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Impact of Low Money Market fund rates
Old 04-22-2008, 03:20 PM   #1
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Impact of Low Money Market fund rates

How has the reduction on rates paid on money market funds impacted you? (ie have you paid off debt, etc) It seems the rates are below that of inflation and overall real purchasing power is decreasing on money in these accounts.

Tomcat98
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Old 04-22-2008, 03:25 PM   #2
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How has the reduction on rates paid on money market funds impacted you? (ie have you paid off debt, etc) It seems the rates are below that of inflation and overall real purchasing power is decreasing on money in these accounts.

Tomcat98
Yes in a way. I decided such lousy yields I added more to my index fund in the taxable. Still have our emergency fund in MM.
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Old 04-22-2008, 03:52 PM   #3
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Unfortunately, there are not a lot of choices when it comes to liquidity. For those funds that you will not need for a while, it might be a good time to put into the market, as NML said.
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Old 04-22-2008, 04:33 PM   #4
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...I decided such lousy yields I added more to my index fund in the taxable...
That's one of the purposes/effects of low interest rates.

Make it so it's not worth keeping idle cash in a below-inflation account and that will drive people to equities and real estate.

Did I just say real estate?
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Old 04-22-2008, 05:53 PM   #5
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Moved a chunk of my cash into the new managed payout fund paying 5%.

Put another chunk into upgrading my house.

Otherwise enjoying the giant gobs of 6.25% cd's I bought at penfed a while back.
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Old 04-22-2008, 07:01 PM   #6
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Otherwise enjoying the giant gobs of 6.25% cd's I bought at penfed a while back.
Rub it in.. wish I had put in a lot more than $10K in the 6% Penfed.

The bad news is super safe investment have low or even negative real returns.
The good news is that there are numerous investments which generate reasonable returns with good liquidity. Vanguard short term corporate 4.25 GNMA 4.78% intermediate corporate 5.20% (more for >$100K investments.)


Profitable banks with conservative lending practices (no/little subprime liar loans) with dividends ranging from 4.2% to 5.5% Wells Fargo, BB&T, and US Bankcorp, GE 3.8%. A fair number of conservative REITs with yields of 5-6% like the Realty Company (O).

Personally, I have pretty much eliminated any cash in my IRAs and trimmed my cash in my taxable account to less than <1 year expenses.
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Old 04-22-2008, 08:36 PM   #7
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I did switch my brokerage core account to a muni fund instead of the default no-name cash account. About the same lousy return, but it's tax free.

Dan
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Old 04-22-2008, 10:16 PM   #8
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The bad news is super safe investment have low or even negative real returns.
The good news is that there are numerous investments which generate reasonable returns with good liquidity. Vanguard short term corporate 4.25 GNMA 4.78% intermediate corporate 5.20% (more for >$100K investments.)
The former are bad. Very bad. The latter are worse. Moderate risk investments with mediocre returns.

This is a marathon of annual decisions. When you see fricking cash selling for 6%+, buy a bunch. When you're being modestly rewarded for certain bond classes by a 1-2% margin over recent decent cash rates, buy them. GNMA's and short term corps for 4-5% suck. They're going to take a beating in the next 2 years.

When you can get 5%+ for treasuries, 8.5-9% for good quality high yield, and a 3% allegedly "real" yield on tips...back the truck up.

Just dont chase yield, dont commit to long range on crap, and dont take on more risk than the return warrants.

Can I put on some fake fangs and yell "ISM/OSM!" when you open the door?

Wait for it................
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Old 04-23-2008, 02:59 AM   #9
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The former are bad. Very bad. The latter are worse. Moderate risk investments with mediocre returns.

This is a marathon of annual decisions. When you see fricking cash selling for 6%+, buy a bunch. When you're being modestly rewarded for certain bond classes by a 1-2% margin over recent decent cash rates, buy them. GNMA's and short term corps for 4-5% suck. They're going to take a beating in the next 2 years.


I don't disagree. I don't find any bonds particularly compelling at these prices, although the spread for high yield is sufficiently large that I think they are worth investing a small portion of your assets.

The stability of the Vanguard GNMA $10/share +/- 5% with a yield of approximately 5.5% over many decades is IMO a worthy of considering. Your 100K gets almost twice the income of a money market and 50% more income than a CD. You are risking losing 5-10% of your principal at this levels and so on a total return basis, not particularly attractive. Its been a core bond holding for me for more than a decade and my mom for even longer. The income stability is very high so I don't get too excited if one month it 9.80 share and two months later is 10.40. I just spend $950/month it generates.

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When you can get 5%+ for treasuries, 8.5-9% for good quality high yield, and a 3% allegedly "real" yield on tips...back the truck up.

Just dont chase yield, dont commit to long range on crap, and dont take on more risk than the return warrants.
I completely agree almost to the percentage point. I bought TIPs near 4% real, Muni's over 5%, and CD's at 6%. As rates have fallen I've sold most of them.

Unfortunately, my time machine has malfunctioned and can't buy near these rates anymore. So if you need income... You have to do something.

Personally, I vote dividend stocks. But I can't in good conscious suggest that a conservative investor switch from CDs and Money Markets to Banks or financial stocks with hefty yields.

Are you suggesting that somebody who needs current income move money from a money market maturing CD to the new Vanguard funds. If not what do you suggest.

P.S. It is likely that OSM/ISM will make me a lot more money than the TIPs bonds I sold to purchase them...It just hasn't been worth the headache.
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Old 04-23-2008, 09:50 AM   #10
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I don't disagree.
One of my favorite terms from our old company.

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As rates have fallen I've sold most of them.
Me too.

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Are you suggesting that somebody who needs current income move money from a money market maturing CD to the new Vanguard funds. If not what do you suggest.
Its hard to make a recommendation at this point, but if I cant make the backward looking "you oughta have bought a truckload of those 6.25% cd's last year" I'd suggest splitting some money between target retirement income, lifestrategy income, wellesley or the 5/7% managed payout funds. Put some eggs in each basket and tweak them until you're getting your desired income level.

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P.S. It is likely that OSM/ISM will make me a lot more money than the TIPs bonds I sold to purchase them...It just hasn't been worth the headache.
What a load of risk to take for a bond! I'm still wondering if taking an equity level risk on a fixed income instrument is worth it for an equity level return.

I guess its another layer of diversification. Just wouldnt have been one of my first 8-10 picks.
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Old 04-23-2008, 11:04 AM   #11
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That's one of the purposes/effects of low interest rates.

Make it so it's not worth keeping idle cash in a below-inflation account and that will drive people to equities and real estate.

Did I just say real estate?
What got me to thinking about this is that I noticed our cash position has grown to about 1 1/2 yr salary so a lot of dead money. I could agree that it might drive people to spend instead of save. In my case I see no increase desire to go out and purchase anything above what I already had planned. We do see increased spending in gas, food etc.

As for equities I am comfortable with our positions and we already are adding to positions each month at a good clip. I guess I could work on retiring a mortgage which is at 6% but I am already on pace to have it retired in 3 yrs.

Tomcat98
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Old 04-23-2008, 11:18 AM   #12
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How has the reduction on rates paid on money market funds impacted you?
Tomcat98
It's gonna make my 2008 tax bill somewhat lower.
... an unexpected 'bonus' arrrrggggghhhhh

Ok, you all have me thinking again ... you're making my hair hurt.
I'm thinking I need to move some of it (my emergency fund) somewhere ...
any suggestions? Thanks
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Old 04-23-2008, 04:15 PM   #13
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We had a chance last year to liquidate our high-school sophomore's college fund (Berkshire Hathaway & Tweedy, Browne) for some of those bodacious PenFed 6% CDs.

But we said, "Nah, looks like Berkshire's about to take off again, and Tweedy's been on a real tear."

So we did it anyway in February, when Berkshire was still selling at $4700/share, and put it in two-year CDs for 3.85%. (Thanks to a strong nudge from Laurence.) I guess it's only money, but now it's absolutely safe money.

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I'm thinking I need to move some of it (my emergency fund) somewhere ... any suggestions? Thanks
I hear that bank stocks are poised to take off!

Just kidding. When we all sit around jawboning ways to squeeze another 50 basis points out of a small percentage of our investments, we're way past diminishing returns. It's probably better to just focus on asset allocation and on getting a life.
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Old 04-23-2008, 05:32 PM   #14
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... GNMA's and short term corps for 4-5% suck. They're going to take a beating in the next 2 years.
...
I sold my TIPS when they got down to 1.4% which is where they are at now. The last time we had a very low level of real yields Vanguard's short term investment grade (VFSTX) and short term bond index (VBISX) did OK. Here is some data:
Code:
 
..........2002 2003   2004 2005
VFSTX     5.2   4.2   2.1   2.3
VBISX     6.1   3.4   1.7   1.3
Not fabulous but you didn't take a beating either. Right now the spread between short term investment grade and short term treasury is 2.5%. Looking back the worst spread I can find was 2.2% at the start of the Iraq war.

So I'm planning on putting more into VFSTX (or admiral equivalent) as we get closer to a turn in the economy. When (or if) TIPS rates get up there again it will be time to increase the duration and load up. This is sort of a Larry Swedroe approach.
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Old 04-26-2008, 10:24 AM   #15
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I have a $78,000 CD coming due this Monday (April 28). The new interest rate is not going to be very good. I kind of see my CD's as a safety net. But, with the low rates, maybe the price is just too high for the the safety afforded. So, the question is, what might be ALMOST as safe as a CD in terms of not losing principal? I am familiar with ETFs and Vanguard funds, so specific suggestions in those two categories would be helpful. Thanks.
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Old 04-26-2008, 04:11 PM   #16
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I have a $78,000 CD coming due this Monday (April 28). The new interest rate is not going to be very good. I kind of see my CD's as a safety net. But, with the low rates, maybe the price is just too high for the the safety afforded. So, the question is, what might be ALMOST as safe as a CD in terms of not losing principal? I am familiar with ETFs and Vanguard funds, so specific suggestions in those two categories would be helpful. Thanks.
I just had a large CD mature last week and didn't have the guts to renew at 215 basis points lower than what I was getting.

Decided to leave 20% of the cash in there and take a small hit initially and move 80% of it to my Vanguard money market account, even though it's about 50 basis points lower than the renewal CD rate.

From there I'm going to dollar cost average a few thousand dollars at a time each month into the Vanguard REIT index fund. I figure I'm under-allocated in real estate and it's a good time to start moving my real estate allocation back up with this extra dead money. It might take me the next 12 months to get there, but I'm in no rush.

So, that's my philosophy. See what asset class you may be under-allocated in and dollar cost average into it.

With interest rates this low, equities and real estate are the two areas to move into.
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Old 04-26-2008, 04:45 PM   #17
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About a month ago I moved some to Fido Floating Rate, bought more DUK stock (through the reinvest plan), and this week bought I-bonds. Keeping a chunk for the next big swoon in the market.
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Old 04-26-2008, 07:47 PM   #18
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Well, my allocation is not exactly perfect (real weak re: emerging markets). But, in this situation I want to just slightly fudge away with one of my three CD's and put that CD money into something almost as safe as a CD and still be compensated a bit more for my additional, albeit, slight risk. I'm afraid that a single stock, including a solid one like DUK, would be too risky (for me). And, even with the REITS meltdown , I'm still overweight there. Is there something that looks like money, smells like money, is as almost as safe as money, is almost as readily available like money (if needed) and pays out about 4+%?
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Old 04-26-2008, 07:57 PM   #19
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Savings Bonds. HSBC MMF (3.05 % APY)? Waiting for better rates.
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Old 04-26-2008, 09:25 PM   #20
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Well, my allocation is not exactly perfect (real weak re: emerging markets). But, in this situation I want to just slightly fudge away with one of my three CD's and put that CD money into something almost as safe as a CD and still be compensated a bit more for my additional, albeit, slight risk. I'm afraid that a single stock, including a solid one like DUK, would be too risky (for me). And, even with the REITS meltdown , I'm still overweight there. Is there something that looks like money, smells like money, is as almost as safe as money, is almost as readily available like money (if needed) and pays out about 4+%?
Alliant Credit Union Savings Account 4.35% APY

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