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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Re: How to diversify into bonds Date: 1/15/2014 3:35 AM
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EnCoderer,

You wrote, What I'm wondering is if there's any better place to park this cash rather than just as cash? CD ladders could work. Possibly Series-I bonds (Up to the 10k annual cap of course)?

I consider anything that is guaranteed not to lose principal to be cash or a cash-equivalent account. Currently my cash is spread across checking, savings and CD accounts. In the past I've substituted a diversified short-term bond fund - if you do that, add a little more because you can lose a small amount of the principal.

I was seriously considering I-bonds before the market crash - I even started an account with TreasuryDirect - but never bought anything. After that the fixed rate component went to 0%. It looks like we're finally above 0%; but I think I'll give it another pass this quarter.

The problem with I-bonds is that you can't liquidate for the first year. That means you can't really count the holdings as part of your e-funds until that first year is (nearly) up. For most people that could be more important than the $10K/yr purchase cap.

Also, If I really wanted a solid, year long emergency fund, I'd need about $100k in there. That covers our mortgage plus living expenses. At that size, I'd basically be losing 2, 3k a year (on a good year) to inflation.

$100K is pretty hefty for just one year's expenses. I assume you're just counting expenses that are non-discretionary? I live in the Seattle area (not cheap) and my annual expenses including the mortgage are significantly less than half that. Be sure to not count things like savings or investment contributions in that number. Also eliminate expenses that might be optional expenses.

Even if you make a lot in income, one of the advantages of owning things out-right is that you don't have loans that must be paid on even if stuff happens. I'm guessing, but I also suspect a large part of that expense is because you're in that stage of life where you're married and have children. That can be a real drain on assets; but it's still a good idea to reserve appropriately even if your expenses will eventually go down when the kids get out on their own...

Anyway as to the inflationary loss, consider it as a buffer that can be used as a hedge and this is the on-going cost of your hedge. By having cash on hand, you avoid a forced sell when the markets are down - which is the most likely time for you to have a serious emergency. The fund can also be put to use for more than just emergencies. You might consider using part of it for making new investment purchases after the market has tanked. That's when investments are on sale! And only people with cash on hand can make the most of the opportunity.

- Joel
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