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My portfolio is about as eventful as it gets right now — I’m on the verge of a threshold rebalance. My Vanguard Developed Asia Pacific fund is flirting with my 15% rebalance trigger, sitting at -14% as of Friday evening.
What makes this one interesting is that I’m sitting on an unusually large cash balance in my money market fund. Right now it’s actually my star performer — the only holding in the green. Bonds are a close second, barely 1.5% off their peak. So I have a genuine choice: do I use cash or bonds to rebalance back to target?
Here’s where it gets a bit murky though. That cash isn’t really part of my portfolio in any meaningful sense — it’s proceeds from a business sale, and it was never factored in when my retirement portfolio was stress tested before I retired. It sits outside the plan entirely, essentially surplus money beyond what I need. Which raises the question of whether it should even be in the rebalancing conversation at all.
The Asia Pacific and bond funds are both in tax-advantaged accounts, so no capital gains headaches there. The money market fund is after-tax, but selling from it won’t affect my tax situation either way. No gotchas on that front.
This is new territory for me — I’ve never had a cash position like this before, and the fact that it technically lives outside my retirement plan makes the decision less obvious than it first appears. Curious what others think: cash or bonds for the rebalance?
Isn’t the cash losing value to inflation? I’d use some of the cash to buy a total stock market index fund.
My money market fund is giving me 1.25% above inflation at the moment…I’m happy beating inflation with zero risk.
It depends on what you call cash. If you consider money market funds and US T-bills cash, then you can beat inflation by about ~ 1% point right now (assuming you are in a relatively low tax bracket).
I think much of the answer depends on why you were holding the cash outside your portfolio in the first place. Has that reason changed at all? If so, maybe invest some of it. If not, then maybe rebalance from bonds.
That’s the rub. The business sale cash is genuinely surplus to my needs. A year into retirement, I haven’t formed any strong opinions on what to do with it — and the possibilities really are endless: buy property for the kids, put it to work in the markets, keep it as a substantial buffer. My portfolio is already my “enough.” The sale proceeds are a welcome elephant in the room, sitting in the kitchen, impossible to ignore, but not causing any trouble, and at the moment, increasing in value ahead of inflation.
When in doubt, split it down the middle, 50% in, 50% out.
Based on what you’ve said so far, the only question I would ask is: if you use the cash to make the purchase, would that cash used then be considered part of your retirement portfolio?
It sounds like you have two “buckets” so to speak, a tax advantaged retirement portfolio bucket, and a pile of cash bucket whose use is still undetermined. So, by using the cash to buy the international fund it seems that you might be combining the buckets and thus starting to manage both buckets as a single portfolio. That’s very doable, but I’d suggest putting some thought into how that will play out. For example, if the international fund rebounds and gains to the point you need to sell some of it, selling it outside of the retirement account might create tax problems.
Thanks for your thoughts— I can’t move money market cash directly into the tax advantaged bucket, so the alternative would be running a virtual portion of the retirement portfolio by shifting some of the money market into Asia Pacific on the after-tax side. In theory, if Asia Pacific recovered I could then rebalance within the tax advantaged account to keep the tax implications clean.
But honestly, even typing that out made me realise how convoluted it is. Decision made — I’m keeping it simple and rebalancing with bonds inside the tax advantaged bucket where it belongs. Sometimes you just need someone to help you think it through out loud. Appreciate the viewpoint reset.
Then it sounds like you could go either way and it doesn’t matter much.
This reminds me of a contributor we haven’t heard much from lately wrote an article about aiming to be “half wrong.” (Maybe it was John Yeigh.) Applying it to your case, given whatever amount you need to put into Asia PAC, take half from your bond allocation and half from your side cash. You can only be half wrong and you can stop thinking about it.
Yes, it was John’s first article. It’s worth a second reading.
https://humbledollar.com/2019/01/half-wrong/
Yes it is. Thanks for looking it up.
Thanks Edmund!
I think it was Adam Grossman’s who wrote an article about bout that, or it may have been to make little changes then see how you feel after you have taken the plunge.
Also sensible advice.
David, you may be referring to this article.
Looks like I’m the self-appointed HD reference desk today (:
You’re doing good work Ed. Hope you stay on the job.
It says something that such a simple idea, being only half wrong, is completely new to me! Humble Dollar really is a fantastic resource. I’m going to put that principle into practice, though I’m keeping my fingers crossed that I never hit the 15% threshold that would trigger a rebalance.
That’s a nice “problem” to have. We had a chunk of cash from the sale of our previous home, even after putting a solid down payment on our new place and keeping some money aside to furnish and decorate it. It mostly sat in high-yield savings accounts until we figured out what we wanted to do with it—and we just recently found it, which will be a topic for a post soon. From my experience, there’s nothing wrong with waiting to do anything with it until the time is right for you.
Totally agree with you: absolutely nothing wrong with good ol’ cash if you can keep pace with inflation. I’m happy to learn you’ve got a future post lined up, I enjoy your writing.
Thanks, Mark!
I’m in total agreement with both of those sentences!
Thanks, Dan!