Best place to park cash for 1-?? months

[sgeeeee]

Although Salaryguru may actually be on welfare, and not a guru at all, . . .

Oh no. My secret is out.

 

[cute fuzzy bunny]

Patience is way overrated IMHO.

I have plenty of patience, I just hate to wait.

A terrific dialog. I have a couple of other web sites of information to digest that were referred to. My theory of market trending is thoroughly perforated, partially bandaged, and apparently raises as many questions and doubts as it may have answered.

My plan is to wait until after the end of the year as I dont feel like buying any dividends this year, then shift about 10% into vanguards tips fund, choose one or two others to park 30-40% more of it, and the rest into the vanguard corporate short term fund. I'm definitely not into 'timing'...once i'm in, i'm in. It just looks like the good news and upsides are dialed in, and short of one of our marines finding bin laden and perforating him with a kitchen utensil, more good news may be hard to find. I just have a gut feeling that we're going to see a 10-15% downdraft sometime in the next few months. For the non-US large cap equities like reits and whatnot, I'll buy those now where prudent.

For the fishermen, I'll spare you the photo of my "catch of the day" from cabo san lucas: a 1/2" minnow I 'caught' in the webbing of my swim suit...

 

[Cut-Throat]

Doug, John Galt

That was a 115lb. fish, the next day I got one that the guide was estimating at 165 lbs. - He said we were not bringing that one on board!


GDER,

That's not a diaper grin, it's what we call a **** eating Grin! - The same Grin that I had on my last day in the Navy when I knew that I wouldn't have to look at any Fat Lifers any more

 

[eytonxav]

Hey Cut-throat, I haven't fly fished since I was a wee lad back on the beaverkill, still have my Fenwick though! Seeing your pic and signature graphic is giving me the itch again. The nice thing about ER is that there are so many interests one can pursue and you have the time to do it .

 

[Ted]

 I am not
interested in "eventually" any more.  This is an area
where my wife and I are perfectly matched.  We
live in the moment.  Any planning ((financial or otherwise) is short term, although we might use
long term investments to produce current income.
In brief, we want what we want and we want it right now.  It's a philosophy similar to not buying any green bananas.  Patience is way overrated IMHO.

Everyone's time horizon is certainly their own business, but people who expect to either catch big fish, or sustain the spending in retirement necessary to go where they can be caught, had best have some patience and a long term financial plan that includes stocks.

I do a fair amount of fishing myself, mostly on streams with an ultralight spinning outfit. I usually catch about 5 fish per each one caught by buddies with fly rods, though I agree that fly rods are a lot of fun when you're not having to retrieve the fly from branches behind you.

I think that the motivation for fishing is the same as the motivation for gambling. The gratification of winning is heightened by the hours of anticipation. It probably relates to the prehistoric hunting instinct, which is why men are more attracted to hunting, fishing, and gambling than women are.

 

[unclemick]

My mental time horizon is forever - hence my fondness for div. stocks - even view SEC yield of our balanced index funds as the 'floor' with 4% SWR as the ceiling.

Liking both chicken and beef - if either goes on sale - plan to buy some - to eat or as stocks - provided they pay dividends.

 

[John Galt]

HI Ted! Excellent post, re "time horizons, fishing"etc.

About time horizons, I try to live as if today was my last day, but provide for the possibility that I might live to be 100. You know my position re. stocks. BTW, I too do
a lot of fishing. Flyfishing can be fun, but certainly is not the most efficient if you are interested in "catching" as
opposed to just fishing. I will allow there are exceptions to this.

John Galt

 

[Cut-Throat]

Ted,

Back on the topic of parking cash. I am in a similar situation and specifically are you recommending the Vanguard VBISX - for this?

 

[Bob_Smith]

Cut-Throat,

I took a look awhile back at the performance of Vanguard's Short Term Corporate fund vs. their Prime Money Market Fund on a year by year basis. Over the past 20 years, the ST Corp fund beat the MM fund 15 times, often substantially. On the 5 years it lagged, it made up the difference (plus additional) the following year, every year except one. It would appear the downside is limited. Here are the numbers:

ST CORP MM

2002... 5.22% .......1.65%
2001... 8.14% .......4.17%
2000... 8.17% .......6.29%
1999... 3.30% .......5.01%... -1.71%, next yr. +1.88%
1998... 6.57% .......5.38%
1997... 6.95% .......5.44%
1996... 4.79% .......5.29%... -0.5%, next yr. +1.51%
1995... 12.74% ......5.82%
1994.. -0.08% .......4.08%... -4.16%, next yr. +6.92%
1993... 7.07% .......3.01%
1992... 7.20%........3.74%
1991... 13.08% ......6.14%
1990... 9.23% .......8.27%
1989... 11.45% .....9.39%
1988.... 6.95% ......7.59%... -0.64%, next yr. +2.09%
1987.... 4.46% ......6.65%... -2.19%, and next yr. -0.64%%
1986... 11.42% .....6.61%
1985... 14.90% ....8.08%
1984... 14.22% ....10.57%
1983.... 9.11% .......8.94%

 

[wabmester]

Over the past 20 years, the ST Corp fund beat the MM fund 15 times, often substantially.

We've been in a declining interest rate environment for the past 20 years. If I were a betting man, I'd bet that the next 20 years will look a lot more like 1964-1984 than 1984-2004, and you won't see any cap gains from bond funds for a while.

 

[Bob_Smith]

We've been in a declining interest rate environment for the past 20 years.  If I were a betting man, I'd bet that the next 20 years will look a lot more like 1964-1984 than 1984-2004, and you won't see any cap gains from bond funds for a while.

Actually, the capital return for that fund was negative in seven years out of 20, even in the declining rate environment you describe. A fund with a duration of only 1.8 years has a limited downside, whether you're in a rising or a declining rate environment. It probably isn't a good idea to put a large portion of one's assets into such a fund if it will be needed in only a few months. But over time I think one comes out ahead by avoiding cash and using short term bond funds instead, for that portion of their assets that might otherwise be in cash.

 

[John Galt]

I've never really been a stock investor. I dabbled back in the 60s when I had no money to speak of. Then, later on I was in a couple of employer sponsored
retirement plans which had money in stocks. Very late
in my career I had stock options from my employer,
which I exercised.

Since I ERed in 1993, I've owned one preferred stock
which paid a nice dividend. That's about it.
However, even if I had been more active in common
stocks in the past, I still would be out now. Once I
saw that I could make it until the end, even if I had to
settle for a low dividend/interest rate, that was it for me.

So, I have no argument with those who forsee higher
inflation, rising interest rates, or maybe a roaring bull
market. Could all happen. Probably will. But I have
plenty of cash, plenty of real estate (for inflation
protection) and a steady predictable cash flow.
Plus, I will be 62 in a couple of years and some day
I might even come into an inheritance. Why take a
chance at this point?

John Galt

 

[unclemick]

Park and un-parking is an interesting bet with the duration of vg short term bond funds in the 2 yr range. So - keep some in MM for real short and venture the rest? I'm still leaning to

ward VBSIX ( corp. around 2 yr duration ) with the gamble that interest rate fluctuation will not overwhelm yield and make me 'feel locked in'.

 

[unclemick]

BTY - I lost the bet in 94 - ie had some vg short term corp and was 'locked in mentally' until 95 rebound - just looked it up.

Thnaks Bob_Smith, you jogged the old memory cells - the few I have left.

 

[Ted]

Ted,

Back on the topic of parking cash. I am in a similar situation and specifically are you recommending the Vanguard VBISX - for this?

The data on the performance of Vanguard's short term bond fund presented by Bob Smith says it all. Note also that there was only one year when this fund had a negative return, which was very small. Thus, I feel very comfortable using it for "cash" beyond my immediate spending needs, which I take care of with a checking account.

 

[cute fuzzy bunny]

Ok, that sounds like its agreed that the short term bond fund is a good short term parking space for cash with higher returns and nominally more risk than a money market fund. [monte burns] Exxxxcellent [/monte burns]

How about for a little bit longer? The last few days I've been looking longingly at vanguards Wellesley Income fund (vwinx).

Roughly a 9.4% 10 year total return, almost 11% over the life of the fund (1970). In the last 10 years, 3 down years of 1%, 1% and 4.5%. About 2/3 bonds and 1/3 value stocks paying high dividends.

Over the last 10 years, the dividend/gains throwoff from this given a 500k investment has been about $29,600 per year, with that figure only varying a few thousand from best to worst years. Thats more than I need to live on with less than I have to invest. Since my fiancee is going to keep working part time, we've also got a nice steady cashflow for a lean year and to cover taxes and extraordinary expenses.

The NAV has wandered with the stock market but in a more muted manner than the typical stock fund. Over any 5 or 10 year period the nav improvement exceeds inflation.

Admiral shares charge a 0.2% management fee.

On face value, it appears that if you had at least 500K and can live on $30k/year or less, you could park your investments here, have it pay out the dividends and gains to your checking acct, and go fishing for 30 years.

The thing that keeps plucking my string is every bond expert on the planet saying that the bond market is going off a cliff within a year. But then the Fed talks down interest rate and inflation increases.

Yes, I do need ritalin

 

[Telly]

on Dec 29th, 2003, 11:42am, Cut-Throat wrote:Ted,

Back on the topic of parking cash. I am in a similar situation and specifically are you recommending the Vanguard VBISX - for this?

The data on the performance of Vanguard's short term bond fund presented by Bob Smith says it all.  Note also that there was only one year when this fund had a negative return, which was very small.  Thus, I feel very comfortable using it for "cash" beyond my immediate spending needs, which I take care of with a checking account.

I'm getting a bit confused here as to who is talking about which Vanguard bond fund...

VBISX is Vanguard's Short Term Bond INDEX fund.

VFSTX is Vanguard's Short Term Corporate Bond fund.

 

[Cut-Throat]

Hi Telly,

I'm glad you asked, I did not want to again. I am as confused as you are

 

[cute fuzzy bunny]

Both funds look fairly safe, the short term corporate bond fund has a slightly higher return, the short term index contains both corporate and government bonds, a lower return, and presumably a slightly improved margin of safety.

I believe Ted expressed a preference for the corporate short term fund in another thread, but perhaps he has other thoughts here.

 

[Cut-Throat]

TH,

Just finished reading "What Wall Street Does not Want you to know".

They had a quote in there - "More money has been lost waiting for a correction in the Stock Market than the Corrections themselves"

I feel the same way as you do, but it's hard to admit that market timing is probably a lost cause.

 

[cute fuzzy bunny]

Oh I cant disagree.

But I just dumped my big beautiful house for a nice little tract house, and if I slide that cash into the market now with these vaporous prices and it drops and wipes out the nice gain I just scraped up, I'd be mighty PO'd. It just seems that whenever "everyone" thinks its going to keep going, thats when the anchor gets thrown overboard.

I had planned on moving into the vanguard short term corporate for a while, but I think i'll put a largish hunk of my uninvested capital into this vanguard wellesley income fund. Unless we see a sharp interest rate hike and/or inflation - - and I dont see that in 2004 - - I should enjoy a modest NAV improvement from the value stock portion of that fund and a nice income stream. I'll hold up a quarter to a third of the remaining cash for any correction that comes along. Plus I still have a fairly good size chunk invested and a big IRA thats split between vanguard healthcare and the total market index.

So all is not entirely lost on this thickhead.

 

[Bob_Smith]

VBISX  is Vanguard's Short Term Bond INDEX fund.

VFSTX  is Vanguard's Short Term Corporate Bond fund.

Here are the numbers for the two funds for the last eight years. The Index fund was created in 1994. The average duration for the Index fund is 2.5 years at the moment, while the duration of the Corporate fund is only 1.8 years. The current yield on the corporate fund is 2.98%, while the yield on the index fund is 2.39. Shorter duration, higher yield, and minimal risk - my money is in the corporate fund now. It's probably splitting hairs, but it seems a decent bet to me.

S.T. CORP S.T. INDEX
2002... 5.22% .......6.10%
2001... 8.14% .......8.88%
2000... 8.17% ....... 8.84%
1999... 3.30% .......2.08%
1998... 6.57% .......7.63%
1997... 6.95% .......7.04%
1996... 4.79% .......4.55%
1995... 12.74% ......12.88%

 

[wabmester]

Unless we see a sharp interest rate hike and/or inflation - - and I dont see that in 2004

While you should be OK with short-term bonds, I'm curious about how you (or anybody else) can think we won't see a spike in rates real soon now.

All of the signs are there: stock dividends and prices are up, dollar is down, gold is up, interest rates are unattractively low, economy is picking up, fed has signaled higher rates, etc.

As far as I can tell, the only thing holding rates down is intervention by the BoJ to prop up the dollar (to keep the yen from taking off even more than it has), and that can't go on forever.

Failing to time entry into the stock market just means you might miss out on some upside, but failing to correctly time an exit from longer duration bonds could hurt, especially in the early years of retirement (for every 50% drop, you need a 100% gain just to break even).

 

[cute fuzzy bunny]

Two words: Election Year.

Plus the Wellesley funds bonds average moderate term rather than long. Even if they boost 50 basis points in the 2nd half of 2004 (and I'm not thinking they'll go that far before Dubya gets re-elected) it wont hurt that much.

On the other hand, I could be completely wrong.

 

[wabmester]

Two words: Election Year.

Heh. Remember the immortal words of the elder George Bush regarding Greenspan: "I reappointed him and he disappointed me."

I really don't know how things are going to play out, but I'm in capital preservation mode until some of the artificial market manipulation stuff eases off and the markets are allowed to find their natural levels.