Selecting a short term bond for my EF

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Selecting a short term bond for my EF

Postby icedtea » Fri Dec 28, 2012 12:56 am

I'm going with a multi-tiered EF:

- $5k in MMA
- $5k in I-bonds
- $5k in short term bond fund

For the short term bond fund, I'm looking at Vanguard Short Term Bond Index Investors (VBISX) and Vanguard Short Term Investment Grade (VFSTX). I've been told the higher the yield, typically the greater the risk. VFSTX has a higher yield and it looks like it fell quite a bit during 2008-2009 but otherwise it's been pretty stable. Is VFSTX inherently riskier than VBISX? If so, why? I'm inclined to choose VFSTX but I'd like to better understand the differences.

Iced Tea
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Re: Selecting a short term bond for my EF

Postby Valuethinker » Fri Dec 28, 2012 6:06 am

If it fell more historically then it is intrinsically more risky.

On interest rate risk, the two funds will be very similar. (short term bonds with higher coupons, ie the first fund, have a marginal advantage when interest rates rise, but I wouldn't depend on that, it could only be theoretical and overwhelmed by other factors (extension risk on Mortgage backed securities, illiquidity, general market forces on dealers).

On credit/ default risk, you'll get a much bumpier ride with the first fund. During another credit crunch, the market 'flight to safety' drops everything but the safest bonds (US Treasury Securities).

If there is a standoff re debt limits, weird things happen, but there's no reason, to my knowledge, to believe that US Treasury security holders will not get their money and interest back in full. To say any more risks a political discussion which is not my intent.

As well as the historic performance, the higher yield on the former fund tells you that it is more risky. The long term perforrmance of the more risky fund is pretty similar to the latter fund? So you did not really get rewarded for taking on that risk.


If this is your Emergency Fund you want to be very safe. I would also consider laddered CDs (within FDIC limits) because they may be paying superior interest rates. I believe there are cashable CDs (with an interest penalty).


Also as I understand US I bonds (WARNING NOT USIAN, THIS IS NOT ADVICE, THIS IS HEARSAY FROM AN INEXPERT OBSERVER) they are not instantaneously cashable unless owned for at least 5 years?
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Re: Selecting a short term bond for my EF

Postby shipwreck » Fri Dec 28, 2012 7:27 am

Valuethinker wrote:Also as I understand US I bonds (WARNING NOT USIAN, THIS IS NOT ADVICE, THIS IS HEARSAY FROM AN INEXPERT OBSERVER) they are not instantaneously cashable unless owned for at least 5 years?


I Bonds are redeemable after one year. There is a 3 month interest penalty if held under 5 years.
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Re: Selecting a short term bond for my EF

Postby livesoft » Fri Dec 28, 2012 8:33 am

Vanguard has at least 4 short-term bond funds. See this link: viewtopic.php?p=1383073#p1383073 to help me not repeat myself.
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: Selecting a short term bond for my EF

Postby john94549 » Fri Dec 28, 2012 8:43 am

You might want to consider the simplicity of a garden-variety savings account where funds can be transferred to a checking account as required, on-line. I use Alliant CU for this purpose. The rate is not sexy (what is, these days?) at 0.8%, but the funds transfer from savings to checking immediately, they give you free checks (200, as I recall), and no fees or maintenance charges, and a minimum balance of $100 or something. I think of it as an interest-bearing checking account. Alliant is an "all access" credit union, meaning anyone can join with a one-time membership in one of their affinity groups (such as the PTA).

If you are into plastic, there "might" (and I stress "might") be some rewards checking deals you could explore for the funds. I'm not into all the hoops, but, for some, it's an option.
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Re: Selecting a short term bond for my EF

Postby camaro327 » Fri Dec 28, 2012 9:22 am

I would omit the ST bond fund completely. There's little to be gained on that small of amount (5K). I like a high yielding online savings and possibly upping the I-bonds to 10K after the first 5K had passed the 1 yr mark required for redemption.

Also, remember that the I-bonds can be redeemed in amounts less than the purchase amount. For example if you buy 5K in I-bonds and need 1K, you only need to redeem that portion.
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Re: Selecting a short term bond for my EF

Postby livesoft » Fri Dec 28, 2012 9:30 am

john94549 wrote:You might want to consider the simplicity of a garden-variety savings account where funds can be transferred to a checking account as required, on-line.
You have just described the simplicity of a garden-variety short-term bond fund: Easily transferred to a checking account as required, on-line. They also come with check books.
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: Selecting a short term bond for my EF

Postby john94549 » Fri Dec 28, 2012 9:44 am

Livesoft, as a (former) owner of a tad in VFSTX, I would concur. I'm just not all that into sinking SEC* and distribution yields these days. Not to mention NAV risk. Not my cup of tea, but others (as, I suspect, you) disagree. Reasonable people, and all that . . ..

I would agree, however, that I sold VFSTX too soon, as the short- and long-term capital gains just cranked out were quite tasty.

*I bought the fund a few months back when the SEC yield was 1.64. It's now 50 basis points lower.
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Re: Selecting a short term bond for my EF

Postby icedtea » Sat Dec 29, 2012 1:46 pm

If you're comparing the performance of Vanguard Short Term Investment Grade (VFSTX) against a given MMA or CD, how do you interpret the different returns provided on vanguard.com?

See https://personal.vanguard.com/us/funds/ ... =INT#tab=1

There are returns before taxes, returns after taxes on distributions and returns after taxes on distributions and sale of fund shares.

How do you benchmark these returns against say an MMA with a 1.05% APY?
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Re: Selecting a short term bond for my EF

Postby dbr » Sat Dec 29, 2012 2:06 pm

That interest rate is before taxes, so you compare before taxes.

The after tax data doesn't mean much anyway. To be meaningful you have to figure your tax cost for your specific tax situation.
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Re: Selecting a short term bond for my EF

Postby icedtea » Sat Dec 29, 2012 4:30 pm

dbr wrote:That interest rate is before taxes, so you compare before taxes.

The after tax data doesn't mean much anyway. To be meaningful you have to figure your tax cost for your specific tax situation.


Thanks. Does the before tax return include dividends? 'Cause if I look at the performance chart from YTD alone, the return is much lower.
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Re: Selecting a short term bond for my EF

Postby tfb » Sat Dec 29, 2012 4:50 pm

icedtea wrote:How do you benchmark these returns against say an MMA with a 1.05% APY?

You can't, because those returns include the effect of interest rate dropping in recent years. You don't know whether interest rates will keep dropping the way it did lately, drop more slowly, stay level, go up a little, or go up a lot. In each scenario, one will turn out to be better than the other. You just don't know which scenario will play out. For $5k, I would not use a short term bond fund.
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