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Money Mkt. vs Bond Funds vs decision paralysis
Old 07-14-2010, 09:14 AM   #1
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Money Mkt. vs Bond Funds vs decision paralysis

A few years ago when the market was up and I rebalanced (has it really been that long ago?!), I rebalanced into Money Market rather than Bond Funds like I usually would. That unusual move on my part turned out to be good. But time is getting on. The Money Market return is now 0, but at least I'm not losing capital... well, I am, I'm not keeping up with inflation on those $ now.

It seems I should be moving those MMkt. $ over to a Bond Fund, but there has been this thought of interest rates increasing right around the corner. But it hasn't happened yet, for all the talk of it. And now I see more about it being a ways off. So rising rates that seemed imminent, now seem indeterminate.

This is all in an IRA, and I do not plan on tapping it for many years.

I guess the usual thought would be to go to a short term bond fund to limit the downside when an upside in interest rates occurs.

But I just can't seem to do it... decision paralysis... stuck... not moving...

Any thoughts?

And is a bond fund with a 3 year duration short enough to minimize a big loss on the eventual interest rate increase? It has a higher return than a short-term fund of only 1.n years duration. Risk/reward balance between those two durations?

Any thoughts appreciated!
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Old 07-14-2010, 09:31 AM   #2
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I just stick to my targeted percent allocations. I've seen both situations where some have zero percent in cash (money markets) and only keep equities and bonds or where some keep all three. I prefer to have all three. That is equities, bonds and cash and try to keep to my targeted percentage allocations. This approach takes the analysis of "what's the climate like?" out of the equation.
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Old 07-14-2010, 09:43 AM   #3
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Quote:
Originally Posted by Telly View Post
...

But I just can't seem to do it... decision paralysis... stuck... not moving...

Any thoughts?

....
That's been my investment style all my life. Whenever I got a large (to me ) amount like an annual Keogh deposit, I'd give myself a deadline, have it all in equities by end of the month or the end of the third quarter; then when the market got more iffy like now, I split it into three chunks, and invest it when I can literally push myself to do it. I'm no expert on investing, to say the least. I have a lot of money parked in Ginnie Maes at $11.00, I would not go there now (except for reinvesting), the NAV is just too high. I also have a nice chunk in Zeros which will mature in 2015 but now is not the time to go there IMO, I paid $14/share in 1990 and now why would I pay about $103 for a volatile product? My thought is that I would not throw money at bonds now. I'm selling Ginnies in small chunks when I can overcome the inertia which is hard because holding money there looks good for awhile.
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Old 07-14-2010, 10:59 AM   #4
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Go short term.... the rate is over 2% and the downside is low..

OR... spread the money around with various online MM accounts... I see many with 1 to 1.5% rates. I have one at AIG and it is very easy to move money between it and the checking account.
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Old 07-14-2010, 12:58 PM   #5
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I would go three-year bonds. The impact of a rate change will be minimal, if any. Then in 3 years you will be in a better position to decide long term.
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Old 07-16-2010, 03:54 PM   #6
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Couple things: SHV is a t-bill ETF which pays something...not a lot, but more than a MM fund.
SHY is the 1-3 year ETF, investing ONLY in treasury issues and yielding over 1%. Principal risk is there, but pretty low.
Finally, BSV is the Vanguard short term bond fund. It does own corporates, but has a higher yield than SHY.
I am an SHY type of guy, being a Permanent Portfolio lover, but have owned BSV too and liked it a lot.
So there are plenty of alternatives. Take it slowly and get acclimated to it, and you will gradually get a feel for how they act.

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Old 07-16-2010, 04:35 PM   #7
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That unusual move on my part turned out to be good. But time is getting on.
Depending on when you did it, rebalancing to MM vs. bonds may not have been better. 1 year and 5 year returns on bonds has been better than MM.
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Old 07-16-2010, 04:39 PM   #8
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Looking at that "universal portfolio" (25% each stocks/bonds/MM/gold), I have trouble seeing where it will get its 8% average annual growth over the next year. Gold must surely (?) getting close to maxed out, interest rates are close to zero and stocks... just maybe, I guess.
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Old 07-17-2010, 09:35 PM   #9
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But I just can't seem to do it... decision paralysis... stuck... not moving...
A great way of avoiding decision paralysis is to DCA your money. Move a little bit into your target allocation and repeat over time. This way you shouldn't have to worry about moving a big chunk of money and then having rates go up the next day.
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Old 07-18-2010, 09:38 AM   #10
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I second photguy's suggestion. Determine your final target allocation and DCA the money into it monthly over 6 months, a year, 2 years - whatever feels comfortable to you. I am DCA'ing 10% of my portfolio from short term corporates to int. term treasuries over a 2 year period.

I jumped into new asset categories (EM & REITs) with both feet once they had dropped a bit in 2008, only to suffer really big losses when they fell even more. I would have benefited with a DCA approach even if it meant I would have lost some gains if they had rocketed up instead of dropping like a stone.
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Old 07-18-2010, 11:13 PM   #11
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The following article was posted awhile ago on the Fidelity site. It provides some helpful perspective about the tradeoffs (penalties) of staying in cash. It provides some helpful comparisons and analysis of the benefit of assuming just a little risk to earn just a little interest vs. staying in cash. Additional comparison for using CD's, TIPs etc. Title is Cost of waiting in cash.

https://guidance.fidelity.com/viewpo...aiting-in-cash
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Old 07-19-2010, 01:02 PM   #12
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Looking at that "universal portfolio" (25% each stocks/bonds/MM/gold), I have trouble seeing where it will get its 8% average annual growth over the next year. Gold must surely (?) getting close to maxed out, interest rates are close to zero and stocks... just maybe, I guess.
No portfolio including the 'permanent portfolio' is flawless and guaranteed to return anything. The question is where to put my money where it will make the most/lose the least. The PP may be as good as any portfolio but I have my AA and I'm sticking to it. Didn't do so well in May
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Old 07-19-2010, 01:31 PM   #13
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I keep 2 yrs expenses in MMF and banks, and 3 yrs in short term federal bonds. Hard to imagine short term federal bond fund doing less than MMF over a 2 y period, though it's possible. Meanwhile I'm earning a couple of percent more than MMF.

You can also earn 1.29% in FDIC-covered savings at online banks, like Ally.
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Old 07-19-2010, 03:31 PM   #14
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Telly:

Was in the same boat as you. Had IRA monies in MM.(earning 0%)

Made the decision to buy, Vanguard GNMA. AT the time, paying around 3%. ( bought at 10.88 NAV),

Only problem is once interest rates start to rise, your GNMA NAV will drop.

Just be ready to dump your GNMA's when the economy picks up.
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Old 07-20-2010, 03:38 PM   #15
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Vanguard said recently they believe that short and medium term bonds already have priced in some anticipated rate increases, and might not take much of a hit if rates rise modestly. Who knows?
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Old 07-21-2010, 09:33 AM   #16
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Well, I moved half of the MM IRA $ to the bond fund with a 3 year duration. DCA'ing a multiplicity of small amounts over time would be a big pain for me, no automated method available. Plus, I always monitor to see that exchanges happen properly.

Years back, if I had stuck to my original plan of rebalancing equities <--> bond funds, and not have decided that time to use MM as the recipient from selling off some equities, the decision paralysis would not have come up (or so I think!).

In doing some research of Morningstar sheets at the library, and other sources, seems that all the dollars that people piled into bond funds as they ran screaming from equities a few years ago, is mostly still there in bond funds.
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Old 07-21-2010, 06:21 PM   #17
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For relatively short-term, liquid investments, I haven't found anything that beats CDs right now. Government insured, paying nearly twice what the government pays on its treasury notes, and some can be redeemed with very low penalties if interest rates goes up. That is a win, win, win situation. I have a bunch of money with Ally Bank in their 5-yr CD. It's paying nearly 3% and only charges 60 days interest if you want to withdraw your principal early (because interest rates have gone up and you want to reinvest at a higher rate, for example). Another way to think about it, if interest rates spike up to 5% and you want to refinance, you CD has an effective duration of just one-quarter of a year. The higher the spike, the lower the duration. It's a great deal.
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Old 07-21-2010, 07:00 PM   #18
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I'd probably either look at a short term investment grade bond fund or a CD ladder.

In the CD ladder you might put 20% into five different CDs with maturities of 1, 2, 3, 4 and 5 years. Then when each CD matures you roll into a new 5 year CD.

But as G4G said above, if there's only a small penalty (1-3 months interest) for early withdrawal of a longer duration, it might be worth doing as the "break even" point even with the penalty might be less than a year.
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Old 07-21-2010, 07:26 PM   #19
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But as G4G said above, if there's only a small penalty (1-3 months interest) for early withdrawal of a longer duration, it might be worth doing as the "break even" point even with the penalty might be less than a year.
With the yield curve as steep as it is the break-even is really favorable for CDs right now. You have to make sure you understand the break fee, though, as they are all different. I've seen ones that allow them to charge "economic replacement value" which is calculated by the bank . . . I wouldn't touch those.
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