Parking Cash

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Topic Author
Binx
Posts: 68
Joined: Thu Mar 20, 2008 8:59 pm

Parking Cash

Post by Binx »

I could use some suggestions on where to park about a 100k in cash. It is currently in a money market account in a taxable portfolio earning 2.7 % (federally tax free). I would like to do better than this.

I am in New York and pay 6.75% NY Tax and 15% Federal tax. I was looking at CD's, treasuries and tax free Muni's but have realized that because of our small retirement income we can handle about 18k of interest income in our taxable portfolio before pushing intom the 25% bracket. So I think I can consider some investments that wouldn't normally be put into a taxable account.

I was think of a total bond ETF like (BND) or some type of conservative investment.

Thanks
Valuethinker
Posts: 42165
Joined: Fri May 11, 2007 11:07 am

Re: Parking Cash

Post by Valuethinker »

Binx wrote:I could use some suggestions on where to park about a 100k in cash. It is currently in a money market account in a taxable portfolio earning 2.7 % (federally tax free). I would like to do better than this.

I am in New York and pay 6.75% NY Tax and 15% Federal tax. I was looking at CD's, treasuries and tax free Muni's but have realized that because of our small retirement income we can handle about 18k of interest income in our taxable portfolio before pushing intom the 25% bracket. So I think I can consider some investments that wouldn't normally be put into a taxable account.

I was think of a total bond ETF like (BND) or some type of conservative investment.

Thanks
Hi

Generally if you want higher return, you have to take on higher risk.

This is normally rewarded in the equity portion of your portfolio, but not in the fixed income and cash portions.

You might want to look at a Tax Exempt MMF) although for reasons above, that may not be of interest to you.

But generally, if you want cash like safety, you get cash like returns.

As an alternative, if you don't feel you are going to need that money in the short run, you could consider a ST bond fund. Higher long run returns, but also higher risk.
Topic Author
Binx
Posts: 68
Joined: Thu Mar 20, 2008 8:59 pm

Re: Parking Cash

Post by Binx »

Valuethinker wrote:
Binx wrote:I could use some suggestions on where to park about a 100k in cash. It is currently in a money market account in a taxable portfolio earning 2.7 % (federally tax free). I would like to do better than this.

I am in New York and pay 6.75% NY Tax and 15% Federal tax. I was looking at CD's, treasuries and tax free Muni's but have realized that because of our small retirement income we can handle about 18k of interest income in our taxable portfolio before pushing intom the 25% bracket. So I think I can consider some investments that wouldn't normally be put into a taxable account.

I was think of a total bond ETF like (BND) or some type of conservative investment.

Thanks
Hi

Generally if you want higher return, you have to take on higher risk.

This is normally rewarded in the equity portion of your portfolio, but not in the fixed income and cash portions.

You might want to look at a Tax Exempt MMF) although for reasons above, that may not be of interest to you.

But generally, if you want cash like safety, you get cash like returns.

As an alternative, if you don't feel you are going to need that money in the short run, you could consider a ST bond fund. Higher long run returns, but also higher risk.

Thanks, I was thinking along those terms. I know the shorter duration bond funds have less volatility than say intermediate or long term but I am unsure of the risk/reward relationship of short vs. imtermediate. I have seen on this board that many consider the rewards of long term bonds insufficient for their risks.

I would also consider a total bond fund. In the comparison between short, intermediate and total is one choice more tax efficient. Thanks.
gassert
Posts: 178
Joined: Thu Apr 26, 2007 7:50 pm

Post by gassert »

You said that you needed to "park" 100k. That's the operative word in your question. If by park, you mean we need a place for it until we buy a house in 2 months, then that's a lot different than "parking" for the addition your going to put on your home in 5yrs.

Risk tolerance aside, you will generally want to match the duration of the investment to the timeframe of the funds. Even possibly taking on equity risk if the parking is long enough.

If the time horizon is undetermined, then it very much becomes a question of risk tolerance. Some people can tolerate their emergency fund sitting in stocks, some strickly money market. Depends on many factors.

This is the first issue - risk level. A far distant second is the tax efficiency, which is what is being discussed now
Topic Author
Binx
Posts: 68
Joined: Thu Mar 20, 2008 8:59 pm

Post by Binx »

gassert wrote:You said that you needed to "park" 100k. That's the operative word in your question. If by park, you mean we need a place for it until we buy a house in 2 months, then that's a lot different than "parking" for the addition your going to put on your home in 5yrs.

Risk tolerance aside, you will generally want to match the duration of the investment to the timeframe of the funds. Even possibly taking on equity risk if the parking is long enough.

If the time horizon is undetermined, then it very much becomes a question of risk tolerance. Some people can tolerate their emergency fund sitting in stocks, some strickly money market. Depends on many factors.

This is the first issue - risk level. A far distant second is the tax efficiency, which is what is being discussed now

Thanks for you input. It has been a help, I expect to use this money in about 2 years. You said "you will generally want to match the duration of the investment to the timeframe of the funds. " Why is this, I know I'm missing something obvious. Thanks so much.
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grabiner
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Post by grabiner »

Binx wrote:Thanks for you input. It has been a help, I expect to use this money in about 2 years. You said "you will generally want to match the duration of the investment to the timeframe of the funds. " Why is this, I know I'm missing something obvious. Thanks so much.
The value of a bond changes over time, but the volatility decreases as the bond approaches maturity, and is necessarily zero at maturity. If you buy a one-year bond for $10,000 with a 4% yield, it will be worth a guaranteed $10,400 in one year. If you buy a ten-year bond for $10,000 with a 5% yield, expecting $10,500 next year, you might have $9500 instead if interest rates rise, so a ten-year bond is not a good way to save money that you will need in one year.

A bond fund isn't a single bond, but it behaves the same way; its duration is a measure of the average risk of all the bonds it holds. (Duration is less than maturity, even for a single bond, because a bond represents multiple payments over time; that ten-year bond is a promise to pay $500 a year for ten years, and $10,000 in ten years, so its duration is less than ten years.)
Wiki David Grabiner
livesoft
Posts: 75221
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft »

Places to park cash:

(1) The difference in yield between taxable and tax-exempt money market funds have narrowed. I use VMSXX. This week's yield rate: 2.06%

(2) Short term investment grade bond funds. I use VFSUX in a tax-deferred account. 4.45%

(3) GNMA bond fund. I use VFIIX in a tax-deferred account. 4.74%

Contrast to Vanguard Prime Money Market fund this week: 2.38%

You can see all these yields and others on one web page: https://personal.vanguard.com/us/funds/vanguard/bytype
fidelio
Posts: 217
Joined: Sun May 04, 2008 5:28 pm

Post by fidelio »

binx - surprised no one has mentioned cd's. i buy them via a fidelity brokerage acct. there should be plenty of 2-yr. cd's w/ yields close to short bond funds. no risk, or almost none. another alternative is 2-yr. treasury notes. buying them can be a trick, but no tisk, and no state tax. otherwise, sit in a good mm (vanguard prime). i have a feeling s.t. rates will be up before too long, but that is of course a guess. good luck, artie
Topic Author
Binx
Posts: 68
Joined: Thu Mar 20, 2008 8:59 pm

Thanks

Post by Binx »

Thanks everyone, I will look at some brokerage CD's and VG bond funds.
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