Muni Bond Fund appropriate for Emergency Fund?

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TheTimeLord
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Muni Bond Fund appropriate for Emergency Fund?

Post by TheTimeLord » Wed Aug 07, 2013 12:18 pm

Is a Muni Bond fund such as Vanguard Long-Term Tax-Exempt Fund Investor Shares (VWLTX) an appropriate place for some percentage of one's Emergency Fund. Personally I keep a 15 month emergency fund and would like to see a bit more of a return but not looking to meaningfully increase risk. Right now the money is mostly allocated between Money Markets and I-Bonds.
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scrabbler1
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by scrabbler1 » Wed Aug 07, 2013 12:24 pm

Not sure if a long-term muni bond fund is best because its NAV will fluctuate a bit. I use an intermediate-term muni bond fund as my first-tier emergency fund. You won't get the return of a long-term muni bond fund but it sure beats the miniscule returns from money markets while offering good liquidity and decent price stability.

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TheTimeLord
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by TheTimeLord » Wed Aug 07, 2013 12:41 pm

scrabbler1 wrote:Not sure if a long-term muni bond fund is best because its NAV will fluctuate a bit. I use an intermediate-term muni bond fund as my first-tier emergency fund. You won't get the return of a long-term muni bond fund but it sure beats the miniscule returns from money markets while offering good liquidity and decent price stability.
I was looking at that the intermediate-term also or even perhaps a mix. Seemed the difference in yield was about 1% which over time can add up.
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scrabbler1
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by scrabbler1 » Wed Aug 07, 2013 1:03 pm

Do a mix. I have money in both types of muni bond funds. The intermediate-term muni bond fund is my first tier EF while the long-term muni bond fund is the second tier. My intermediate-term fund is a national one, the long-term fund is a home-state-only one, further diversifying between those two holdings.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by Rushmore » Wed Aug 07, 2013 1:06 pm

I believe that a muni bond fund is inappropriate for an emergency fund. You are looking for liquidity and principal protection with an emergency fund. While a muni bond fund can provide liquidity, it cannot assure principal protection. Anybody who was invested in VWITX in May / June this year got soundly slapped on the hand -- you can definitely get whacked in these funds, and I don't think they should be the "open in case of emergency" money.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by LAlearning » Wed Aug 07, 2013 1:18 pm

StarbuxInvestor wrote:Is a Muni Bond fund such as Vanguard Long-Term Tax-Exempt Fund Investor Shares (VWLTX) an appropriate place for some percentage of one's Emergency Fund. Personally I keep a 15 month emergency fund and would like to see a bit more of a return but not looking to meaningfully increase risk. Right now the money is mostly allocated between Money Markets and I-Bonds.
--As the primary EF, I agree that it is inappropriate. YTD that fund is down ~4.5%, which is when the emergency will arise.

--Sounds like you want to build and EF tier: cash, CDs, IBonds, Muni funds. That is very reasonable. Just make sure you have a plan for what to draw on first and how much is in each tier.

--For someone keeping >1 year of funds you can argue both ways: the value is enough that drops don't matter as you have the reserve vs. I am fearful of needing a large cushion therefore should keep it safe.

--I would not use long term bonds for anything. The risk/reward is just not there for me. Use an intermediate term, get most of the returns, with less of the fluctuations.
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by Call_Me_Op » Wed Aug 07, 2013 1:38 pm

StarbuxInvestor wrote:Is a Muni Bond fund such as Vanguard Long-Term Tax-Exempt Fund Investor Shares (VWLTX) an appropriate place for some percentage of one's Emergency Fund.
Not really. An emergency fund is supposed to be a pool of money that can be tapped in the short-term without suffering a capital loss. Long-term muni fund can see a significant loss in a near-term time frame.
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by chipmonk » Wed Aug 07, 2013 1:52 pm

Rushmore wrote:I believe that a muni bond fund is inappropriate for an emergency fund. You are looking for liquidity and principal protection with an emergency fund. While a muni bond fund can provide liquidity, it cannot assure principal protection. Anybody who was invested in VWITX in May / June this year got soundly slapped on the hand -- you can definitely get whacked in these funds, and I don't think they should be the "open in case of emergency" money.
I understand the emphasis on principal protection, but disagree that it has to be an ironclad requirement if you buffer your holding amount enough.

I use VWLTX/VWAHX (long-term muni funds cited by the OP) as my emergency fund, but it's also part of my general bond allocation. I think $20k is about my requirement for an emergency fund, but I have about $55k in muni bonds. So I didn't worry about my emergency fund requirements in the slightest when muni bonds took a "nosedive" (5% loss) in June.
Call_me_op wrote:Not really. An emergency fund is supposed to be a pool of money that can be tapped in the short-term without suffering a capital loss. Long-term muni fund can see a significant loss in a near-term time frame.
I think the notion that you want to be able to access your emergency funds "without suffering a capital loss" is so that you aren't forced to sell into a loss when your emergency corresponds with adverse market conditions. In that case, you might not reap the expected gain when the market recovers... because your asset allocation is thrown out of balance by having taken the e-fund money out of the market. But why you can't just withdraw your emergency money from whatever holdings you want, and rebalance at the same time?

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by kenyan » Wed Aug 07, 2013 3:14 pm

It's perfectly fine, as long as you understand that the entire balance may not be there in an emergency, and your e-fund is proportionally larger to account for this risk. An all-cash emergency fund is not needed if you have sufficient capital to draw on that will not cause you undue penalty.
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by Call_Me_Op » Wed Aug 07, 2013 5:27 pm

chipmonk wrote: I think the notion that you want to be able to access your emergency funds "without suffering a capital loss" is so that you aren't forced to sell into a loss when your emergency corresponds with adverse market conditions. In that case, you might not reap the expected gain when the market recovers... because your asset allocation is thrown out of balance by having taken the e-fund money out of the market. But why you can't just withdraw your emergency money from whatever holdings you want, and rebalance at the same time?
Because stocks and bonds can tank at the same time. That's why God made cash (and I-bonds).
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by stlutz » Wed Aug 07, 2013 5:42 pm

Let's back up a minute. Why do you feel you need a 15 month "emergency fund".

Could it be possible that there is some mental arithmetic going on where you are wanting to say that you have an "aggressive" asset allocation and that way you make that feel comfortable is to have a huge emergency fund? If so, why not reduce your "emergency fund" to a more typical level (say 6 months) and bump up your bond allocation to something that you are actually comfortable with?

It ends up being the same thing dollar-wise, but it does make clear the distinction between "bond investments" and "cash".

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by scrabbler1 » Wed Aug 07, 2013 6:09 pm

I always considered the risk of earning very little (and thereby losing purchasing power) by holding too much in cash for a long time bigger than the risk of having to sell some of the shares of my tax-free-dividend-earning intermediate-term muni bond fund at a loss.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by Rebecca_S » Wed Aug 07, 2013 9:18 pm

We keep the bulk of our emergency fund in a Muni bond fund. Our expenses are low compared to income and we do keep a slush fund in cash at our credit union. We have a large taxable account. Therefore we are less concerned about needing to draw down in an emergency, it has been about 10 years since the last time we had to withdraw from the account, so we are comfortable with the possiblity of a 5-10% short term loss if we needed the money.
I would not recommend it for someone who was just starting out but if you have amassed a fair amount of taxable assets and are comfortable with the risk I don't see the problem.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by FoolStreet » Wed Aug 07, 2013 9:43 pm

StarbuxInvestor wrote:Is a Muni Bond fund such as Vanguard Long-Term Tax-Exempt Fund Investor Shares (VWLTX) an appropriate place for some percentage of one's Emergency Fund. Personally I keep a 15 month emergency fund and would like to see a bit more of a return but not looking to meaningfully increase risk. Right now the money is mostly allocated between Money Markets and I-Bonds.

Honestly, anything past 12 months (or even 6), starts getting you into the bond portion of your AA. So, the question, is whether munis are appropriate in your FI asset allocation? And the answer is, "of course!"

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by yukon50 » Wed Aug 07, 2013 11:55 pm

scrabbler1 wrote:I always considered the risk of earning very little (and thereby losing purchasing power) by holding too much in cash for a long time bigger than the risk of having to sell some of the shares of my tax-free-dividend-earning intermediate-term muni bond fund at a loss.
I agree with this. For example, what has been the real return on cash since 2008?

What are good funds for muni's? I've looked into the Vanguard mutual funds and MUB.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by stlutz » Thu Aug 08, 2013 1:34 am

What are good funds for muni's? I've looked into the Vanguard mutual funds and MUB.
If you like to minimize your credit risk (e.g. only AA and above), then the State Street bond ETFs are also work a look--SHM and TFI. They trade commission-free and TD and Schwab.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by z3r0c00l » Thu Aug 08, 2013 6:19 am

Ideally an emergency fund can get you cash at the local bank or ATM using a card. Bond funds don't offer that. Just a personal choice I suppose, some here consider their credit card to be an e fund and invest the rest.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by nisiprius » Thu Aug 08, 2013 6:38 am

StarbuxInvestor wrote:Is a Muni Bond fund such as Vanguard Long-Term Tax-Exempt Fund Investor Shares (VWLTX) an appropriate place for some percentage of one's Emergency Fund. Personally I keep a 15 month emergency fund and would like to see a bit more of a return but not looking to meaningfully increase risk. Right now the money is mostly allocated between Money Markets and I-Bonds.
A long-term bond fund? No. Read Vanguard's own description:

Image
Vanguard wrote: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).
I don't think Vanguard offers checkwriting privileges on this fund, which should also tell you something.

If you'd bought into this fund in mid 1979 and the emergency had occurred circa in late 1981, you've have been forced to sell shares of your fund for $0.67 on the dollar. Now of course everyone has their own standards for how much risk they are willing to take in their "emergency fund" but that does not come close to meeting my standards for emergency-fund safety.

Long-term bond funds are a lot riskier than intermediate-term. Indeed, according to Vanguard, they are literally in a different category. In fact, risk level 3 is the same category as balanced funds that are 60% stocks.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by Rainier » Thu Aug 08, 2013 7:14 am

My e-fund is 1/3 I-bonds, 1/3 int muni, 1/3 long muni.

Who cares if your e fund has $10,000 or $9,500? It's all moot if you have $15k emergency.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by mtwoy » Thu Aug 08, 2013 7:17 am

nisiprius wrote:
Image

Nsi,

How did intermediate-term tax-exempt perform over that same period? (Hint: not any better).

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by scrabbler1 » Thu Aug 08, 2013 7:23 am

z3r0c00l wrote:Ideally an emergency fund can get you cash at the local bank or ATM using a card. Bond funds don't offer that. Just a personal choice I suppose, some here consider their credit card to be an e fund and invest the rest.
While I did not really describe it a my first-tier emergency fund, I do keep a small buffer or cushion (about $750) in my local bank's checking account above the minimum amount needed to avoid monthly account fees. I do this in case I need some quick cash from an ATM or need to write a check which is below the minimum amount required on the muni bond fund account (I have checkwriting privileges, another good feature on that account). I guess I could call this cushion my Tier-1A EF and the intermdiate-term muni bond fun Tier-1B EF?

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by TheTimeLord » Fri Aug 09, 2013 9:44 am

stlutz wrote:Let's back up a minute. Why do you feel you need a 15 month "emergency fund".

Could it be possible that there is some mental arithmetic going on where you are wanting to say that you have an "aggressive" asset allocation and that way you make that feel comfortable is to have a huge emergency fund? If so, why not reduce your "emergency fund" to a more typical level (say 6 months) and bump up your bond allocation to something that you are actually comfortable with?

It ends up being the same thing dollar-wise, but it does make clear the distinction between "bond investments" and "cash".
Personally I feel 6 months is insufficient for a true emergency especially if it coincides with a meaningful market downturn. I would guess you could finds lots of people back in 2007-2008 who ran through 6 month emergency funds and then were forced to liquidate investments at well below where they wanted. I do probably tilt towards an aggressive growth level of asset allocation.
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TheTimeLord
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by TheTimeLord » Fri Aug 09, 2013 9:47 am

z3r0c00l wrote:Ideally an emergency fund can get you cash at the local bank or ATM using a card. Bond funds don't offer that. Just a personal choice I suppose, some here consider their credit card to be an e fund and invest the rest.
You can say the same for I bonds. In my case I always plan to have a few months cash available in bank accounts in case of emergency so a week to sell and transfer from a brokerage account should not be a hardship.
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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by siamond » Fri Aug 09, 2013 11:11 am

VMATX got slapped by minus 10% in the past few months. Sobering.

Personally, I don't use an emergency fund at all. My plan is to reverse-balance from whatever (liquid enough) asset is at a higher point (relatively speaking) if & when I need some emergency money. Hopefully, never. In the mean time, I'd rather have all my money maximally invested in a sound (diversified AA) manner. I realize this is a tiny bit of a bet.

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Re: Muni Bond Fund appropriate for Emergency Fund?

Post by TheTimeLord » Fri Aug 09, 2013 11:27 am

siamond wrote:VMATX got slapped by minus 10% in the past few months. Sobering.

Personally, I don't use an emergency fund at all. My plan is to reverse-balance from whatever (liquid enough) asset is at a higher point (relatively speaking) if & when I need some emergency money. Hopefully, never. In the mean time, I'd rather have all my money maximally invested in a sound (diversified AA) manner. I realize this is a tiny bit of a bet.
That one of the reasons I am looking.
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