Where to park large amount of money? Bond Strategy?

[PaloAlto]

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!

 

[meierlde]

Look at vanguard short term investment grade (or depending on your time frame intermediate or long term) (avg maturity short i 3.1 intermediate 6.1 long term 23.3 years)

 

[OldShooter]

We have some money parked for more or less the same reason. About half is in brokered CDs (under $250K/institution) and half in RidgeWorth Seix Floating Rate High Income Fund (SAMBX). My theory is if the market really does go on sale I won't mind taking whatever penalty is involved with ditching the CDs. The Ridgeworth is a higher yield option with some risk, but I did a little research and feel that the risk is acceptable to us. There are a number of floating rate funds around, some are leveraged. I decided to stick with an unleveraged one. Leverage in an uncertain rate environment is a little too exciting for me. Floating-Rate Mutual Funds: Rewards And Risks

 

[RobbieB]

How about CA muni bonds? Pays more than 1% and double tax free.

 

[swakyaby]

How about CA muni bonds? Pays more than 1% and double tax free.

+1

Vanguard California intermediate term tax-free bond fund is where I park additional funds. Expense ratio only 0.09% for Admiral shares. It only makes sense if you're in the higher tax brackets.

 

[PaloAlto]

Thanks for the suggestions. I think for our situation the Vanguard California Intermediate Term Tax Exempt Fund (VCADX) make sense since current yield is around 1.9% tax free. Any idea how this might react to interest rate increases by the Fed?

I feel bad about getting a paltry 0.45% on a lot of this money and tried to get airline miles instead (BankDirect) since on a post tax basis the returns were better than 1% but nothing like cold hard cash (or electrons that can be converted to cash) especially since Airlines keep devaluing miles and I have to wait to redeem business class tickets to see 3-5c/mile value

 

[brewer12345]

Thanks for the suggestions. I think for our situation the Vanguard California Intermediate Term Tax Exempt Fund (VCADX) make sense since current yield is around 1.9% tax free. Any idea how this might react to interest rate increases by the Fed?

Vanguard's website says that this fund has a duration of 5.3. By way of handgrenade close, an instantaneous 1% interest rate increase across the curve would give you roughly a 5% loss.

 

[PaloAlto]

Vanguard's website says that this fund has a duration of 5.3. By way of handgrenade close, an instantaneous 1% interest rate increase across the curve would give you roughly a 5% loss.

Thanks - That's helpful! I assume that also means if you hold for 5 years the impact of the rate increase cancels out the loss in principal?

 

[brewer12345]

Thanks - That's helpful! I assume that also means if you hold for 5 years the impact of the rate increase cancels out the loss in principal?

Depends on the makeup of the fund, what interest rates do afterward, what the fund manager does over that time, etc. Hard to answer with a strong degree of certainty.

 

[Fedup]

I think CD is best. PenFed has 12-month or 15-month CDs about 1.2% to 1.45%.

 

[brewer12345]

In your shoes I would look for a bullet fund. I have become uncomfortable with the interest rate and negative convexity risk that has crept into bond funds so I started switching to IBDL. This is an investment grade corporate bond fund that is highly diversified and all of the bonds mature in 2020 (when the fund distributes its cash and dissolves). In a potentially rising rate environment, I can roll down the curve over time and know when my money matures rather than trust to the vagaries of a portfolio manager. You may be able to find something similar in the muni world.

 

[rpguy4]

Also check Ally Bank CD Rates. Ally Bank has a "Raise Your Rate CD" which allows you to raise your rate on the CD 1 time during the period (2 or 4yr CDs only)

 

[Out of Steam]

I have become uncomfortable with the interest rate and negative convexity risk that has crept into bond funds so I started switching to IBDL. This is an investment grade corporate bond fund that is highly diversified and all of the bonds mature in 2020 (when the fund distributes its cash and dissolves).

That seems like a good concept for intermediate term bonds. If rates go up, just sit on it and let the bonds pay off at face. The loss is just foregone interest from not having been invested at the higher market interest rate.

 

[pb4uski]

In your shoes I would look for a bullet fund. I have become uncomfortable with the interest rate and negative convexity risk that has crept into bond funds so I started switching to IBDL. This is an investment grade corporate bond fund that is highly diversified and all of the bonds mature in 2020 (when the fund distributes its cash and dissolves). In a potentially rising rate environment, I can roll down the curve over time and know when my money matures rather than trust to the vagaries of a portfolio manager. You may be able to find something similar in the muni world.

Just curious Brewer, why do you prefer IBDL over BSCK? I own both BSCK and IBDC and view them as similar but lean a bit towards BSCK.

One thing I have noticed is that maturity year returns for the Guggenheim Bulletshares are pathetic... it seems that they go with CP or other short term paper with the proceeds from maturities during the year and then distribute to shareholders in December.... I suspect the same is true for the others but I have not researched it. My solution is to just sell a year before the terminal distribution to avoid the issue.

 

[brewer12345]

Just curious Brewer, why do you prefer IBDL over BSCK? I own both BSCK and IBDC and view them as similar but lean a bit towards BSCK.

One thing I have noticed is that maturity year returns for the Guggenheim Bulletshares are pathetic... it seems that they go with CP or other short term paper with the proceeds from maturities during the year and then distribute to shareholders in December.... I suspect the same is true for the others but I have not researched it. My solution is to just sell a year before the terminal distribution to avoid the issue.

I did the digging a while ago, but I think ibdl was cheaper. Like you, I expect to switch horses well before maturity.

 

[gcgang]

I've also been holding significant cash. Leaving it in roughly 1% FDIC stuff. While bonds yield more, it's just 1-2% more. I'd rather take less yield and forgo ANY nominal principal decline or loss of liquidity.

 

[mathjak107]

keep in mind that by avoiding bond funds the extra income vs cash you give up can be a lot .

since last year we are hearing how bond funds may not be a great choice .

for every month iidecided to sit in cash because i was afraid bonds may take a hit , i gave 25k-28k in interest a year difference . our inco9me portfolio was yielding 3% until this last month when we toned down the high yield portion so now it is about 2.50%

so even if my bond funds got hit i doubt i would lose that much in value . it has now been almost 18 month since the great cash or bonds debate was on the radar . i can take an incredible hit in bond fund value and still be well ahead .

 

[Scuba]

Rather than bond funds, which are subject to losses when other investors cash out even if you don't, why not build a portfolio of individual bonds with limited duration that you can hold to maturity?

Another idea is hard money loans. They pay much better than bonds and your loan is secured by a trust deed on the property.

 

[mathjak107]

there is not much difference between bonds and bond funds .

as long as you stay in a bond fund long enough to meet its duration the increase in interest you get offsets the loss in nav .

individual bonds do not change valus but in rising interest rates they do not get more interest either . bond funds do get rates bumped up as older bonds are replaced with newer bonds .

at the end of the day both will be just as far behind current rates .

limited maturity bonds do not provide much fighter cover in a portfolio for stocks .

the longer you go out the more bonds are influenced by greed ,fear and perception and less on just what is happening to interest rates .

you need about 3x the weight in intermediate term bonds as you do long term bonds to up lift the same dollars in equities .

so it depends why you want bonds . if you notice most balanced funds barbell short and long term bonds . not only is the duration the same as an intermediate term but the yield is higher and when stocks fall those longer term bonds can get a much more powerful up lift .

even wellesly is about 26% long term bonds . there is a reason .

so a mix of bonds work well . keep in mind a total bond fund is anything but total. it lacks way to many segments to really be called total .

 

[target2019]

Recently we went with a Discover Bank account. Around 1%, so we can dump cash in that until a better answer evolves.

Next line of defense is our state MMF at Vanguard. The yields are very low, however, at 3% or so for long term.

The logical choice is CDs. Less popular would be hi-yield dividend fund or ETF.

 

[travelover]

I anguished over this for cash I'm holding to replace my house and ended up at PenFed at 1.36% for a one year CD. They were a bit of a pain to deal with until I got my identity established with them.

 

[Ready]

5 year bank CD's are paying around 2.25%, and some only charge six months simple interest for early termination. I would go with these over a 1% savings account unless you think you are going to need the money in one year or less.

I would not buy brokered CDs. They have the same interest rate sensitivity as bonds.

 

[Spanky]

Discover is paying 0.95% for saving account.

 

[Sue J]

Discover is paying 0.95% for saving account.

They recently increased this to 1.00%.

OH BOY!

 

[mathjak107]

i use fidelity conservative bond fund for cash . it is about 1% and is so short that it hardly moves .