Where is your cash?

[tuixiu]

When the market was way way down I couldn't resist moving some of my x years living expenses I've been building up into equities (it was split three ways among S&P500 Index, Small Cap Index, and Intl Stock Index) to ride the hopefully inevitable rise and grab some gains. This is all in taxable account.

I know, dirty market timer etc. but we're still in accumulation phase and still both working so I figured I had some flexibility here during the slow march towards my cash allocation for retirement.

Anyway, that move obviously worked out pretty well but I'm feeling it's time to move that back where it should be, but everything kinda sucks right now for cash. The cash pile has been building up in a money market fund but that's crap right now for interest, CD rates are crap, bleh.

So what do you guys and gals do for cash right now, at least the ones who aren't still riding 5% CDs? Are you just going with MMs and CDs and figuring low inflation makes it a wash? Short term bond funds? TIPs fund?

 

[LOL!]

We are in the accumulation phase and have no need for the safety of cash. Hence we use bond funds for fixed income, but tend to the shorter duration types. In our IRAs (where we have a choice) we use the Vanguard short-term investment grade and Vanguard GNMA funds. These are the only Vanguard bond funds we own.

Some folks don't like either of these because the former is not Treasuries and thus riskier, while the latter has extra risk because of pre-payment and negative convexity (or something like that). We have held both funds for quite a while and are comfortable with their volatility and risks.

 

[tuixiu]

Thanks for the reply LOL, and that brings an interest side discussion... is it stupid to start building up our needed requirement cash now?

I always figured I'd do it slowly, but is it wiser to just stay in a more aggressive stance until one morning when we're going to retire the next day, then move a huge pile of it into x years living expenses of cash?

 

[JOHNNIE36]

Our situations are different as we are not in the accumulation game any longer. What we have has to last the rest of our lives so everything is in CD's and MM. Our CD's are at 4.5% and have three years to go at this rate. I can live with that as I think rates wil be back up by the time these CD's mature. What I don't like is the
$175K we have in MM getting crap (1.55%). I'd sure like to find a decent CD that I don't have to tie up for five years. We might have to stay the course because at our age, our number one concern is safety that's why we have to stick with FDIC covered issues.

 

[audreyh1]

Well I confess. With the miserable rates in cash I have put some of my cash into a fund I normally wouldn't - a Ginnie Mae bond fund - FGMNX. At least until cash rates "normalize" back to 2% or higher.

Johnnie - a lot of MMs are paying way less that 1%, 1.55% is actually a great rate for MM.

Audrey

 

[REWahoo]

Well I confess. With the miserable rates in cash I have put some of my cash into a fund I normally wouldn't - a Ginnie Mae bond fund - FGMNX. At least until cash rates "normalize" back to 2% or higher.

Same here. I put 1/3 of my cash in VFIIX and another 1/3 in VBISX. I plan to move all of it back to a Mmkt fund once interest rates become more reasonable.

 

[tuixiu]

1.55% is actually a great rate for MM.

I was thinking the same thing when I read that. Isn't it funny sitting in here drooling enviously at this 1.55% Money Market Fund? Who'd thunk it?

 

[RE2Boys]

Yeh, my MM are down next to zero return right now. I've moved some cash into Vanguard Short Term Bond Fund as a temporary measure and some cash into GE Interest Plus notes paying about 2%.

 

[Amethyst]

Only works if you're in Federal civil service retirement plan...

I just moved a chunk of cash into a CSRS Voluntary Contribution account paying, I think, 3.7% and change, tax-deferred.

In 2010 I plan to roll this account into a Roth IRA; the interest will go to the Thrift Savings Plan (TSP).

 

[IndependentlyPoor]

Glad to see this question. It prompted me to actually have a look at yields and durations of the Vanguard funds one might use for "cash". Of course, bond funds other than a money market are subject to NAV loss when interest rates rise. Since short term rates are essentially controlled by the FED, the question is: What would happen to your "cash" when the FED decides to raise rates? There probably is a practical upper limit to how fast the FED can raise rates without wrecking the banking system. I don't know that that is, but worst case, maybe as much as 1% per quarterly meeting?

Here is a table of Vanguard funds that one might consider for one's "cash". The right two columns show the quarterly return in the event of a 1% and 0.5% rate hike. These returns are based on assuming that the NAV declines by an amount equal to the Duration for each percent increase in FED rates. I included the Avg. Maturity just to remind folks that Duration and Maturity are not the same thing. The table is sorted according the the 0.5% hike scenario. Note that the order is not the same for the 1% hike.

	Yield	Duration	Avg. Maturity	1% hike	0.5% hike
Prime Money Market	0.21	0.0	0.2	0.05	0.05
Tax-Exempt Money Market	0.17	0.0	0.1	0.04	0.04
GNMA	3.66	2.0	3.0	-1.09	-0.09
Short-Term Investment-Grade	1.9	2.5	-1.20	-0.25
Short-Term Tax-Exempt	0.96	1.1	1.2	-0.86	-0.31
Short-Term Federal	1.62	1.9	2.3	-1.50	-0.55
Short-Term Treasury	0.99	2.0	2.5	-1.75	-0.75
Short-Term Bond Index Inv	1.71	2.6	2.8	-2.17	-0.87
Inflation-Protected Securities	1.39	3.4	9.0	-3.05	-1.35

[TD] 2.79[/TD]

This seems to indicate that GNMAs might be a reasonable substitute for a money fund. Have I missed something? I know hardly anything about GNMAs.

I am happy to post the spreadsheet if anyone wants it.

 

[LOL!]

Thanks for the reply LOL, and that brings an interest side discussion... is it stupid to start building up our needed requirement cash now?

I always figured I'd do it slowly, but is it wiser to just stay in a more aggressive stance until one morning when we're going to retire the next day, then move a huge pile of it into x years living expenses of cash?

I don't know. I looked pretty stupid watching my VFSUX drop 10% last year (it has since recovered). Some folks advocate always having at least 2 years of expenses in cash. I guess that would include your emergency fund. I imagine that when money markets and CDs are paying well, then everybody likes cash. Conversely, when cash isn't pay well, folks don't like it.

In any event, I think it's a good idea to avoid long-term bond funds and stick to short duration funds. If you look inside some actively-managed bond funds like PIMCO Total Return, you will see they have shortened up maturities and hold quite a bit of cash.

Just remember, if you want a higher dividend rate, then you will have to accept some risk. Maybe it's not worth it?

BTW, this question is asked at least once a day over on the Bogleheads forum. There are some folks there who like GNMAs and some folks there who don't like them. Here is a classic discussion on GNMAs: http://www.bogleheads.org/forum/viewtopic.php?t=37057 And here is a discussion on chasing yields: http://www.bogleheads.org/forum/viewtopic.php?t=40988

 

[grumpy]

I recently moved almost all of my cash from Vanguard MM Prime to Discover Savings Bank - paying 2% interest.

 

[caninelover]

Its split between Vanguard's MMF and CA tax-exempt MMF. Both are returning next to nothing. I am also still in the accumulation phase so in the near future I will be adding the short-term investment grade fund into the mix as well.

I am still thinking about laddering some CDs but the thought of locking into 1-2%...seems like it may be better to wait until returns on MMF start to creep up a bit.

 

[FIREd]

I have very little cash right now sitting in savings accounts or money market funds. I moved that money into bond funds last year. I use Vanguard GNMA in our IRAs, Vanguard short term tax exempt and Vanguard intermediate tax exempt in our taxable account and PIMCO total return in our 401K.

 

[walkinwood]

Tiuxiu,

Right through my accumulation phase, I used the Vanguard Short Term Investment Grade fund for the bond portion of my 80% equity / 20% bond portolio. I probably had about 3 months cash handy at most times in a MMF.

As for building your cash cushion, as you get to about 5 years from your retirement, you could start putting new money towards your cash allocation. At that point, you may be thinking of a more conservative asset allocation anyway.

Currently, I keep 1 year in cash (MMF) and a big chunk of my bond portion (now, 60/40) in the vanguard ST investment grade fund. I find that works for me. As someone else pointed out, it lost 10% at one point last year, but has recovered nicely.

 

[mickeyd]

I have always kept 1/2 in a MMF and 1/2 in Vanguard ST Bond fund. Seems like an idiot proof way to meet my goals for liquidity and return. It's never been a real money-maker, not supposed to be, but I can get my mitts on it PDQ.

 

[IndependentlyPoor]

I'm gonna be rude and quote my own message here, because I think it helps to see all the data in one place. I added a chart of the Prime MMF and the "two best" alternatives to show how they weathered the crisis.

Glad to see this question. It prompted me to actually have a look at yields and durations of the Vanguard funds one might use for "cash". Of course, bond funds other than a money market are subject to NAV loss when interest rates rise. Since short term rates are essentially controlled by the FED, the question is: What would happen to your "cash" when the FED decides to raise rates? There probably is a practical upper limit to how fast the FED can raise rates without wrecking the banking system. I don't know that that is, but worst case, maybe as much as 1% per quarterly meeting?

Here is a table of Vanguard funds that one might consider for one's "cash". The right two columns show the quarterly return in the event of a 1% and 0.5% rate hike. These returns are based on assuming that the NAV declines by an amount equal to the Duration for each percent increase in FED rates. I included the Avg. Maturity just to remind folks that Duration and Maturity are not the same thing. The table is sorted according the the 0.5% hike scenario. Note that the order is not the same for the 1% hike.

	Yield	Duration	Avg. Maturity	1% hike	0.5% hike
Prime Money Market	0.21	0.0	0.2	0.05	0.05
Tax-Exempt Money Market	0.17	0.0	0.1	0.04	0.04
GNMA	3.66	2.0	3.0	-1.09	-0.09
Short-Term Investment-Grade	1.9	2.5	-1.20	-0.25
Short-Term Tax-Exempt	0.96	1.1	1.2	-0.86	-0.31
Short-Term Federal	1.62	1.9	2.3	-1.50	-0.55
Short-Term Treasury	0.99	2.0	2.5	-1.75	-0.75
Short-Term Bond Index Inv	1.71	2.6	2.8	-2.17	-0.87
Inflation-Protected Securities	1.39	3.4	9.0	-3.05	-1.35

[TD] 2.79[/TD]

This seems to indicate that GNMAs might be a reasonable substitute for a money fund. Have I missed something? I know hardly anything about GNMAs.

I am happy to post the spreadsheet if anyone wants it.

Am I going to swap some MMF to GNMA? Dunno. Could some of the GNMA price increase be due to crisis market distortion that wvanishes (right after I commit)?

 

[CybrMike]

Not exactly a traditional approach but lately I've been moving my cash to real estate investments since they are so cheap and been getting from 15 - 20%. Know there is work in fixing up the properties and managing them, but I've been blessed with a someone who can find and manage an inexpensive crew so only the cash management and collecting rents are left up to me. The rest of my cash is sitting in the MM account at EverBank, which I'm sure is what your looking to do.

 

[Alan]

I have my cash in Penfed CD's at 5%, Bank of Internet savings at 1.75% and VG short term bond fund at 1.71%. Very hard to find decent yields at present.

 

[Dawg52]

Some in a MM yielding basically nothing, a short term bond fund and of course CD's.

 

[slouch]

I have my eFund parked at SmartyPig earning a meager 2.01% APY.

 

[73ss454]

I'm lucky enough to be holding 200K in Pen Fed, 100K at 6% and 100K at 6 1/4%. The rest in Vanguard MM.

 

[WhoDaresWins]

I keep a checking account at a local bank(.4 percent), a money market account at Capitol One and a short term bond fund at USAA.

 

[Sue J]

DH has been feeling like his job is insecure for about a year so we are keeping a large emergency fund right now. Most of it is at Emigrant Direct (1.3%) and a small amount is in PenFed CDs at 6%. Those have about another year to maturity.

 

[bbbamI]

Couple of cds earning 4% for two more years. The rest in mm earning squat, $80 in my purse and about $25 worth of change in a bottle.