Almost out of time: Roth, Intrm Investment OR Intrm Bond Idx

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understandingJH
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Almost out of time: Roth, Intrm Investment OR Intrm Bond Idx

Post by understandingJH »

I'm looking to purchase as an emergency fund. I have a good portion of my emergency fund in a rewards checking account and a small portion in Savings Bonds. I put last years ROTH IRA contribution to Short Term Investment Grade. It managed to earn about 1.4%, not quite enough to keep up with inflation, but almost.

I'd like to take on a bit more risk for more return with the 2013 Roth IRA contribution, so I'm debating between Interim Term Investment or Interim Term Bond Index. Can't decide if having more US treasuries (less Corp.) is preferable or not.

SEC is 2.71 on Inter-Term Investment Grade
SEC is 2.58 on Inter-Term Bond Index

Duration is 6.5 (investment) vs 5.3 (bond Index).
Distribution is 3.26 (investment) vs 2.86 (bond index).

As I see it, as long as we don't have another 2008/9 event in the near future Investment Grade seems the better choice. Higher current distributions, higher SEC yield, and a year less duration.

Best CDs at my credit unions right now for IRAs are either 1.35% for 3 years, or 1.55% for 4 years. I doubt I have time to find something else for opening an IRA by tomorrow at a new credit union.
Last edited by understandingJH on Mon Apr 14, 2014 8:07 pm, edited 6 times in total.
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FelixTheCat
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Re: Vanguard Interm Investment Grade or Interm Bond Index?

Post by FelixTheCat »

Mine is in Vanguard Limited-Term Tax-Exempt Fund.
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understandingJH
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Re: Vanguard Interm Investment Grade or Interm Bond Index?

Post by understandingJH »

imgritz wrote:Mine is in Vanguard Limited-Term Tax-Exempt Fund.
I have a little bit of my emergency fund in there too! But seeing this is a IRA purchase, it's hard to justify a tax exempt bond.
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FelixTheCat
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Re: Vanguard Interm Investment Grade or Interm Bond Index?

Post by FelixTheCat »

Didn't read it was a tax advantaged account. My emergency fund is in a taxable account.
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understandingJH
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Re: Vanguard Interm Investment Grade or Interm Bond Index?

Post by understandingJH »

imgritz wrote:Didn't read it was a tax advantaged account. My emergency fund is in a taxable account.
The reason for me doing this is I'd like to build a 12 month emergency fund, though at least 6-months would suffice. I'm right now at 5 months. I've been using tax-advantaged space as a place to park some of my emergency fund while not loosing out of the space allotment for a given year. I plan to eventually convert the ROTH IRA space to my retirement asset allocation once I hit my 12 month goal. But at least for the next 1-3 years, it will serve as part of my emergency fund. I'd like for my emergency fund to at least keep up with inflation after tax. My rewards checking earns 2.5% before tax. So this is why I'm taking on a bit more risk. My emergency fund is setup in tiers of increasing risk:

Rewards Checking @ 2.5%
High Yield Checking @ 0.65% (very small token amount here)
I Savings Bonds @ 1.18%
Vanguard Limited Term Tax Exempt (SEC 0.76%, Distribution 1.63%)
Vanguard Short Term Investment Grade (SEC 1.54%, Distribution 1.93%)
???? <--- my current dilemma
Topic Author
understandingJH
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by understandingJH »

Also looking at morning star charts, aside from 2008/9, there isn't much difference between the interim-term bond index and the investment grade funds. What I do notice is that for the near future investment grade seems better because of lower duration, higher distribution (yeah I know it's backwards looking, but I assume the distribution will stay higher than the other fund for a while since SEC yield is also higher).

The steep bond curves I believe implies that short term bonds may go up faster than intermediate/long and thus not be as "safe" as everyone implies. This is another reason I'm considering intermediate term bonds for this tier of my emergency fund. I'd have to deplete my checking accounts and savings bond before I'd have to touch any bond fund I have.

Bond curves:

Image

Image

Image
Last edited by understandingJH on Tue Apr 15, 2014 9:37 am, edited 2 times in total.
dickenjb
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by dickenjb »

You are overanalyzing this. Either will be fine. You are talking about a $5500 investment.
Topic Author
understandingJH
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by understandingJH »

dickenjb wrote:You are overanalyzing this. Either will be fine. You are talking about a $5500 investment.
Perhaps, and I tend to do that often. That said, one reason I'm doing this is to better understand what I'm investing in instead of just comparing past performance. So the difference of a fund with much more of a corporate component vs treasury is where the crux of my deliberation is at.

The reason I bring up the yield curve is this dynamic chart.
DSInvestor
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by DSInvestor »

If you need more time to study your options, just put your 2013 contribution in the Short term fund that you already own and take your time. There are no tax consequences to exchange to a different fund inside IRA accounts.

IMO, for emergency funds return of your money is more important than return on your money.
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Austintatious
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by Austintatious »

You mention that you have some "emergency" money in savings bonds. You might want to take a look at today's post on this thread re I bonds, and consider the possibility of buying bonds in May. If the calculation offered in that last post on May's new inflation-adjusted rate is correct, I bonds will be getting a bit more attractive and I'm wondering if they'd be a safer and suitable alternative to your bond funds.

http://www.bogleheads.org/forum/viewtop ... st=2029318
Topic Author
understandingJH
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by understandingJH »

Austintatious wrote:You mention that you have some "emergency" money in savings bonds. You might want to take a look at today's post on this thread re I bonds, and consider the possibility of buying bonds in May. If the calculation offered in that last post on May's new inflation-adjusted rate is correct, I bonds will be getting a bit more attractive and I'm wondering if they'd be a safer and suitable alternative to your bond funds.

http://www.bogleheads.org/forum/viewtop ... st=2029318
Thanks I'll look into that. I'm getting 2K back on my taxes, so I might use the I bonds for that. It would be attractive to add the IRA amount too IF the fixed rate goes up, but I'd hate to loose the ROTH space (but I guess I'm also giving up I Bond space in the process). Needless to say I can't max out both (or even the 10K for the I Bond). What is preferable? Eventually the money in the ROTH space will be converted to include stocks once it becomes part of my retirement AA. So that goal probably throws a bit of wrench into things.

Also, I wonder about how wise it is to look a portion of my emergency fund up for a year (you can't withdraw from I bonds until after 1 year).
Last edited by understandingJH on Tue Apr 15, 2014 10:41 am, edited 1 time in total.
Topic Author
understandingJH
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by understandingJH »

DSInvestor wrote:If you need more time to study your options, just put your 2013 contribution in the Short term fund that you already own and take your time. There are no tax consequences to exchange to a different fund inside IRA accounts.

IMO, for emergency funds return of your money is more important than return on your money.
Thanks, I could do that too. I'll consider it. I agree with your last statement, except if you are planning to keep a very large emergency fund (6-12 months), if you don't use it, inflation is a big concern over time. So I thought using tiers would help.
Last edited by understandingJH on Tue Apr 15, 2014 1:17 pm, edited 1 time in total.
Austintatious
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by Austintatious »

understandingJH wrote:
Austintatious wrote:You mention that you have some "emergency" money in savings bonds. You might want to take a look at today's post on this thread re I bonds, and consider the possibility of buying bonds in May. If the calculation offered in that last post on May's new inflation-adjusted rate is correct, I bonds will be getting a bit more attractive and I'm wondering if they'd be a safer and suitable alternative to your bond funds.

http://www.bogleheads.org/forum/viewtop ... st=2029318
Thanks I'll look into that. I'm getting 2K back on my taxes, so I might use the I bonds for that. It would be attractive to add the IRA amount too IF the fixed rate goes up, but I'd hate to loose the ROTH space (but I guess I'm also giving up I Bond space in the process). Needless to say I can't max out both (or even the 10K for the I Bond). What is preferable? Eventually the money in the ROTH space will be converted to include stocks once it becomes part of my retirement AA. So that goal probably throws a bit of wrench into things.

Also, I wonder about how wise it is to look a portion of my emergency fund up for a year (you can't withdraw from I bonds until after 1 year).
As our I bond enthusiast and expert Mel Lindauer has made clear in that thread, one ought not assume that the the fixed rate will increase or even stay at the current level. It might well be decreased, so you'd want to be prepared for that contingency and decide accordingly. As for the 12 months of inaccessibility, a lot of folks consider their I bonds as part of their emergency stash but, like them, you'd want to be reasonably confident that you won't be needing that particular money for the 12 months following purchase. To me, once that hurdle is cleared, it's hard (if not impossible) to beat I bonds as an emergency funds alternative.
Topic Author
understandingJH
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Re: Almost out of time: Roth, Intrm Investment OR Intrm Bond

Post by understandingJH »

Thanks for all your feedback. In the end, I decided to go with the intermediate-term investment grade fund.
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