Hello;
I need to invest about $10K in my taxable account. I need to preserve capital for this, since I need the money back in 3-5 years. Hence a CD or a Bond fund type of investment.
I have already maxed out $20K I-Bonds for 2011.
I looked at Ally Bank CD. It only yields about 1.2 to 1.4%. I was looking at VMLTX and wanted to get opinions on that vs a CD?
Thanks.
Please recommend a CD or a safe Bond Fund
-
- Posts: 189
- Joined: Thu Feb 11, 2010 12:34 pm
Re: Please recommend a CD or a safe Bond Fund
Ally just dropped the rate on its 5-year CD, but I believe it's still hovering at around 2.2% with a 60-day early withdrawal penalty. Ken's blog (depositaccounts) has fairly thorough analyses of the effective rate on Ally's 5-year if broken after 3 - 5 years. That might suit your needs.InvestoGuy wrote:Hello;
I need to invest about $10K in my taxable account. I need to preserve capital for this, since I need the money back in 3-5 years. Hence a CD or a Bond fund type of investment.
I have already maxed out $20K I-Bonds for 2011.
I looked at Ally Bank CD. It only yields about 1.2 to 1.4%. I was looking at VMLTX and wanted to get opinions on that vs a CD?
Thanks.
- nisiprius
- Advisory Board
- Posts: 52211
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
1) This is a tax-exempt bond fund. Tax-exempt bonds typically pay lower interest rates than taxable bonds. Usually, in the roughest way, if you're in a high tax bracket, after taxes they will do better than taxable bonds; but not if you're in a low bracket. It would be a waste to hold this fund in a tax-advantaged account because you're giving up return in order to get a tax break you're getting anyway.
2) Vanguard puts this fund in Risk Category 1, and says "Risk Category 1: Conservative. Vanguard funds are classified as conservative if their share prices are expected to remain stable or to fluctuate only slightly. Such funds may be appropriate for the short-term reserves portion of a long-term investment portfolio, or for investors with short-term investment horizons (three years or less)." Money market funds are less risky in terms of fluctuation, but Vanguard does put them in the same broad risk category.
3) Growth are not the only thing to look at but you should always look at them. They show what happens if you leave a sum of money in the account, reinvesting dividends (just like a bank account where the interest is added to the account). In a cash investment, the number of dollars in the account never goes down, even slightly. In a bond fund, it can and it does. These charts compare VBMLX in blue with Vanguard Prime Money Market Fund in orange.
Here's a place where you would have seen about $10,000 in the fund one day, and one week later you'd have seen $100 less. Would this bother you? Also, notice that if you're watching it closely day by day you will see many misleading ups and downs that have nothing to do with how the fund is behaving long-term. The money market fund shows almost no growth at all over this time period, but it never goes down.
In a long-term view, the fluctuations in the bond fund are barely visible.
2) Vanguard puts this fund in Risk Category 1, and says "Risk Category 1: Conservative. Vanguard funds are classified as conservative if their share prices are expected to remain stable or to fluctuate only slightly. Such funds may be appropriate for the short-term reserves portion of a long-term investment portfolio, or for investors with short-term investment horizons (three years or less)." Money market funds are less risky in terms of fluctuation, but Vanguard does put them in the same broad risk category.
3) Growth are not the only thing to look at but you should always look at them. They show what happens if you leave a sum of money in the account, reinvesting dividends (just like a bank account where the interest is added to the account). In a cash investment, the number of dollars in the account never goes down, even slightly. In a bond fund, it can and it does. These charts compare VBMLX in blue with Vanguard Prime Money Market Fund in orange.
Here's a place where you would have seen about $10,000 in the fund one day, and one week later you'd have seen $100 less. Would this bother you? Also, notice that if you're watching it closely day by day you will see many misleading ups and downs that have nothing to do with how the fund is behaving long-term. The money market fund shows almost no growth at all over this time period, but it never goes down.
In a long-term view, the fluctuations in the bond fund are barely visible.
Last edited by nisiprius on Tue Aug 30, 2011 3:10 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
- nisiprius
- Advisory Board
- Posts: 52211
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Because that's doing short-term thinking about a long-term fund.260chrisb wrote:Good time to ask this question: why not ... VWLTX long term tax exempt. VWLTX [has] a moderate [risk] but at 2.11% and 3.01 for the past year why not?
Relative to other bonds long-term bonds are quite risky, both in terms of interest rate risk and inflation risk. Again, if you go to Vanguard's own description for VWLTX, they way "Moderate funds—Risk level 3: Vanguard funds classified as moderate are subject to a moderate degree of fluctuation in share prices. In general, such funds may be appropriate for investors who have a relatively long investment horizon (more than five years)." Personally, given an average duration of seven years, the blurb for this fund might well read "more than seven years."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.