Where to park large amount of money? Bond Strategy?

[Montecfo]

With a similar objective recently, I chose Metropolitan West Unconstrained (MWCRX). My previous favorite was Riverpark ST High Yield (RPHYX) which is closed.

If you can accept a bit more risk then intermediate bond funds such as DODIX DLTNX can be interesting. Also PONDX.

I liked that using funds does not require me to tie up funds as CD's do.

Good investing.

 

[copyright1997reloaded]

It pays to follow along at https://www.depositaccounts.com/ which is created by Ken Tumin (Bank Deals Blog).

I've been layering in on CD deals in the 12 month to 2 year range as I expect rates to increase, but not super fast. Recent CD purchases have been a 1 year (Synchrony Bank @ 1.35% - they just raised to 1.45% a week or so ago), 1 year @ Connexus CU @ 1.5%, 2 year @ Hudson Valley Federal Credit Union @ 2.00%). This is all for $ I want no market risk in.

When I do CD's, if I am doing a large amount I will typically break it up into multiple CD's so that if I break it, I'm not hit with losing a bunch of interest on the whole thing.

Money market rates are also moving up. For example, UFB Direct now has a savings account with 1.30% APY (on balances of 50K or higher).

 

[LOL!]

Intermediate-term bond funds went UP 2% since mid-March.

I don't worry about losses in bond funds at all. I even sell them when they lose money if equities have dropped in order to buy equities. It just is not a big deal. No need to sit around in cash earning a paltry amount for a bond debacle that won't be significant anyways.

And if bond funds go down, your equity funds are going to take a bigger hit anyways. So why not have ALL your $4MM+ in cash to start with?

So can you get over your fear of a small insignificant loss in order to make more money?

 

[Markola]

I don't worry about losses in bond funds at all. I even sell them when they lose money if equities have dropped in order to buy equities. It just is not a big deal. No need to sit around in cash earning a paltry amount for a bond debacle that won't be significant anyways. ?

That's what I figure, too. Look at the values of the VG Total Bond Index Fund (VBTLX) over any length of time and there just isn't much drama to worry about. I have 20% in that fund, earning a small return, which seems a more conservative approach than the certain negative return from holding cash, thanks to inflation.

 

[audreyh1]

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 .

There are some CDs yielding more than the safer (very high credit quality) short and even intermediate bond funds, so you really have to review this on a case by case basis.

 

[audreyh1]

Discover is paying 0.95% for saving account.

Synchrony and Ally are paying 1.05%.

 

[mathjak107]

my income model spins off close to 3% at the moment with potential for more . i hold risk to about 25% that of the s&p 500 and it works fine year after year .
in 2016 it clocked in at over 6% . high yield was a great place to be , as the markets beat up the high yield market like 1/2 the bonds were defaulting . it made no sense .

fidelity high yield fund had 1/2 the volatility of the s&p 500 and beat the s&p 500 with 16% returns . the model had 20% in high yield .

this year i hold zero high yield in the model as the edge is gone and risk is to high . so yield now is much lower on the model.

it is about 77% assorted bond funds and 23% dividend equity income fund .

sitting it out in cd's since the concern of bond rates cropped up would have been a bit painful.

i keep about 5 years withdrawals in this model for near term spending plus 1 year cash for current spending .

another 5 years is in a growth and income model for eating in 7-12 years and all the rest in a long term growth model for eating off in the long term .

i find it easy to optimize 3 different portfolio's and match it to the time frame i need it .

i use the fidelity insight newsletter models so there is really little to do except for a 30 second read each friday of a market recap and an occasional fund swap .

 

[audreyh1]

3% CDs not so painful.

 

[mathjak107]

if you can get 3% . it was pretty hard last year . i saw 5 year cd's at less than 2-1/2% a year ago . so 2-1/2% vs 6% is a big difference to give up in anticipation of something that may or may not happen .

that big difference carry's over to this year and if bonds dip that is a cushion . so the longer this dip takes the bigger the cushion for when it happens becomes . in the years i have been using the income model vs cd's the cushion built up is very very large and there is likely no drop that is going to come close to the extra gained so far vs cd's alone . .

only cd's i use are current spending as i have some roll over each month .

as peter lynch said , we generally give up more money preparing for or in anticipation of drops then in the drops themselves

 

[mystang52]

For parking cash, why not set up a bunch of laddered CD's? You can easily increase that average 1% return you are currently getting. And by definition with ladders you won't be tying up all of the money to one maturity date, so you'll have ample opportunities to roll over or find better rates as any given CD matures.

 

[audreyh1]

if you can get 3% . it was pretty hard last year . i saw 5 year cd's at less than 2-1/2% a year ago . so 2-1/2% vs 6% is a big difference to give up in anticipation of something that may or may not happen .

that big difference carry's over to this year and if bonds dip that is a cushion . so the longer this dip takes the bigger the cushion for when it happens becomes . in the years i have been using the income model vs cd's the cushion built up is very very large and there is likely no drop that is going to come close to the extra gained so far vs cd's alone . .

only cd's i use are current spending as i have some roll over each month .

as peter lynch said , we generally give up more money preparing for or in anticipation of drops then in the drops themselves

2 1/2% CDs versus 6% high yield (intermediate?) bonds - that is comparing apples to grapefruit!

High yield bonds do not provide a good ballast when equities crater - they get hit almost as hard.

But everyone has their investment strategy and asset allocation. To each his own.

 

[mathjak107]

it is a comparison of hiding out in just a cd to a comprehensive dedicated income portfolio for someone trying to AVOID bonds because they thought they were headed for a dip . ...

the income model consists of assorted bond funds covering many segments of the bond market and duration's as well as a smidgen of a dividend income fund .

the high yield fund is gone today because the risk is higher than it was and no longer offers the spread . but even then it was only 20% of that model and the entire model only represents 5 years of withdrawals . .

i see no reason to keep more than a years cash in cash instruments only . the additional rewards on the model vs the risks are very very good .


with the goal of keeping the model 75% less volatile than the s&p 500 , over the years i have been using it for short term money i have seen .

2012 10.70
2013 2.9
2014 7.1
2015 flat
2016 6.70


that is 5.60% average , not bad in a world of 1-3% cash instruments with not much risk at all . especially when you consider the cushion built up by the higher returns over the years using it vs just sitting in cd's with short term money . .

the point being that many times we give up so much more preparing for or anticipating a drop than the damage the drop usually inflicts , unless you do more damage to yourself by poor investor behavior .

if rates continue to rise than some bond funds will be swapped out for better choices. , some types of income funds and bond funds tend to do better if inflation is rising vs just rates rising . you have inflation adjusted bond funds , international bond funds if the dollar weakens , floating rate bond funds and commodity linked bond funds out there that can all be used instead when it is their time in the sun .

that is the beauty of keeping a portfolio dynamic and adaptable as the big picture changes over time .

 

[jetpack]

bankrate has the top direct CD rates

Best CD Rates – Compare CD Rates at Bankrate.com

1yr: 1.5%
2yr: 1.7%

 

[audreyh1]

it is a comparison of hiding out in just a cd to a comprehensive dedicated income portfolio for someone trying to AVOID bonds because they thought they were headed for a dip . ...

the income model consists of assorted bond funds covering many segments of the bond market and duration's as well as a smidgen of a dividend income fund .

the high yield fund is gone today because the risk is higher than it was and no longer offers the spread . but even then it was only 20% of that model and the entire model only represents 5 years of withdrawals . .

i see no reason to keep more than a years cash in cash instruments only . the additional rewards on the model vs the risks are very very good .


with the goal of keeping the model 75% less volatile than the s&p 500 , over the years i have been using it for short term money i have seen .

2012 10.70
2013 2.9
2014 7.1
2015 flat
2016 6.70


that is 5.60% average , not bad in a world of 1-3% cash instruments with not much risk at all . especially when you consider the cushion built up by the higher returns over the years using it vs just sitting in cd's with short term money . .

the point being that many times we give up so much more preparing for or anticipating a drop than the damage the drop usually inflicts , unless you do more damage to yourself by poor investor behavior .

if rates continue to rise than some bond funds will be swapped out for better choices. , some types of income funds and bond funds tend to do better if inflation is rising vs just rates rising . you have inflation adjusted bond funds , international bond funds if the dollar weakens , floating rate bond funds and commodity linked bond funds out there that can all be used instead when it is their time in the sun .

that is the beauty of keeping a portfolio dynamic and adaptable as the big picture changes over time .

You can run a dynamic asset allocation model and hope to gain more over time compared to a fixed asset allocation model, rather than getting burned.

Many of us are running fixed asset allocations with broad diversification, which means by definition we are giving up performance on some of our assets part of the time in the interest of lower volatility overall. I guess we do it that way because we don't believe there are dynamic or timing models that outperform in the long run especially after taxes and expenses, plus it's less work.

Not much risk at all? Recent performance is not a measure of risk and hindsight is 20/20.

 

[mathjak107]

in this case it is just simply showing that by avoiding something because you think it will fall may leave you behind where you would have been getting a better return longer which acts as a cushon . .

 

[Fedup]

Are the CDs in Vanguard safe? That's where I have my IRA account and I don't want to transfer in/out to get higher CDs rate.

 

[jazz4cash]

Are the CDs in Vanguard safe? That's where I have my IRA account and I don't want to transfer in/out to get higher CDs rate.

Not sure what you consider safe but if you are talking about FDIC CDs issued by banks that are brokered by Vanguard, most folks would consider anything with FDIC coverage to be safe. That's what Fido offers for my IRA. Some folks avoid brokered CDs due to liquidity I guess. I think I'm one of em but I appreciate your desire to stay with Vanguard when the benefit of opening another IRA is marginal.

 

[imoldernu]

Current IBond rate 1.96, and adjusts for CPI inflation. Go to Gov't site for details.
Our older 2001-2003 bonds are returning more than 5% .
Depends on where you think inflation will go. In our case we consider that it was a good move, and we always felt safe.

Won't work for large amount, but then, each person could invest up to $60K/year, which we were able to do. Anyway, every little bit counts.

 

[Fedup]

Not sure what you consider safe but if you are talking about FDIC CDs issued by banks that are brokered by Vanguard, most folks would consider anything with FDIC coverage to be safe. That's what Fido offers for my IRA. Some folks avoid brokered CDs due to liquidity I guess. I think I'm one of em but I appreciate your desire to stay with Vanguard when the benefit of opening another IRA is marginal.

Are they considered brokered CDs and what's wrong with brokered CDs. Sorry I'm really clueless when it comes to CDs that are not FDIC insured.

 

[bmcgonig]

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.

In looking at IBDL I have a question. Its selling at 25.5. Would I be correct that it terminates at 25 and therefore we're paying a 2% premium? If so then if it's yielding 2.25 % then the real yield is about 1.25%?/pa? That's assuming that in 2019 we sell it.

Thanks

 

[pb4uski]

Are they considered brokered CDs and what's wrong with brokered CDs. Sorry I'm really clueless when it comes to CDs that are not FDIC insured.

Vanguard brokered CDs are FDIC insured, just like "bank" CDs (CDs that you purchase directly from a bank rather than through a broker like VBS). No problem if you hold them to maturity.

The main difference is that brokered CDs are not redeemable early... so if you want out you have to sell them like you would a bond... so they have interest rate risk.

 

[brewer12345]

In looking at IBDL I have a question. Its selling at 25.5. Would I be correct that it terminates at 25 and therefore we're paying a 2% premium? If so then if it's yielding 2.25 % then the real yield is about 1.25%?/pa? That's assuming that in 2019 we sell it.

Thanks

https://www.ishares.com/us/products/271056/ishares-ibonds-dec-2020-corporate-etf

Take a look at the "characteristics" section. "Average yield" of 2.22% is effectively the YTM of the underlying portfolio (YTW in the case of callable bonds). The average coupon is 3.32% on the bonds in the portfolio, so the average bond in the portfolio is trading at around 103. You are effectively buying short term bonds at a premium and getting YTM of about 2% with minimal credit risk and steadily declining interest risk as the portfolio grinds toward maturity.

In contrast, it looks like the Lehman Agg I shares fund sports a portfolio YTM of about 2.5%. In return you get average maturity of 8 years and almost a third of the bonds being MBS pass throughs with a lot of negative convexity/extension risk. No thanks.

 

[MJ]

This past January, I had a truck load of CDs coming to maturity and at that time CIT bank was having a promotion paying $95 when you opened their 1.05% HYS with a minimum of $25K keeping it for 3 statement cycles. Due to their omission of limiting the promotion to only one account, I opened 14 accounts of $25,000 each giving me $95 for each new account. They currently have a promotion paying $100 when you open only one new spring 1.15% account with a minimum of $15K again keeping it in the account for 3 "full" cycles.

 

[jetpack]

A few pluses for Vanguard brokered CD's:

- FDIC insured on face value
(though you may pay more or less than face value. You could actually make money if
the bank goes under! )

- Rates tend to be higher, especially for longer term
( I see a 8 year 2.94% CD at the moment)

- You can sell them at anytime
(though they may go up or down in value. inverse of interest rates)

- For building a ladder, you can buy them in small increments out to 10 years

- no maturity instructions are needed, bank won't auto roll over onto new cd.
( I hate the 10 day window that some banks give you)

- you can have multiple CD's from multiple bank in one vanguard account, so
easier to watch and manage.


Negatives:

- The spread between buying and selling is high compared to stocks
(not a problem if holding to maturity)

- interest rate risk in that value will go way down if interest rates go up.

- somewhat confusing interface to learn for buying

 

[eytonxav]

With a similar objective recently, I chose Metropolitan West Unconstrained (MWCRX). My previous favorite was Riverpark ST High Yield (RPHYX) which is closed.

If you can accept a bit more risk then intermediate bond funds such as DODIX DLTNX can be interesting. Also PONDX.

LOL, I utilize everyone of the funds you mentioned.