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Pixy & intercst:

I will complicate matters by disagreeing/diverging from both of you; not in principle, but in practice.

Further, let's limit ourselves to the retirement issue where I agree that the retiree needs a 3/5/7 year source of "non-volatile" funds; presumably so that the retiree will not need to sell stock securities at inopportune moments.

Most preaching on the above axiom invariably says: "cash, cash & cash". It is here that I disagree in that I believe that there are a variety of different places to go to in order to solve this need:

1. REITs
2. Annuities
3. Investment Grade bonds
4. Cash flow real estate
5. Debt

What I am suggesting is that generally, retirees or anyone else who invests in the stock market (either directly or indirectly) will likely arrive with a portfolio that has an approximate beta of 1.0; unless that investor intentionally works very hard at devising a stock portfolio that is materially different in its beta. It is this beta that we are trying to avoid by holding "5 years of cash" because cash has a beta of 0.0.

However, cash has traditionally crappy returns. So I suggest that other categories be used as a replacement for cash as each have much higher returns but have similar beta's to cash.

As an example compare the SP500 to a REIT to cash. SP500 has traditional returns of 11% per annum and a beta of 1.0; a REIT has traditional returns around 8% with a beta of .2 versus cash which has a traditonal return around 4% to 6% with a beta of 0.0. Why sacrifice 2% to 4% to achieve a .2 reduction in beta?

Intuitively (but I can't figure out how to prove it mathematically) it seems to me that the retiree should really have a protfolio that is:

1. 6 months of cash
2. 54 mohths of low beta investments
3. The balance in common equities.

Personally, I take the most risky of all positions by remaining 100% invested in common equities; but for incidental cash positions; backed up by the ability to borrow up to 5 years of typical living needs.


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