DCA from SUB to MUB? [Short- to intermediate- muni bonds]

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

DCA from SUB to MUB? [Short- to intermediate- muni bonds]

Postby matonplayer » Fri Jun 28, 2013 5:27 pm

In order to meet my allocation goals I need to take a substantial chunk of cash from a windfall and move it into bonds. Given the current market conditions, would it make sense to purchase a chunk of SUB ( short-term munis) and then DCA over the next couple of years from SUB into MUB (intermediate-term Munis)? Note that this in a taxable account so I'm inclined to stick with munis for a couple more years until our tax rate drops. I'd go the CD route but I like the idea of liquidity and the chunk I have to allocate is sizable enough such that I'd have to open several accounts to stay within FDIC and I'd rather not deal with the hassle. My only other option that I can see is just holding cash and DCA from that into MUB. Thoughts?
matonplayer
 
Posts: 100
Joined: Wed May 22, 2013 10:02 pm

Re: DCA from SUB to MUB?

Postby livesoft » Fri Jun 28, 2013 5:30 pm

It looks to me like you should've bought MUB on June 24th. Whenever a bond fund drops 10%, that means BUY! BUY! BUY! (Was that a good Cramer impersonation?)

If you DCA, then don't prolong it more than 10-12 months. I'd say go 50% MUB, 50% SUB, then do anything you want after that.
Send me a pm to put your ad here.
livesoft
 
Posts: 34842
Joined: Thu Mar 01, 2007 8:00 pm

Re: DCA from SUB to MUB?

Postby matonplayer » Fri Jun 28, 2013 5:39 pm

livesoft wrote:It looks to me like you should've bought MUB on June 24th. Whenever a bond fund drops 10%, that means BUY! BUY! BUY! (Was that a good Cramer impersonation?)

If you DCA, then don't prolong it more than 10-12 months. I'd say go 50% MUB, 50% SUB, then do anything you want after that.

I actually did buy both some SUB and MUB on the 26th but by that time MUB had ratcheted up a notch.
matonplayer
 
Posts: 100
Joined: Wed May 22, 2013 10:02 pm

Re: DCA from SUB to MUB?

Postby Scooter57 » Fri Jun 28, 2013 6:41 pm

You can increase the amount covered by FDIC or NCUA insurance by creating trust accounts in the name of your chosen heirs. These Payable on Death accounts are completely under your control unless you die. Then they go to your beneficiary. You can list a charity, too, if you have no spouse, family member or friend you want ad an heir. Each name on the account gets $250k worth of insurance.

Munis have a lot further to drop so there is no rush to invest now. CD rates are shoiwing signs of rising.
Scooter57
 
Posts: 715
Joined: Thu Jan 24, 2013 9:20 am

Re: DCA from SUB to MUB? [Short- to intermediate- muni bonds

Postby Kevin M » Fri Jun 28, 2013 8:01 pm

There are multiple ways to increase FDIC or NCUA coverage in taxable accounts. Search for "fdic ownership categories". A couple can get $1M coverage with a joint account and two individual (single) accounts. As mentioned above, you get $250K per beneficiary for POD or revocable trust accounts.

Since retirement accounts are a unique ownership category, there is no way to increase coverage beyond $250K for these types of accounts.

Be careful about letting the tax tail wag the risk/return dog. Although I own muni bond funds, I also hold CDs in taxable accounts to decrease my interest-rate risk. There's nothing wrong with doing some of each.

Why are you looking at MUB and SUB instead of the Vanguard muni bond funds? MUB was on sale, but much of that discount relative to say VWIUX has disappeared. MUB is more volatile.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)
User avatar
Kevin M
 
Posts: 4432
Joined: Mon Jun 29, 2009 3:24 pm

Re: DCA from SUB to MUB? [Short- to intermediate- muni bonds

Postby matonplayer » Fri Jun 28, 2013 8:44 pm

Kevin M wrote:There are multiple ways to increase FDIC or NCUA coverage in taxable accounts. Search for "fdic ownership categories". A couple can get $1M coverage with a joint account and two individual (single) accounts. As mentioned above, you get $250K per beneficiary for POD or revocable trust accounts.

Since retirement accounts are a unique ownership category, there is no way to increase coverage beyond $250K for these types of accounts.

Be careful about letting the tax tail wag the risk/return dog. Although I own muni bond funds, I also hold CDs in taxable accounts to decrease my interest-rate risk. There's nothing wrong with doing some of each.

Why are you looking at MUB and SUB instead of the Vanguard muni bond funds? MUB was on sale, but much of that discount relative to say VWIUX has disappeared. MUB is more volatile.

Kevin


My account is with TD Ameritrade and there's a $50 transaction fee for Vanguard funds, so I've been trying to stay with ETFs.
matonplayer
 
Posts: 100
Joined: Wed May 22, 2013 10:02 pm

Re: DCA from SUB to MUB? [Short- to intermediate- muni bonds

Postby hollowcave2 » Fri Jun 28, 2013 8:50 pm

I think it's overly complicated to buy SUB and then DCA into MUB. (Wow, what a sentence :oops: )

I'm a fan of DCA but I don't think it will help a lot with bond funds because 1) bond funds are still less volatile than stocks, 2) the time period of investing into bond funds tends to be years and I think that's too long for DCA, and 3) you'll miss out too much on bond interest, which is the primary way bonds help you earn money. The best way to get into a bond fund is choose a duration suitable for you and then plan to stay in that fund for a time longer than the duration.

I do understand your concern about rates and bond funds, but the best way to handle that is choose a duration that meets your investor profile, which seems to be shorter durations. If you do get the intermediate fund, I would suggest putting the money in 3 or 4 chunks from a cash account over a time period no longer than one year. And even then you need to stick with the fund. An intermediate fund benefits you over a period of years.

And let's not forget, higher bond rates will actually help you in the long run. Vanguard articles have shown time and time again that higher rates give you higher total returns if you ride out the initial drop in price. Check out the Boglehead Wiki.
User avatar
hollowcave2
 
Posts: 1682
Joined: Thu Mar 01, 2007 3:22 pm
Location: Sacramento, CA

Re: DCA from SUB to MUB? [Short- to intermediate- muni bonds

Postby matonplayer » Fri Jun 28, 2013 8:59 pm

hollowcave2 wrote:I think it's overly complicated to buy SUB and then DCA into MUB. (Wow, what a sentence :oops: )

I'm a fan of DCA but I don't think it will help a lot with bond funds because 1) bond funds are still less volatile than stocks, 2) the time period of investing into bond funds tends to be years and I think that's too long for DCA, and 3) you'll miss out too much on bond interest, which is the primary way bonds help you earn money. The best way to get into a bond fund is choose a duration suitable for you and then plan to stay in that fund for a time longer than the duration.

I do understand your concern about rates and bond funds, but the best way to handle that is choose a duration that meets your investor profile, which seems to be shorter durations. If you do get the intermediate fund, I would suggest putting the money in 3 or 4 chunks from a cash account over a time period no longer than one year. And even then you need to stick with the fund. An intermediate fund benefits you over a period of years.

And let's not forget, higher bond rates will actually help you in the long run. Vanguard articles have shown time and time again that higher rates give you higher total returns if you ride out the initial drop in price. Check out the Boglehead Wiki.


Yep, that makes a lot of sense.
matonplayer
 
Posts: 100
Joined: Wed May 22, 2013 10:02 pm

Re: DCA from SUB to MUB? [Short- to intermediate- muni bonds

Postby Kevin M » Fri Jun 28, 2013 10:45 pm

hollowcave2 wrote:I do understand your concern about rates and bond funds, but the best way to handle that is choose a duration that meets your investor profile, which seems to be shorter durations.

I disagree. A better way is to use non-brokered 5-year (or longer) CDs with reasonable early withdrawal penalties, which have higher yields than short-term bond funds and have essentially no interest-rate risk and no credit risk.

hollowcave2 wrote:And let's not forget, higher bond rates will actually help you in the long run. Vanguard articles have shown time and time again that higher rates give you higher total returns if you ride out the initial drop in price. Check out the Boglehead Wiki.

But your returns will be even higher in the long run if you "ride out" the bond fund drop in price in a CD which does not drop in price (except for the EWP).

By combining non-brokered CDs with intermediate-term, investment-grade or muni bond funds you can lower your effective duration while maintaining a higher yield with lower risk.

Kevin
||.......|| Suggested format for Asking Portfolio Questions (edit original post)
User avatar
Kevin M
 
Posts: 4432
Joined: Mon Jun 29, 2009 3:24 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: bighatnocattle41, Bing [Bot], has-been, MerriebytheSea, N52570, Yahoo [Bot] and 59 guests