Welcome to Pension Attention, the best show for first responders who want to take control of their finances.
After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]
Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are. At whatever stage in your career, you are in, in order to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you not only take control of your finances and build the life you deserve. To find out more about me or my advisor partner, or any one of our advisors here at ONE Fire and Police, you can go to our website PensionAttention.com or give us a call. You can call us at (805) 409-8150. I want to send a big shout out to each of you who have been listening to the pension attention podcast here each week. We've gotten a lot of feedback and follow up, and we're just greatly blessed to be able to speak to you each week on a medium, such as a podcast. And if you haven't already done so you can go to our website, which is again, PensionAttention.com. And there you can click on the media tab and you can click, download and subscribe and you can download and subscribe there or you can download and subscribe the Pension Attention podcast anywhere you would download a podcast, whether that's the apple app on your phone, Spotify, SoundCloud, even Google has a podcast app. So, you can download us and listen to us whenever you want. And let us know what we're doing. Leave us a message. Leave us a comment. It's always good to hear feedback. And if you like the show, tell someone you like, and if you don't like show, tell something you don't like. I say it each and every week, because I actually mean it. I do want you to like it, if you do and I want you to understand the topics we're going through. And I, I write each week's episode, usually from experience, not just my nearly 15 or 20 years in the business, but really topical and recent experience. [02:06.4]
And this one today is coming the past few weeks from a lot of conversations I've been having with a lot of you listening with clients, even prospective clients that have called in from different stations who heard about us and it's largely around cash. And specifically, the question of do I have too much cash on hand? What is the right amount? How much cash should I have for short term and how much cash should I be looking at to invest? And that comes into a couple of things I want to talk about today. One of it is bucket planning, but we're gonna be going through this from a standpoint of, again, topical relationships with regards to inflation, which is usually the KickUp of the question around cash, because really the number one asset class that gets hurt in a time of inflation, whether that's transitory inflation or it's longer systemic inflation, cash gets hurt the worst. And when it comes to security, it's comforting. Let's be honest to know that you have adequate cash reserves to tap into when you need them, but there's also a downside to stockpiling cash. [03:09.5]
It can really drag down your portfolio. By portfolio, I mean your entire portfolio, not just your deferred comp plan or other investments that are more mid-range or longer term, we're going to talk about that today, but just your entire portfolio as a whole. And it can cause you to maybe fall behind financially over the long haul, especially during periods of inflation. Again, whether it's transitory or more systemic and long-term. And if you're like many Americans listening here, you're probably sitting on a larger pile of cash than normal after spending, maybe less than you normally would during the pandemic. And maybe even for a few of you listening, I know I've had a lot of clients who've actually had real estate transaction sales or the move off of a real estate to buy another property and actually having some cash on hand after that transaction. So right now, what I've been seeing is more people have had some cash and they're questioning shoot what's going on with the market? [04:02.6]
Interest rates are at a pretty low environment and almost historically low, but there's also this creeping little inflation compensation is something we've talked about a few episodes ago, or maybe you even trimmed, maybe some of your stock exposure during the pandemic last year, and never really got back in. The U.S personal savings rate. The percentage of disposable income people save was 27.6% in March. Now that's below the record of 33.7% savings rate in April of 2020, but it is nearly four times the pre pandemic rate of 7.3%. Now this is according to financial services firm UBS. So nearly $17 trillion was held in money market funds, bank savings accounts and small cities in January just seven months ago, give or take, which is up 24% from the start of 2020, according to crane data. [04:55.7]
Now economic research from Moody's analytics estimates that us households have $2.3 trillion in what they call “excess” savings at the end of the first quarter of this year. Now this excess savings is on top of what households would have saved if the pandemic had not occurred and their savings behavior had been the same as in say, 2019. So, some investors have been reluctant to funnel their spare cash into assets, such as stocks that have historically delivered bigger returns over time, which makes sense. There's a lot of skepticism out there. I've talked about this heavily on the podcast. We've talked about it heavily with clients and with prospective clients. If you're listening right now, we've had a meeting before you've heard me talk about this, that's where diversification becomes really strong as it pertains to “getting in the market.” And I want to say this very clearly. We are not so much of a firm around timing the market, but rather time in the market, that's really a key differentiator. [05:57.9]
And U.S investors, if you look at it had an elevated 19% of their portfolios in cash in April, despite an improving economy and rising stock prices. Again, this is based on the UBS survey. So, you're not alone is what I'm trying to say. Now, sure, having a rainy-day fund can help you survive financial jams. I mean anything from unexpected car repairs to, we all know we have the, the one month where the tires need to be changed and the dog needs to go to the vet. That happens, that's where cash comes in. But cash really shouldn't play a big role in your overall investment life or the investment accounts, which are really meant to fund long-term goals, such as retirement, or maybe even a goal such as college tuition. For those of you listening, who have younger kids. So, let's talk for a second about the weight of too many greenbacks. [06:47.3]
So having too much wealth parked in a low return asset class can result in what we call portfolio drag. Many of you who are clients listening right now have heard me talk about that before. It's a term used to describe earning less on your money by playing it safer than you otherwise would. My golfing buddies out there would basically say, you're laying up instead of going for the hole, right? Now, mind you, we can't always be shooting for the pin every time we have to have some diversification, take some layout shots and to continue with my golf analogy that I just apparently got onto, we have to understand that it's an 18-hole round. So, shooting one shot is one of many and understanding that one asset class like cash should be one of many. Now we still should have cash for certain reasons again, short term cash that are really for the unexpected. And as a certified financial planner, the CFP board, when we go through the designation and we're looking at things like the topic of cash, the rule of thumb, and again, this is a rule of thumb is anywhere between three and six months of your overhead. What does that mean? [07:54.1]
If you have a $10,000 a month overhead, that includes your mortgage, your utilities, your gas, your insurances, all that stuff that you need to live, and it's $10,000 a month, you should have somewhere around $30,000 to $60,000 in just cash. Now for those listening right now, who are first responders, I have usually taken that rule of thumb and said for your guys's role, let's get a little more granular and specific, which is why I specialize in this for each of you is we don't need to necessarily be in that six-month category because that's more on the average American out there who has private sector jobs. They're a little bit more tumultuous and they have a more of a then maybe a lot of you about losing their job or their job going away. So, it's really important to understand that a rule of thumb is just that, but I wanna at least provide that to you today when we're talking about the notion of cash. And if you want to find out more on that or what your specific number or cash should be, you can always reach out to us. You can give us a call at (805) 409-8150, or you can go to our website and schedule some time there at PensionAttention.com. [09:59.0]
And to pick up further on that. Another reason being too conservative can be maybe costly is cash, which yields basically zero is also losing purchasing power risk, and generating essentially a negative return when you factor in consumer inflation, which has risen right now to nearly 5%. Again, that's a little bit more of a discussion around it being transitory versus longer term. So, we want to weigh short-term needs against long-term goals to find that optimal cash position. So personal finance pros out there. If you're really looking at it, all of you, DIYers here, we want to talk about what's called what we typically refer to as a bucket approach that allocates cash over different timeframes. Now, for any of you following someone on social media, or I read some books, or maybe even a white paper or googled this topic, you're going to get this whole vast world of what people have been calling bucket planning. Now, by the way, this has been used in financial advising and certified financial planning space for many, many years. And I want to dissect today since we're talking about cash and specifically the question, I've received from many is am I holding too much cash, Brad? [10:07.6]
And the answer to that is really more around planning. Yep, I always go back to that because it's important. So, let's talk about what bucket planning is essentially in my mind, there's three buckets. There's short term mid-term and long-term, so let's go through each of those. So, bucket number one, let's start with that one is short term. Short term is when you need cash. This is for you, younger people out there who aren't retired. This is your Vegas money with your boys. This is something like that. This is for those of us that are married, maybe with kids. This is our emergency funds, such as maybe an unexpected health care bill. We need to view this bucket almost as it's your emergency bucket. As your personal safety net, when life throws you a curve ball, that's your cash position. This is also the same bucket that I recommended that somewhere between three to six months of your outflow, which is really just to curtail any Uh — Ohs that might happen, whether it's job related, health-related or something of the like. That's bucket, number one. [11:04.9]
Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the DROP program? Go to www.pensionattention.com to find out how we can help. [11:23.5]
Bucket number two is what I call Midterm bucket or major expenses, like goal-oriented cash, which we'll talk about or intermediate goals in general. So, if a big-ticket purchase such as maybe a new car or a big one, we talk about here at the firm, which is college planning or college tuition, or maybe even the down payment on a new home. All of those are midterm buckets, and we should have the money socked away for things as well. Now, here is an important bucket because we can't risk the money too much in a few years. And so, we talk about timeframe a lot. And I get this question a lot. Hey, Brad, I have the goal of buying a new home here really soon, or maybe it's for my younger guys listening right now and your first home. And we talk about, okay, I got 60, 70, $80,000 in cash. I'm probably looking at a year or two out. What should I do with the cash? [12:18.2]
And I want to answer that today from a 10,000-foot view, because this really comes down to more specific conversations and planning based on risk tolerance, the amount of down payment we're actually shooting for. But in general, anything less than let's say two or three years is really short term, in my opinion. That's my opinion, anything less than two or three years is short term. What you really should weigh the volatility risk of having that midterm bucket, because it's not short term. It's not three to six months necessarily, and it's not necessarily set up for an emergency fund. It's more set up for in this case, as an example, hypothetical an intermediate goal of a house purchase, maybe it's your first house purchase either way. It needs to be weighed with the risks associated with what could happen in 12 to 24 to 36 months. You have less time to recover. The last thing you'd want is say, okay, I want to put this $80,000 into a balanced portfolio because it's not cash and it's not in my deferred comp plan for long-term, but I would like to see it grow while I'm still saving into it. [13:21.6]
Well, let's say a year in the market takes a little bit of a correction. All of a sudden, we have a little bit less purchasing power or less down payment to have. That's not good either. So that middle bucket's really important to talk through. It's really important to understand what works for you, what risk you're willing to take, and then find the right manager and advisor to build a portfolio that's customized to that need. Something with maybe a little bit less volatility, a little less equity, a little bit more fixed, income oriented, maybe short terms. You're not getting hit by interest rates or market fluctuations. You can do a lot of tailoring in that bucket, but it needs to be discussed and talked about. [13:59.7]
And by the way, the same thing as a hypothetical for say, college tuition. For those of you right now who have younger kids looking to doing that, you've got a finite time period before potentially that would be used, right? Let's say your kids are 5 and 8 or something like that. You know, you got 13 years and 10 years before they turn 18. And the probability of them going to college and we need to spend it, it's a little bit higher than those two or three years as we discussed, but it's also not 30 years like a retirement investment portfolio, right? So, understanding that mix of investments is also vitally important along with what you are each month contributing. So, it all goes together in a plan, but those two, I bring those up first, the first bucket being your emergency fund, just your cash on hand, that's just cash in my opinion. That is cash in the bank, in the money market account, in your savings account, that's cash. [14:50.3]
The second bucket, which has dovetailed right off from that is that interim period, that intermediate goals, right between that cash piece and your retirement accounts. And that's the biggest one that needs to be talked about because that has a lot of question marks in it. And that's largely the advice I've been giving to clients who have brought up the topic that I'm discussing today around, Am I holding too much cash? We go into a whole host of questions about, okay, well, wait a minute. What are the come from? I mentioned some of the ways it's happened either we pulled off cash from last year. Not many did that. A lot of it's been real estate transactions where the amount they needed for the new home was less than they actually ended up liquidating some cash and they have it on hand. So, a lot of it has to do with now we have an individual account or joint account or a trust account that we need to start managing for that client. That's a little bit different perspective than maybe say the deferred comp plan, but not much because if there's no goal oriented for it, then it's really just an after-tax account, which adds another asset class to the overall portfolio, which is a good thing. There's nothing wrong with that, but it needs to be discussed and talked through. [15:56.0]
And as you can probably see this segues into the third and final bucket, in my opinion, which is investments and or retirement planning. And they really go hand in hand in that regard. So, for money earmarked for the long-term, honestly the less cash is better. Here at One Capital Management, we have an allocation set in our portfolio is around 2% of cash. And that's used for different reasons, but you can see it's a pretty low number. Because even a cash position of 5 or 10% in a portfolio in a long-term portfolio can act more as a headwind than anything else. So, to maximize long-term returns, we want to build a portfolio structured around equity and stock positions and fixed income having cash involved, but at a lower allocation. And that's some quick research, it was interesting. The seven nations with the biggest government pension funds, which by the way, is the group that includes the United States had an average cash position of 4% in 2019 UBS data had kind of shown that. [16:58.8]
And it was interesting to me because even a large pension fund like we have in California, like CalPERS CalSTRS or through the city for many listening right now, right? The target for cash in those longer-term portfolios is relatively low as shown by this data, which is pretty interesting, if you look at it from the larger scale of things. Now a zero cash allocation, by the way, isn't crazy. You might be thinking well, Brad, I don't want any cash in my long-term position, and it's not crazy to think that I do like some allocation there for different reasons. We have dividends going over to there. It's always good to have some allocation towards the money market so that we can start utilizing that for different reasons, maybe through some volatility, time periods, a holding pattern, there's different reasons to have cash, but a zero cash position isn't nuts. [17:44.8]
And once you have buckets, one and two that I talked about funded and can really understand the tolerance through volatility, through some financial ups and downs, you'll likely have enough protection to invest more aggressively with bucket number three and regarding buckets three, when it comes to, for many of you listening right now, your deferred comp plan, finding a manager to help build your portfolio means a lot in the long-term because that's what you're going to have a lot of your management coming in when it comes to strategic diversification, global asset allocation, and it might help to look at it from a perspective of wealthopoly. When you think about your long-term investments, think about the game monopoly. The guy owned to that; a guy named Charles Darrell invented the game back in 1934. He put the drivers of the economy, if you really look at the game around the board, which are railroads utilities and real estate, right? [18:38.7]
Now, if you had invented that game today, do you think you would have used the same industries? Probably not. You'd probably have used industries, such as pharmaceuticals, technology, finance, and probably consumer goods. You see, I'm bringing this up because the economy and the drivers of the economy change over time. So, it's important that you own them for the long-term and have managers that can adapt to those changes. So, the old philosophy of buy and hold or set it and forget it, you grotto be really careful there. I actually call it actively waiting. It's a term I've used before and I use a lot over my career with, with clients is we want to find the right positions. We want to tailor, build the portfolio for what your goals are within your timeframe. But we also liked the positions we're owning. We don't want to move off of them every day. So, we want to find that happy medium between buying the right positions and holding those, but actively waiting, meaning we're active in the process. We're waiting for those to do we want them to do which they usually do over time if we're doing it right, but we're active in the process. [19:42.0]
We are moving around allocations to find the right weightings for each sector. And that's why I recommend when talking about the original question of, am I holding too much cash? We have to go through the process of what is that cash for? What does it mean to you and what do we ultimately want it to be around? Because if we look at the buckets we talked about today, we need to go from stage one bucket number one of we'll call it the emergency fund, or just cash on hand, which bleeds right into bucket number two of that intermediate or mid-term goals, or maybe there's a midterm account, something to fund an idea or a strategy or a trip or something that you find value in maybe prior to retirement. That's the difference between bucket one and bucket three as well, right? [20:29.9]
So, finding that midterm there, and then when you get into that long-term, that third bucket, when you talk about the long-term strategy around it, having an actively managed portfolio or actively managed to for comp plan is really the difference between set it and forget it, and actively building your and understanding the changes that are happening each and every month, each and every quarter, each and every year. We've seen a lot of changes. I've talked about this heavily. In fact, on this podcast in particular around technology can be disruptive and what does that mean? We've seen everything and for many of you listening right now who have been in the investing world, especially in the third bucket for deferred comp plan, many of you have seen things that have changed. We've gone from everything from social media to now we're talking about Bitcoins and cryptocurrencies nowadays. We've seen governments be shut down. We've seen transitions happen between presidential elections. We've seen a lot going on. So, the mind starts thinking, wow, what's different than it used to be before. And that's where finding that advisor who's been there before, who helped you through that is really important. [21:29.9]
And I've said this before, and I mean, this, if it's not us here at ONE Fire and Police with myself or Toby Rodriguez, find someone you can build trust in because it's really important to help disseminate the question of, am I holding too much cash, which is today's topic. We're really going through the proper, in my opinion, the proper solution to that, or proper answer to that question, which is bucket planning for that cash. And ultimately when you get to that third bucket, if that ends up being the case for it, strategizing on where those assets need to be allocated based on your tolerance and based on your goals that ultimately have to fit into your overall retirement plan. [22:05.5]
I want to thank you for listening to the Pension Attention podcast this week. Stay tuned for next week. We're gonna be talking about The Psychology of Money. I just finished a fascinating book, actually titled that, ‘Psychology of Money. As a lot of the things, I've shared with many of you listening here around our behaviors, as it relates to money, I'm looking forward to it until then stay safe. [22:25.0]
You've listened to Pension Attention with Brad Barrett. Before acting on anything discussed today, remember to speak with a financial advisor near you about your specific situation, or again, if you'd like our help, you can visit us at PensionAttention.com or give us a call (805) 409-8150. [22:41.9]
The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [23:05.0]
