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Too Much Cash?

Michael Perry

I’VE SPENT THE PAST seven or eight years lamenting our cash position, both the interest it was earning and the size of it. The former was too little, the latter too much.

Some years ago, we sold an investment property with the idea of buying another somewhere we might potentially retire. But as I noted in a recent article, we’ve never been able to settle on where that would be. We were also constantly thinking we were going to move or be moved away from the Houston area, where my job had deposited us, and that we might want the cash for a house in our new location. Of course, despite repeatedly raising the possibility of a relocation to my higher-ups, this never happened.

The result: Hundreds of thousands of dollars have languished in cash, with me grousing about it—at least until last year, when I retired. But with the volatility in the stock and bond markets that soon followed, this large cash position has probably contributed to the quality of our sleep.

Still, I know high inflation is eating away at it. True, a majority of this money is in a 401(k) stable value fund, which provides higher rates than are available in most other options. Our stock position is now three percentage points off our target, and is politely asking for a rebalance. Add the coming proceeds from the house we just sold, and the voice becomes more insistent: Shouldn’t we be buying stocks?

Well, maybe, except we may still want to purchase a property. We’ve decided to store everything and travel, but for how long? We could tire of living out of suitcases and decide to pick a place from our U.S. short list, or we might pull the trigger on a part of Italy that we like. This might be in a few years, or we might stumble on something in our first few months of travel. If that happens, we’ll be glad to have cash on hand, rather than having to get a mortgage—especially if we settle on a foreign country—or being compelled to sell stocks at a market low.

Not counting the proceeds from this year’s house sale, the cash in our taxable account would cover a few years of living expenses, although exactly how large those expenses will be has become more nebulous, given our lifestyle change. We can approximate them at “more.” Even before considering a potential property purchase, we’ve introduced our own uncertainties, financial and otherwise, into our lives. Where’s our roof? Where are our doctors? How quickly can we be settled somewhere again if care is needed or, alternatively, get to a family member who needs us? An extra margin of safety for a while isn’t an altogether bad thing.

So, as much as my DNA as a (former) longtime accumulator says to buy into the current stock market weakness, I’m not positive it’s the right call for us. It’s not so much concern about the next turns in the market that gives me pause, but the fact that we might need this cash in the near term—and, if we need it soon, it doesn’t belong in the stock market. The good news: We don’t need to create a margin of safety by selling stocks today. We already have it.

What we’ll likely do is move a significant portion of our taxable cash position into Treasury bills, either building a ladder of one-year bills or sticking with three-month Treasurys. These are yielding more than high-yield savings accounts and certificates of deposit, and are liquid, fully guaranteed by the U.S. government and carry little interest rate risk. Yes, it’s possible to lose money if rates continue to rise and we want our money before maturity, but the possible loss seems minimal.

With interest rates rising, we’ll also want to think more about where we hold our cash, so it’ll be accessible yet minimize taxes on the income. Rather than buy the Treasury bills in a taxable account, we may choose to buy a tax-efficient stock fund there, and then offset this with an equal shift from stocks into Treasury bills in an IRA. When we need cash, we can then reverse this maneuver, selling stocks in the taxable account and offsetting that with an equal shift from Treasury bills to stocks within the IRA.

Of course, what’s most likely to happen is we’ll continue to hold what seems like a lot of cash, I’ll continue to bemoan the opportunity cost, and we’ll go another few years before buying anything. Meanwhile, the stock market will head back to new highs. But at least I’ll sleep well.

Michael Perry is a former career Army officer and external affairs executive for a Fortune 100 company. In addition to personal finance and investing, his interests include reading, traveling, being outdoors, strength training and coaching, and cocktails. Check out his earlier articles.

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