Where to put the Cash?

[Culture]

I just sold a commercial property worth about 30% of my total assets. Prior to this sale, I had only 10% of my non-real estate investments as cash, with the logic that my commercial property made of the balance of my cash position (I am not saying this made sense, just this is what I did).

Anyway, with the sale I want to move 40% of my portfolio to cash. Currently, I have the sale proceeds in a MM fund. The questions is, where to put it? Short term, intermediate term or long term bonds? Inflation protected securities? Commercial or government? The little cash I had before was split equally between MM, short term and int. term bonds (all vanguard indexes).

Ignoring the question as to whether I should or should not have a 40% cash position (just assume I should), were would you put the new cash, and why? I have the flexibility to put this is tax sheltered or non-tax sheltered accounts (obviously, if I place it in tax-sheltered accounts this means more of my equity investments will be in non-tax sheltered accounts, as it is a zero sum game. Currently, I am thinking of putting it all in VFITX (Vngrd Int Term Gvmt Bonds).

 

[twaddle]

I assume you mean "bonds" rather than "cash."

Put them all in your tax-sheltered accounts since bonds are the least tax efficient investment right now.

I would go for a mix of nominals and inflation-indexed, but the yields on both are pretty poor right now. I wouldn't go very long term since there's little or no term premium right now. I'd also check around for CD's since you can probably get a higher safe yield than gov't bonds.

 

[Rich_by_the_Bay]

The questions is, where to put it? Short term, intermediate term or long term bonds? Inflation protected securities? Commercial or government? The little cash I had before was split equally between MM, short term and int. term bonds (all vanguard indexes).

Pretty hard to answer from the information you chose to share. I would wonder

a) how soon do you need to get at this money
b) are you insisting on the principle being guaranteed or can you tolerate a little fluctuation in the value over time.
c) does it need to be protected as in FDIC or similar?

Nothing wrong with a competitive money market fund for cash, yet you seem eager to put is somewhere else. Maybe tell us a little more about what you're trying to accomplish here - you'll get better answers from people a lot smarter than I am. Just a suggestion.

 

[Culture]

I assume you mean "bonds" rather than "cash."

Yes. Right or wrong, I am including bonds in my definition of cash. My plan is to keep the bonds and REITs in the tax sheltered accounts, with equities held in tax managed equity indexes.

I am cautious of inflation protected securities, because quite frankly I do not feel I completely understand them.

 

[twaddle]

I am cautious of inflation protected securities, because quite frankly I do not feel I completely understand them.

Well, you probably shouldn't invest in anything you don't understand. Keep the money parked in your MM until you've read up on what you're getting into.

Swedroe has a good book that describes TIPS and a useful heuristic on an allocation for them. There's also a good book called, I think, "The Bond Book."

 

[Culture]

a) how soon do you need to get at this money

I expect to start the withdrawal phase in 6 years. However, I expect to have a 3.0% to 3.5% withdrawal rate, so the investment horizon is long term (40 years).

b) are you insisting on the principle being guaranteed or can you tolerate a little fluctuation in the value over time.

I accept fluctuation is unavoidable.

c) does it need to be protected as in FDIC or similar?

No.

Maybe tell us a little more about what you're trying to accomplish here

I am trying to move my asset allocation to 40% cash/bonds from the 10% cash/bonds where it is currently. I want to asset allocation to reflect a long-term investment horizon.

 

[haha]

Yes. Right or wrong, I am including bonds in my definition of cash.

Any reason for this? Granted, unless you are limiting yourself to money zero maturity the breakover between cash and other US treasury fixed interest paper is arbitrary. But that doesn't mean it isn't important. To group cash with, say 10 or 20 year bonds, or even worse with long term corporates is to create enough misunderstanding to get hurt.

Many of us would consider 13 week treasury bills "near cash"; 26 week T-bills "less less near cash", and anything longer definitely not cash. And nothing with meanigful price risk should be considered cash. That means that at times like this, maybe one should question whether standard MMFs deserve to be called cash.

Ha

 

[Culture]

Nothing wrong with a competitive money market fund for cash, yet you seem eager to put is somewhere else.

I guess my main concern in the MM rates are very low, way too low for long-term investments. I intent to keep 3 to 5% in MM funds as a emergency fund, but no more.

 

[LOL!]

YOu can divide your fixed income up as 33% TIPs, 33% Intermeidate term bond, and 33% money market fund. All in a tax-deferred account. Take your risk on the equity side, let your fixed income be safe.

 

[Culture]

Any reason for this?

I guess it is only a bad habit. I realize that there is a difference between cash and bonds. However, given that a bond has an almost guaranteed (speaking of treasury bonds here) return of principle and interest if held to maturity, I still this it is a reasonable grouping.

Given the almost certainty of inflation, cash actually has more of a price risk than a MM or short term bond fund, and probably more than int. or long term bonds if held to maturity (IMHO).

 

[twaddle]

Sounds like you simply need to find a higher yield MM account in the near term. Vanguard Prime is still > 5%, I believe.

 

[Culture]

YOu can divide your fixed income up as 33% TIPs, 33% Intermeidate term bond, and 33% money market fund. All in a tax-deferred account. Take your risk on the equity side, let your fixed income be safe.

Reality is I will probably end up doing something like this. Like a true indexer, I am always worried about dumping everything into one basket.

 

[Rich_by_the_Bay]

With the additional information you added, I'd put most of it in a total bond index fund. You'd get intermediate term bond returns, you'll never beat the overall bond returns but you'd never trail it either.

I'd also put about 1-2 years' needs in a TIPS fund (tax sheltered) to help you wait out an inflationary period long enough for stocks to start beating back inflation.

 

[Culture]

Sounds like you simply need to find a higher yield MM account in the near term. Vanguard Prime is still > 5%, I believe.

Yeah, but the 5 year return is 2.76% compared to 3.89% for vanguard treasury int. term bonds and 5.11% for vanguard treasury long term bonds.

 

[twaddle]

Yeah, but the 5 year return is 2.76% compared to 3.89% for vanguard treasury int. term bonds and 5.11% for vanguard treasury long term bonds.

I see your problem. You think historical returns predict future returns. Sorry, current yield is the best prediction of future return on bonds.

 

[Culture]

I see your problem. You think historical returns predict future returns. Sorry, current yield is the best prediction of future return on bonds.

The yields are also higher for short, int. and long term bonds.

 

[Culture]

I see your problem.

I think that problem is that our avatars might be cousins.

Edit (spelling)

 

[twaddle]

The yields are also higher for short, int. and long term bonds.

Yes, the yield curve is slightly positive right now. But I'll reiterate my suggestion that you read up on bonds before investing. If you're looking for low volatility, then you should understand the concept of "duration" if nothing else. Once you have that under your belt, you'll probably be able to choose a mix of investments that implement your plan more effectively.

(Edit: sorry for the confrontational tone BTW. I was talking on the phone while posting, and the [-]turkey[/-] reptilian portion of my brain took over.)

 

[Culture]

(Edit: sorry for the confrontational tone BTW. I was talking on the phone while posting, and the [-]turkey[/-] reptilian portion of my brain took over.)

Not a problem. I love the given-and-take on this board. It has the lowest s/n ratio of almost any board I know of.

 

[twaddle]

OK, I had some time to re-read this thread. So, you're basically looking for a long-term set-and-forget bond fund allocation for the next 40 years, right? But what I don't understand is that you feel short-term yields (such as your MM fund) are too low. Or rather you feel that returns would be too low based on historical data.

I guess it might be helpful to understand a few things:

1) The last 5-years were unusual in that the fed had pushed short-term rates into the negative real yield territory for much of that term. Cash was truly trash, and that's reflected in the poor 5-year MM return.

2) Historically, short-term t-bills have a real yield averaging around 1%.

3) Historically, longer-term treasuries have a real yield averaging around 2.5%.

So, looking at today's yields in that historical context, a MM yield of 5% nominal (about 2.5% real) is outstanding! You want to keep that as long as you can.

Longer term, who knows what inflation will do, but the current term premium doesn't buy you much protection if inflation goes up. That's why a mix of TIPS and nominals makes a lot of sense to me. In fact, locking in the current low long-term yield makes pretty much zero sense to me, so I would focus on short-term nominals and mid-term TIPS.

If you want to chase a little more yield, look at Vanguard's junk bond fund. At around 8%, the spread looks good in historical terms, but there is plenty of risk there if the economy goes into a funk.

 

[chinaco]

If you intend to keep a substantial amount of money in short-term paper... you may need to concern yourself with inflation. Especially if that money equal say 10 years of income. I would invest in something that is going to keep up and hopefully earn a little.

As someone stated do not invest in something that you do not understand... educate yourself.

Dealing with inflation in fixed securities is important. If you cannot do it directly, consider using something to hedge.

 

[Culture]

So, looking at today's yields in that historical context, a MM yield of 5% nominal (about 2.5% real) is outstanding! You want to keep that as long as you can.

I think I get you point. As long as short term yields stay high like they are now (relative to long bonds), there is no reason to take the duration risk that exist with long bonds (interest rates going up). However, when/if long yields increase significantly relative to MM yields, I should consider moving to int and long bonds.

Correct?