Bond Fund or Guaranteed 3%

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Carl262
Posts: 99
Joined: Mon Nov 10, 2014 5:26 pm

Bond Fund or Guaranteed 3%

Post by Carl262 »

My wife and I have a reward checking account (RCA) that pays 3.09%/year (Consumers Credit Union of Illinois) on balances up to $10,000. We keep the balance at $5,000 as part of an e-fund, and I count the RCA money as part of our bond allocation. The rest of my bond allocation is in VBTLX in my tIRA. Historically, VBTLX outperforms the RCA by about 1.5%, but the RCA has no volatility (although the income is taxable, we're in the 15% bracket). Part of me feels I am wasting guaranteed money by not keeping $10,000 in the RCA, but I am hesitant to pull it away from assets that have historically performed better long-term.

1) Should we be utilizing the other $5000 in RCA space to take full advantage of the 3.09%?
2) Does counting the RCA as part of the bond allocation make sense?
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Bond Fund or Guaranteed 3%

Post by sawhorse »

You get a checking account with 3.09%?! I wanna sign up!

Risk adjusted, that's better than you can expect with bonds today and with way more liquidity. Interest rates can't go anywhere but up, which bodes poorly for bonds.

Keep the money in the checking account.
User avatar
ps56k
Posts: 980
Joined: Sat Mar 19, 2011 1:28 pm
Location: Chicago area

Re: Bond Fund or Guaranteed 3%

Post by ps56k »

Carl262 wrote:My wife and I have a reward checking account (RCA) that pays 3.09%/year (Consumers Credit Union of Illinois) on balances up to $10,000.
Interesting place - http://www.myconsumers.org/personal/che ... cking.html
with several monthly reqs to receive your 3% or 5% "reward" for spending money with your Debit Card.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 10:55 pm

Re: Bond Fund or Guaranteed 3%

Post by lack_ey »

Yes and yes. Even after taxes that's better than a bond fund now. If you're already dealing with any hassles of the account, maximize it. Look at the current SEC yields on bond funds of low-to-moderate risk. That's a best guess of subsequent returns for something around the holding period of the duration. You have to take significant term or credit risk to get better yields than 3%. See here for starting SEC yield vs. subsequent return:
viewtopic.php?f=10&t=150865

Interest rates on bonds could certainly go down from here, though. That's not impossible. It's just that the odds are in favor of the reward checking account.
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Bond Fund or Guaranteed 3%

Post by sawhorse »

Can anyone sign up, or do you have to be an Illinois resident?

Also, the requirement is to make 12 transactions a month using a debit card, but you can't enter your PIN? I've never heard of not entering your PIN. How do you do that?
User avatar
jhfenton
Posts: 4754
Joined: Sat Feb 07, 2015 10:17 am
Location: Ohio

Re: Bond Fund or Guaranteed 3%

Post by jhfenton »

Agreed. Yes and yes. To get 3% in a bond fund now, you have to go to something like VCIT (Vanguard Intermediate Term Corporate) with a 6.5 year duration and some modest credit risk. You can always reallocate if rates rise.
Topic Author
Carl262
Posts: 99
Joined: Mon Nov 10, 2014 5:26 pm

Re: Bond Fund or Guaranteed 3%

Post by Carl262 »

Interesting place - http://www.myconsumers.org/personal/che ... cking.html
with several monthly reqs to receive your 3% or 5% "reward" for spending money with your Debit Card.
For 3%, you need to login online once/month and use the debit card 12x/month. We split up groceries at the self-checkout into a few small transactions and normally have the requirements met early in the month after spending $20 on routine things. That way we still take advantage of our credit card rewards for the rest of our monthly spending - and of course we never buy things we wouldn't have bought anyway.

To get 4% or 5% with CCU requires doing more than we are comfortable, so we only get 3% each month.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Bond Fund or Guaranteed 3%

Post by retiredjg »

Carl262 wrote:2) Does counting the RCA as part of the bond allocation make sense?
This is one way to do it. Counting your emergency fund in your asset allocation can get awkward when your portfolio is small. But if it has been working for you, there's no clear reason to change it.

On the other hand, if you are holding a small bond allocation and your emergency fund is a big portion of that....you may be sort of fooling yourself and your situation may not be as safe as you think.
Topic Author
Carl262
Posts: 99
Joined: Mon Nov 10, 2014 5:26 pm

Re: Bond Fund or Guaranteed 3%

Post by Carl262 »

sawhorse wrote:Can anyone sign up, or do you have to be an Illinois resident?

Also, the requirement is to make 12 transactions a month using a debit card, but you can't enter your PIN? I've never heard of not entering your PIN. How do you do that?
Anyone can sign up. I also believe they reimburse for ATM fees (although we never use the ATM, so I haven't verified that). To use the debit card as "credit", you just click "credit" instead of "debit" at the register (or if it asks for a pin right away click "cancel", then click "credit"). I'm assuming they do it that way because they probably get a small percentage back from the retailer when it's done on credit, versus nothing on debit.
sawhorse
Posts: 3745
Joined: Sun Mar 01, 2015 6:05 pm

Re: Bond Fund or Guaranteed 3%

Post by sawhorse »

Carl262 wrote:
sawhorse wrote:Can anyone sign up, or do you have to be an Illinois resident?

Also, the requirement is to make 12 transactions a month using a debit card, but you can't enter your PIN? I've never heard of not entering your PIN. How do you do that?
Anyone can sign up. I also believe they reimburse for ATM fees (although we never use the ATM, so I haven't verified that). To use the debit card as "credit", you just click "credit" instead of "debit" at the register (or if it asks for a pin right away click "cancel", then click "credit"). I'm assuming they do it that way because they probably get a small percentage back from the retailer when it's done on credit, versus nothing on debit.


Do all stores allow that? Does it have the same anti-fraud protection that credit cards do?
Topic Author
Carl262
Posts: 99
Joined: Mon Nov 10, 2014 5:26 pm

Re: Bond Fund or Guaranteed 3%

Post by Carl262 »

sawhorse wrote: Do all stores allow that? Does it have the same anti-fraud protection that credit cards do?
The only store we can't do it at is Costco, since they only allow Amex credit transactions. You could call CCU to ask about fraud protection.
User avatar
Kevin M
Posts: 15787
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Bond Fund or Guaranteed 3%

Post by Kevin M »

Yes and yes. I keep $45,000 in two RCAs earning 3%, and include it as part of my fixed income. I would keep more there if possible. For those interested in RCAs, a good resource is DepositAccounts.com | High Yield Rewards Checking Accounts.

A more important indicator of bond fund expected return than historical performance is SEC yield, currently about 2% for TBM. The reason historical performance of TBM is better is because rates have fallen. You may earn more than 3% over the next year in TBM, but only if SEC yield drops even further, making future expected return even lower.

If TBM returns 7% over the next year, we'll see many posts about how much better TBM is than safer investments earning a guaranteed 2%-3%, and you may experience some regret. The problem is that SEC yield and future expected 5-year to 10-year return would then be about 1%. At that point TBM could squeeze out one more great year, returning 6%-7% as SEC yield falls to 0%, at which point, the party would be over.

My basic strategy for fixed income has been to shift more into safer assets with comparable yields as bond yields have fallen over the last 4-5 years. I like to have some fixed income exposed to term risk (falling rates -> increasing prices, and vice versa), but the closer rates get to 0%, the less potential reward for taking term risk, so the less I want to take. There's just not as much juice to squeeze out of term-risk at 2% as there was at 5%.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
ThisTimeItsDifferent
Posts: 333
Joined: Sat Jan 31, 2015 1:51 pm

Re: Bond Fund or Guaranteed 3%

Post by ThisTimeItsDifferent »

I'm in a similar situation, or rather someone who asked for advice is, but with a guaranteed 3% tax-deferred fixed/flexible annuity account.

viewtopic.php?f=1&t=161149

Your comment that the low SEC yield on bond funds argues in favor of the 3% account is very interesting. Maybe I should advise any asset allocation rebalancing from equities into that 3% account instead of something like VBTLX or PBDIX (total bond funds).
Pizzasteve510
Posts: 635
Joined: Sun Jul 27, 2014 3:32 pm

Re: Bond Fund or Guaranteed 3%

Post by Pizzasteve510 »

sawhorse wrote:?... Interest rates can't go anywhere but up, which bodes poorly for bonds.
...nt.
This is not necessarily true. Rates can, and have gone down. Rising rates is not a 100% certainty, otherwise long bonds would not be priced where they are.

I am not saying that 3% isn't a good deal, just that assuming the above quote is dangerous.
jfave33
Posts: 3287
Joined: Thu Mar 19, 2015 6:18 pm

Re: Bond Fund or Guaranteed 3%

Post by jfave33 »

Carl262 wrote:
Interesting place - http://www.myconsumers.org/personal/che ... cking.html
with several monthly reqs to receive your 3% or 5% "reward" for spending money with your Debit Card.
For 3%, you need to login online once/month and use the debit card 12x/month. We split up groceries at the self-checkout into a few small transactions and normally have the requirements met early in the month after spending $20 on routine things. That way we still take advantage of our credit card rewards for the rest of our monthly spending - and of course we never buy things we wouldn't have bought anyway.

To get 4% or 5% with CCU requires doing more than we are comfortable, so we only get 3% each month.

Probably a stupid question but do POS transactions include internet sales like amazon.com? Or does it have to be physical stores.
chessmannextmove
Posts: 278
Joined: Mon Feb 23, 2015 12:57 pm

Re: Bond Fund or Guaranteed 3%

Post by chessmannextmove »

At least 6mo of your ef should be in a checking/savings account. Only use bond funds as a 2nd or 3rd tier ef.
User avatar
Kevin M
Posts: 15787
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Bond Fund or Guaranteed 3%

Post by Kevin M »

jjface wrote:Probably a stupid question but do POS transactions include internet sales like amazon.com? Or does it have to be physical stores.
Online purchases usually work, but it may depend on the card. For one of mine, I had to uncheck "use as debit card" on Amazon for it to count. I also use one of mine to pay AT&T U-verse bill in two chunks (the card that requires five purchases >$50). Previously was using it to auto-pay Sonic.net bill.

For the typical RCA that requires only small purchases, I usually use it only for small purchases ($1-$20), and use cash-back CC for everything else.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Topic Author
Carl262
Posts: 99
Joined: Mon Nov 10, 2014 5:26 pm

Re: Bond Fund or Guaranteed 3%

Post by Carl262 »

chessmannextmove wrote:At least 6mo of your ef should be in a checking/savings account. Only use bond funds as a 2nd or 3rd tier ef.
While I know that is "standard advice", 6 months of expenses in a checking account is overly cautious for me. If both my wife and I lose our jobs simultaneously (due to our industries, this is unlikely even in a recession) and the stock market took a 50% drop, we would still be able to cover well over 6-months expenses. I don't plan on being more cautious than that.
User avatar
Kevin M
Posts: 15787
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Bond Fund or Guaranteed 3%

Post by Kevin M »

^Agreed. The idea is to have sufficient liquidity to cover expected and unexpected expenses. If you have 2X or more of that amount in stocks, you're probably fine. If you hold bonds in retirement accounts, you can always sell bonds and buy stocks there to rebalance.

However, the point of this thread is that if you can earn 3% in a checking account, why not use it in preference to a bond fund with a yield of 2%?

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
NoRoboGuy
Posts: 882
Joined: Fri Apr 01, 2011 11:07 pm
Location: Alabama
Contact:

Re: Bond Fund or Guaranteed 3%

Post by NoRoboGuy »

jjface wrote:
Carl262 wrote:
Interesting place - http://www.myconsumers.org/personal/che ... cking.html
with several monthly reqs to receive your 3% or 5% "reward" for spending money with your Debit Card.
For 3%, you need to login online once/month and use the debit card 12x/month. We split up groceries at the self-checkout into a few small transactions and normally have the requirements met early in the month after spending $20 on routine things. That way we still take advantage of our credit card rewards for the rest of our monthly spending - and of course we never buy things we wouldn't have bought anyway.

To get 4% or 5% with CCU requires doing more than we are comfortable, so we only get 3% each month.
Sadly, as of February 1, 2016, the Consumer's Credit Union (CCU) interest rate paid on your balances is going to go down a bit if you are in the top two tiers. Even with the reduction, this is still (by far) the best deal out there.

The short explanation for the change is you have to do 12 transactions on the debit card for 3.09% (rate is unchanged, and ceiling is unchanged at $10K), 12 transactions on the debit card plus 12 transactions on the credit card for 3.59% (rate drops from 4.09% to 3.59%, and ceiling drops from $20K to $15K, and now you need to have a minimum of $500 in purchase transactions), and 12 transactions on the debit card and $1,000 of transactions on the credit card for 4.59% (rate drops from 5.09% to 4.59%, ceiling is unchanged at $20K). The rules are worth it if you typically use your cash at this level of activity.
There is no free lunch.
jfave33
Posts: 3287
Joined: Thu Mar 19, 2015 6:18 pm

Re: Bond Fund or Guaranteed 3%

Post by jfave33 »

Yes the top tiers dropped 0.5 percent. Not much though and the top tier requirements are less which is good. Sometimes I struggled to meet the $1k purchase in a month. This will allow me to use my other cards a bit more to get higher cashback rates on the other categories. 3% on groceries is pretty good on the CCU card with no annual fee.
Post Reply