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TIPS instead of MMF
Old 01-24-2010, 07:56 PM   #1
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TIPS instead of MMF

Hey guys, this is my first post, I'm 19 and I've been investing with Vanguard for 6 months now. I've enjoyed reading the forum, everyone here seems pretty smart and knowledgeable.

I have 2 questions I've been thinking about:

So right now my Vanguard Prime Money Market Fund (VMMXX) is yielding nothing, what would stop someone from using the Vanguard TIPS index (VIPSX) for extra cash until interest rates rise? Both have the same expense ratio, 0.25%, and there aren't any redemption fees for selling before 2 months or anything like that.


Also, when these vanguard funds say there is a minimum initial investment of $3000, can you put that amount into the fund and then withdraw as much of it as you want? Can you put the $3000 in there and then take it all out so that you can then start investing, say $200 per month in the future?

Thanks for the help.
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Old 01-24-2010, 09:28 PM   #2
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Originally Posted by John Galt View Post
So right now my Vanguard Prime Money Market Fund (VMMXX) is yielding nothing, what would stop someone from using the Vanguard TIPS index (VIPSX) for extra cash until interest rates rise? Both have the same expense ratio, 0.25%, and there aren't any redemption fees for selling before 2 months or anything like that.
Nothing wold stop anyone from doing what you propose, unless he wanted to be sure not to have drawdowns. VIPSX varies in price, the MMF stays at $1, barring disasters.

Ha
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Old 01-26-2010, 02:08 AM   #3
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Also, when these vanguard funds say there is a minimum initial investment of $3000, can you put that amount into the fund and then withdraw as much of it as you want? Can you put the $3000 in there and then take it all out so that you can then start investing, say $200 per month in the future?
I recently opened a Vanguard Prime MM fund to use for distributions from other funds, but I didn't want to keep $3k in there, either. I called Vanguard (contact number is on the site; also they have online chat help) and asked them about this; they told me that $1k is the minimum balance, and if it were less than that and they noticed they might close the fund and send me a check.

But I was asking about Prime, so you may want to ask them about other funds.
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Old 01-26-2010, 08:13 AM   #4
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As well as inflation fears driving up interest rates, so can demand for money, so it's very possible that the likely high deficits governments around the world are running will drive up real interest rates as well as economies recover. TIPS have a very large sensitivity to changes in real rates, and currently the real rate of return offerd by TIPS is very low compared to historical averages. IMHO, the current real rate on TIPS is not paying one adequately for bearing this risk.
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Old 01-26-2010, 03:45 PM   #5
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VIPSX varies in price, the MMF stays at $1, barring disasters.
This point should be highlighted. VIPSX can be quite volatile. I don't consider it an appropriate alternative to a "cash equivalent" like a money market fund.

I think you'd be better off with one of the online savings accounts (like ING Direct, Capital One Direct, Ally, etc). Several are paying 1.5% on FDIC insured deposits.
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Old 01-26-2010, 05:27 PM   #6
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I only keep about $500 in Vanguard's Prime Money Market fund. Last month I had $6 in it. Vanguard never closed it. If the balance drops to zero, Vanguard will close the fund and you will have to bring in $3K to reopen it.

I don't know how much money you have to invest, but if it were me I would rather put the money in short term CDs or even i-bonds rather than VIPSX (unless it's some kind of emergency fund money, in which case I would look into high yield savings accounts). At least your principal would be protected with CDs or i-bonds. Currently i-bonds pay 3.36% (annualized) for the first 6 months, CDs at USAA for example pay 1.4-2.15% for 1-2 year terms.
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Old 01-26-2010, 07:52 PM   #7
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Take a look at the chart of VIPSX. The NAV or price per share can drop by 10% in a few months or go up by 10%. It is a bond fund and bonds funds are not rock solid like a CD.

As for the yield, one has to be careful since Vanguard quotes the "real" yield which is different than the yields quoted for money market funds and for bond funds. Morningstar reports a current yield of 1.7% and even that is suspicious.

Anyways, if you don't mind if your investment loses 10% in 6 months, then by all means buy this fund instead of a money market. But you might also look at other fixed income funds that might lose 10% in 6 months as well for a better deal.
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Old 01-27-2010, 07:46 AM   #8
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Alright, thanks for the info guys.

I know everyone here is big on indexing, which is going to be the core of my portfolio, but what do you feel about high dividend yield stocks like Frontier (FTR), which has a dividend yield of 13%. Supposedly the dividend is secure.

How much of your portfolios do you allow yourself to mess around with individual stocks, I am thinking 10%.
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Old 01-27-2010, 09:09 PM   #9
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IMHO, the current real rate on TIPS is not paying one adequately for bearing this risk.
If you buy actual TIPS, not the fund, the last auction rate was around 1.4%. If you hold the bonds to maturity, then there is no risk of losing principle.

I know 1.4 isn't an exciting rate by historical TIPS standards, but there aren't a lot of great alternatives right now. I bought some for our 401Ks. I do think inflation will take off eventually, so I'm hoping to make the bulk of the earnings money on the eventually high inflation factor.

We have a high yield checking account with a credit union paying 2.5%. There are some good deals like that or even better if you search around the Internet. A lot of the financial bloggers post the best deals around.
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Old 02-23-2010, 03:27 PM   #10
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Alright, thanks for the info guys.

I know everyone here is big on indexing, which is going to be the core of my portfolio, but what do you feel about high dividend yield stocks like Frontier (FTR), which has a dividend yield of 13%. Supposedly the dividend is secure.

How much of your portfolios do you allow yourself to mess around with individual stocks, I am thinking 10%.
That's about what most people recommend. No more than 10% of your total assets in any single company stock, including the one you may be working for.
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Old 02-24-2010, 07:26 AM   #11
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I've never been a Vanguard customer, but my impression of their "customer service" is that if they feel that you're moving money around too frequently (whether it's within their published rules or not) then they'll find a way to punish you. Eventually the fastest way to move money around becomes putting it with someone else.

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Supposedly the dividend is secure.
That's pretty funny!

You might want to read the stock-picking thread on shipping stocks and VaCollector's posts about Bank of America's dividend. Or what's left of those dividends.

If a stock (or a mutual fund) is being marketed for its eye-popping dividend, then it's a sign of financial manipulation to promote a dividend. You'd probably rather own a stock that pays a reasonable dividend (3-5%) and is devoting its efforts to selling ever-rising amounts of product with big margins.

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How much of your portfolios do you allow yourself to mess around with individual stocks, I am thinking 10%.
UncleMick refers to this as the "testosterone poisoning" portion of his portfolio.
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Old 02-24-2010, 08:50 AM   #12
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I've never been a Vanguard customer, but my impression of their "customer service" is that if they feel that you're moving money around too frequently (whether it's within their published rules or not) then they'll find a way to punish you.
Really? That kind of sucks. Anyone else experienced this? How often would they consider too often?
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Old 02-24-2010, 09:02 AM   #13
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I've never been a Vanguard customer, but my impression of their "customer service" is that if they feel that you're moving money around too frequently (whether it's within their published rules or not) then they'll find a way to punish you.
I have been a VG customer for over 20 years and my experience with their customer service is quite different than your "impression".

Just an FYI for anyone considering VG...I have had nothing but positive experience from my 20 years+ with VG...both taxable and IRA Rollover accounts...now quite a significant sum Low costs good service. YMMV

TomCat
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Old 02-24-2010, 09:04 AM   #14
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Really? That kind of sucks. Anyone else experienced this? How often would they consider too often?
Once you sort out your asset allocation, you won't be moving your money too often. When MM yields dropped, I kept a minimal amount in the MM fund since that was the pathway to my checking account. The rest I put in a blend of bvisx (short bonds) and vbiix (intermediate bonds). You could just use vbmfx (total bond). Figure out how long you want to keep the money in bonds and buy a duration to match.

You may have already been there, but spend some time on the boglehead forum: Bogleheads Investing Advice and Info
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Old 02-24-2010, 09:11 AM   #15
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I've been a Vanguard customer for 5 years and have never had anything but a positive experience with their customer service. I don't do a lot of "messing around" with individual stocks, but I have made several trades of both Vanguard and other mutual funds with no hint of punishment for my activity.
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Old 02-25-2010, 03:13 PM   #16
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Really? That kind of sucks. Anyone else experienced this? How often would they consider too often?
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Originally Posted by TomCat View Post
I have been a VG customer for over 20 years and my experience with their customer service is quite different than your "impression".
Just an FYI for anyone considering VG...I have had nothing but positive experience from my 20 years+ with VG...both taxable and IRA Rollover accounts...now quite a significant sum Low costs good service. YMMV
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I've been a Vanguard customer for 5 years and have never had anything but a positive experience with their customer service. I don't do a lot of "messing around" with individual stocks, but I have made several trades of both Vanguard and other mutual funds with no hint of punishment for my activity.
Yeah, yeah, yeah, sure, I'm reading these "impressions" from "actual Vanguard customers" on the Bogleheads.org discussion board.

Those of you who don't trade often don't have any complaints. But those of you contemplating the maneuvers that JG is considering might be better off posting those questions to the Bogleheads and perhaps be able to get the feedback from those who've actually tried his idea.

My point is that I wouldn't use any mutual fund company, let alone Vanguard, for chasing yield. Our checking account is linked to our brokerage account and we can get what we want where we want it in a day or two.
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Old 02-25-2010, 03:36 PM   #17
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I've been a Vanguard customer for 5 years and have never had anything but a positive experience with their customer service. I don't do a lot of "messing around" with individual stocks, but I have made several trades of both Vanguard and other mutual funds with no hint of punishment for my activity.
I noticed when rebalancing in January that after selling some VTSAX (or was it VFWIX? or both? I sold both), Vanguard told me that I couldn't sell any more of that fund for two months. I don't remember why. This was the first time I had ever sold any equity fund. I don't really care but just thought I'd mention it in this thread.
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Old 02-25-2010, 05:19 PM   #18
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I noticed when rebalancing in January that after selling some VTSAX (or was it VFWIX? or both? I sold both), Vanguard told me that I couldn't sell any more of that fund for two months. I don't remember why. This was the first time I had ever sold any equity fund. I don't really care but just thought I'd mention it in this thread.
I think you have it backwards. Some Vanguard funds when you trade out of them, you can't BUY back in for 2 months. Note: this only includes purchases and exchanges by phone or internet. Dividend and CG reinvestments are OK, and if you REALLY have to buy back in you can do it by snail mail.

I have been with Vanguard since 1978. 32 years. I have four words about Vanguard: Best. Investment. Company. Ever. (and not because Jack Bogle goes to my wife's church, and that is where we were married). Because over 32 years compounded, low cost and tax efficiency really do matter!

Btw I think I was one of the earliest investors in VFINX - back then you could exchange shares of any of the components of the S&P 500 for shares in Jack's "crazy index fund" - I exchanged my shares of Sears, Roebuck for the fund and saved a hefty commission - no discount brokers back then! Certainly no $8 trades.

Here is the policy:

Learn more about our frequent trading policy



All open VanguardŽ funds accept exchange requests online, by telephone, or by mail. However, because excessive transactions can disrupt the management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on exchanges and other transactions.
If you sell or exchange shares of a Vanguard fund, you will not be permitted to buy or exchange back into the same fund, in the same account, within 60 calendar days. However, this rule does not apply to:
  • Vanguard money market and short-term bond funds.
  • Vanguard ETF™ Shares.
  • Transaction requests submitted by mail to Vanguard by shareholders who hold their accounts directly with us. Please note that transaction requests submitted by fax or wire are subject to the policy.
  • Purchases of shares with fund dividends or capital gains distributions. For example, if you reinvest dividends or capital gains, these purchases will not be blocked even if shares in the fund were sold or exchanged within the previous 60 days.
  • Transactions made through Vanguard’s Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business OnlineŽ.
  • Sales of shares by Vanguard to pay fund or account fees.
  • Transfers and re-registrations of shares within the same fund.
  • Purchases of shares by asset transfer or direct rollover.
  • Conversions of shares from one share class to another in the same fund.
  • Sales of shares through checkwriting.
  • Section 529 college savings plans, certain approved institutional portfolios and asset allocation programs, as well as trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to this policy.)
For information about the Vanguard Variable Insurance Funds’ frequent-trading policy, see the funds’ prospectus. A separate policy applies to participants in employer-sponsored retirement plans administered by Vanguard.
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Old 02-25-2010, 05:24 PM   #19
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I think you have it backwards. Some Vanguard funds when you trade out of them, you can't BUY back in for 2 months. Note: this only includes purchases and exchanges by phone or internet. Dividend and CG reinvestments are OK, and if you REALLY have to buy back in you can do it by snail mail.
OH - - - Thanks!! THAT must be what they said. I wasn't paying much attention since I am pretty much a buy-and-hold'er, except for rebalancing. Thanks for correcting my unintentional mistake.

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I have been with Vanguard since 1978. 32 years. I have four words about Vanguard: Best. Investment. Company. Ever. (and not because Jack Bogle goes to my wife's church, and that is where we were married). Because over 32 years compounded, low cost and tax efficiency really does matter!
I am really, really happy with Vanguard though I have only been with them a few years. What I really liked best was the polite, expert, helpful people on the phone. Well, and the low costs, of course.

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Btw I think I was one of the earliest investors in VFINX - back then you could exchange shares of any of the components of the S&P 500 for shares in Jack's "crazy index fund" - I exchanged my shares of Sears, Roebuck for the fund and saved a hefty commission - no discount brokers back then! Certainly no $8 trades.
How cool! You are a Vanguard original. Say hello and thanks to Jack Bogle! I have never met him or seen him in person but he has sure made an impact on investing.
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Old 02-25-2010, 05:45 PM   #20
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Vanguard encourages buy and hold and discourages frequent trading in order to keep the costs low and protect long term investors. If you want to move your money every 3-4 months, you won't have any problem doing it at Vanguard. If you want to move your money every week or even every month, look elsewhere because their frequent trading policy will get in the way.
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