Cash is King, and needs to be treated that way.
When it comes to retirement, you’ve GOT to change your perspective of your investment portfolio. You are no longer in an accumulation phase, now you are withdrawing assets in order to put food on the table.
Withdrawing is soooo much different than accumulating and you’ve got to make that mental transition or else you’ll make fundamental mistakes.
Mistake 1: Reaching for yield.
(For the video on this please click here).
What is ‘reaching for yield”, you ask? Simple, you don’t like the interest you are receiving on your cash and cd’s so you wonder if there is “something better”. And this is where you begin to fall for the trap.
The trap goes like this:
Your bank accounts (CDs and savings combined) are paying 2%. Other investments are paying more. In the example I use in the video above, the Vanguard Total Bond Index which at the time of the video 2 days ago was paying 2.72%.
So, on $60,000 the Vanguard Fund would pay $1,632 over the course of a year. Whereas the bank accounts would pay $1,200. You’d make $432 more in Vanguard.
But would you???
The Vanguard Fund fell from 10.72 per share on January 1, 2018 to 10.22 a share on 11/8/2018, losing 4.66%.
You need to subtract the interest you would have received from the Vanguard Fund over that time from the decline in price per share to arrive at your TOTAL RETURN, which is the only thing that matters. In this case the total return was around a 2% LOSS.
That’s right you LOST money in the Vanguard fund. How much did you lose in the bank accounts? Nothing.
In order to get that extra $426 in interest from the Vanguard Fund you lost $2,796 in principal. Don’t do that!
And, hopefully, you can see how this Reach For Yield thing works. Because what typically happens, in my experience at least, is folks are not satisfied with the rates they’re receiving on their safe money, so they start stretching for more.
And here’s how it works.
You “I’m only getting 2.40% on my bank accounts. What’s an alternative?”
Eager to Please Financial Advisor (ETPFA): “Vanguard’s Total Bond Index is yielding 2.72% now. That would net you an extra $400 or so in interest.”
You “Ugh. That’s not much better. Anything else that’s worth the risk?
ETPFA “Sure! Let me search around and I can find something.”
And this is where the story goes from bad to worse. The ETPFA “finds something” that seems appealing, from a YIELD perspective. But from a total return perspective it is fraught with risk.
My friends, if you’re going to take risk, just go with stocks to at least be rewarded for your risk. Makes no sense to take any risk with the cash you’re going to need to pay the bills over the next three years.
Keep it safe. Keep it simple and respect your cash. When you’re in retirement CASH has a value well beyond the yield you receive. Understand this. Please.