Generating investment income in 2011

[dante56]

Hi all,

I am new to this board but feel like I have been here before. Perhaps because I was a member of the original Retire Early forum many years ago and many of the monikers here look familiar.

Here is my current situation for which I would appreciate getting some advice from the wise folks here.

My taxable funds are all in cash. I have them distributed over several high-yielding money-market/savings/checking accounts netting 1.5% interest. I would like to put this money to use this year to provide income to pay for living expenses. Some specifics:

1. Cash amount is low 7-figures.

2. Cash amount represents 80% of investable assets; remaining 20% in 401K accounts in stable value fund and Vanguard target retirement fund

3. Tax bracket historically high and AMT-triggering but 2011 is a "job search" year so don't anticipate it to be too high.

4. Almost 55 years of age so might consider ER if can't find suitable position or can't start own business.

Question:

What would be the best way to maximize the cash flow from the taxable account?

I welcome any and all questions if answers to them will help me double the current paltry 1.5% return. Thanks.

Dante

 

[RonBoyd]

What would be the best way to maximize the cash flow from the taxable account?

I welcome any and all questions if answers to them will help me double the current paltry 1.5% return. Thanks.

I don't have any answers to your questions but I am sure others will be along momentarily with no end to solutions for you.

I do have a question of my own, however. Are your "living expenses" so low that a 3% return would cover them without depleting the Principle? Seems to me that Inflation would eat that up before you even got involved.

 

[traineeinvestor]

At the risk of stating the obvious, buying bonds is one option. Just go far enough out in terms of maturity until you reach your desired yield. Of course, there is no such thing as a free lunch and you a will have to live with fluctuations in value over the life of the bonds (which can be partly ignored if you hold to maturity). I'll defer to others on the possibilities of CDs.

You can also get better yields than cash in equities but that is a different world of risk v return considerations.

 

[LOL!]

What's your burn rate?

I'd just build a standard asset allocation with some percentage of equities and the rest in bonds in a tax-efficient way and live with it. I do not care if my portfolio loses money in the short term. I actually would not own any cash at all. I'd prefer an intermediate bond fund and short-term investment grade bond fund. I know I would not need to spend more than about 3% to 4% annually, so I just wouldn't worry about it. If my income or cash flow was less than that, I'd just spend the principal, too.

In essence, I have to ask, why does your portfolio have so much cash now? Maybe you just sold your business? What was your portfolio like in 2008? 2009? Why is your portfolio not set up for ER already? You can have the portfolio of someone in ER, yet still be working. There's no sin in that.

 

[dante56]

What's your burn rate?
In essence, I have to ask, why does your portfolio have so much cash now? Maybe you just sold your business? What was your portfolio like in 2008? 2009? Why is your portfolio not set up for ER already? You can have the portfolio of someone in ER, yet still be working. There's no sin in that.

No proceeds from sale of any business; am purely a working stiff. Taxable income in 08 and 09 in cash but that is moot now. Never seriously got down to doing the AA for the nest egg. But thinking about it now. Running into the same issue of doing it all at once or DCAing in every day or every week.

Burn rate is less than 4%.

Developing confidence in an AA and re-balancing and staying the course every year requires an act of faith; I am not there yet.

 

[LOL!]

You may be a good candidate to just buy TIPS directly from the US Treasury or at auction (to reduce purchase fees). If you hold to maturity you will not lose principal. You will not lose to inflation either. But you won't make any money either. Of course, you cannot look at your portfolio of TIPS either because your brokerage will reveal "mark-to-market" losses which may mess with your mind.

The bonds will not generate monthly income though.

Check out the book by Zvi Bodie and his videos on the web.

 

[walkinwood]

I place some of my "cash" portion in Vanguard's Short Term Corporate bond fund (VFSTX). It works for ME. Not risk free though - it fell 10% in 2008-09.

You should have ample time to read some fine investment books. See the FAQ forum for a list. My favourite continues to be The Four Pillars of Investment by William Bernstein. Larry Swedroe is another author I like and he has a book on Financial Plans out recently.

My advice is to DCA into any change in AA.

 

[dante56]

My advice is to DCA into any change in AA.

DCA in daily or weekly?

I haven't checked yet but is it possible to link multiple bank accounts to the Vanguard account and have a set amount of cash from these accounts get pulled automatically (daily or weekly) by Vanguard to purchase 6 or more Vanguard mutual Funds. Has someone does this and have some pointers?

 

[79protons]

put 50% in Vanguard total stock market, 50% in Vanguard total bond market, go play golf.

 

[JBmadera]

certainly just my opinion but I would nail down exactly what my living expenses are/need to be and then let that requirement help drive the employment and asset allocation discussion. Once you nailed the expense piece I would check out Otar's work on investing for retirement.

best of luck!

 

[dante56]

put 50% in Vanguard total stock market, 50% in Vanguard total bond market, go play golf.

Sounds tempting.

Just curious, if that is what you have done with your portfolio too? And if not, why not?

 

[kyounge1956]

No proceeds from sale of any business; am purely a working stiff. Taxable income in 08 and 09 in cash but that is moot now. Never seriously got down to doing the AA for the nest egg. But thinking about it now. Running into the same issue of doing it all at once or DCAing in every day or every week.

Burn rate is less than 4%.

Developing confidence in an AA and re-balancing and staying the course every year requires an act of faith; I am not there yet.

You might find reading the Asset Allocation Tutorial thread and doing the homework assignments helpful in choosing an AA.

 

[dante56]

certainly just my opinion but I would nail down exactly what my living expenses are/need to be and then let that requirement help drive the employment and asset allocation discussion. Once you nailed the expense piece I would check out Otar's work on investing for retirement.

best of luck!

Will check out Otar's work. Expense piece is already nailed down exactly.

 

[nun]

After you have set aside a few years (say 2,3,4) worth of cash in a CD or savings account to buffer you from market swings just do what John Bogle does. Put a %age of your portfolio equal to your age into bonds and the rest into equities. So 45% equities, 55% bonds

As you have most of your assets in taxable accounts you will have to have some tax efficient bonds in there like Vanguard Intermediate-Term Tax-Exempt bond fund ((VWITX) and(VWIUX) for Admiral shares) and or Vanguard Limited-Term Tax-Exempt bond fund ( (VMLTX) and (VMLUX) for Admiral shares). Then make up your equities allocation from Vanguard Total Stock market and Total International Stock market.

In the retirement accounts go with Vanguard Total Bond Index fund ((VBMFX ) for Average Joe investors and (VBTLX ) and/or something like the Short-Term Investment Grade bond fund ( (VFSTX) and (VFSUX) for Admiral shares).

If your burn rate is 4% you should be able to sit back and sip a martini

 

[Nords]

DCA in daily or weekly?

DCA studies have shown that it works best when you plunk it all down in one lump at the very start. Of course the studies assume that the market goes up more than it goes down, and their conclusions are based on thousands of trials while you'd really only get to do that once. The odds are roughly 2/3.

DCA is most effective as a disciplined means of saving. You've already done that. Your job is to deploy your AA plan as effectively as you can. You could plunk it all down now and be done with it, dribble in a little every day (which sounds like a hassle), or dribble in some every week/month. The last sounds like it'll give you the best compromise of deployment and market timing. Of course if the market is rising the entire time you're dribbling then you'll be kicking yourself for not plunking it down all at once.

After 5-10 years the results won't be significantly affected by whether you plunked or dribbled.

 

[letsquit]

Consider a CD ladder. As far as distribution withdrawl strategy, consider a time sequenced strategy as opposed to asset allocation. Ray Lucia is an advocate (but he's also selling asset managemnt services!). His books are easy to understand, but implementation appears to be an art , not a science. Also google John Spitzer and Sandeep Singh for true academic studies on distribution and asset allocation.

 

[letsquit]

I've been relutant to put fixed income money into bond mutual funds, as I expect much higher interest rates in the next few years. Bond ladders might protect us somewhat. Although, you'd think we could find a mutual fund run like a bond ladder to minimize interest rate risk. Anybody know of such a fund? Thanks.

 

[dante56]

I've been relutant to put fixed income money into bond mutual funds, as I expect much higher interest rates in the next few years. Bond ladders might protect us somewhat. Although, you'd think we could find a mutual fund run like a bond ladder to minimize interest rate risk. Anybody know of such a fund? Thanks.

Same here. In fact, I pulled out of the Vanguard Total Bond Market fund last week and transferred the money into a stable value fund offered by my employer in my 401K account.

Also, I am looking into buying individual bonds and have met with some professional managers as well as Schwab and Vanguardi and have concluded that DIY is the best route. At first, I was thinking of only purchasing New Issues, but am now opening up to some secondary market bonds as well. There is a good deal of learning involved- may need to crack open some of the old textbooks from my Uniiversity of Chicago MBA Finance courses.

 

[nun]

Same here. In fact, I pulled out of the Vanguard Total Bond Market fund last week and transferred the money into a stable value fund offered by my employer in my 401K account.

Also, I am looking into buying individual bonds and have met with some professional managers as well as Schwab and Vanguardi and have concluded that DIY is the best route. At first, I was thinking of only purchasing New Issues, but am now opening up to some secondary market bonds as well. There is a good deal of learning involved- may need to crack open some of the old textbooks from my Uniiversity of Chicago MBA Finance courses.

I'm a big advocate of keeping things simple and using low cost mutual funds. I too have been worried by the possibility of interest rate increases hurting my bonds. However, intermidiate and short term bond funds won't get completely crushed and you'll be getting income from them. I seriously looked at my big Vanguard Total Bond Market holding, but as its duration is below 5 years and it is by definition diversified i decided to leave it alone as its in my portfolio to reduce volatility and produce some steady returns. Looking at it over the long term its chart is consistently upwards through rising and falling interest rates. If you get your allocation right who cares. You'll just take gains from your equities and buy more bonds at a nice low price.

I think many people are tempted to do things to try to maximize their returns which inevitibly involve market timing and pricey strategies requiring brokers. If your goal is to get 4% out of your money and sleep easily at night I'd go with a simple mutual fund approach. I can see the attraction of buying a bond ladder and holding to maturity, but I wonder if it would produce any noticible difference compared to just holding the total bond market as that's obviously made up of every type and maturiy of bond there is.

 

[walkinwood]

DCA in daily or weekly?

I haven't checked yet but is it possible to link multiple bank accounts to the Vanguard account and have a set amount of cash from these accounts get pulled automatically (daily or weekly) by Vanguard to purchase 6 or more Vanguard mutual Funds. Has someone does this and have some pointers?

First decide on your AA. I suggest doing a lot of reading so that you feel absolutely comfortable with it. You will be tested severely in the next downturn (whenever that happens), so you must be sure you understand why your AA is where it is. I did as I advise, but still had a hard time re-balancing in 08/09. I finally DCA'd the re-balancing too.

In terms of DCA timing, take your pick. Personally, I do it on a monthly basis and stretch it out to a year or more.

I did some abrupt AA changes in the past and was unlucky with just about all of them. If the timing had been different, I may have been lucky - its a toss-up. In ER, I lean towards protecting the downside.

Vanguard will let you link multiple bank accounts to your VG account. I don't know the highest frequency DCA that they allow - it may be a month.

 

[LOL!]

Lot's of folks are fearful of adding to their bond funds nowadays. It's a big topic on the Bogleheads' forum with these threads active:
Bogleheads :: View topic - Muni Bond Risk Brouhaha
Bogleheads :: View topic - In Which a Bond Market Timing Strategy is Entertained
Bogleheads :: View topic - The pain of rebalancing into bonds (low yields & risk, t
Bogleheads :: View topic - Thoughts on new 10-yr TIPS currently up for auction
etc.

These are interesting reads with a couple showing that a rise in interest rates of 1% to 2% is really no big deal. That is, the bond funds do no worse than cash after a couple of years.

If you are so risk averse that you cannot stand to lose money, then you don't have many choices.

 

[nico08]

Confused about Dollar Cost Averaging

DCA studies have shown that it works best when you plunk it all down in one lump at the very start. Of course the studies assume that the market goes up more than it goes down, and their conclusions are based on thousands of trials while you'd really only get to do that once. The odds are roughly 2/3.

Can someone help me to understand this statement? Isn't the whole point of Dollar Cost Averaging that you invest a set amount of money at regular intervals? By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time. If this is true, then how can DCA studies have shown that it works best when you plunk it all down in one lump sum at the very start?

Thank you for your insight.

 

[clifp]

Dante just curious what was your screen name on the retire early forum?

 

[LOL!]

midnighter, let me ask you this: If you buy when the S&P 500 is at 1000 all at once, is that better than buying when the S&P500 is at 1000, 1010, 1020, ..., 1500?

If you said it is better to buy at 1500 than at 1000, then no explanation will help you.

Basically, the market goes up 2/3rds of the time and down only 1/3rd of the time, so lump sum works better 2/3rds of the time. The funny thing is that "better" is only slightly better -- maybe 1% or 2% on average over the course of a year.

 

[79protons]

These are interesting reads with a couple showing that a rise in interest rates of 1% to 2% is really no big deal. That is, the bond funds do no worse than cash after a couple of years.

what happened in the early 1980s if you were in, say a 10 year bond fund, when inflation jumped from 9% to 14% in less than a year? I am going to guess that you lost 20% or so? I'd like to find some data and charts on that, because we could be in for a similar spike. If disaster can happen in the stock market, it can happen in the bond market as well.