Best Short Term, Liquid Investments

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novicezach
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Best Short Term, Liquid Investments

Postby novicezach » Thu Apr 20, 2017 1:31 pm

A couple of years ago my wife and I were making an offer on an apartment, so I pulled a decent amount of our investments out of the market and put them in a Discover bank account yielding 0.95%. We did not get the apartment, and have lost out on quite a few since, and that same tidy sum is still sitting in the account fetching the same interest. I want to keep that amount in something safer than equities, but I keep thinking I am missing out on returns by leaving it there. Any suggestions of short-term investments where I can yield a bit more? I am okay taking a bit more risk on the principal, but not too much. Will I increase my returns in short-term bond funds or money market funds? What about for tax purposes? If I'm in a very short-term bond fund or money market fund, do those investments get the preferred dividend rate rather than being taxed as ordinary income? Hope this makes sense, first time poster! Thanks in advance for the help!

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saltycaper
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Re: Best Short Term, Liquid Investments

Postby saltycaper » Thu Apr 20, 2017 2:58 pm

I use VCSH/VSCSX, Vanguard Short-Term Corporate Bond Fund. I wouldn't call it the "best" fund, but it suits me. I would not be surprised by 3-5% declines in "normal" times. It wasn't around in 2008-09, so not sure what it would have done then. Maybe 10-15% decline? Excepting times of financial calamity or product-specific issues, I would expect it to be less volatile than, say, an intermediate-term government bond fund.

I wouldn't use a short-term government bond fund, since the rates aren't much more than a savings account. Ditto for money market accounts at this time, at least the ones I look at.

A case could be made for a 5(ish)-year direct bank CD that you would plan on breaking if you needed the money (remote chance there would be a problem). I use some of these too.

A corporate bond fund should offer no tax advantages to a savings account. Treasurys are exempt from state tax. There are muni funds that provide tax advantages, but I don't follow those rates.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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saltycaper
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Re: Best Short Term, Liquid Investments

Postby saltycaper » Thu Apr 20, 2017 3:03 pm

There is another tactic some people use, which is to over-allocate to the fund and then invest some or all of it in equities. So if you need $5,000, invest $10,000 in equities, or $7,500 in a 60/40 balanced fund. (I'm making up these numbers; others can comment on what might be more appropriate.)

It would depend in part on how problematic it would be if the money you anticipated being there was not available in that specific fund and you had to raid other funds to get it or change your spending plans.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

aristotelian
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Re: Best Short Term, Liquid Investments

Postby aristotelian » Thu Apr 20, 2017 3:06 pm

I-Bonds if you plan to hold the funds for over a year. I also like VCSH.

SimplicityNow
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Re: Best Short Term, Liquid Investments

Postby SimplicityNow » Thu Apr 20, 2017 3:24 pm

You might consider CD's if you are as risk adverse as you sound.

2 years are paying 1.6-1.8% and 5 years are 2.25 to 2.6%

If you want much more then that you are going to have to consider some equities.

lack_ey
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Re: Best Short Term, Liquid Investments

Postby lack_ey » Thu Apr 20, 2017 3:33 pm

saltycaper wrote:I use VCSH/VSCSX, Vanguard Short-Term Corporate Bond Fund. I wouldn't call it the "best" fund, but it suits me. I would not be surprised by 3-5% declines in "normal" times. It wasn't around in 2008-09, so not sure what it would have done then. Maybe 10-15% decline? [emphasis added] Excepting times of financial calamity or product-specific issues, I would expect it to be less volatile than, say, an intermediate-term government bond fund.

For reference, iShares 1-3 Year Credit Bond (CSJ) lost about 6% and iShares Intermediate Credit Bond (CIU) lost about 11%. The latter follows a 1-10 yr benchmark. Both are slightly higher credit quality than the pure corporate fund that Vanguard has. So I would think high single digits decline before bottoming out, not low double digits. I could be wrong.

The Vanguard fund uses a 1-5 yr index and does not count as "very short-term" as the OP specified, though. Some ideas of short term mean 1-3 yr.

In case we for whatever reason were looking at the very short term, corresponding to ultrashort bond funds, generally duration < 1 yr, there are things like iShares Short Maturity Bond ETF (NEAR), PIMCO Enhanced Short Maturity Active ETF (MINT), and Vanguard Ultra-Short-Term Bond Fund (VUBFX, VUSFX). They're all actively managed, which probably makes more sense in that space—most bond indexes cover 1+ yr benchmarks and the ratings agencies / classifications are different down in the sub-1-yr market, which spans money market instruments and then other fixed income that's outside of what the money market funds are allowed to have. That's a nontrivial amount of credit risk, though, depending. Though probably not that extreme if you're looking at option-adjusted spreads in the 0.70% range.

Now, if the money is not going to be spent, it should probably just be reinvested as usual. What is the purpose of keeping it in something safer than equities?

novicezach
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Re: Best Short Term, Liquid Investments

Postby novicezach » Thu Apr 20, 2017 3:39 pm

Really appreciate all the feedback. I have looked at VCSH in the past, but it just doesn't seem to offer enough of a premium to what I am getting for the risk involved. Looking back, I obviously wish I had kept everything invested in equities, but at the time, and many times since then, we have put in offers to purchase apartments where I wanted to make sure that we had the down payment amount safe from the fluctuations of the market (I live in NYC so the apartment buying process is pretty nuts).

Vanguard Fan 1367
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Re: Best Short Term, Liquid Investments

Postby Vanguard Fan 1367 » Thu Apr 20, 2017 5:06 pm

novicezach wrote:Really appreciate all the feedback. I have looked at VCSH in the past, but it just doesn't seem to offer enough of a premium to what I am getting for the risk involved. Looking back, I obviously wish I had kept everything invested in equities, but at the time, and many times since then, we have put in offers to purchase apartments where I wanted to make sure that we had the down payment amount safe from the fluctuations of the market (I live in NYC so the apartment buying process is pretty nuts).


I talked recently to someone in your position in NYC trying to save for an apartment also. This person mentioned Treasury bills, and I believe that Vanguard the other day was saying that one year Treasuries could be had offering 1.2 percent interest.

lack_ey
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Re: Best Short Term, Liquid Investments

Postby lack_ey » Thu Apr 20, 2017 5:31 pm

novicezach wrote:Really appreciate all the feedback. I have looked at VCSH in the past, but it just doesn't seem to offer enough of a premium to what I am getting for the risk involved. Looking back, I obviously wish I had kept everything invested in equities, but at the time, and many times since then, we have put in offers to purchase apartments where I wanted to make sure that we had the down payment amount safe from the fluctuations of the market (I live in NYC so the apartment buying process is pretty nuts).

Nah, you probably made the right decision, just got slightly unlucky with this money. At least the rest of your investments are up, right? Something you're likely to need in the short term should not be (substantially) invested in the stock market.

Vanguard Fan 1367 wrote:I talked recently to someone in your position in NYC trying to save for an apartment also. This person mentioned Treasury bills, and I believe that Vanguard the other day was saying that one year Treasuries could be had offering 1.2 percent interest.

I don't think so, not the 1-year.

Image

In any case, you have to venture out further in term or credit risk to get a return above inflation, even ignoring taxes.

NiceUnparticularMan
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Re: Best Short Term, Liquid Investments

Postby NiceUnparticularMan » Thu Apr 20, 2017 8:28 pm

From my perspective, the yield curve is so flat these days it doesn't make sense to chase higher yields unless you can really go out at least 3-5 years. So personally I wouldn't bother changing things unless you stop looking for an apartment you might move into immediately.

dexter74
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Re: Best Short Term, Liquid Investments

Postby dexter74 » Fri Apr 21, 2017 10:08 am

I'd say CDs. You may want to look into some that have more forgiving early withdraw penalties, albeit with a slightly lower return to make them a lil more "liquid". 2.00% return for a no risk investment beats the heck out of 0.95%. You could also consider a CD ladder, allowing money to come free once a yr [or however you structure the ladder]

NiceUnparticularMan
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Re: Best Short Term, Liquid Investments

Postby NiceUnparticularMan » Fri Apr 21, 2017 10:35 am

dexter74 wrote:I'd say CDs. You may want to look into some that have more forgiving early withdraw penalties, albeit with a slightly lower return to make them a lil more "liquid". 2.00% return for a no risk investment beats the heck out of 0.95%. You could also consider a CD ladder, allowing money to come free once a yr [or however you structure the ladder]


At 2% versus 1% with a 6-month interest penalty, your break-even would be 12 months, right? If you are actively looking for a place, I don't see that being very compelling, particularly since even if it takes you a couple years, you are still talking about a trivial amount of additional return.

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Ged
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Re: Best Short Term, Liquid Investments

Postby Ged » Fri Apr 21, 2017 10:55 am

I used VCSH as a place to stash money to bridge the gap between retirement and the start of SS. I also looked at a CD ladder but eventually reached the conclusion that it wasn't worth the effort. In the 4 years I've owned it the NAV has fluctuated about 1% and the yield has been about 2%.

I also looked at a 20/80 balanced fund but it had a 20% decline in 2009 so I decided to stay with VCSH.

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jhfenton
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Re: Best Short Term, Liquid Investments

Postby jhfenton » Fri Apr 21, 2017 11:51 am

I use VSCSX too. I prefer it to the ETF share class, VCSH. You just need an initial investment of $10,000, and then you are free to go below that.

Edited to add: In your specific situation, assuming your federal tax bracket is 25% or higher, I'd probably just use VMLTX/VMLUX (Vanguard Limited Term Tax Exempt). Above $50K (VMLUX), the SEC yield is 1.40%. The duration and volatility is lower than VSCSX, and you're not giving up much in after-tax yield.
Last edited by jhfenton on Fri Apr 21, 2017 12:09 pm, edited 2 times in total.

dexter74
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Re: Best Short Term, Liquid Investments

Postby dexter74 » Fri Apr 21, 2017 11:55 am

NiceUnparticularMan wrote:
dexter74 wrote:I'd say CDs. You may want to look into some that have more forgiving early withdraw penalties, albeit with a slightly lower return to make them a lil more "liquid". 2.00% return for a no risk investment beats the heck out of 0.95%. You could also consider a CD ladder, allowing money to come free once a yr [or however you structure the ladder]


At 2% versus 1% with a 6-month interest penalty, your break-even would be 12 months, right? If you are actively looking for a place, I don't see that being very compelling, particularly since even if it takes you a couple years, you are still talking about a trivial amount of additional return.


Taking away the early withdraw penalty, 100k in a 5 yr cd yields a good amount more at 2% than 0.95%.

NiceUnparticularMan
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Re: Best Short Term, Liquid Investments

Postby NiceUnparticularMan » Fri Apr 21, 2017 12:05 pm

dexter74 wrote:Taking away the early withdraw penalty, 100k in a 5 yr cd yields a good amount more at 2% than 0.95%.


Right, for money you don't need for five years, a 5 year CD is going to beat a savings account, absent a big increase in rates.

The problem as I understand it is that the OP may need this money whenever they find an apartment, so potentially with a few months. And my understanding is 5 year CDs usually have at least a six-month interest penalty (perhaps more than that, but you can shop for one that only has that).

So, you could actually lose money selecting the 5 year CD (if you need the money within six months). The savings account will look better up to about a year. After that, the advantage is going to be small for a while--for example, I think at 2 years, you'd have made about 1.5% annually on the 5 year CD after penalty. Not coincidentally, that's about what you could get on a 2 year CD.

Obviously it is up to the OP. But for money you might need within a few months, I struggle with the idea this is really worth doing.

dexter74
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Re: Best Short Term, Liquid Investments

Postby dexter74 » Fri Apr 21, 2017 12:08 pm

NiceUnparticularMan wrote:
dexter74 wrote:Taking away the early withdraw penalty, 100k in a 5 yr cd yields a good amount more at 2% than 0.95%.


Right, for money you don't need for five years, a 5 year CD is going to beat a savings account, absent a big increase in rates.

The problem as I understand it is that the OP may need this money whenever they find an apartment, so potentially with a few months. And my understanding is 5 year CDs usually have at least a six-month interest penalty (perhaps more than that, but you can shop for one that only has that).

So, you could actually lose money selecting the 5 year CD (if you need the money within six months). The savings account will look better up to about a year. After that, the advantage is going to be small for a while--for example, I think at 2 years, you'd have made about 1.5% annually on the 5 year CD after penalty. Not coincidentally, that's about what you could get on a 2 year CD.

Obviously it is up to the OP. But for money you might need within a few months, I struggle with the idea this is really worth doing.


Ahh. Good points. I have to invest a chunk of change for my senior citizen mom, who is not online and incredibly risk-averse, so I'm going the CD ladder route. Some local credit unions actually have decent rates.

NiceUnparticularMan
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Re: Best Short Term, Liquid Investments

Postby NiceUnparticularMan » Fri Apr 21, 2017 12:19 pm

dexter74 wrote:Ahh. Good points. I have to invest a chunk of change for my senior citizen mom, who is not online and incredibly risk-averse, so I'm going the CD ladder route. Some local credit unions actually have decent rates.


Yep, for safe medium-term investments where total liquidation in the near future is unlikely, that makes sense. In the long run you have to worry about inflation and such creating a loss in real terms, but it sounds like your mom may not weight that concern very highly.

novicezach
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Re: Best Short Term, Liquid Investments

Postby novicezach » Fri Apr 21, 2017 12:26 pm

Thanks again everyone! Super helpful!

dexter74
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Re: Best Short Term, Liquid Investments

Postby dexter74 » Fri Apr 21, 2017 12:38 pm

NiceUnparticularMan wrote:
dexter74 wrote:Ahh. Good points. I have to invest a chunk of change for my senior citizen mom, who is not online and incredibly risk-averse, so I'm going the CD ladder route. Some local credit unions actually have decent rates.


Yep, for safe medium-term investments where total liquidation in the near future is unlikely, that makes sense. In the long run you have to worry about inflation and such creating a loss in real terms, but it sounds like your mom may not weight that concern very highly.


Ugh. She'd put it in her savings account, earning a measly 0.01%. My hands are kind of tied, as any moves have to be local and risk-free, so I'm sticking about 1/4 of her $$$ in a rewards checking acct that pays 2.00% and the rest in a CD ladder. She's terrible w/ money, so at least this way she earns a lil bit, and the CDs will [hopefully] deter him from blowing large sums on ridiculous purchases.


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