I have a significant pile of cash (taxable) that I’ve set aside, given my age, as “forced early retirement protection”. In other words, several years worth of living expenses in case of layoff and difficulty getting the next job. At current rates of 5.3% I have it in a money market because why risk that money, given what it is ear-marked for, if I can get an ROI that good?
Well, rates are falling now. The money market is still high but how long can that last? The best CD is 4.4% but durations under year. Callable CDs are better, up to 4.7% but again at less than 2 years. Treasuries appear even worse.
If I was to create a ladder with durations of 1, 2 and 3 years I would struggle to get 4.5%. But… maybe that is ok given the likeliness of rates dropping?
I have considered VBIAX and/or VFMV, but both of those do have risk of drops as much as 15-20%, which is not compatible with the reason I am holding these funds.
Ideas? EDIT: to make more clear, the question is to stay in the 5.3% money market, or lock in rates that are lower today given the risk of the MM dropping even further.
I see the non-economic factors of the world as making macro-economics far more difficult to predict than normal: especially war in Europe and threats of wars in Asia, but also the convulsive shifts brought on by GCC/energytech, and Chinese and even signs of USA instability.
For the past 25 years, I’ve kept 5 to 10 years of living expenses in a money market fund or a short-term corporate bond fund with an an average maturity of 2 to 3 years. You just have to resign yourself that this money is going to get a far smaller return than the S&P 500. It’s there so that I don’t need to sell any of my much higher performing stock portfolio during a market downturn.
Oh sure. I’m probably worrying too much that it is about a full point lower than my money market fund, that is all. I need to juggle locking in a rate versus gambling the MM yield won’t fall much more than that over the next 2 years.
But now you have me considering VCSH - Vanguard Short-Term Corporate Bond ETF
The name of the game here is, safety. Get what you can. Avoid risk.
Staying in the MMF as interest rates fall won’t be all that bad. Unless you think interest rates will be back to the sub-2%, or sub-1% levels in short order. I’d still sit tight at this time. If it really does get that bad, then move the money.
Alternative: The general purpose, good ol’ fashioned dollar cost averaging into one of the other funds starting when interest rates go below whatever your lowest feel-good number is. 4%, 3.5%… etc
I didn’t get out of the bond fund quick enough when the FED started jacking rates and my capital loss was about equal to a year’s worth of interest. That put me back to the point where I’d be if I just left it in the money market fund.
I’ve been liking T-bills (and T-notes to a small extent) in recent years. The reason I like them is because I can easily ladder to whatever duration I like. For example, if I know I will need a bunch of money in a year, I can simply put it into a 52-week T-bill and not think about it again. In 52 weeks, on a Thursday, the money appears in my account and can be used as necessary. In fact, last Thursday, the 52-week T-bill that I purchased on 8/4/23 at a rate of 5.351%, matured and was deposited into my account. Since I didn’t need the money right now, and since I have other T-bills maturing this week, I bought another 52-week T-bill, but that one is only yielding 4.458%. Overall, for most of the cash invested in T-bills, I have been outpacing the money market funds (or HYSAs) by a little bit. But it does take a minute or two of “work” twice each week to place the orders for the new T-bills each Tuesday and Thursday. In my case, in order not to have to think about ladder details, I simply buy ALL the new T-bills, that way I have stuff maturing twice every week for at least a year out. And when I see CDs with good yields, I sometimes snap them up, but the ones with good yields disappear very quickly so I can’t much of them. And lately, there are no CDs with good yields.
This can’t happen with T-bills. Ever. You buy a T-bill at a discount, and then at maturity, it pays you face value. Every time. For example, today I bought CUSIP 912797MK0, the 26-week T-bill, for 97.5759, and on 2/13/25, it will mature at 100 exactly.
Yes. When I was younger and “10 years worth of living expenses” was 40% of my net worth, I took the time to buy FDIC-insured CDs and Treasury securities.
Now that 10 years worth of expenses is less than 5% of my portfolio, I’ve gotten lazy in my old age and did the easy thing in buying a bond fund.
On Treasury Direct, you can specify how many times you want to reinvest your T-Bills (something like up to 25 times). When the bills mature you get the interest payment in your bank account while the principal amount is used to buy another T-Bill. So it is all on autopilot.
I second what @MarkR said. (It’s hard to go wrong following his advice. )
Buy individual bond-type securities, not bond funds. Nobody can predict the path of interest rates precisely. The individual bonds always return principal at maturity (with interest). The bond fund’s NAV (Net Asset Value) will fall when interest rates rise and you may lose principal. (As @intercst did.)
Although I have Treasury Direct accounts I find it most convenient to buy T-Bills through Fidelity. If you place an order in advance of an auction Fidelity will execute the order at no charge to you.
I’ve used TreasuryDirect (TD) for decades. And I still use it for some things. However, it is a terrible platform for a few reasons. One, in my case, because I use my cash for expenses, and because expenses vary constantly and dramatically (for example November is property tax, March/April is homeowners insurance, Feb and August are car insurance, etc), my reinvestments also vary. So a simple autopilot isn’t really appropriate. My reinvestments each week are often of different amounts. And if I happen to sell a stock one week, then that week there is a lot more cash that may go into T-bills. And if I happen to buy a stock another week, then there is less cash going into T-bills that week. Two, the TD interface is just plain clunky. Three, and this one is egregious, when I got locked out of my TD account a few years ago, and due to COVID it was nearly impossible to get anyone on the phone to fix it for months, they simply DELETED all reinvestments, and DELETED all transfers to bank accounts, and put all the matured money into the C-of-I for many months. Now I buy almost all my T-bills at a broker, it’s free, and it’s much easier to track, and the money can easily from to or from equities as I choose.
I still use TD for a few things. For example, I have eight 8-week T-bills with enough to pay all critical bills for a few months. That’s in case my broker gets hacked and I can’t access it for a while. All I have to do is direct those maturing 8-week T-bills to my bank account instead of to reinvestment (and on Tuesday the money appears in my bank account ready for use). I also have a 17-week T-bill issued on 4/30/24 that I was unable to buy at my broker. Because for 17-week T-bills, at my broker, there are only about 20 hours available to buy it (because announcement is on Tuesday and auction is on Wednesday), and I wasn’t able to access a computer during those 20 hours (because it was Passover), but at TD you can place the order well in advance of the official announcement of the bills. And of course, I-bonds are held at TD (except for the old paper ones, and even they can be transferred to TD with a bit of paperwork).
Reinvesting on TD is also kind of weird. You can reinvest up to 2 years, but no longer. So, for an 8-week T-bill, you can specify up to 12 reinvestments. For a 17-week T-bill, you can specify up to 6 reinvestments. And so on for all the durations.
Wendy writes “Buy individual bond-type securities, not bond funds. Nobody can predict the path of interest rates precisely. The individual bonds always return principal at maturity (with interest). The bond fund’s NAV (Net Asset Value) will fall when interest rates rise and you may lose principal.”
That is just flat out WRONG!. Even upper-tier, triple AAA credits sometimes default at rates that are well documented and can easily be looked up. The one supposed exception are debt instruments issued by our dear government, which will probably always return nominal principal but almost never, ever return the purchasing of the money put at risk due to INFLATION, which our dear government hasn’t been accurately tracking and reporting since the mid '80s.
So the CD/ MM/ bond game is this. If one truly wants to move purchasing power forward, i.e., “preserve capital”, much less appreciate that purchasing power, then interest-rates have to be timed and/or credit-risk assumed.
I would agree with that when it comes to CDs (which have FDIC insurance) or bonds from the Treasury, which have a nearly-zero chance of default. I would not buy individual corporate bonds however because then the default risk is definitely not zero, and I would not want to research them enough nor buy a large enough variety of corporate bonds to mitigate that risk. In that case the bond fund starts to make sense. Except that the NAV really can fall, which is why I don’t understand investing in bonds over equities (other than Treasuries). To me bond funds don’t give an ROI high enough to offset the possible NAV drops.
Does a yearly return of 54% --as a long zeros bond fund did offer back in '94-- seem worth investing in as compared to an average stock fund? Does buying a corporate bond that offered an achieved 100% YTM seem worth investing in as compared to an average stock fund? (I’ve done that more than once by buying low and then getting called.)
Bonds and bond funds, stocks and stock funds, commodities and commodity funds, etc., etc., are all just financial tools that have their time and purpose. The trick is knowing (or learning) which might best suit one’s means, needs, interests, and goals.
Yes. Longer-term bonds don’t offer enough of a return vs. the stock market to compensate you for the risk of loss. That’s why I only invested in a short-term bond fund back when money market funds were offering 0.01% interest (essentially zero)
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