What Short-term investment option?

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LeonGTR
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What Short-term investment option?

Post by LeonGTR » Thu Aug 10, 2017 10:57 pm

My parents' variable annuity recently matured. After a long while, my mom decided not to rollover to a new annuity that the FA had ready to sell to her. She was initially in favor of rolling over due to tax concerns, but after looking at the fees and the long timeline of withdrawing she figure she would just rather pay Uncle Sam now then later along with the insurance company and FA commission.

Knowing that I recently went and managed my own money instead of staying on with the FA, my parents are looking at me for expert advise on what to do with this money. They want it in a liquid format, but also if possible to earn more then a online savings account with worries of inflation eating up the money for a few years. Mom seems intent on using the money to buy a rental property for income purposes at the right price when she sees one.

I recommended a short-term investment-grade bond fund, but I am wondering if there is a better alternative? It will be in a taxable account naturally.

aristotelian
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Re: What Short-term investment option?

Post by aristotelian » Thu Aug 10, 2017 11:12 pm

I like your plan.

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JoMoney
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Re: What Short-term investment option?

Post by JoMoney » Thu Aug 10, 2017 11:28 pm

Personally, if liquidity was a concern, I would be leery of the corporate bonds/investment-grade fund. Certainly it would be better than a junk bond fund, but it could still have issues.
Here's a link to a Morningstar Chart of what happened in the 2008-2009 period when liquidity dried up on corporate bonds vs the Treasury bond fund.
Granted that over longer periods the higher interest rates of the corporate bonds have resulted in typically higher returns, but that needs to be weighed against the certainty that comes with treasuries or a high-yield FDIC account, and how willing/able you are to accept that with your 'liquid' safe money.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

jalbert
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Re: What Short-term investment option?

Post by jalbert » Fri Aug 11, 2017 1:56 am

I recommended a short-term investment-grade bond fund, but I am wondering if there is a better alternative? It will be in a taxable account naturally.
The amount that is earmarked for a real estate purchase needs to be in a cash vehicle like a money market fund or online savings account so that the principal is intact when it needs to be used for the purchase.
Risk is not a guarantor of return.

Valuethinker
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Re: What Short-term investment option?

Post by Valuethinker » Fri Aug 11, 2017 2:52 am

LeonGTR wrote:My parents' variable annuity recently matured. After a long while, my mom decided not to rollover to a new annuity that the FA had ready to sell to her. She was initially in favor of rolling over due to tax concerns, but after looking at the fees and the long timeline of withdrawing she figure she would just rather pay Uncle Sam now then later along with the insurance company and FA commission.

Knowing that I recently went and managed my own money instead of staying on with the FA, my parents are looking at me for expert advise on what to do with this money. They want it in a liquid format, but also if possible to earn more then a online savings account with worries of inflation eating up the money for a few years. Mom seems intent on using the money to buy a rental property for income purposes at the right price when she sees one.

I recommended a short-term investment-grade bond fund, but I am wondering if there is a better alternative? It will be in a taxable account naturally.
There are not, now, low risk investments which give a return exceeding inflation.

That is true essentially across the developed world.

High risk investments, like equity, property etc., may give higher returns than inflation, but they can also give lower, or negative, returns. That volatility has to be lived with.

Does anyone think, after 2008, that American residential housing is a low risk investment?

ST Investment Grade bond fund is not zero risk. But return matters to the investor-- they have not squared away the new investment reality.

So put them into that, and hope they don't lose money. Probably, they will not. ST IG bonds have historically low default rates-- the credit risk is significantly lower than for IG bonds in general (the borrowers don't have time to default, in essence).

If they really need certainty on the money, then FDIC insured CDs are the logical alternative, and have been paying higher rates than alternatives.

Valuethinker
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Re: What Short-term investment option?

Post by Valuethinker » Fri Aug 11, 2017 2:53 am

jalbert wrote:
I recommended a short-term investment-grade bond fund, but I am wondering if there is a better alternative? It will be in a taxable account naturally.
The amount that is earmarked for a real estate purchase needs to be in a cash vehicle like a money market fund or online savings account so that the principal is intact when it needs to be used for the purchase.
Yes, or FDIC insured CDs from a financial institution?

mega317
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Re: What Short-term investment option?

Post by mega317 » Fri Aug 11, 2017 11:01 am

From your post I am assuming she would buy the property any time she sees it which might be tomorrow.

Ally no penalty CD is 1.5%. Vanguard short-term investment grade SEC yield is 1.89% with the risks mentioned above. How important is it to her to not lose ANY of the investment?
Valuethinker wrote: So put them into that, and hope they don't lose money.
Valuethinker's whole post nailed it. And I wouldn't put someone else in an investment that requires hope.

chevca
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Re: What Short-term investment option?

Post by chevca » Fri Aug 11, 2017 11:16 am

I agree with the online saving or CD route. That's the safest place for this unknown and likely short timeframe.

It's highly doubtful inflation is going to eat away at this money in a short timeframe. It would be minimal. I wouldn't even concern myself with that.

LeonGTR
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Re: What Short-term investment option?

Post by LeonGTR » Fri Aug 11, 2017 2:15 pm

Okay thank you, I will bring up the Online savings or CD route. Which probably sounds like the best option, I don't think they ever used an online only bank before, just hope it isn't a hassle to withdraw when the time comes.

trueblueky
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Re: What Short-term investment option?

Post by trueblueky » Fri Aug 11, 2017 2:22 pm

LeonGTR wrote:Okay thank you, I will bring up the Online savings or CD route. Which probably sounds like the best option, I don't think they ever used an online only bank before, just hope it isn't a hassle to withdraw when the time comes.
Don't just pick the one with the highest current rate. See comments about various online accounts at http://www.depositaccounts.com

LeonGTR
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Vanguard Annuity?

Post by LeonGTR » Sat Aug 12, 2017 4:15 pm

[Thread merged into here, see below. --admin LadyGeek]

Some background on my issue is in an earlier thread here. viewtopic.php?f=1&t=225466

After consulting with their CPA, they decided it is better after all to rollover to another variable annuity while withdrawing money from it year by year to minimize tax penalties. They went to the local national bank branch that they hold their accounts at and the FA there recommended 2 different variable annuities. Naturally, I didn't think they were that much of an improvement compared to the original one considered, but they wanted one as "the lesser of the three evils" that had 1% AUM and the ability to choose investments, a cheapest of which is the S&P 500 index at around 60 BP and most other options approaching towards 100 or surpassing it. It had the usual surrender charges for 5 year for withdrawing more then 10% a year.

Knowing that vanguard is low cost provider of investing products, I wondered if they also had annuities which they did with a much more attractive fees and investment options. The lack of surrender charge seems perfect for my mom if she happen to see rental property to purchase at the right price! It seems that the vanguard annuity is a much better option of the lesser evils.

Does anybody have any experience with vanguard's variable annuity? Is there an even better variable annuity (as unlikely as it seems) for my parents situation? Again, they are mainly interested in an annuity in which they can withdraw out yearly to minimize their tax penalty and possibly put it towards a rental income property.

mindboggling
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Re: Vanguard Annuity?

Post by mindboggling » Sat Aug 12, 2017 4:48 pm

Not sure what kind of information you are looking for. I am in the process of annuitizing a Vanguard Variable Annuity that I bought almost 20 years ago. All I did for 20 years was add money to it. The sub-fund choices are adequate but not exhaustive. Choose a simple combination and leave it alone. There was no pressure to buy. I spent months reading the prospectus and no one ever called to pester me about buying. Fund expenses plus mortality and insurance charges make it more expensive than normal investing, therefore it is not recommended for short time horizons. Tax on investment gains is deferred, but any capital gains are converted to ordinary income when withdrawn or annuitized. Also, if you take money out without annuitizing, taxable money (ordinary income) comes out first before return of principal.

One other thing: the annuitization process does not exactly move at lightning speed. Vanguard has to plod through some procedures and then it get passed to the insurance company. Patience!
In broken mathematics We estimate our prize, --Emily Dickinson

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LadyGeek
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Re: What Short-term investment option?

Post by LadyGeek » Sat Aug 12, 2017 5:25 pm

LeonGTR - In order to give appropriate advice, it's best to keep all the information in one spot. I merged your post back into the original. If you want to retitle the thread, just edit the Subject: line in Post #1.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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