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This question assumes one has an appropriately sized emergency fund already established.

If I expect the equities market to decline in the next year or two - what specific circumstances would make holding cash (in a 1% savings account for example) preferable to purchasing bonds?

For the sake of analysis, the bonds purchased can be in the form of 5-year US treasury bond (currently at 1.83% PA.)

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Chris
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3 Answers3

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A bond can default, a pile of cash is just a pile of cash.

Bonds are usually slightly more risky than holding cash, so they give a slightly higher rate of return. Risky bonds give higher returns than safe bonds.

Keep in mind that estimating risk is fundamentally an attempt to predict the future. If conditions change enough to make default likely, there is a big downside to a "low risk" bond. Housing bonds were considered safe until large numbers of people took the unprecedented action of not repaying their mortgages. Municipal bonds are considered safe right now because how often do cities go bankrupt under the crippling weight of pension obligations? And so on.

Jim W
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There are a lot of reasons for holding large amounts of cash:

  1. For accidents-You never know when you will need money.Selling Bonds in the secondary market is an option but you never know what will be the coupon value when you will be selling the bond.

  2. Junk Bonds can Default on Principal amount or the Interest-If you are planning to buy junk bonds then, you must diversify them with the help of mutual funds specialized on junk bond schemes.Still, there are risks with junk bonds even after diversification.

  3. Same amounts of return in fixed deposit schemes-Why go for bonds if you can get the same amount of returns on fixed deposit schemes.(At least in India)

AakashM
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Kuntal Banerjee
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If inflation increases greatly, then the bonds will lose value faster than cash. Also, cash can be used instantly, but a bond has to be sold before it can be used.

Also, your bond holdings are known to all the three-letter agencies, but if you have cash, only you know about it.

The problem with cash is that the government is making it harder and harder to deal in cash in the United States.

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