HERE AT HUMBLEDOLLAR and in many other places, this point has been made: The best investment portfolio isn’t the one that’s theoretically or empirically superior. Rather, it’s the one that lets you sleep at night.
What I’ve found, as far as my portfolio goes, is that the necessary prerequisite for a good night’s sleep is one thing above all else: an oversized cash reserve. By that, I mean a cash hoard that can handle not only the most likely contingencies, but also unexpected ones—and then some. I typically keep enough cash to finance our normal expenditures for at least six years. In fact, with the current bubbly stock market, I’m above that level. To back that up, I also have a decent allocation to bond funds, consisting mostly of an intermediate-term municipal fund in a taxable account and total bond market index funds in retirement accounts.
Back in 2017, author William Bernstein was quoted in HumbleDollar saying, “When you’ve won the game, stop playing with money you really need.” That insight struck a chord with me, and it’s one of the reasons I’ve come to value cash. I’m less interested in getting richer and more interested in guaranteeing that the modest lifestyle that has served my wife and me so well can be maintained for as long as we remain on this planet, regardless of any curveballs thrown our way.
The importance of a good-sized cash reserve was brought home to me over my many years as a criminal defense lawyer. While my early days often involved more dramatic and serious cases, later on my bread-and-butter business was representing basically good, decent people who (or whose kids) made a mistake or two: driving while intoxicated, drug possession and various other weaknesses of the “there but for the grace of God go I” type.
What constantly amazed me was how many of these seemingly middle-class folks, at a time of real urgency, struggled to come up with even a modest down payment for my services. For most garden variety misdemeanors, I had long believed it was reasonable to ask for a $1,000 retainer, with a payment plan for any remaining balance that stretched over several months.
But I was surprised time and again by how many potential clients found it difficult or impossible to come up with even that modest lump sum. I ultimately took a tip from a good friend and colleague, and lowered my retainer to $500, compensated for by a slightly longer payment plan. I was rewarded with a significant increase in new clients.
Of course, my healthy allocation to cash was a lot easier to justify not so long ago when it could garner upward of 2% in interest. Several years ago, dinosaur that I am, I became comfortable opening online savings accounts. I guess my resentment at the infinitesimal interest offered by our brick-and-mortar bank finally got to me, and I decided to explore the wonderful world of online banking. We now have a handful of online savings accounts, along with some no-penalty certificates of deposit, and they’ve proven to be easy to manage. The online transfer process works smoothly. I simply have to do enough planning to request the funds needed a few days in advance and—presto—the money lands in my local checking account ready to be deployed.
Nowadays, even at online banks, you’re lucky to get 0.5% interest. That hurts. But it’s still a multiple of what my local bank pays. If it ever goes below zero, as has happened in some European countries, I’ll have to rethink all of this, as that’s a concept my simple mind just can’t comprehend. But until then, I will stay the course.
So, yes, I’m overweight plain old, boring, nonproductive cash. But you know what? I sleep very well.
Andrew Forsythe retired in 2017 after almost four decades practicing criminal law in Austin, Texas, first as a prosecutor and then as a defense attorney. His wife Rosalinda and he, along with their dogs, live outside Austin, at the edge of the Texas Hill Country. Their four kids are now grown, independent and successful. They’re also blessed with four beautiful grandkids. Andrew loves dogs, and enjoys collecting pocketknives and flashlights. Check out his earlier articles.
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I have shared your article with many. You put into words what I have been thinking since I read Bernstein’s book. Now retired (76) and spending down!
You did not mention as part of your safe money was a SPIA. Is that because you have a enough safe cash investment to last 25 or more years? Thanks
Paul, thanks for your comments. As for a SPIA (Single Premium Immediate Annuity), I haven’t seriously considered them, at least not yet. I think we have enough saved to finance a long retirement and leave some to our kids, and, frankly, I have a hard time accepting the idea of turning loose a big chunk of principal. And, being a natural worrier, I’d probably fret some at even the remote chance that the insurance co. would go belly up!
At age 72, I agree with the idea of holding more cash and cash equivalents, although at the moment, I favor short term bond funds over anything longer term due to the interest rate risk. It took 50+ years to accumulate what we have and at this point in my life, security takes precedence over risk. It took me too long to earn what we have to risk losing a big chunk of it by being too aggressive. That said, we’re still roughly 55/45. On the other hand, our son is about 70/30, but he also has many years to recover from a significant downturn. As one commentator noted, what helps you sleep at night is entirely subjective – but it also helps if you have enough saved to begin with!
What helps a person sleep at night is entirely subjective. An oversized cash reserve doesn’t help me sleep at night. In fact it would decrease my sleep quality. When I was younger and had less money it was confidence in the plan I was following, and I was constantly evaluating it to make sure it was warranted. Now what makes me sleep is continuing that and an oversized pile of liquid assets that makes getting cash quick and easy. If all hell broke loose and cash was inaccessible, I have a plan for that too, but it doesn’t involve an oversized cash reserve.
Series I Savings Bonds are a great option for long-term cash reserves. They pay a rate that adjusts every 6 months to match the inflation rate, so the real value of your savings doesn’t decline over time. The rate can’t dip below zero (protecting against deflation). There are tax benefits too. The downside is that there are annual purchase limits, so you have to build up your holdings over several years.
I am thankful that books by Jonathan and others helped me force myself out of my comfort zone when I was younger and wish I had read them many years ago. However, now that I’m retired, Bernstein’s quote has become my mantra.
Thanks for all the kind comments, folks. David, I look forward to your upcoming story. And Rick, you truly did right by your family members.
Thank you for your kindhearted look at people who did not have the $1000 retainer. I do believe you sleep well – you have no serious wrinkle lines in your cheerful cheeks in that photo of you!
Spot on, Andrew. Nice piece. Cash is the fuel for uninterrupted compounding as well as a good night’s sleep. You may enjoy (or be horrified by) the story I’m sharing in my next post. Should run in a couple weeks or so.
I agree with every letter Mr. Forsythe has written in this column. I chuckle at those who give me the boring old “cash is trash” line and all the rest. I have enjoyed “winning the game” and am perfectly happy to forgo possible future gains (and losses) on any supposed excess cash I hold.
SMART…comfort is in the eyes of the beholder.
Nice article Andrew. When my wife and I were managing her Mother and her Aunt’s finances, we targeted 5 years of cash, net of pension and Social Security. We then felt comfortable investing the remainder of their portfolio in quality, low cost index funds. They easily survived the 2008 crash, and benefitted from the market recovery, and both died with a larger estate than when they retired. That experience will guide how my wife and I fund our retirement.