Short Term Bond Fund vs Prime Money Market

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Short Term Bond Fund vs Prime Money Market

Postby jamesdz » Fri Aug 24, 2012 6:05 pm

Dear Bogleheads,
I am periodically holding significant sums (K$50+) in my Vanguard Prime Money Market Account;
have read that a better alternative may be to switch these funds to the Vanguard Short-Term Bond Fund to receive a slightly
higher return without incurring any significant interest rate risk.
Have any of the forum members had any experience with this approach ?
Would appreciate your input.
Thank you.
Jim D
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Re: Short Term Bond Fund vs Prime Money Market

Postby livesoft » Fri Aug 24, 2012 6:24 pm

If you are at all worried about interest rate risk, do not buy a bond fund.

Once you stop worrying about interest rate risk, then you can consider a bond fund.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Short Term Bond Fund vs Prime Money Market

Postby JPH » Fri Aug 24, 2012 6:48 pm

Do you reinvest your dividends? Short Term pays dividends frequently, and you will need to keep track of the cost basis of all those small purchases when you sell. I've had both funds for years.
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Re: Short Term Bond Fund vs Prime Money Market

Postby sscritic » Fri Aug 24, 2012 6:56 pm

JPH wrote:Do you reinvest your dividends? Short Term pays dividends frequently, and you will need to keep track of the cost basis of all those small purchases when you sell. I've had both funds for years.

Many people who use short term bond funds use average basis, especially if they write checks against the account.* Vanguard has to keep track of that for you under the new rules (they did before anyway).

* Imagine using specific ID on a rent check for $1000 with the notation 2.367 shares from 2/27/2008, 3.246 shares from 4/29/2009, etc. I am not quite sure how to get the dollar value to come out to $1000 when you don't know what the price will be the day the check is redeemed; I guess if you are close, you can just write "and the rest from the shares from 12/31/2010."
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Re: Short Term Bond Fund vs Prime Money Market

Postby joe8d » Fri Aug 24, 2012 9:28 pm

I am periodically holding significant sums (K$50+) in my Vanguard Prime Money Market Account;
have read that a better alternative may be to switch these funds to the Vanguard Short-Term Bond Fund to receive a slightly
higher return without incurring any significant interest rate risk.
Have any of the forum members had any experience with this approach ?
Would appreciate your input.


Online Savings accounts and /or 1 yr CD's would be an option to consider. I use Ally 's Online Savings ( 0.89% ) and a 1 yr ( w/3 mo rungs ) CD ladder for my savings.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Johm221122 » Fri Aug 24, 2012 9:34 pm

jamesdz wrote:Dear Bogleheads,
I am periodically holding significant sums (K$50+) in my Vanguard Prime Money Market Account;
have read that a better alternative may be to switch these funds to the Vanguard Short-Term Bond Fund to receive a slightly
higher return without incurring any significant interest rate risk.
Have any of the forum members had any experience with this approach ?
Would appreciate your input.
Thank you.
Jim D

Why do you hold cash?
If for investing keep it in your desired AA?
If for business or other is it there long enough to matter at todays interest rates?
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Re: Short Term Bond Fund vs Prime Money Market

Postby Kevin M » Sat Aug 25, 2012 12:10 am

Is this in a taxable account or tax-advantaged account? If taxable, why are you using a money market fund at all when you can easily earn about 1% in an online savings account linked to your Vanguard account?

A short-term bond fund is not a substitute for a cash-like investment. If interest rates were to increase 1%, the value of your fund would drop 2%-3% (depending on duration).

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Re: Short Term Bond Fund vs Prime Money Market

Postby abuss368 » Sat Aug 25, 2012 12:21 am

jamesdz wrote:Dear Bogleheads,
I am periodically holding significant sums (K$50+) in my Vanguard Prime Money Market Account;
have read that a better alternative may be to switch these funds to the Vanguard Short-Term Bond Fund to receive a slightly
higher return without incurring any significant interest rate risk.
Have any of the forum members had any experience with this approach ?
Would appreciate your input.
Thank you.
Jim D



Hi jamesdz,

A few items to consider:

1) What is the purpose of the funds? Are they allocated for a future expenditure? If so, when are the funds needed?

2) Is this a tax advantaged or taxable account?

3) Are you aware of interest rate risk by moving further out on the yield curve?

If you have a moment, please consider providing some additional information.

Best.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Sheepdog » Sat Aug 25, 2012 5:35 am

I use a short term bond fund instead of MM. As sscritic wrote, I use Vanguard' s calculated average cost basis for withdrawals (check and transfer). It is not troublesome.
I accept the posiblie interest rate increase problems.
For me, the positives are better than the negatives.
Why don't I at least consider using an online bank like Ally's at least for some of my cash? When you have a spouse who will not learn to use a computer, that eliminates them for me. She can use the telephone to work with Vanguard and our banks. She can always receive paper statements as well from them.
To each our own.
Last edited by Sheepdog on Sat Aug 25, 2012 10:02 am, edited 1 time in total.
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Re: Short Term Bond Fund vs Prime Money Market

Postby trasmuss » Sat Aug 25, 2012 5:41 am

If it is a taxable account you may wish to consider the Limited Term Muni fund. It doesn't pay a lot but it is federal tax free and doesn't seem to be as volatile as some of the other short term bond funds. The Short Term Muni fund is even less volatile but also pays less. For me the Limited Term fund was "just right".
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Re: Short Term Bond Fund vs Prime Money Market

Postby Dandy » Sat Aug 25, 2012 8:39 am

Money markets used to be safe, convenient and pay better yields than almost all like alternatives. The game has changed. I don't know if Mutual Fund money markets like Vanguard's Prime will ever attain their "prime" place due to updated and pending regulations. It also used to be a major hassle to move money say from banks to Vanguard and vice versa. Now a few clicks and you can move money, with no charge. Now you can drive yourself crazy chasing a yield that is a few basis points better - but we all must be aware of investing inertia and failure to adapt to changes.

If you find yourself with a large amount in Prime and you don't plan to invest it in Vanguard equity or bond funds in the near future I think you should look at other "safe" alternatives to Prime. Depending on your time frame you can choose I Bonds, Vanguard brokerage CDs (which are generally lower yielding) which are convenient, or bank FDIC products. On line banks currently provide much better yields on CDs, bank money market deposit accounts, and bank savings accounts than Prime -- and they are guaranteed. You can easily get 3/4% better yield on a Discover or Ally bank Money Market deposit or savings acct and similar benefits on CDs. $50k at 3/4% for 1 year is $375. Once the bank acct is set up you can get this benefit with a few clicks and if/when you want to move the money back to Prime for investing again just a few clicks.

Hey $375 per year is not going to change your standard of living and you may not want to leave the $50k in the bank for a year. But when people focus on very small differences in mutual fund expense ratios they should also focus on better alternative to Prime for their cash especially when it does not require fees or much hassle. Discover bank .70% Money Market, .80% on line savings, Ally Bank .89% for both. There may be better but these two are usually at or near the top.
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Re: Short Term Bond Fund vs Prime Money Market

Postby am » Sat Aug 25, 2012 9:05 am

Amex savings now .9%.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Kevin M » Sat Aug 25, 2012 11:00 am

Dandy wrote:Once the bank acct is set up you can get this benefit with a few clicks and if/when you want to move the money back to Prime for investing again just a few clicks.

No need even to do this (use a money market fund) in a taxable mutual fund account at Vanguard. You can do same-day purchases of Vanguard mutual funds at Vanguard directly from a linked bank account, and you can have dividends deposited directly to your bank account.

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Re: Short Term Bond Fund vs Prime Money Market

Postby livesoft » Sat Aug 25, 2012 11:45 am

Even if a short-term bond fund fell 3% in the next year, one would still be doing better than the bank rates posted in this thread.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Short Term Bond Fund vs Prime Money Market

Postby mickeyd » Sat Aug 25, 2012 12:09 pm

Vanguard Short-Term Bond Fund to receive a slightly
higher return without incurring any significant interest rate risk.
Have any of the forum members had any experience with this approach ?


I no longer stash my short term cash in the PMMF due to the poor rates that it currently pays. When I did have an active PMMF I also had a slice of the VG STB fund. I have since moved my PMMF cash to a local saving account, but I still retained about 25% of my cash reserves in the STB fund.

My strategy was/is to only tap the STB cash if my PMMF/savings cash is depleted. In the meantime I get a bit of diversification and perhaps a bump in current return with the STB. I have never had to tap my STB fund and reinvest the dividends monthly. It's a strategy that has worked for 10+ years.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Kevin M » Mon Aug 27, 2012 2:35 pm

livesoft wrote:Even if a short-term bond fund fell 3% in the next year, one would still be doing better than the bank rates posted in this thread.

How do you figure?

Short-term treasury SEC yield is 0.28%, distribution yield is 0.12%, even without a 3% loss you do better with a bank account paying about 1%.

Short-term bond index admiral shares SEC yield is 0.61%, distribution yield is 1.52%, and duration is 2.8 years. Even assuming the distribution yield increases to about 2.5%, how do you come out better with a 3% loss in NAV over the next year?

Short-term investment grade SEC yield is 1.36%, dist. yield is 2.19%, duration is 2.9 years. Same question.

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Re: Short Term Bond Fund vs Prime Money Market

Postby Sidney » Mon Aug 27, 2012 2:39 pm

Kevin M wrote:
livesoft wrote:Even if a short-term bond fund fell 3% in the next year, one would still be doing better than the bank rates posted in this thread.

How do you figure?

Short-term treasury SEC yield is 0.28%, distribution yield is 0.12%, even without a 3% loss you do better with a bank account paying about 1%.

Short-term bond index admiral shares SEC yield is 0.61%, distribution yield is 1.52%, and duration is 2.8 years. Even assuming the distribution yield increases to about 2.5%, how do you come out better with a 3% loss in NAV over the next year?

Short-term investment grade SEC yield is 1.36%, dist. yield is 2.19%, duration is 2.9 years. Same question.

Kevin


If I look back at several years, I can't construct a scenario where a 3% decline next year would offset the difference between my bond funds and cash yield on a cumulative basis. The key is to not look at one year. I don't know if that is what livesoft meant but that is how I look at things. For example, over the last five years, I have kept a slice of my bonds in Limited Term Tax Exempt. Over the 5 years (just an example), the total return is almost 20%. I can take a 3% hit and still be up 17% - after tax.
I always wanted to be a procrastinator.
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Re: Short Term Bond Fund vs Prime Money Market

Postby livesoft » Mon Aug 27, 2012 2:45 pm

Kevin M wrote:
livesoft wrote:Even if a short-term bond fund fell 3% in the next year, one would still be doing better than the bank rates posted in this thread.

How do you figure?

You are so nice to count potential unrealized capital losses. If you do that, you have to be nice and count unrealized capital gains as well. :)
VCSH is up 4% YTD, so if it drops 3%, let's say it is up 1% YTD and still has some "yield" to pay out for the next 4 months before December 31.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Kevin M » Mon Aug 27, 2012 4:24 pm

livesoft wrote:
Kevin M wrote:
livesoft wrote:Even if a short-term bond fund fell 3% in the next year, one would still be doing better than the bank rates posted in this thread.

How do you figure?

You are so nice to count potential unrealized capital losses. If you do that, you have to be nice and count unrealized capital gains as well. :)
VCSH is up 4% YTD, so if it drops 3%, let's say it is up 1% YTD and still has some "yield" to pay out for the next 4 months before December 31.

But unfortunately we can't invest in the past. The OP was asking about doing something now, not going back in time and investing at the beginning of the year.

Since you said "in the next year", I assumed you were talking about from now until one year from now. I wouldn't question the statement you just made (YTD returns, etc.), although I might question the usefulness of it in making investing decisions in the present.

It's easy to pick a winning strategy ex-post. Are we confusing outcome with strategy here?

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Re: Short Term Bond Fund vs Prime Money Market

Postby Kevin M » Mon Aug 27, 2012 4:37 pm

Sidney wrote:If I look back at several years, I can't construct a scenario where a 3% decline next year would offset the difference between my bond funds and cash yield on a cumulative basis. The key is to not look at one year. I don't know if that is what livesoft meant but that is how I look at things. For example, over the last five years, I have kept a slice of my bonds in Limited Term Tax Exempt. Over the 5 years (just an example), the total return is almost 20%. I can take a 3% hit and still be up 17% - after tax.

I too am quite happy with my bond fund returns over the last few years, but unfortunately that is not at all predictive of returns going forward--even looking out five years or more. Starting with yields of about 2% or less, I don' think you can you construct a likely scenario where you get a total return of 20% over the next five years.

It's important that bond fund owners not extrapolate past returns into the future; they are almost certain to be sorely disappointed if they do. Past returns certainly are not a reason to substitute a short-term bond fund for a cash equivalent.

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Re: Short Term Bond Fund vs Prime Money Market

Postby livesoft » Mon Aug 27, 2012 5:54 pm

Kevin M wrote:It's important that bond fund owners not extrapolate past returns into the future; they are almost certain to be sorely disappointed if they do. Past returns certainly are not a reason to substitute a short-term bond fund for a cash equivalent.

Kevin

I think it is also important not to extrapolate capital losses into the future. If one is always worried that bond funds will have a negative return, then one will have ulcers buying bond funds or perhaps never buy a bond fund.

One has to start somewhere and at sometime. I do not believe that just because someone tells me that bond funds might drop in value is a reason to avoid them. I will say that if a short-term bond fund drops in value, I will say, "So what!" or "Who cares!" I will enjoy good returns eventually just like I have enjoyed good returns in the past.

It is also funny to me that one will invest in an equity fund (make it an emerging markets or a small-cap value stock fund) while avoiding a short-term bond fund. Sure, some folks say take your risk on the equity side, but let's get real here.

And if folks are not extrapolating past returns into the future whenever they buy any investment, then what are they doing?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Sidney » Mon Aug 27, 2012 5:58 pm

Kevin M wrote:
Sidney wrote:If I look back at several years, I can't construct a scenario where a 3% decline next year would offset the difference between my bond funds and cash yield on a cumulative basis. The key is to not look at one year. I don't know if that is what livesoft meant but that is how I look at things. For example, over the last five years, I have kept a slice of my bonds in Limited Term Tax Exempt. Over the 5 years (just an example), the total return is almost 20%. I can take a 3% hit and still be up 17% - after tax.

I too am quite happy with my bond fund returns over the last few years, but unfortunately that is not at all predictive of returns going forward--even looking out five years or more. Starting with yields of about 2% or less, I don' think you can you construct a likely scenario where you get a total return of 20% over the next five years.

It's important that bond fund owners not extrapolate past returns into the future; they are almost certain to be sorely disappointed if they do. Past returns certainly are not a reason to substitute a short-term bond fund for a cash equivalent.

Kevin

That wasn't my point. My point is, if you sit in cash, you can expect to get a return that reflects cash. Over the very long term, cash returns are very low (expected return ~ zero?). As a result, I don't hold any.
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Re: Short Term Bond Fund vs Prime Money Market

Postby scone » Mon Aug 27, 2012 6:22 pm

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Re: Short Term Bond Fund vs Prime Money Market

Postby Rob't » Mon Aug 27, 2012 6:34 pm

Glad I wasn't using Short Term Investment Grade as a "cash" account in 2008:


S-T Investment-Grade Inv
Fund Inception Date 10/29/1982

High High Date Low Low Date
$10.81 01/22/2008 $9.57 12/08/2008



You want your rainy day money to be stable, because it could rain on 12/7. Livesoft was dead on:

If you are at all worried about interest rate risk, do not buy a bond fund.

Once you stop worrying about interest rate risk, then you can consider a bond fund.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Kevin M » Mon Aug 27, 2012 8:48 pm

Sidney wrote:My point is, if you sit in cash, you can expect to get a return that reflects cash. Over the very long term, cash returns are very low (expected return ~ zero?). As a result, I don't hold any.

True, this generally has been the case, and in theory it should be the case. A higher risk investment (bonds) should have a higher expected return than a lower risk investment (cash). However, in the current environment, there are some anomalies available to the retail investor.

The yield on the 2-year treasury (short-term bond) is about 0.3%, 3-year treasury is about 0.4% and 5-year treasury (intermediate-term bond) is about 0.7%, yet the retail investor can get about 1% on cash (for institutional investors, the 1-month T-bill pretty much is cash, and the yield is about 0.1%). So although institutional investors get a higher yield by taking more interest-rate risk, retail investors can get a higher yield on cash than on a 5-year bond with its interest-rate risk. In other words, the retail investor can earn about 10 times the rate on cash that an institutional investor can earn.

Here is what one of our forum members, grok87, who is an institutional fixed income investor, has this to say on the topic in this post:

grok87 wrote:I am an institutional fixed income investor. I am continually amazed at how retail folks fail to realize how lucky they are in terms of their fixed income options. I would love to have these accessible to me as an institutional investor:

1) I bonds: better real return than short term tips with no interest rate risk. Also no expense ratio if you are comparing to VIPSX

2) FDIC insured savings account yielding 1%. Same risks (i.e. none) as tbills which are yielding zero.

3) Longer term cds with easy early withdrawal penalties. If interest rate rise a lot you can cash in, essentially at par, and reinvest at the higher rates. Plus they usually yield more than treasuries. For example its easy to find a 5 year cd yielding 2.5% (some yield 3%) vs. 5 year treasury at 1.66%.

4) The G fund in the federal TSP. the yield of longer dated treasuries without the interest rate risk.

With all of these superior retail fixed income products, I simply can't understand peoples preferences for the total bond market index fund or corporate bond funds. Higher expenses and more risk and lower yields/returns.

They say there is no such thing as a free lunch. But for retail fixed income investors every day is a smorgasboard of tasty free dishes while I am starving for yield here in institutional fixed income land!
;-)
cheers,


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Re: Short Term Bond Fund vs Prime Money Market

Postby grok87 » Wed Aug 29, 2012 10:02 pm

Kevin M wrote:
Sidney wrote:My point is, if you sit in cash, you can expect to get a return that reflects cash. Over the very long term, cash returns are very low (expected return ~ zero?). As a result, I don't hold any.

True, this generally has been the case, and in theory it should be the case. A higher risk investment (bonds) should have a higher expected return than a lower risk investment (cash). However, in the current environment, there are some anomalies available to the retail investor.

The yield on the 2-year treasury (short-term bond) is about 0.3%, 3-year treasury is about 0.4% and 5-year treasury (intermediate-term bond) is about 0.7%, yet the retail investor can get about 1% on cash (for institutional investors, the 1-month T-bill pretty much is cash, and the yield is about 0.1%). So although institutional investors get a higher yield by taking more interest-rate risk, retail investors can get a higher yield on cash than on a 5-year bond with its interest-rate risk. In other words, the retail investor can earn about 10 times the rate on cash that an institutional investor can earn.

Here is what one of our forum members, grok87, who is an institutional fixed income investor, has this to say on the topic in this post:

grok87 wrote:I am an institutional fixed income investor. I am continually amazed at how retail folks fail to realize how lucky they are in terms of their fixed income options. I would love to have these accessible to me as an institutional investor:

1) I bonds: better real return than short term tips with no interest rate risk. Also no expense ratio if you are comparing to VIPSX

2) FDIC insured savings account yielding 1%. Same risks (i.e. none) as tbills which are yielding zero.

3) Longer term cds with easy early withdrawal penalties. If interest rate rise a lot you can cash in, essentially at par, and reinvest at the higher rates. Plus they usually yield more than treasuries. For example its easy to find a 5 year cd yielding 2.5% (some yield 3%) vs. 5 year treasury at 1.66%.

4) The G fund in the federal TSP. the yield of longer dated treasuries without the interest rate risk.

With all of these superior retail fixed income products, I simply can't understand peoples preferences for the total bond market index fund or corporate bond funds. Higher expenses and more risk and lower yields/returns.

They say there is no such thing as a free lunch. But for retail fixed income investors every day is a smorgasboard of tasty free dishes while I am starving for yield here in institutional fixed income land!
;-)
cheers,


Kevin

yep. still true.
cheers,
grok, CFA | Danon delenda est
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Re: Short Term Bond Fund vs Prime Money Market

Postby joe8d » Wed Aug 29, 2012 10:15 pm

:thumbsup Grok
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Re: Short Term Bond Fund vs Prime Money Market

Postby joe8d » Wed Aug 29, 2012 10:28 pm

Why don't I at least consider using an online bank like Ally's at least for some of my cash? When you have a spouse who will not learn to use a computer, that eliminates them for me. She can use the telephone to work with Vanguard and our banks. She can always receive paper statements as well from them.
To each our own.


Ally Bank has excellent phone Reps.I do all my transactions with them over the phone and they issue paper statements every month.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Kevin M » Wed Aug 29, 2012 11:23 pm

joe8d wrote:
Why don't I at least consider using an online bank like Ally's at least for some of my cash? When you have a spouse who will not learn to use a computer, that eliminates them for me. She can use the telephone to work with Vanguard and our banks. She can always receive paper statements as well from them.
To each our own.


Ally Bank has excellent phone Reps.I do all my transactions with them over the phone and they issue paper statements every month.

And if you have a trust account, you can only open CDs by phone (not online), and you can only receive paper statements. I actually don't like that. I started with a trust account, but after I learned about these limitations, I started using POD accounts instead (e.g., to open new CDs online).

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Re: Short Term Bond Fund vs Prime Money Market

Postby joe8d » Wed Aug 29, 2012 11:38 pm

Kevin M wrote:
joe8d wrote:
Why don't I at least consider using an online bank like Ally's at least for some of my cash? When you have a spouse who will not learn to use a computer, that eliminates them for me. She can use the telephone to work with Vanguard and our banks. She can always receive paper statements as well from them.
To each our own.


Ally Bank has excellent phone Reps.I do all my transactions with them over the phone and they issue paper statements every month.

And if you have a trust account, you can only open CDs by phone (not online), and you can only receive paper statements. I actually don't like that. I started with a trust account, but after I learned about these limitations, I started using POD accounts instead (e.g., to open new CDs online).

Kevin


Kevin. Not sure what you are are saying. All my Ally accounts are POD with 3 beneficiaries ( 750 k FDIC coverage). Opened Online, administered over phone and mailed statements.
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Re: Short Term Bond Fund vs Prime Money Market

Postby Kevin M » Thu Aug 30, 2012 2:49 pm

joe8d wrote:Kevin. Not sure what you are are saying. All my Ally accounts are POD with 3 beneficiaries ( 750 k FDIC coverage). Opened Online, administered over phone and mailed statements.

Joe8d,

What I'm saying is that with POD accounts you can have it either way: do everything online and have online statements (what I do), or do transactions by phone and get paper statements (what you do). My point about trust accounts was to emphasize that not only can you do transactions by phone and get paper statements, but that with a trust you must do certain transactions by phone, and you must receive paper statements (as far as I can tell, I cannot switch to online statements for my trust accounts); just more color to counter the notion that you must do everything online at Ally.

Also, in my experience Ally provides excellent phone service, as well as excellent online chat service.

Kevin
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Kevin M
 
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