Articles for Financial Advisors

Barclays Aggregate vs. Money Market

Barclays Aggregate vs. Money Market

Financial advisors typically recommend a portfolio contain 6-12 months of cash savings to cover emergencies. Some mutual fund managers believe opportunity costs begin to outweigh possible benefits when investors hold > 10% of their portfolio in cash.


Advisors and investors should rethink how prudent it is to have any cash equivalents in a portfolio. The Barclays Aggregate Bond Index almost always outperforms even a very efficient fund such as the Vanguard Money Market Fund. The likelihood of needing money when the Barclays Index is underperforming a money market fund is highly unlikely.


From 2004-2013, there were 41 months of negative returns for the Barclays Aggregate Bond Index; the worst month for any given year ranged from -0.76% (May 2007) to -2.36% (October 2008), as shown in the table below. Thus, for any given month, there was a 66% likelihood the Barclays Index was positive for the month.


Actual Likelihood of Needing Emergency Money

When considering replacing all cash equivalents with an ETF that tracks the Barclays Aggregate index, the question becomes: What is the likelihood of a cash emergency when the Barclays index is having a negative month?


During the 10 years (2004-2013), the odds of needing emergency cash when the Barclays Index had a negative monthly return appears to have been 34% (see Table I). However, once you factor in the likelihood of a cash emergency and multiply it by the likelihood of a negative month for the Barclays index (34%), the odds of needing cash during a negative month become radically lower.


For example, if one supposes there is a 10-20% likelihood of needing cash for any given month, the odds drop from 34% down to 6.8%-12.6% (.1 or .2 multiplied by 34%). Increasing the odds above 10-20% may be unfair since it falls outside of the   the likelihood of an “emergency.” If there is a 30-50% chance of something happening, the proper description is likely to be “a fair chance” or “somewhat likely,” not “emergency.”


Table I

Negative Months [2004-2013]: Barclays Aggregate Bond Index


Year (# of negative months)


Year (# of negative months)

2004  (3)  [worst: -2.6%]


2009  (3)  [worst: -1.56%]

2005  (5)  [worst: -1.03%]


2010  (2)  [worst: -1.08%]

2006  (4)  [worst: -0.98%]


2011  (2)  [worst: -0.29%)

2007  (3)  [worst: -0.76%]


2012  (3)  [worst: -0.55%]

2008  (6)  [worst: -2.36%]


2013  (6)  [worst: -1.78%]

Total number of negative months = 41 (34% of all months)


Financial Planning Mantra

The vast majority of financial planning books and articles recommend 5%-25% of a portfolio be in cash equivalents, such as a money market fund. The recommended percentage is based on investor’s time horizon and risk level. Expected cash needs are usually dealt with separately since once such needs have been taken care of, the 5%-25% cash equivalent recommendation remains.


Cash equivalents are recommended for a portion of a portfolio for three main reasons: [1] a safe haven when stocks and bonds are experiencing negative returns, [2] to reduce overall risk, and [3] for emergency purposes. Consider these four reasons: (1) 1977 was the last time the S&P 500 and 20-year U.S. government bonds both experienced a negative year; (2) 1969 was the last time the S&P and 5-year government bonds both experienced a negative year; (3) the difference between the standard deviation (SD) of the Barclays index and a money market fund is modest—and the impact of 20% of a portfolio lowering its SD by 200-300 basis points is small; and (4) the likelihood of needing emergency money during a negative month for med-term quality bonds is quite small (as discussed earlier).


A $1 million portfolio

Suppose you have a new retiree with a $1 million portfolio. Based on her age and risk level, you would normally recommend $200,000 go into a money market fund. Instead, you put the entire $200,000 into the Barclays index. If an emergency arises, part of the Barclays ETF can be liquidated—assuming the emergency would drain most or all of the client’s checking account.


By having $200,000 in the ETF Barclays bond index, your client will likely earn 1-3% more each year. On average, this translates into an extra $3,000-$4,000 each year.

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