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Having cash in hand is a good thing. Whether it’s for an emergency fund or money you’re saving up for something short-term like a car, having money at your disposal is a good thing.
But there’s a limit to that goodness and having too much cash in hand can absolutely be a problem. When you have money sitting in the bank, it’s earning a little bit of interest (a real little bit in this day and age!). However, that interest usually isn’t going to be keeping up with inflation and time will slowly erode the value of each of your saved dollars.
Therein, lies the problem. While it’s good to have some cash in hand that’s sitting on the sidelines ready to go when needed, too much is a bad thing.
And that’s where we’re at right now.
Due to a few changes we’ve made over the past few months, we’re now sitting on a fair amount of money… a little more than $182,000.
That number doesn’t even count the bond fund ETFs we have in place for our bucket strategy because each of those serves a purpose. Each fund represents about a year’s worth of living expenses that we withdraw each year to live off of. We keep 4-5 years of these in place and when one matures, I buy another one for the ladder for 4-5 years out. I talk about this more in my post, The Drawdown on Investments – Our Game Plan.
Instead, I’m referring to money just sitting without a job to do. $182k just sitting on its butt doing nothing… that’s a problem I need to rectify!
As a reminder, I’m not a financial advisor and I’m only discussing my thoughts regarding my personal situation. Don’t consider this advice of any kind and please contact a professional before making any financial decisions you don’t fully understand.
Where did all this cash in hand come from anyway?
There were three events that gave us more cash than we’re used to holding onto:
- A CD maturing
- Rebalancing our portfolio
- Selling our last investment property
A CD maturing
Last year around this time, interest rates continued to drop more and more. While that’s great for getting loans, that’s not a good thing for savers so I decided to wring a little bit more out of our savings.
Since we had a general idea of our spending, I took $15k of our spending money for the year and put it into a CD. That was a good move on one hand since we were able to get a little more money than we would have if we had just left it in our Ally savings account. The savings interest rates have continued to drop even more since I had locked in.
It wasn’t all fun and games though. It turned out to be a slight problem because we were barely able to make it through 2020 on the money we had leftover in our spending money account. I don’t think we anticipated a pandemic and that threw off our annual spending (especially because we spent ~$12k on a 2012 Honda Pilot for a random road trip).
Regardless, it all worked out fine for the year and the bonus is that we now just received the money from our CD maturing. So that’s an extra $15,000 plus interest sitting in our savings account ready to get back to work!
Rebalancing our portfolio
We’re careful in not trying to time the market because that’s generally just going to be a recipe for disaster. However, I have no problems with rebalancing our portfolio and that’s something we’ve started doing a couple of times a year.
Essentially, this allows us to get our desired asset allocations back in check. In our case, I’ve been trying to keep our portfolio around the 70% mark for stocks. So if the market is hot, that percentage grows and I need to trim it down and sell some stocks. If the market’s doing bad, my holdings percentage drops so I need to buy more to get it back to where I want it.
Not only does that help keep my risk levels where I want them (which is the main point), but it also somewhat helps in forcing me to buy low and sell high. It’s a beautiful thing!
If the topic of rebalancing seems foreign to you, I’d encourage you to check out the post Selecting your asset allocation from JL Collins’ incredible Stock Series. And if you really want to be on the right track, he’s got a best-selling book which I consider to be one of the greatest investing books ever… The Simple Path to Wealth. This might be the best investment you’ll ever make!
As I discuss in my post, Portfolio Rebalancing: Get Your Asset Allocation in Line, my goal is to rebalance our portfolio twice a year. However, 2020 was no ordinary year and I ended up rebalancing a couple more times than I anticipated. That let me buy during a major drop and sell during a nice high point.
Between the invaluable and free Empower (formerly Personal Capital) tool and my rebalancing spreadsheet, I was able to quickly get my numbers where I wanted them. If you want to be able to have better control over your investments, Empower (formerly Personal Capital) is an awesome management tool… and it’s free! Here’s a screenshot from Empower (formerly Personal Capital) on where we stand in our investment accounts right now:
Simplicity… I love it!
This might also be a good time to encourage you to get on my mailing list. I’ll send you a few cool tools including the Portfolio Rebalancing Spreadsheet I created (and use myself) to help determine the adjustments to be made when rebalancing my asset allocation. Sign up right here…
No spam. One email a week. Unsubscribe anytime.
Wow, I’m just full of some great recommendations today! Between The Simple Path to Wealth, signing up for Empower (formerly Personal Capital), and getting on my email list, your savings and investments are going to thank you!
So I sold a bunch of stock (VTI) to get my portfolio back in line and now I have to decide what to do with that money. That’s about $82,000 – a pretty good chunk of change to have as cash in hand just sitting!
Selling our last investment property
If you’ve been following along on the Route to Retire adventures recently (did you sign up for the email list yet?!), you know that we did something I never thought we’d do. We sold our last investment property.
I won’t go too much into this since I just talked about last month in my post, Owning Rental Properties Is Smart, but I’m Out, Jack!. The gist though is that the property appreciated by over 60% in just five years of owning it! It was too enticing to pass up.
When all was said and done, I now have about $85,000 cash in hand from my LLC that owned the property.
Time to put our cash in hand to work!
What a strange problem to have. In my younger years, I would have felt like we were swimming in a pool of money with all this cash in hand…
But now I know better. It’s ok to take a step back and even to leave money sitting in cash for a few months while deciding the right way to go with it. It’s probably even fine to leave some of sitting a little longer until rates begin to rise again.
However, if I don’t get most of this money invested, I’ll be missing out on growth in the long run. Not only that but eventually inflation will slowly erode the value of this money.
So what am I going to do?
Well, in typical Route to Retire fashion, I tend to write about things before I completely implement them. I do that for a couple of reasons. The first is that it’s what fresh on my mind and I want to share my thoughts on what’s going on right now.
The second reason is that I don’t proclaim to be the smartest person on the planet (though I’m pretty close! 😉 ). But I’m smart enough to know that there are people smarter than me who read this blog. I love to hear thoughts and perspectives that are different than mine because it gives me a chance to step back and reconsider if I need to pivot with my plans.
I have a few thoughts on this money and what I might do with it…
Invest in REITs
As I mentioned in Owning Rental Properties Is Smart, but I’m Out, Jack!, I’m not ready to get out of the real estate game. I like having that hedge in place against a bad stock market reign. That said, I’m content for now with not owning any physical properties.
So I’m thinking that I’m going to take most or all of the $85k from the proceeds of the duplex sale and invest the money in REITs. Here’s some scoop on REITs if you’re unfamiliar…
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.Investopedia — https://www.investopedia.com/terms/r/reit.asp
When compared to owning physical real estate, the pros of owning REITs include:
- A lot more liquid – you can buy and sell REITs on the stock market just like you would other investments.
- Diversification – instead of owning just one property, you might own a piece of hundreds or thousands. That spreads out your risk of bad tenants to the whole considerably.
- Cash flow – REITs are required by law to payout at least 90% of their income to shareholders through dividends.
So, you do gain some great aspects of owning real estate without all the headaches with REITs. But it’s not as advantageous in owning the physical property yourself. Here are a few of the cons of owning REITs instead of the actual property:
- You miss out on appreciation.
- You lose a lot of the tax advantages of owning physical real estate.
- Market fluctuations can affect the value of your holdings.
Although I’m just touching on the subject, there are more ups and downs to each avenue of investment. Do your own research or bring in a professional if you need some help.
For me though, I’m ready to be a little more hands-off with real estate and I think putting my $85k to work in REITs might be the way to go. I already own some shares of Vanguard Real Estate Index Fund Admiral Shares (VGSLX) and I think that will be the landing point for most or all of this cash in hand. It currently has a 0.12% expense ratio and has returned about 8.20% over the past 10 years.
I’ll need to dig around to determine if there are other REITs I want to consider investing in as well.
Here’s an important piece of the equation though. REITs are not considered to be very tax-efficient because they’re routinely paying off dividends. Because of that, I’d prefer to keep these holdings sheltered in a retirement account… but how do I get money into my retirement accounts to use?
I won’t literally move it in this case. Instead, I’ll move the money to my taxable investment account. I’ll sell ~$85k of Vanguard Total Stock Market ETF (VTI) in a retirement account (likely my Roth IRA or rollover IRA) and buy the VGSLX there. Then I’ll buy ~$85k of VTI in the taxable account to bring my holdings back to where they were. VTI is more tax-efficient than VGSLX so that should be the right move there.
I’ll more than likely take the $15k from the CD maturing and move that to my taxable account to invest in VTI as well. That’s money we shouldn’t need for several years so it’s time to give it room to grow.
What the heck else to do with our cash in hand… invest in bonds?
This is where everything falls to @#$%. My normal plan from rebalancing would be to take the money sold from stocks and buy Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) to help smooth the waves from stock volatility.
But with interest rates at rock bottom, things aren’t looking so pretty. With nowhere left to go but up for rates, that’s not going to fare well for bonds.
I’m no expert, but I don’t like putting my money in an investment with a really bad outlook for a while.
That said, like a lot of us, I’m not as versed in bonds as I should be. Maybe there’s something to this that I’m not understanding.
So right now, that money’s sitting in a money market account (Vanguard Federal Money Market Fund) just rotting away.
I have a feeling that a lot of my money from the rebalancing isn’t going to be invested in bonds. Assuming that’s the case, a lot of my cash in hand might simply need to stay as cash in hand. The bad news is that it’s not going to earn a lot that way. The good news is that I’ll be ready to jump on opportunities to buy when the market takes a turn.
Finding a good place to store cash you don’t want to be invested in stocks right now is a struggle. We’re in a unique period of time nowadays and patience might just be the key.
I planned to run these thoughts by my financial advisor/accountant. But after he prepared my 2020 tax return, he let me know that he’s only doing long-term financial planning now rather than one-off fee-only advisory sessions like we were doing. I don’t blame him for making that move but that does mean I’ve got to find someone smarter than me to run things by.
Eventually, I’m going to need to find another financial advisor. Although we have a nice plan in place, I think it’s still good to have a fiduciary fee-only advisor to run things by periodically. When looking for a financial advisor, there are only three places I’ll be looking:
- The National Association of Personal Financial Advisors (NAPFA)
- Garrett Planning Network
- XY Planning Network
Two of the most important factors to consider are that the planners are fiduciaries and fee-only. Those three sites help ensure that I’ll be covered in both respects. Next, I’ll need to find someone who we click with and understands our long-term goals.
In the meantime, I reached out to my good friend Fritz from The Retirement Manifesto to see what he thinks. We’re going to do a video chat later this week. It’s been a while since we’ve talked so that’ll be fun and I’ll bounce some of my ideas off of him as well.
I’m curious to hear what you’re doing with your spare cash in hand right now. Let me know your thoughts below.
Thanks for reading!!
UPDATE (04/13/21): I talked to Fritz and decided on a plan to handle my excess cash. You can read more about it in my “Investment Portfolio Changes I’m Making!” post.