Thinking of moving large chunk from MM to short term Bonds

[ejman]

Since ER back in 2002 I've maintained about 4 + years worth of living expenses in the Vanguard Prime MM fund. For most of that time, returns were acceptable being in the 2.5 to 5% or so range. This year as everyone knows the MM returns are near zilch. I'm thinking of transferring about 75% of my 4 year MM stash to a short term Bond ( either Vanguard Short term index or Vanguard short term investment grade). Current yields are between 1.5 to 3.5 % for those two.

Opinions? yeah or Nay? Other suggestions?

 

[W2R]

It's all a matter of risk tolerance, I suppose? I have started moving some of my cash into bond index funds this summer, as well. But I still have quite a bit in MM. CD's might be another option.

Edited to add: What I meant by risk tolerance is this. During the economic collapse, I was concerned about the dropping value of my bond funds. Some dropped so fast that it almost seemed as though they were stock funds. This was not within my comfort zone for my cash/bonds/fixed money. So, I moved my MM cash to Vanguard Treasury MM funds instead of investing more in bond funds as previously planned. Now, I have moved completely out of Treasury MM, mostly into Prime MM (which doesn't pay well at all either), and I am gradually moving into bond funds. I was too terrorized by the economic events to do that in Oct 2008 - March 2009.

 

[LOL!]

There is an excellent thread about this subject over at bogleheads:
Bogleheads :: View topic - On this quest for money market alternatives

The gist is that if you move from cash to bonds, then you are altering your asset allocation. Bonds can lose money. Even short-term bonds lost 10% last year and have since recovered. So if this cash is something you need to not lose any money, then these short-term bond funds are not for you.

For myself, I have not held cash at all in the last couple of years, but have used Vanguard short-term investment grade and GNMA funds --- both of which don't get any respect in the thread I linked. I can sleep comfortably if my funds lose 10% as they did last year.

I cannot predict what the future may hold, but I'm not converting them to cash.

 

[ejman]

It's all a matter of risk tolerance, I suppose? I have started moving some of my cash into bond index funds this summer, as well. But I still have quite a bit in MM. CD's might be another option.

Edited to add: What I meant by risk tolerance is this. During the economic collapse, I was concerned about the dropping value of my bond funds. Some dropped so fast that it almost seemed as though they were stock funds. This was not within my comfort zone for my cash/bonds/fixed money. So, I moved my MM cash to Vanguard Treasury MM funds instead of investing more in bond funds as previously planned. Now, I have moved completely out of Treasury MM, mostly into Prime MM (which doesn't pay well at all either), and I am gradually moving into bond funds. I was too terrorized by the economic events to do that in Oct 2008 - March 2009.

Yes, a very scary period I too was paralyzed by events. I must say I was also paralyzed by events back in the crash of 87 and that paralysis turned out to be a blessing. I'll have to dig in deeper and see what the actual October 08-March 09 dip was for the Vanguard ST bond funds. I can stomach a 10% drop in value of my "cash" pot more than that I dunno

 

[ejman]

There is an excellent thread about this subject over at bogleheads:
Bogleheads :: View topic - On this quest for money market alternatives

The gist is that if you move from cash to bonds, then you are altering your asset allocation. Bonds can lose money. Even short-term bonds lost 10% last year and have since recovered. So if this cash is something you need to not lose any money, then these short-term bond funds are not for you.

For myself, I have not held cash at all in the last couple of years, but have used Vanguard short-term investment grade and GNMA funds --- both of which don't get any respect in the thread I linked. I can sleep comfortably if my funds lose 10% as they did last year.

I cannot predict what the future may hold, but I'm not converting them to cash.

I did sleep "relatively" well during the October 08- March 09 debacle knowing I have 4 years worth of expenses covered. The opportunity cost of all that cash however is certainly starting to get my attention.

 

[DblDoc]

It's all a matter of risk tolerance, I suppose? I have started moving some of my cash into bond index funds this summer, as well. But I still have quite a bit in MM. CD's might be another option.

Edited to add: What I meant by risk tolerance is this. During the economic collapse, I was concerned about the dropping value of my bond funds. Some dropped so fast that it almost seemed as though they were stock funds. This was not within my comfort zone for my cash/bonds/fixed money. So, I moved my MM cash to Vanguard Treasury MM funds instead of investing more in bond funds as previously planned. Now, I have moved completely out of Treasury MM, mostly into Prime MM (which doesn't pay well at all either), and I am gradually moving into bond funds. I was too terrorized by the economic events to do that in Oct 2008 - March 2009.

I dodged that bullet, fortunately, by following Larry Swedroes advice: Take your risk in the equity portion of your portfolio and stick with short and intermediate term treasuries for bonds with some TIPS for good measure. For sure the yields may not be as good as corporates and GNMA's but those treasury funds did just as expected when the market melted down.

DD

 

[haha]

I did sleep "relatively" well during the October 08- March 09 debacle knowing I have 4 years worth of expenses covered. The opportunity cost of all that cash however is certainly starting to get my attention.

Which is likely to be at least in part a reflection of us being almost 6 months from the debacle.

Ha

 

[Rich_by_the_Bay]

While it's true that even short term bonds can lose money they are very unlikely to do so for the long haul. I use them (short term federal) as a cash equivalent but only in combination with at least 2-3 years in MMF or CDs. In other words, I would not use ST bonds to write checks against for my daily expenses, but I am quite comfortable using them to replenish my MMF after 2-3 years of longevity (or sooner if returns dictate).

 

[deserat]

Since ER back in 2002 I've maintained about 4 + years worth of living expenses in the Vanguard Prime MM fund. For most of that time, returns were acceptable being in the 2.5 to 5% or so range. This year as everyone knows the MM returns are near zilch. I'm thinking of transferring about 75% of my 4 year MM stash to a short term Bond ( either Vanguard Short term index or Vanguard short term investment grade). Current yields are between 1.5 to 3.5 % for those two.

Opinions? yeah or Nay? Other suggestions?

The MM returns are what led me to look at CDs - I still have some in the the MM, but for a specific chunk of money, I wanted a better yield and was willing to let it sit there for 2 years. That's enough time to get a decent interest-rate, yet short enough to rethink the investment vehicle and adjust if there are large changes (think runaway inflation).

In any case, you are smart to have the 4 year cushion in cash to allow the other vehicles to smooth out in their performance.

 

[walkinwood]

I have kept one year of expense in cash, and moved the rest to Vanguard's Short-Term Investment Grade Corporate fund.

From my Quicken records, Sep 1, 08 to March 31, 09 results with no addition/removal of cash, and dividends reinvested : -6.52%. I think the VFSUX hit a high on 1/18/08 and a low on 12/8/08. Return during that time was -7.88%.

I can live with this kind of fluctuation on money I don't need for the next 12 months.

 

[kaneohe]

You could put liquid needs in a savings account at Alliant Credit Union (NCUA insured) at 2.00% (but subject to change.......recent trend down, then flat). Stuff not needed right now .....1-4yr CD ladder 2.2-3.1%. No flunctuation in principal value.

 

[ejman]

I have kept one year of expense in cash, and moved the rest to Vanguard's Short-Term Investment Grade Corporate fund.

From my Quicken records, Sep 1, 08 to March 31, 09 results with no addition/removal of cash, and dividends reinvested : -6.52%. I think the VFSUX hit a high on 1/18/08 and a low on 12/8/08. Return during that time was -7.88%.

I can live with this kind of fluctuation on money I don't need for the next 12 months.

Thanks for the info on VFSUX walkinwood. Was the -6.52% return actual for the period or the annualized rate that quicken gives you?

 

[ejman]

You could put liquid needs in a savings account at Alliant Credit Union (NCUA insured) at 2.00% (but subject to change.......recent trend down, then flat). Stuff not needed right now .....1-4yr CD ladder 2.2-3.1%. No flunctuation in principal value.

Yes, this could be an option. I'm not familiar with credit unions or NCUA insurance... well, I need to do more research.

The CD route is certainly another option although this option bothers me if inflation spikes quickly. Knowing my personal psychology I tend to "sit" on things and I worry with CD's that I would just let them continue even as inflation heats up.

My experience with bond funds has been that although the NAV takes a hit when inflation spikes, the dividends fairly quickly compensate for this as managers adjust their portfolios

 

[LOL!]

Thanks for the info on VFSUX walkinwood. Was the -6.52% return actual for the period or the annualized rate that quicken gives you?

We own this fund. Vanguard ST investment grade grew 3.9% from 8/1/2008 to 7/31/2009. This is calculated from our results and the same number is reported on the Vanguard web site. The YTD return is 10% which has helped it make up lost ground.

Treasuries were where to be in the last half of 2008. Vanguard Intermediate Treasury is up 6.85% for the past 12 months even though it is down 2.5% YTD.

So the warning once again: These bond funds are not cash and can lose money. OTOH, if you want to weather a 10% loss, just have 10% more in the fund than you will need. Then a drop of 10% will still leave you with enough money to meet obligations.

 

[kaneohe]

Looks like this fund recovered nicely in a short period.VFSUX - Mutual Fund Quote for Vanguard Short-Term Investment-Grade Adm - MSN Money

anyone know how to get a similar chart for a longer period? I think I found one that
goes about 10 yrs but not any longer. Trying to see the periods when value dropped and how long to recover. Can find NAV for longer periods but that doesn't show the dividend component of return.

 

[headingout]

I'm a few years from retirement, have 1 year expenses in VFSTX, 1 year in a USAA savings account. I was surprised at the drop in VFSTX over the past year but it wasn't bad enough to be truly alarming and I always felt confident that it would recover much quicker than equities, which it did.

 

[2good]

Yes, this could be an option. I'm not familiar with credit unions or NCUA insurance... well, I need to do more research.

Another option right now is a savings account with Discover Bank (FDIC insured) at 2%. Money can be withdrawn at any time.

 

[walkinwood]

Thanks for the info on VFSUX walkinwood. Was the -6.52% return actual for the period or the annualized rate that quicken gives you?

Thanks for picking that up - its the annualized rate.

 

[grumpy]

Another option right now is a savings account with Discover Bank (FDIC insured) at 2%. Money can be withdrawn at any time.

Thanks, 2good. I had been procrastinating on this for a while. I had a high 5 figure amount in Vanguard MM Prime earning almost nothing. I opened a Discover Bank savings account yesterday, on-line and mailed a check for $50K this morning.

 

[audreyh1]

I moved 2% of my cash allocation into FGMNX (Fidelity GNMA fund) a few months ago. I'm still counting it as "cash", but maybe one day I'll reassign it and change my bonds/cash allocation accordingly.

One of the appeals to me of a GNMA fund was the government guarantee - kind of like having FDIC insurance on the underlying bonds. I don't know how long the current "insurance" on MM funds is going to last past the Sept? deadline. A lot of the MM funds I have now I have switched to "government reserves" type MM (not treasury-backed — that pays almost 0%) because I'm tired of having to monitor the current temporary MM fund guarantee program.

Maybe I'm being overly prudent here now that we are out of the woods on the financial meltdown (and I do believe we are), but I have a feeling that I will never feel quite the same way about commercial MMs again. The current absolute interest rate difference is not enough for me.

LOL! Just wait! When short term interest rates start rising and you start seeing a large interest rate % difference between government-backed MM and commercial MM I'll probably change my tune. Then again, that would be due to economic expansion which is a good environment for commercial MMs.

Audrey

 

[audreyh1]

Not all bond funds behave the same.......

For those of you lamenting the behavior of diversified bond funds in your portfolio, I had the same unpleasant experience. Dodge and Cox Income which has evolved to become my "core" bond fund at over 60% of my bond allocation did a spectacular nose-dive last year and it was the best behave one!

In fairness, the total return for DODIX in 2008 was fractionally positive, so it didn't actually lose money for the year but that is not what I wanted my bond allocation to do during a bear market! At the points where I rebalanced it was also showing a significant loss (for a bond fund). I did not realize that DODIX had eschewed government bonds in favor of corporate bonds - admittedly very high quality corporates. But still, not what I expected. Fortunately, DODIX has recovered very well after the debacle, and continues to rally.

So I as I rebalance going forward, I plan to gradually replace DODIX with Vanguard's Short-Term Index fund VBISX. This is a higher credit quality bond fund and another benefit is the duration fixed at around 2.5 years which I think is a great number for "short-term". Exactly the goal I have for my bond allocation - short-term very high quality bonds.

An AA purist might ask why not only use a government bond fund as the asset class to balance out equities as they are even less correlated? Well, other than the unattractive longer duration of an intermediate fund like Fidelity Government Income FGOVX, my instincts push me so strongly towards more diversification in a bond fund that I just can't quite bring myself to do that. Obviously, I am not a purist! I just needed to find the "right" kind of diversification and duration. VBISX is quite a steady-eddie in spite of owning some corporate bonds. It should still work well for rebalancing against equities.

I've been tracking the relative performance of the three different bond funds for quite a while. Here is a comparative Yahoo chart:

Here is the link to the Yahoo page you can play around with the comparisons and time lines. 2 Year Chart of DODIX vs VBISX vs FGOVX
You can click on the S&P box to also compare equities, but that distorts the chart pretty badly - hard to see anything else with the huge S&P swing.

Audrey

P.S. Knocking on wood so I don't jinx anything.

 

[REWahoo]

Audrey

P.S. Knocking on wood so I don't jinx anything.

Whatever you do, don't say "Wheeee..."

 

[W2R]

Whatever you do, don't say "Wheeee..."

I must admit that recent market events have inspired some glee!!!

 

[audreyh1]

Whatever you do, don't say "Wheeee..."

LOL! I'll try not to! I don't think I've actually said that in a long time, unless it was when we were running some rapids in a canoe last month!

Audrey

P.S. Want2Retire! For Gosh Sakes girl! Restrain yourself! Keep cool .

 

[DayDreaming]

Another option right now is a savings account with Discover Bank (FDIC insured) at 2%. Money can be withdrawn at any time.

For high interest savings accounts, there's SmartyPig - silly name but they give 2.75% interest right now. SmartyPig is set up to make it easy for people to reach a savings goal they have for buying something specific. But there's no reason you can't just use it as a place to park some cash for a while. It's not a regular bank account though - you can't make small withdrawals - I think you have to withdraw the whole amount when you say you've reached your goal. It's FDIC insured.