is no interest rate risk, in a savings account?
5. Following a Three Bucket Strategy
My wife and I are in our early 50’s, working full time in demanding medical and legal positions. I plan to cut back to part time later this year, and we both expect to be retired from our current professional jobs in three years. The $500,000 cash position transitions nicely to the cash bucket of a Three Bucket Strategy.
If our equity investments continue to increase in value in the next few years, we are on track. If the stock market takes a dive between now and then, we are still on track. Either way, we hope to spend our retirement alternatively working as tour guides in Florence, Italy and Yellowstone National Park.
Cash is Not Trash!
In fact, cash is still accepted in many places for good and services. In one’s personal finance portfolio, I prefer not to think of it as an anchor holding back returns but the lifeboat that might save you when the boat hits the iceberg. Or maybe the dinghy that takes you ashore when you are tired of sailing.
It is flexible, it gives you options, and it is there when you need it. Earlier in my career, even when my human capital was near its peak, I preferred to have an out-sized cash position and over time, with more life experience and a professional career in the bottom of the eighth inning, I value it even more.
[PoF: Today’s guest post is a good example of personal finance being personal. I wouldn’t choose to hold so much cash, citing math as the principal reason. VagabondMD has his reasons, which are largely based on risk tolerance and the ability to sleep well at night.
There is no right answer, but each of us can have a best answer as it applies to our personal situation.
The question of bonds and rising interest rates is an interesting one. The resale value of an individual bond will fall when the interest rate rises, but what happens to bond funds isn’t entirely predictable. When some bonds reach maturity, they are replaced with new bonds at the new, higher interest rate. If you’re interested, Schwab has explored a number of periods of rising interest rates and the effects on various bond funds. Hint: we should be OK.
Personally, I keep a miniscule cash cushion of one to three months’ expenses, or less than 4% of VagabondMD’s $500,000. I like to put my money to work, but that’s just me.]
How large is your cash position? How did you settle on that amount? Is there any reason you would increase or decrease how much cash you’re holding?