Where to park large amount of money? Bond Strategy?

[ESRwannabe]

I recently left the W2 world with a significant severance. That and a habit of having significant cash reserves has now upped our cash holdings to around $600K. They are currently spread over 4 accounts but none of them earn more than 1%.

Our other holdings (pre-tax and post tax) amount to around $4M and are all in well diversified stocks and stock funds, so I was thinking this might be a good time to build up some bond holdings (say around $400K, leaving $200K for our emergency fund) but I have no experience in doing that. We have significant invested assets in both Vanguard and Fidelity so funds by either of these companies would work.

I am primarily looking for relatively safe funds that return better than 1%. Eventually, if there is a market crash, we would use these funds to buy more equities - this was a good strategy for us post 2008 and I wish we had $600K then - only had $100K which I put right in! Any advice from the more experienced investors on how to go about it would help. Tax efficiency is a bonus - we live in California and are top tax bracket so our marginal rates are over 50%

Thanks in advance!

You should definitely look into municipal bond funds. I'd suggest using a combination of funds. First I'd put some money into Vanguard and I'd spread it out into a short-term muni fund, an intermediate muni fund, and a CA specific muni fund (state and federal tax free). Then if you want to increase your returns you could look at putting some into a municipal bond closed end fund (CEF).

 

[Montecfo]

LOL, I utilize everyone of the funds you mentioned.

Well, that is a bit stunning, 5 funds. Please feel free to share other insights, I can only guess i would like them.

Montecfo

 

[eytonxav]

Well, that is a bit stunning, 5 funds. Please feel free to share other insights, I can only guess i would like them.

Montecfo

Nothing special, other bond holdings include: FFRHX, FGMNX, FNMIX, WEFIX, and SHY. Other investment grade bond holdings reside in Wellington twins.

 

[sengsational]

I usually check depositaccounts.com reward-checking-accounts and I see you can make 1.5% on $250K with a Lexington KY based "MemoryBank" (apparently this is to boost their entry into web banking). The site says the institution is healthy and you only have to use your debit card 5 times a month.

My credit union is 2.25% but only up to $10K and you need to use your card 30 times! I'd never get there.

Earn 1.5% Annual Percentage Yield† (30X the national average*!) for the first year on balances up to $250,000, if you meet these simple requirements each monthly statement cycle1:

Receive at least 1 electronic deposit such as payroll, transfers from other financial institutions, or even Popmoney2.
Use your debit card for at least 5 in-person or online purchases3.
Get your statements online.

 

[PaloAlto]

Thanks for all the replies and insights. I started with moving $150K into a Short Term tax exempt fund (VWSUX) that yields 1.09%. I reckon I have another $250K to place and will look at some other funds to diversify but at least I am now getting around 1.8% tax equivalent return on some of the cash!

I recently read an article in Money magazine about floating rate funds and found they yield around 4% with relatively stable price levels - seems too good to be true so I decided to do some more research. Any thoughts on those?

 

[OldShooter]

Thanks for all the replies and insights. I started with moving $150K into a Short Term tax exempt fund (VWSUX) that yields 1.09%. I reckon I have another $250K to place and will look at some other funds to diversify but at least I am now getting around 1.8% tax equivalent return on some of the cash!

I recently read an article in Money magazine about floating rate funds and found they yield around 4% with relatively stable price levels - seems too good to be true so I decided to do some more research. Any thoughts on those?

As I mentioned in post #2, we are using SAMBX. Bought 7/23/14 to park some money. It has been yielding about 4% with no excitement at all. At the same time I bought a couple of brokered 3-year CDs yielding 1.2%.

I have a friend who runs money for a family office and he has been buying leveraged floating rate funds -- pushed by his principals even though he is nervous about it. I think they have been doing OK too.

Recently I was doing an investment advisor survey for a nonprofit I'm involved with and one of the advisors told us that they are also using SAMBX and quite happy with it. So that was a nice confirmation. At the time we bought, it was on Schwab's recommended list and it still looks like that's the case.

 

[PaloAlto]

As I mentioned in post #2, we are using SAMBX. Bought 7/23/14 to park some money. It has been yielding about 4% with no excitement at all. At the same time I bought a couple of brokered 3-year CDs yielding 1.2%.

Thanks Oldshooter. I will have to look into SAMBX for the other money I need to park. I don't know much about brokered CD's but 1.2% seems very low to lock up funds for 3 years when you can get 1%+ in money market funds. Am I missing something?

 

[Fedup]

Thanks Oldshooter. I will have to look into SAMBX for the other money I need to park. I don't know much about brokered CD's but 1.2% seems very low to lock up funds for 3 years when you can get 1%+ in money market funds. Am I missing something?

According to Morningstar, SAMBX went down 20% plus in 2008.

 

[Blue Collar Guy]

I recently left the W2 world with a significant severance. That and a habit of having significant cash reserves has now upped our cash holdings to around $600K. They are currently spread over 4 accounts but none of them earn more than 1%.

Our other holdings (pre-tax and post tax) amount to around $4M and are all in well diversified stocks and stock funds, so I was thinking this might be a good time to build up some bond holdings (say around $400K, leaving $200K for our emergency fund) but I have no experience in doing that. We have significant invested assets in both Vanguard and Fidelity so funds by either of these companies would work.

I am primarily looking for relatively safe funds that return better than 1%. Eventually, if there is a market crash, we would use these funds to buy more equities - this was a good strategy for us post 2008 and I wish we had $600K then - only had $100K which I put right in! Any advice from the more experienced investors on how to go about it would help. Tax efficiency is a bonus - we live in California and are top tax bracket so our marginal rates are over 50%

Thanks in advance!

let us know when you time the market and go from bonds to stock after the crash, im interested to see how your market timing is.

 

[audreyh1]

I recently read an article in Money magazine about floating rate funds and found they yield around 4% with relatively stable price levels - seems too good to be true so I decided to do some more research. Any thoughts on those?

They are great until the stock market has a hiccup or we go through a credit squeeze/credit crisis. Then they can be hit hard. It's similar to owning a high yield bond fund - on the higher end of the credit risk spectrum.

 

[copyright1997reloaded]

They are great until the stock market has a hiccup or we go through a credit squeeze/credit crisis. Then they can be hit hard. It's similar to owning a high yield bond fund - on the higher end of the credit risk spectrum.

There is so much truth in this. I have plenty of money in the market. The money I have in cash and equivalents has ONE major purpose - to be there when I need it. That isn't to say I wouldn't consider something like a floating rate fund for some money that would otherwise be in a longer term bond fund, but no way would I use that for my "two years of living expenses" money.

 

[PaloAlto]

let us know when you time the market and go from bonds to stock after the crash, im interested to see how your market timing is.

Let me clarify - over 90% of our assets are in stock funds. Not trying to time the market but just don't feel comfortable going 98% stock at all time highs. Sometime during the 2008 correction I did get into this position - did not catch the bottom but it was a good time to go all in with a 15 year horizon [emoji851]

 

[PaloAlto]

According to Morningstar, SAMBX went down 20% plus in 2008.

Oops. That wouldn't work. At least the yields are not too good to be true then [emoji56]

 

[gcgang]

According to Morningstar, SAMBX went down 20% plus in 2008.

+1

While interest rate risk is somewhat mitigated, your Senior loans are to crappy companies. Defaults happen. The loans themselves are illiquid and difficult to value.

As part of a diversified "alt" strategy, they have a place, I suppose, alongside your Reits, foreign bonds, hi yield, MLPs, etc...

I'd just as soon earn a couple percent less and be liquid.

 

[OldShooter]

Thanks Oldshooter. I will have to look into SAMBX for the other money I need to park. I don't know much about brokered CD's but 1.2% seems very low to lock up funds for 3 years when you can get 1%+ in money market funds. Am I missing something?

Yes. This money was parked in 2014.

Re SAMBX, here is the history:

​

I guess I don't consider the history to be alarming. For reference, only about 25% of our fixed income/cash is in SAMBX. 25% in the brokered CDs and 50% in TIPS. So, 75% backed by the full faith and credit of our uncle.

Re "junk bonds" (1) risk and reward go together. No news there. (2) The bank loans in floating rate portfolios are senior to the companies' bonds and the interest rates are floating. There is some fine print that goes with this, of course, but my conclusion was and is that the risk is acceptable. (I actually like it that some people are afraid of them. That pressures the price down and the yield up.) YMMV of course.

 

[Sunset]

Thanks Oldshooter. I will have to look into SAMBX for the other money I need to park. I don't know much about brokered CD's but 1.2% seems very low to lock up funds for 3 years when you can get 1%+ in money market funds. Am I missing something?

You could simply lock up for 5 years at 2.25% and take a 6 month penalty if cashed out early, netting about 1.6% to 1.8% depending upon the cashout time.

 

[RobLJ]

Personally, I have about 10% of bond allocation in Fidelity's Floating Rate fund &15% in their foreign debt fund. As/if rates normalize, however, I will move dividends and funds from the former. The latter is attractive because real yields are positive, which is not the case here, but if yields shrink I will also move funds to more traditional bonds.
I did sell about 7% of the former a month ago to harvest gains and stuck the proceeds in a zero-coupon intermediate Treasury fund.
And, yes there is stock-like risk in both.
YMMV.

There is so much truth in this. I have plenty of money in the market. The money I have in cash and equivalents has ONE major purpose - to be there when I need it. That isn't to say I wouldn't consider something like a floating rate fund for some money that would otherwise be in a longer term bond fund, but no way would I use that for my "two years of living expenses" money.

 

[audreyh1]

Synchrony just raised the rate on their high yield savings account from 1.05% to 1.15%.

Rates are slowly creeping up.