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What to buy now?
Old 05-22-2008, 01:04 PM   #1
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What to buy now?

I had a jumbo C D which has just matured. I have also recently sold some stock and find myself with what I think is way too much cash ( MM funds ). Most of my investments are in real estate ( my mortgage-free home ) and index funds within tax protected accounts. I'm afraid that I am not as sophisticated as an investor as many of you on this forum and humbly ask for any suggestions as to what I should do with 100k+ in cash ( taxable ), the proceeds from the CD. This is money that I should not need for quite some time. I have pretty much rejected real estate, annuities and high fee mutual funds. I am now trying to understand bonds, but I am, mostly by reading opinions in this forum and elsewhere, getting the feeling that they are not in favor now. I would appreciate any feedback, general or specific, if any of you would be so kind. BTW, I am 60 and semi-retired. So what should I do with $ 100k?
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Old 05-22-2008, 01:24 PM   #2
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Is there some reason you wouldn't just set up a portfolio of index funds (bonds and stocks) similar to what is in your tax deferred accounts? What are your return objectives, risk tolerance, etc.? Do you need this money to remain liquid?
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Old 05-22-2008, 01:59 PM   #3
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Is there some reason you wouldn't just set up a portfolio of index funds (bonds and stocks) similar to what is in your tax deferred accounts?
I've been wondering the same thing, although it is counter to what most suggest here. Having a portfolio of mostly tax-inefficient bonds in the tax deferred accounts and long-term stocks in the taxable accounts would seem to make it difficult to rebalance the overall portfolio.
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Old 05-22-2008, 02:18 PM   #4
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Brewer-
Here's the thing. For several years we have kept a portion of our $ in CD's because my DW thinks that a portion should be extremely low risk and I didn't mind as long as we were getting a fairly decent yield but rates are so low now that even she agrees that perhaps there is something better. No we don't expect to need this money for quite some time. She would still like to put it back into CD's in the near future if rates were to go back to a reasonable level (over 4 1/2 - 5%). With this money I would just like to see some medium term growth, but she doesn't like the idea of opening another brokerage account, and then if CD interests rates return to higher level, moving it again. I would call our combined risk tolerance low to medium. BTW, any guesses as to when rates are likely to go up? Good chance I will buy a bond index fund being as how we have no bonds at all right now. Do you have any recommendations? Vanguard? Fidelity? Are there any taxes on bond funds before the shares are sold? Sorry to be so naive. Thank you for your help.
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Old 05-22-2008, 02:33 PM   #5
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Here's the conundrum -- if you take more risk with the money until CD rates return to 5% or so, that means you'll be invested during a period of rising interest rates, which are usually bad for both stocks and bonds.
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Old 05-22-2008, 03:04 PM   #6
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Ziggy-
That is pretty much exactly what she and I have decided, stocks: bad time to buy, bonds: bad time, CD's: bad time, hence the original question. I am leaning toward what Brewer said. I guess that would be better than having too much cash losing ground to inflation. Is it a good time to but anything? Or is it the lesser of several "evils"? Once again, forgive my naivite'
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Old 05-22-2008, 03:13 PM   #7
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Brewer-
Here's the thing. For several years we have kept a portion of our $ in CD's because my DW thinks that a portion should be extremely low risk and I didn't mind as long as we were getting a fairly decent yield but rates are so low now that even she agrees that perhaps there is something better. No we don't expect to need this money for quite some time. She would still like to put it back into CD's in the near future if rates were to go back to a reasonable level (over 4 1/2 - 5%). With this money I would just like to see some medium term growth, but she doesn't like the idea of opening another brokerage account, and then if CD interests rates return to higher level, moving it again. I would call our combined risk tolerance low to medium. BTW, any guesses as to when rates are likely to go up? Good chance I will buy a bond index fund being as how we have no bonds at all right now. Do you have any recommendations? Vanguard? Fidelity? Are there any taxes on bond funds before the shares are sold? Sorry to be so naive. Thank you for your help.
OK, so your risk tolerance is relatively low. Fair enough.

Bonds are pretty simple. You buy bonds or a portfolio of bonds (AKA a bond fund). Interest payments are taxable (unless you bought munis), and if you sell bonds you may realize a taxable gain or loss (or the bond fund may do so). If you buy fixed rate bonds, you make money if rates subsequently drop, and you lose money if rates subsequently rise. The longer the maturity of the bonds, the greater the potential gain/loss. You can also buy bonds that range from extremely safe (treasuries) to highly speculative.

In the current environment, I would suggest that you not pick a bond or bond fund with an average maturity over 5 years. There is a significant risk that treasury and low risk bond rates may rise in the next few years (inflation-driven), so you don't want to be locked into long maturities with what may turn out to be a low yield.

I can think of a few viable alternatives, in order of increasing risk:

- Pen Fed is currently offering a 5 year CD with a 4.5% APY. If rates rise, you can pull the money out with a penalty of 6 months' worth of interest.
- VMLUX is the Admiral shares version of a Vanguard muni fund that invests in limited duration muni bonds. Currently yields just over 3%, tax free, and relatively safe.
- VWINX is Vanguard Welllesley fund, which is roughly 60% bonds, 40% stocks. It has been around a long time and if you hold it for any length of time it is pretty hard to lose money on it, but it will flop around more than the other two possibilities. Currently yields a bit over 4%.

Conseidering your risk tolerance, I probably wouldn't try to get any sexier than the likes of the above. Having said that, you could also opt to do something like 50% CD, 25% of VWINX, and 25% of Vanguard's high yield fund.
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Old 05-22-2008, 04:03 PM   #8
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FYI: National City Bank is offering 5% APY on CDs of $10,000 or more to customers who have a savings or checking account at the bank. Although the website says it's for 48 month or longer terms, this week I parked some $$ there for 30 months at 5%.


https://www.nationalcity.com/main/CD/pages/CD-Type4.asp
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Old 05-22-2008, 08:19 PM   #9
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FYI: National City Bank is offering 5% APY on CDs of $10,000 or more to customers who have a savings or checking account at the bank. Although the website says it's for 48 month or longer terms, this week I parked some $$ there for 30 months at 5%.


https://www.nationalcity.com/main/CD/pages/CD-Type4.asp
Just make real sure you stay under the FDIC cap with these guys.
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Old 05-22-2008, 10:32 PM   #10
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A couple of more suggestions for bond funds: At Vanguard there are several shorter term bond funds with duration of under 5 years. I use the Vanguard short-term investment grade bond fund (VFSUX) and the Vanguard GNMA fund (VFIIX). Both have yields around 4.5%. It's true that their price (NAV actually) fluctuates a little bit. but they are really not that volatile.

I would (and do) hold these in a tax-advantaged account so that I do not have to worry about taxes on the dividends. If you have any stock index funds in tax-deferred accounts, then you will not be able to deduct any losses in them on your tax return. Therefore, if you wanted to buy any bonds funds in your taxable accounts, you should think about doing the following: (1) Buy tax efficient stock index funds in your taxable instead of bond funds and (2) Sell the same amount of tax efficient stock index funds in your tax-deferred and buy tax-inefficient bond funds with the proceeds in the same account. The net result is that you have the SAME amount of stock index funds as before and the desired amount of bond funds, but in more tax favorable locations.
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Old 05-23-2008, 07:53 AM   #11
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I don't have any specific advice, but in case you decide to build a portfolio with your taxable money, you might find the following article of some interest: Tune Up Your Taxable Portfolio - Morningstar Specialists

cheers
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Old 05-23-2008, 12:43 PM   #12
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Consider Floating Rate Bank Loan funds. After years of stable NAV they were whacked in Aug and Mar. In theory there is no interest rate risk because they float with LIBOR. Credit risk perception fueled the decline even though they are ahead of other debt in a default.

Fidelity has the best unleveraged open end fund and there are many Closed end funds selling at the discount but they are leveraged. The open funds have had a redemption problem that the CEs don't. Examine and try allocating a small portion until you get comfortable with the vehicle.

FFRHX yielding 6%+
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Old 05-23-2008, 01:59 PM   #13
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Thanks to all of you. It looks like this is exactly the sort of information I need to narrow down my research, which I will spend much time on. For my own good, I really need to become more literate in this area, anyway. Unlike many of you, math and finance are not my strong suits, but I am determined to not hire an adviser. I read at least six books per month and love reading/study but it is mostly history, biography, politics and fiction. For this type of study I will just have to grit my teeth and remember that the results will make the discomfort worthwhile. It is possible that our nest egg was hatched more through luck than I like to think ( LBYM, real estate appreciation, equity indexing, etc.). But I am probably boring you with my personal minutiae.
I did not expect this many sincere and knowledgeable responses. I will definitely investigate each of your suggestions and almost certainly act on one or more. Thanks again.
Brewer, does National City Bank have a bad reputation? Am I correct that up to 200k is insured by the FDIC if two names are on the account?
DAB, what does the acronym LIBOR represent?
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Old 05-23-2008, 04:47 PM   #14
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The London Interbank Offered Rate (or LIBOR, pronounced /ˈlaɪbɔr/) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market).

It's now used to set many rates including residential mortages.
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Old 05-23-2008, 05:59 PM   #15
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I'm in a similiar position and here is our current fixed income allocation:

20% VBIRX Vanguard Short Term Bond Index (3.25% yield)
10% VFSUX Vanguard Short Term Investment Grade (4.37% yield)
9% Prime Money Market fund (2.35% yield)
5% Ibonds with 3.4% fixed real yield, you cannot get these anymore

This is all pretty short term as I sold our 10yr TIPS after a very good run.
I expect the fed to raise rates quicker then they did in the last recession which is the reason to stay short term -- 2 years or shorter. If real rates move up I'd like to buy back those TIPS but won't buy until 10yr TIPS are above 2.3% (the long term average for real yield on intermediate term bonds).
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Old 05-23-2008, 07:00 PM   #16
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I think investors should know a little about real interest rates history. Here is an excellent article with data to back it up:
PIMCO - IO August 2003
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Old 05-25-2008, 12:41 PM   #17
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FYI: National City Bank is offering 5% APY on CDs of $10,000 or more to customers who have a savings or checking account at the bank. Although the website says it's for 48 month or longer terms, this week I parked some $$ there for 30 months at 5%.

Thanks for the headsup.
I went to their website and only saw 4.5% for 36 and 48 months CD and no mention that you had to have their saving/checking account. How did you get 30 months, my prefers also?
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Old 05-25-2008, 01:24 PM   #18
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Since you have a significant amount of money, why not consider a bond ladder? This is a series of bonds with different maturity dates. As each one matures, use the proceeds or reinvest it for the same time period. This enables you to capitalize on future increases in bond yields while providing the choice of liquidating a "rung" of the ladder on a regular basis. It's like dollar cost averaging for fixed income.

The Basics Of The Bond Ladder
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Old 05-27-2008, 10:42 AM   #19
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Brewer, does National City Bank have a bad reputation? Am I correct that up to 200k is insured by the FDIC if two names are on the account?
Not necessarily, but they have had some issues lately and had to come begging for capital recently, so I would be careful about teh FDIC limits. But I would tell you to stay under the FDIC cap with any bank, even the strongest, because its simply not worth whatever modest amount of risk you are running to be over the cap.

Read up at the FDIC's website the exact details of how to best maximize coverage.
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