Should Money Market Accts be a larger part of your fixed income allocation?

[DawgMan]

As much as I want to try and squeeze more juice out of my fixed income portion of my AA, I buy into the philosophy that it is basically there to minimize volatility in my over over portfolio, especially once I pull the rip cord and am living off only my investments. While I am trying to minimize being a market timer, I do think some subtle tinkering from time to time could be in order. Perhaps it doesn't move the needle much in the long run, but it makes me feel alive and active! Soooo... we have been riding a 37 yr old bond bull and are now in an environment where I would wager to guess most experts believe we are in position to see a longer trend of subtle interest rate increases. Sure, a recession stops the music, but I would guess most of us would look at our crystal ball and say the trend line is pointing up vs down for the foreseeable future as it relates to interest rates. If you buy into my assumptions and are a total return investor as opposed to a dividend/yield investor and look at your fixed AA to steady the ship with your equity portion, should we not be considering pushing a significant part of our fixed AA in money markets? Approaching just under a 2% yield and following the movement of the Fed, does this not make more sense to consider? I am currently holding a significant portion of my fixed allocation in intermediate funds/ETFs and while the net return may be slightly positive, it doesn't feel right with interest rate trends. While some of the Fed's moves appears to be baked in and the last few months have been holding somewhat steady on pricing, I have to believe the continued trend line will further put pressure on pricing. Alternatively, I don't see any real advantage to short term bonds. If you are a yield investor, I get how you may put your blinders on fund pricing and focus on the yield/dividend, but total return folks, what am I missing here? It seems like if we have a recession and you believe things may go in the $hitter for a while, you could easily jump back to bonds. Market timing? Perhaps, but not sure we can rely on the last 37 yrs of bond trends to guide us for the next 30, especially if you are in or starting retirement. Thoughts?

 

[Dtail]

I think you could get some pushback from the many bond fund holders here. For myself, I have gone away from bond funds and into individual bonds/CD's along with already having MM.
If you wish to consider MM, why not some CD ladder to squeeze out some more yield from that portion of your portfolio?

 

[pb4uski]

Ok, ok... I guess I am a dirty market timer after all. In June I sold all of my fixed income other than PenFed CDs.... mostly 2020 and 2022 target maturity date ETFs... and plunked it into VMMXX that is yielding ~2%. Am considering a CD ladder but I'm guessing that CD rates will rise between now and year end.

 

[DawgMan]

I think you could get some pushback from the many bond fund holders here. For myself, I have gone away from bond funds and into individual bonds/CD's along with already having MM.
If you wish to consider MM, why not some CD ladder to squeeze out some more yield from that portion of your portfolio?

I hear ya on the ladder and don’t discount that approach. I suppose my thinking was you have max flexibility to move back into funds/ETFs if we have an event, but in the meantime, lock in your+/- 2% today and accomplish your minimizing volatility yet locking in a yield. Just throwing it out there.

 

[jazz4cash]

I feel like we see this same question posted at least weekly but not so thoroughly detailed. I agree with the idea of reducing bond holdings and shifting to CDs. CDs, MM and online savings rates seem to be rising daily.

 

[Bigdawg]

Here is another twist: I hold a bit of cash in a MM. I charge everything on a 2% cash back and 0% for 15 months. I pay the min each month and at the 15 month mark have a fairly large balance. I then either pay off the balance from the MM or roll to another card. I always have the $ in the MM to more than cover whatever total balance is on the card. I also hold a few CD's. No bonds.

 

[RenoJay]

I have a significant portion in Vanguard money markets. MM’s are not FDIC insures and can theoretically lose money, but it’s very rare and I feel ok with Vanguard. Caveat: I regularly move money out of MM to make hard money loans that yield significantly more; it’s hard to know how I’d feel about MMs if I didn’t have this alternative fixed income channel.

 

[LOL!]

I don't think the risk||reward relationship is broken yet, so we don't have any money in money markets, CDs, nor other cash.

However, I experimented with T-bills and ETFs of short-term bond funds and find that I am satisfied. For instance, they are probably more risky than a T-bill, but I own lots of FLRN which is investment grade floating rate ETF with a current 30-day SEC yield of 2.52% and a YTD total return of 1.54%. For comparison, the less risky VMMXX (Vanguard Prime MM) is 1.13% YTD.

YTD returns
1.54% FLRN investment grade floating rate
0.97% BIL 1-3 month T-bill ETF
0.27% VCSH short-term corporate bond index
1.13% VMMXX Prime MM
-1.08% VBTLX Total US Bond Index

 

[audreyh1]

For very short-term (cash, cash/equivalents) I tend to move around based on available yield - between money markets, short-term CDs, high yield savings, and T-bills. I try to maintain some liquidity because this will be used to rebalance if needed.

My short-term and intermediate bond funds I leave alone and rebalance.

If you buy into my assumptions and are a total return investor as opposed to a dividend/yield investor and look at your fixed AA to steady the ship with your equity portion, should we not be considering pushing a significant part of our fixed AA in money markets? Approaching just under a 2% yield and following the movement of the Fed, does this not make more sense to consider? I am currently holding a significant portion of my fixed allocation in intermediate funds/ETFs and while the net return may be slightly positive, it doesn't feel right with interest rate trends. Thoughts?

No, it's about combined risk-adjusted return. High quality bond funds do a better job of zigging when the equity markets zag. Money market funds/cash won't appreciate during periods of equity downdrafts.

It seems like if we have a recession and you believe things may go in the $hitter for a while, you could easily jump back to bonds. Market timing?

By the time things have gone in the toilet, bond funds will already have appreciated (interest rates dropped). They will appear expensive. What is the point of buying bonds after the fact?

 

[kevdude]

I have 2-3 years of cash sitting in VMMXX also. I had about another year's worth sitting in VFSUX as well, but decided to move that to Wellington to try to get a better yield/appreciation and, hopefully, to protect a bit on the downside.

 

[njhowie]

Money market funds/cash won't appreciate during periods of equity downdrafts.
.
.
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By the time things have gone in the toilet, bond funds will already have appreciated (interest rates dropped). They will appear expensive. What is the point of buying bonds after the fact?

You make two of the most important statements in that one post which many folks are missing.

Should the equity downdraft come amid an economic slow down on the horizon, the likelihood is that the Fed isn't going to slowly lower rates by 0.25% each quarter like they have raised ... they're going to drop it immediately by 0.5% or more. They are also going to be very aggressive lowering further - they're not going to wait another quarter to lower, they will lower monthly. Money market funds and the high yield savings accounts are going to adjust lower to the new rate immediately. It's sort of the reverse of how your local gas station works when oil prices rise - pump prices quickly jump, as oil prices fall pump prices slowly fall. This is why it makes sense to ladder at this time - because you're always locking in some amount of longer term instruments, guaranteeing a better rate for a longer period while likewise always having something shorter term of lower yield maturing available to reinvest. When rates stop rising and begin to fall, you're still locked in for the higher yields at the tail end of your ladder.

Maybe it's not prudent to have a large portion of your fixed income allocation to long term CDs, treasuries, and bonds. However, there is a very good case for always having some portion of it in longer term maturities. Folks who bought 20 and 30 year treasuries 10 and 20 years ago still look like geniuses today.

 

[LOL!]

^I like the certainty of those interest rate moves of the Fed.

 

[njhowie]

^I like the certainty of those interest rate moves of the Fed.

Note that I cautiously use the word "likelihood".

My crystal ball regarding the certainty of interest rate moves is as good as the best analysts out there.

 

[audreyh1]

Intermediate and long term rates may drop due to economic outlook concerns long before the Fed starts dropping short term interest rates (note the tendency for inverting yield curves to forecast economic decline well ahead of the equity reaction). So bond funds may start appreciating ahead of a major equity decline. When the crap really hits the fan there tends to be an additional sudden “rush to quality” reaction while people panic.

I just handle it by keeping my fixed income allocation in cash (equivalents), short-term bond funds, and intermediate bond funds, with the bulk in intermediate. And rebalance between them and with stocks as rates go up and down and as stocks go up and down. Some durations get hit differently than others and it’s pretty much impossible to predict.

 

[VanWinkle]

I use High Quality Intermediate Bond Funds for a counterbalance to my equities. I do not count on them making a steady income as much as I expect them to go up when equities go down. Money market funds will not have the same effect. I use MM funds for living expenses for the upcoming year. Will bonds go up in the next bear market, no one can be sure. I am betting they will.

 

[COcheesehead]

I use a prime MM yielding about 2% for my less than one year duration needs. Now they are set aside for building a house. I don’t use CD’s because of my tax bracket and instead ladder muni’s. I’ve said it here before and will say it again. Ladders are very predictable for income and yet still allow flexibility as bonds mature. Worst case you can sell a bond within hours.

 

[sengsational]

No, it's about combined risk-adjusted return. High quality bond funds do a better job of zigging when the equity markets zag. Money market funds/cash won't appreciate during periods of equity downdrafts.

I used to think this, a long time ago. But my experience is that both equity fund and bond fund investors flee to cash when TSHTF, so the bond funds are forced to sell. The bond funds get a sizeable haircut, while the equity funds take a beating. The people in cash are the only ones that don't show losses.



It would be great if there were really a low cost way to find a zagger when the market zigs, but bond funds would not be my choice.




The best I'm able to do is the stable value fund in my 401k

 

[Dtail]

I used to think this, a long time ago. But my experience is that both equity fund and bond fund investors flee to cash when TSHTF, so the bond funds are forced to sell. The bond funds get a sizeable haircut, while the equity funds take a beating. The people in cash are the only ones that don't show losses.



It would be great if there were really a low cost way to find a zagger when the market zigs, but bond funds would not be my choice.




The best I'm able to do is the stable value fund in my 401k

Was thinking this concept too, but differentiating between intermediate funds vs. short term funds. I think when the SHTF, the correlation of Intermediate bond funds is closer to 1.0 with equities as opposed to short term treasuries.
However, I have neither at the current time.

 

[audreyh1]

I used to think this, a long time ago. But my experience is that both equity fund and bond fund investors flee to cash when TSHTF, so the bond funds are forced to sell. The bond funds get a sizeable haircut, while the equity funds take a beating. The people in cash are the only ones that don't show losses.



It would be great if there were really a low cost way to find a zagger when the market zigs, but bond funds would not be my choice.




The best I'm able to do is the stable value fund in my 401k

I know you’ve brought this up before, as you had limited choice in your 401K.

2008 was a good lesson in what constitutes a high quality bond fund. Not all bond funds were hurt. There are low cost high quality bond funds that did fine during that crisis. However, if your bond fund had high exposure to commercial debt, it was hurt. But even with the 2008 hit, general core bond funds recovered much more quickly than equities and high yield bonds. So they still helped soften the blow.

If you lump all bond funds together and don’t distinguish between credit quality then I guess there is no useful lesson?

 

[COcheesehead]

I know you’ve brought this up before, as you had limited choice in your 401K.

2008 was a good lesson in what constitutes a high quality bond fund. Not all bond funds were hurt. There are low cost high quality bond funds that did fine during that crisis. However, if your bond fund had high exposure to commercial debt, it was hurt. But even with the 2008 hit, general core bond funds recovered much more quickly than equities and high yield bonds. So they still helped soften the blow.

If you lump all bond funds together and don’t distinguish between credit quality then I guess there is no useful lesson?

Audrey is right. Some of the higher quality bonds were up during the crisis, not down like everything else.

 

[audreyh1]

Was thinking this concept too, but differentiating between intermediate funds vs. short term funds. I think when the SHTF, the correlation of Intermediate bond funds is closer to 1.0 with equities as opposed to short term treasuries.
However, I have neither at the current time.

? Intermediate treasuries should have a lower correlation to equities than short-term treasuries during an equity crisis as they would gain more from “rush to quality” effect that pushes down interest rates. If you are comparing a treasury bond fund to a diversified bond fund, then of course the treasury fund will have lower correlation to equities in general. Those are two different things.

 

[imoldernu]

Folks who bought 20 and 30 year treasuries 10 years ago still look like geniuses today.

How 'bout 18 years ago... I bonds... current yield 5%+.

I Bond Composite Rate of 2.52% includes a Fixed Rate of 0.30%
The composite rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the 30-year life of the bond, and the semiannual inflation rate. The 2.52% composite rate for I bonds bought from May 2018 through October 2018 applies for the first six months after the issue date. The composite rate combines a 0.30% fixed rate of return with the 2.22% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 246.819 in September 2017 to 249.554 in March 2018, a six month change of 1.11%.

The "Fixed" rate in the early 2000's..... add to this percent, the current annualized inflation rate (2.22%) to get the inflation adjusted rate.

Not spectacular, but could be a safe bet in a period of high inflation. Depends on what the crystal ball says. In a period of extended deflation, never less than the base rate.
Note: terms apply for early distribution.

"Fixed Rate":

 

[njhowie]

How 'bout 18 years ago... I bonds... current yield 5%+.

Yes, you look like a genius! I corrected my original post...

Folks who bought 20 and 30 year treasuries 10 and 20 years ago still look like geniuses today.

 

[Dtail]

? Intermediate treasuries should have a lower correlation to equities than short-term treasuries during an equity crisis as they would gain more from “rush to quality” effect that pushes down interest rates. If you are comparing a treasury bond fund to a diversified bond fund, then of course the treasury fund will have lower correlation to equities in general. Those are two different things.

Okay, I thought that people rush more to shorter term bonds in a crisis.

 

[audreyh1]

Okay, I thought that people rush more to shorter term bonds in a crisis.

I’ve seen the 10-year Treasury rate drop dramatically during a crisis. I don’t think people just run to shorter term bonds.

That’s also a reason we sometimes get yield curve flattening or inversion. Folks get concerned about the economy a few years out when they think the Fed has gone too far raising short term rates.