Part 1: Avoiding Cash Holdings in a Retirement Account • Vanguard Group recommen
ID: 2801466 • Letter: P
Question
Part 1: Avoiding Cash Holdings in a Retirement Account • Vanguard Group recommends that investors saving for retirement should not allocate any part of the portfolio to cash (i.e., money market funds). In general, why is this advice consistent with a long-term strategy? • Under what circumstances should an individual investor hold a significant allocation to cash in a retirement account? Why? Part 2: Frequent Trading Restrictions in Retirement Accounts • Frequent trading restrictions are common for employer sponsored retirement accounts. Why is this requirement consistent with a long-term strategy? Part 3: Retirement Account Restrictions on Derivatives, Selling Short, or Buying on Margin • A typical employee sponsored retirement program does not permit employees to invest in currency or financial derivatives or allow them to sell short or buy on margin. What is the rationale for such restrictions on retirement accounts?
Part 1: Avoiding Cash Holdings in a Retirement Account • Vanguard Group recommends that investors saving for retirement should not allocate any part of the portfolio to cash (i.e., money market funds). In general, why is this advice consistent with a long-term strategy? • Under what circumstances should an individual investor hold a significant allocation to cash in a retirement account? Why? Part 2: Frequent Trading Restrictions in Retirement Accounts • Frequent trading restrictions are common for employer sponsored retirement accounts. Why is this requirement consistent with a long-term strategy? Part 3: Retirement Account Restrictions on Derivatives, Selling Short, or Buying on Margin • A typical employee sponsored retirement program does not permit employees to invest in currency or financial derivatives or allow them to sell short or buy on margin. What is the rationale for such restrictions on retirement accounts?
Part 1: Avoiding Cash Holdings in a Retirement Account • Vanguard Group recommends that investors saving for retirement should not allocate any part of the portfolio to cash (i.e., money market funds). In general, why is this advice consistent with a long-term strategy? • Under what circumstances should an individual investor hold a significant allocation to cash in a retirement account? Why? Part 2: Frequent Trading Restrictions in Retirement Accounts • Frequent trading restrictions are common for employer sponsored retirement accounts. Why is this requirement consistent with a long-term strategy? Part 3: Retirement Account Restrictions on Derivatives, Selling Short, or Buying on Margin • A typical employee sponsored retirement program does not permit employees to invest in currency or financial derivatives or allow them to sell short or buy on margin. What is the rationale for such restrictions on retirement accounts?
Explanation / Answer
Vanguard Group recommends that investors saving for retirement should not allocate any part of the portfolio to cash (i.e., money market funds). In general, why is this advice consistent with a long-term strategy?
The reason for such recommendation is that the money market funds give low returns. The risk involved is also low but from the viewpoint of a retirement account, investment in money market fund is not advisable due to the low return. Since the aim of a retirement account is for the long-term, low return money market funds will not be beneficial. In the long-term, one would want to invest money is such financial instruments that will help to get good returns in the long run.
Under what circumstances should an individual investor hold a significant allocation to cash in a retirement account? Why?
A person can have significant money invested in money market funds or cash in a retirement account if he/she will need that amount very soon. For example, there is an upcoming expenditure and the individual will have to spend a significant amount of money then money market funds can be invested in. These funds are low risk and they help to meet short-term financial targets.
Frequent trading restrictions are common for employer sponsored retirement accounts. Why is this requirement consistent with a long-term strategy?
Frequent trading restrictions is implemented on retirement accounts as the frequent trading will lead to extra costs for the individual and it will also disturb the management’s plan to manage the fund. Since the retirement account is a long term goal, so the management’s plan for managing the investment should not be interrupted by frequent transactions.
A typical employee sponsored retirement program does not permit employees to invest in currency or financial derivatives or allow them to sell short or buy on margin. What is the rationale for such restrictions on retirement accounts?
The investment in financial derivatives and currency are risky as they do not ensure any guaranteed return. The risk factor is too high for a retirement account holder to invest. Thus, in order to be safe and not lose any money to the uncertainties of the financial derivatives market, such restrictions are implemented.