My Year Of Cash Drag In Review

At the start of 2020 we revised our asset allocation, reducing equities while increasing fixed income. Serendipity had brought us closer to the finish line more rapidly than we'd anticipated, so we wanted to avoid giving up those extra gains. We made the move to heed Bernstein's dictum that the goal of investing was to not die poor.

Part of our new allocation involved increasing the proportion of alternative assets, i.e.,  real estate. We'd previously kept 10% in the Vanguard REIT fund, and now planned to increase our total allotment to 15%. Our plan for direct ownership of an investment property has not gone according to plan, although the journey has been most instructive.

But this post is not about real estate. It's about what it feels like to have a buttload of cash sitting in the Vanguard Money Market Fund for over a year not working for you, both before and after the big March 2020 COVID dip.

[That dip was memorable, as it occurred while I was a speaker with a number of friends at WCI CON 2020 in Las Vegas. I still recall Leif (a.k.a. the Physician on Fire) coming up to me in a hallway between talks, beatific smile on his face and a glint in his eyes, informing me his net worth had just dropped a cool million dollars. And Larry Flint thought he was a high roller...]

So what were my lessons learned about having my money sit around watching Ricki Lake and eating bonbons instead of breaking a sweat working for me?

A cash buffer provides an overriding sense of abundance.

When my wife and I reviewed our monthly statement, the main difference was that a sum that would have been invested was instead sitting in cash equivalents. You wouldn't think that would affect you psychologically, but it did.

When the cash account goes from holding the emergency fund to holding a couple of years' worth of expenses, it made the cash feel more liquid and available. My mindset went from a student scrimping and saving to feeling complacent, like every day had the potential to be Fat Tuesday.

Interestingly, I did not spend any more freely (frugal habits thankfully die hard), but the urgency to save that had poured rocket fuel on our financial road so far took on less urgency. And by less urgency I mean we still maxed out duals 401ks, our family HSA, and dual backdoor Roths. We simply contributed less to our profit-sharing plan than we had in past years.

It makes you indifferent to costs that would otherwise cause distress.

We have been aggressively trying to augment our taxable account over the past couple of years, but we overshot a bit. A combination of capital gains from selling equities (in order to invest the proceeds in real estate) and reduced contributions to our corporate profit-sharing plan meant that we owed a double digit check to the IRS at year end.

With a large pool of cash at the ready, this surprise didn't faze us. We simply took a few buckets of water from that ocean of taxable money never looked back.

Distress avoided.

It's a shock absorber for life's potholes.

I'm a huge fan of using shifted perspective and modifying my frame of reference to optimize response to life's curve balls. Not going to own direct real estate after all? That leaves only a thousand other opportunities I might pursue for my encore career after medicine- time to hit the library (which just reopened to indoor visits!) and read up on what the next one might be.

People I love have a more difficult time adapting to what they are only able to characterize as aggravations.

I cut my own hair, treasure hunt for used gear and clothing, and pack my own lunches for every shift instead of spending on take out or cafeteria food. My tolerance for inconvenience or strategies that require me to work a little harder or sacrifice a minor convenience is high at baseline.

But it makes the ride smoother when those I love with a lower tolerance are less thrown off balance by unexpected if entirely predictable costs: the oil change that morphed into an auto repair bill exceeding a thousand dollars (our cars are 12 years old; it happens) just didn't rattle us the way it might have when our taxable account held thinner padding.

Am I just be fooling myself?

We are preparing to reach that inflection point where we bank up a sizeable sum in our taxable account as a bridge for the years after we stop making an income but before we draw funds from our retirement accounts.

During those years, we'll need to develop comfort with having one or more years of spending available in cash equivalents. So maybe this is just a form of cognitive dissonance in coming to terms with a financial reality we'll need to accept.

Cash drag is a matter of age and stage

I'd likely have had a bigger issue with sitting on a pile of cash when I was young, scrappy and hungry. For the past decade and a half we've been plowing funds into investments. But time marches on and things change.

I hit the beach twice in the past week to enjoy a four foot swell at my local break. Looking around, it dawned on me that I had become the old guy in the lineup.

Old guys, by definition, are willing to accept the formerly intolerable.

If cash drag is something I'll need to accept during those critical years on either side of retirement, where sequence of returns risk poses the greatest threat to our financial security, so be it.

I'm adept at finding the silver lining.