VFMXX and VBTLX - please augment my understanding

[SecondCor521]

Thanks for your patience.

I understand the excess cash from RMDs. When we managed in-laws situation, that occured. What we had was everything going to local bank checking. All of their income and expense transactions went through that one account.

People have different opinions about what is excess cash, and as you mentioned, what is a good buffer. If you leave too much, you miss interest earned on the excess amount.

We maintained a 6-12 month buffer, as I recall.

Since they already had some stocks in a brokerage, we invested in individual companies and ETF's to diversify what was there. Used JNJ, DUK, and SO with success. VTI total stock is a simpler option.

I did their taxes, and knew what choices made more sense.

Thanks.

The flip side of excess cash and missing out on earnings is having to sell low because you need cash when you didn't expect. I personally keep very little cash, but in this case I have a fiduciary-like obligation, so am thinking 12-18 months, maybe half in money market and half in short term CDs.

I'm still thinking I'll swap between (taxable-income-producing) bond funds in taxable for (not-so-much) stock funds in the IRA.

I also do the taxes in this case.

 

[SecondCor521]

Interesting comments. I guess I’m more of a tops down investor. Look at portfolio, see what it needs, then find an asset to try & meet that need. Each asset will have risks & costs associated with that risk – regardless of whether I identify &/or acknowledge that risk. I want to do the best I can to get compensated for those risks/costs. Whether you call it a decision or a guess, uncertainty is certain & unavoidable. Considering that upfront allows me to avoid active managing!

You asked upthread for educational type resources & I’m assuming that is rhetorical. Ample good resources outside this echo chamber. But if nothing else, one could do worse than looking at the SVB situation as a case study. Management’s playbook may sound familiar in many places to those who have read many posts about bonds on this site!

My comments you quoted were just in the context of fixed income investing, and was just pointing out that it's not simple and there's no clear cut answer as far as I can see.

My question upthread was not rhetorical but in fact quite pointedly literal. I find little to no use for comments that are critical but decline to at least try to provide any help of any kind. It takes very little additional effort to say "Read some books by X" or "Read up on topic Y by reading blog Z" or even "Here's what I think about W".

I'm as familiar with SVB as any reasonably aware person who follows the news of the day and have my own understanding of what happened there. I also have, but will refrain from sharing, my opinion about what should be done differently.

I don't find SVB a particularly applicable case study to anything in this thread other than being aware of the FDIC limits and what's going on with those. If there's another lesson there then perhaps I'm missing something and would appreciate a pointer or having it spelled out to me.

 

[SecondCor521]

More questions on CDs. Assume brokered CDs bought inside a Vanguard taxable brokerage account.

1. Let's say I buy a 3 month CD, so it would mature around end of June. What I want to happen is that the principal and the interest automagically just show up back in the Vanguard taxable account, maybe a few days after CD maturity.

A. Is this what happens most often?
B. Is there any way to tell from the CD listing or with the CUSIP?
C. How do I ensure that happens -- Call Vanguard? Call the issuing bank?

2. I understand that I will typically have about a week or so starting on the maturity date to withdraw the money from the matured CD so it doesn't get reinvested.

D. Correct?
E. How do I withdraw the money back into the Vanguard account if this doesn't happen automagically?

3. I trust that all of the interest earned on these CDs will show up on my Vanguard 1099 consolidated next year, that I can see it in my Vanguard activity, and so forth. In other words, with a brokered CD I generally need only deal with Vanguard, not whatever bank is selling the CD.

F. Correct?

 

[pb4uski]

When brokered CDs mature they go to your settlement account, same with interest if they pay interest before maturity. Happens automatically, you don't need to do a thing.

The only way to "withdraw" is to sell the brokered CD.

You never deal with the issuing bank with a brokered CD, just like you don't deal with the US Treasury with US Treasury bills or notes bought through a broker.

 

[SecondCor521]

When brokered CDs mature they go to your settlement account, same with interest if they pay interest before maturity. Happens automatically, you don't need to do a thing.

The only way to "withdraw" is to sell the brokered CD.

You never deal with the issuing bank with a brokered CD, just like you don't deal with the US Treasury with US Treasury bills or notes bought through a broker.

OK thanks.

When I was talking about withdrawing, I meant the principal amount in the days after maturity. I understand about the secondary market before maturity.

Thanks again.

 

[all4j]

I find little to no use for comments that are critical but decline to at least try to provide any help of any kind.

Before I take the time to reply further, could you enlighten me on who you think I'm being critical of & how it was critical? Please be specific

 

[SecondCor521]

Before I take the time to reply further, could you enlighten me on who you think I'm being critical of & how it was critical? Please be specific

My reply to you was not directed at you. Apologies for the confusion.

I was referring back to posts #10 and #11 on this thread, which involve a different poster whose response I found to be critical and unhelpful.

 

[all4j]

It does seem from reading some other threads that it's not as simple as the highest yielding safe thing though. Liquidity risk, renewal rate risk, duration, credit quality, interest payment schedule, and taxation could all come into play.

I don't find SVB a particularly applicable case study to anything in this thread other than being aware of the FDIC limits and what's going on with those. If there's another lesson there then perhaps I'm missing something and would appreciate a pointer or having it spelled out to me.

Please note: These are excerpts from 2 separate posts.

Re: SVB as a case study…FDIC limits would be a consideration from a consumer/depositor perspective. I had meant to look from a management perspective – which might have lessons for one managing their own $. Details seem to still be evolving & so some of what I’ve read may prove to be inaccurate. Yet as I’ve read the background, I’ve been struck by similarities with comments I’ve seen on this board (& admittedly perhaps other boards as well…which is why I’m NOT trying to single out anyone).

So, SVB finds itself with ‘extra’ cash in the form of deposits. It didn’t make risky loans or invest in complicated products with derivatives, etc. What they did was largely buy U S Government debt of the 10 year variety because that yielded much better than the short term debt of that time. As you said earlier, “as simple as the highest yielding safe thing”. They designated as held for maturity.

What they didn’t do is consider the risk. In fact, they went for months without filling the job of risk officer when it became vacant. They either dismissed or didn’t consider duration/interest rate risk, liquidity, et al I heard someone quote someone else that I’ll paraphrase as “Was it ignorance? Indifference? Hubris? In the end, it didn’t matter.”

From what I’ve read, the SVB folks likely thought they weren’t really taking risks. I’m sure some are reading this post thinking it’ll never happen to them as well.

Is it relevant to this thread? I apologize if it seems to be off topic – perhaps I’ve missed what the thread is about (& I don’t think anyone owes me an explanation). I think the thread started looking at a money market fund, intermediate/index type fund, & then moved to CDs of 2 years to 3 months. All at different points on the yield curve & I missed any reference to duration type risk if it was mentioned. Maybe it was implicitly thought of & determined to be acceptable somehow. Especially for a 3 month CD, if indeed that meets the need. Even if someone were to make the decision on these based on yield, I would think it helpful to clarify the yield numbers better so they are consistent across products.

I’ll hush now & let the thread get back on the track that will benefit the OP.

 

[pb4uski]

I seem to recall reading that SVB had some hedges in place that they let expire in 2022, so one of two things come to mind. Perhaps management didn't appreciate the interest rate risk they were taking and just didn't want to incur the cost of renewing the hedges. Alternatively, perhaps they didn't understand what they needed to do and the hedges expired because the risk officer wasn't there to replace them or insist that they needed to be replaced. Again, it doesn't matter other than to suggest that management had some idea that they were assuming inteest rate risk because otherwise they never would have hedged to begin with.

 

[MichaelB]

I seem to recall reading that SVB had some hedges in place that they let expire in 2022, so one of two things come to mind. Perhaps management didn't appreciate the interest rate risk they were taking and just didn't want to incur the cost of renewing the hedges. Alternatively, perhaps they didn't understand what they needed to do and the hedges expired because the risk officer wasn't there to replace them or insist that they needed to be replaced. Again, it doesn't matter other than to suggest that management had some idea that they were assuming inteest rate risk because otherwise they never would have hedged to begin with.

A third possibility is they wanted to boost short term profits and thought they would have time to hedge again after the quarter close.

 

[all4j]

I seem to recall reading that SVB had some hedges in place that they let expire in 2022,

Good point -- & thanks for reminding my feeble mind of this. I also saw some reference to it, but it was early enough on that details were more speculation. Plus, the situation was a bit complicated & I didn't care to really understand the details. If I recall correctly, they had some hedges on the portion of bonds designated as available for sale, but not for the hold to maturity. They removed the hedges -- for a profit (see MichaelB's post) -- at a time when they were needing to boost their fin statements some. Why did they do it? Ahhh, that's where the speculation comes in........

There was such a mismatch between their duration & their need, it isn't clear to me that hedges would have done much more than change the timing. But, that is my speculation

Point to me is that when one buys an asset, they ignore risks at their own peril

 

[SecondCor521]

Please note: These are excerpts from 2 separate posts.

Re: SVB as a case study…FDIC limits would be a consideration from a consumer/depositor perspective. I had meant to look from a management perspective – which might have lessons for one managing their own $. Details seem to still be evolving & so some of what I’ve read may prove to be inaccurate. Yet as I’ve read the background, I’ve been struck by similarities with comments I’ve seen on this board (& admittedly perhaps other boards as well…which is why I’m NOT trying to single out anyone).

So, SVB finds itself with ‘extra’ cash in the form of deposits. It didn’t make risky loans or invest in complicated products with derivatives, etc. What they did was largely buy U S Government debt of the 10 year variety because that yielded much better than the short term debt of that time. As you said earlier, “as simple as the highest yielding safe thing”. They designated as held for maturity.

What they didn’t do is consider the risk. In fact, they went for months without filling the job of risk officer when it became vacant. They either dismissed or didn’t consider duration/interest rate risk, liquidity, et al I heard someone quote someone else that I’ll paraphrase as “Was it ignorance? Indifference? Hubris? In the end, it didn’t matter.”

From what I’ve read, the SVB folks likely thought they weren’t really taking risks. I’m sure some are reading this post thinking it’ll never happen to them as well.

Is it relevant to this thread? I apologize if it seems to be off topic – perhaps I’ve missed what the thread is about (& I don’t think anyone owes me an explanation). I think the thread started looking at a money market fund, intermediate/index type fund, & then moved to CDs of 2 years to 3 months. All at different points on the yield curve & I missed any reference to duration type risk if it was mentioned. Maybe it was implicitly thought of & determined to be acceptable somehow. Especially for a 3 month CD, if indeed that meets the need. Even if someone were to make the decision on these based on yield, I would think it helpful to clarify the yield numbers better so they are consistent across products.

I’ll hush now & let the thread get back on the track that will benefit the OP.

OP here. It's all good. I don't mind sidebars and thread drifts. If it turns into a SVB thread that's OK with me.

What I was really trying to do was better understand this part of the portfolio and make sure I was providing good input as to how to proceed going forward. I've mostly got that answer for now, I think, but if I have more questions I'll post them here.

I understand in general what you're saying about seeing whether or not any of the failures of SVB risk management might apply to the situation.

What I was trying to convey in the post you quoted is that there are all sorts of risks on any investment or savings vehicle, including all of the fixed income options. And that I'm aware of many of them, including the ones you specifically mentioned: liquidity risk and interest rate risk.

In the case I'm talking about, it's an individual and not a bank, so the applicability of those two risks to them is only approximate. But it's worth thinking about, and I am / we are. I'm also trying to think about all the other risks as well.

 

[target2019]

Yes, all of the risks continually flood into your thinking.

The largest move we made was to change the default allocation in their managed accounts from 20% equity to 40%. That was in response to my looking at their horizon, and projecting when money would run out.

Another move was to funnel new savings into a non-managed brokerage account.

One thing that always happened was the march of higher costs at their LTC facility. It was +5% in that low-inflation period (2009-2018), every year. I would be more pessimistic in these times of higher inflation.