Cash component - how do you use it in retirement/drawdown?

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Some people keep a cash component of their portfolio (separate from emergency fund). The idea is you have some amount of expenditure in cash e.g. 1 year of expenditure or 2 years to expenditure to ride out any downturns in the stock market to avoid selling in a dip / sequence of returns issues.

My question is, how does this work? Do you draw down only cash during a dip, or reduce cash in proportion of stocks?

If you always keep 1 year, then you can never draw it down at all, so do you let the 1 year of cash draw down to zero and then draw down on stocks?

If so, do you replenish it afterwards?

What is the trigger for using cash? when stocks are less than all time highs? when 10% below?

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Whats the difference from an emergency fund here?
In my eyes the emergency fund is exactly for the purpose to not having to sell stocks if sth happens.

Or do you mean having a cash portion in the portfolio to time the market?

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Well, an emergency fund is for emergencies e.g. your house gets flooded, or you lose your job.

The cash component is not for emergency spending, but for cushioning a downturn in the market.

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I don’t care about the stock market when taking out cash. Me needing cash is a very bad signal for selling stocks. So I just raise debt, then pay it back when I get a sell signal or with dividends.

I try to keep always at least the amount of debt I hold in cash, inflation protection.

PS: I try to spend a lot, but almost always fail to do so. But I keep enough cash for a year of spending a lot. Examples: decided to fly only business, but then I don’t fly at all, my first flight this year will be in December. Took out money to buy a nice new car, but then I passed the technical inspection of my 22 years old Seat that runs like new. So I didn’t buy a car


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I’d follow the chosen allocation, if you have 10% target for wealth preserving assets, you rebalance if stock go down or if they go up as needed.

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Cash that forms the part of portfolio should be used to rebalance just like bonds. So if your target is 10% cash then rebalance once a year to get to that target.

this excludes „emergency fund“ which should just stay as it is in liquid instruments

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So, in this case, let’s say you have a 3000 portfolio and you spend 120 per year.

You have 300 cash, 2700 in stocks.

Stock market falls 50%, so you have 1350 stocks 300 cash. 1650 total.

You spend 120, leaving 1530 and then re-balance to end with: 1377 in stocks and 153 in cash.

The cash component partially helps to cushion the fall, and you avoid all timing decisions on cash utilization.

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Yes, target allocation and cashflow are orthogonal (how much you spent/earn shouldn’t really influence you staying on target).

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I think this method makes most sense and is also the easiest to implement.

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Dunno if this is a recipe for trouble, but after maintaining a cash component and getting endlessly frustrated by it I decided to consider my 3 month notice period plus 1.5 years of RAV as my emergency fund. For all the rest I have non-mandatory insurance coming to about CHF1000/year. This means I am assuming that losing my job is the only emergency that can befall me of my family, so yeah, open to criticism.

Edit: that said, I always have about 1.5 month’s expenses as cash.

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We’re talking about portfolio allocation rather than emergency fund here (it’s a different purpose).

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I guess it depends what other stuff you have. With a house you have a lot of potential maintenance issues e.g. new boiler, new roof. Or if you have kids/family and they can get ill or have other unexpected costs.

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I understood your post to conflate the two but could be wrong, had an insanely tiring week with travels and deadlines on top and still haven’t recovered.

I have trouble considering cash as part of a portfolio, possibly a sign of immaturity and inexperience on my part. How much % cash would we be talking about? In my opinion anything below 20% is irrelevant as a cushion, and anything above 10% is too much cash sitting inert.

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But if we talk about (long-term) portfolio allocation I don’t get the ‘you spend 120’?
Unless it’s an active strategy or you are in the withdrawal stage (which @PhilMongoose gets closer to as I recall).

If it’s a mainly passive (cumulating) strategy then it’s only about rebalancing the cash proportion by moving cash to stock in a stock downturn. And not about ‘spending cash’.

At least for me (cumulating stage), cash that I spend in the coming year I don’t consider to be part of my ‘portfolio’ (but this might be semantics).

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For Swiss investors , cash is akin to bond investors in US. This is because post tax bond yields are low in Switzerland . So that’s how we need to look at cash.

60-40 would mean 40% cash

often people think unless you get some interest , you are losing money. But that’s only true for depreciating currencies with high inflation. Switzerland has low inflation, so low yields are also fine.

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The post is about the retirement phase.

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Well, even a small amount can protect you, esp. if the fall is large. Example:

3000 all in stocks. Stocks fall 80%. You have 600. You spend 120. You are left with 480. Stocks go up 5x next year, you have 2400.

compared with:

3000 portfolio 2700 in stocks, 300 in cash. Stocks fall 80%. You have 540+300=840. You spend 120. You are left with 720. You rebalance to 72 cash 648 stocks. Stocks go up 5x next year, you have 3240 stocks and 72 cash.

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Sure, earmarking a cash “position” for the purpose of rebalancing is a valid use case.

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So let’s say you have a 1M stocks portfolio, 200k debt, that’s 200k cash on hand to be spent? And you try to keep this amount equal? Curious about the science behind it. It’s not really margin/leverage as you keep your collateral as cash, it sounds really interesting though.

Actually because of some “bridging” between cash component yielding and cash flow need at near-0 cost I found myself in a similar situation but can’t get my brain decide whether having cash(-equivalent) + debt is a stupid or smart thing. Gpt agrees with both.

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To stress a point already made, Cash component - how do you use it? - #5 by nabalzbhf is really the crux.

You have an asset allocation. If you have less stocks and more cash (or bonds), then you have less variance / more safety but also less expected returns (which might make sense for the retirement phase). When things change, your allocation changes, so you need to rebalance to follow your plan.

Buying the dip outside of this predetermined rebalancing mechanism is market timing.

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