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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 79749  
Subject: Re: Strategy comparison S&P500 vs. IUL Date: 4/3/2013 6:13 PM
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If I may, allow me to offer a small suggestion to the question about what amount of cash or "non-risked reserves" to hold. I believe a reasonable and conservative approach is to hold 5 years worth of cash or cash equivalents .... This would represent "risk free" money that could be used to avoid having to sell securities during a severe market

I used to think this was a reasonable idea. But I've recently read some papers & articles that changed my mind.

Don't have a link handy, but the argument goes like this:
* You want to have an asset allocation of, say, 10% cash and 90% equities (stocks, bonds, etc.)
* You do this because want to avoid having to sell stocks when they are down, so you withdraw from cash instead of selling stocks.

* What you are doing when you spend the cash is shifting your asset allocation to HIGHER equity allocation levels. Instead of 10/90 it becomes 5/95.
* If the bear market lasts longer than your cash cushion, then you are 100% equities. You wanted to have no more than 90% stocks because you wanted to feel safe. But yout strategy caused you to move toward 100% stocks -- the exact opposite of your goal.
* AND, when you've used up all of the cash, you now are selling stocks even deeper in the downdraft. Instead of selling some when they were 5% down, you wind up selling when they are 20% down.

They convinced me that this "cash bucket" approach is mostly an illusion, and that it completely fails you just when you need it the most -- in a terrible downdraft.
You have the comfort of feeling safe, right up until the sawblades hit.

** Their conclusion is that it is safest to maintain your chosen asset allocation, even in a down market.
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