Bank Balance Sheet (M1 Finance Portfolio)

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David Scubadiver
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Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Wed Nov 08, 2017 7:51 am

I am curious about your thoughts on the “Bank Balance Sheet” Portfolio, which seeks to replicate where banks keep their excess deposits that are not being loaned out.

It is billed as a low risk income producing portfolio currently yielding 2% with an ER of 0.10%. Its 1 year return is lower than a decent savings account though its 3 year return is 2.23%.

The portfolio currently is:
70% Vanguard Mortgage Backed Securities (VMBS)
17% IShares 7-10 year treasuries (IEF)
13% IShares National Muni Bond (MUB)

bberris
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by bberris » Wed Nov 08, 2017 10:37 am

You are not a bank.
Banks are highly regulated and restricted as to their investment risk. Even without regulation, they need to be very liquid to make settlements on loans.

We know nothing about you, except that you are not a bank. So you need to assess your own risk tolerance to get an investment plan. It would be an amazing coincidence to find that your risk tolerance would lead you to that exact portfolio.

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Wed Nov 08, 2017 3:21 pm

bberris wrote:
Wed Nov 08, 2017 10:37 am
You are not a bank.
Banks are highly regulated and restricted as to their investment risk. Even without regulation, they need to be very liquid to make settlements on loans.

We know nothing about you, except that you are not a bank. So you need to assess your own risk tolerance to get an investment plan. It would be an amazing coincidence to find that your risk tolerance would lead you to that exact portfolio.
The question was meant to solicit whether people considered it a low risk income producing portfolio, as it is being billed. I don't think it matters whether I am a bank or not. But, I would likely consider using the portfolio to house my emergency fund for whatever that may be worth.

Grt2bOutdoors
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by Grt2bOutdoors » Wed Nov 08, 2017 4:06 pm

Use a mix of Short Term and Mid Term CD's instead - a rolling ladder coupled with Short Term Bond Index fund.
I would not use the MBS fund, it's duration will extend as interest rates rise and mortgage refinancing's fall off. As was noted, you aren't a bank, a bank has access to other tools besides MBS, they have access to Fed Funds overnight purchases, repos, short term treasuries, client deposits, debt issuance including commercial paper. Your proposed portfolio is not "safe" enough if your needs are near term.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 8:04 am

Grt2bOutdoors wrote:
Wed Nov 08, 2017 4:06 pm
Use a mix of Short Term and Mid Term CD's instead - a rolling ladder coupled with Short Term Bond Index fund.
I would not use the MBS fund, it's duration will extend as interest rates rise and mortgage refinancing's fall off. As was noted, you aren't a bank, a bank has access to other tools besides MBS, they have access to Fed Funds overnight purchases, repos, short term treasuries, client deposits, debt issuance including commercial paper. Your proposed portfolio is not "safe" enough if your needs are near term.
That is what I figured. But liquidity is important to me and I am interested in reasonably bearing treasuries and cds while buying and selling short term. Using it like a reserve account.

Grt2bOutdoors
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by Grt2bOutdoors » Thu Nov 09, 2017 8:21 am

David Scubadiver wrote:
Thu Nov 09, 2017 8:04 am
Grt2bOutdoors wrote:
Wed Nov 08, 2017 4:06 pm
Use a mix of Short Term and Mid Term CD's instead - a rolling ladder coupled with Short Term Bond Index fund.
I would not use the MBS fund, it's duration will extend as interest rates rise and mortgage refinancing's fall off. As was noted, you aren't a bank, a bank has access to other tools besides MBS, they have access to Fed Funds overnight purchases, repos, short term treasuries, client deposits, debt issuance including commercial paper. Your proposed portfolio is not "safe" enough if your needs are near term.
That is what I figured. But liquidity is important to me and I am interested in reasonably bearing treasuries and cds while buying and selling short term. Using it like a reserve account.
The reason why yield is so high on your proposed M1 portfolio is due to the MBS, but there is no free lunch. Banks are quite nimble in being able to modify duration of assets up or down, they own individual securities and they have access to those other tools mentioned above. And, as a last resort, they have access to FED discount window, but using it would likely result in a bank examiner visiting the office shortly thereafter. It doesn't pay to buy short term cds, the yields on them are lower than online savings accounts. You can buy 4 week T bills but the yields are less than online savings accounts, the 52 week bills are yielding more than 1 year cd's (on an after-tax basis - looks like the one settling today will have a yield of 1.50% or 1.13% after tax for someone in 25% tax bracket but you have to tie up money for a year whereas no penalty cd or online savings is completely liquid), but you can get your hands on a no penalty 11 month cd special at Ally bank yielding 1.50%.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 8:47 am

I was considering using this like a savings/checking account. I don't care, if in the short term, it earns less than a savings account. But, over time, I am curious whether it would outperform. Accordingly, I would be buying and selling as paychecks come in and expenses need to be paid. I might try to limit the selling somewhat, and use it as a fund for "big expenses" like insurance premiums and real estate taxes, but still, it will be "raided" several times a year.

Grt2bOutdoors
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by Grt2bOutdoors » Thu Nov 09, 2017 10:05 am

David Scubadiver wrote:
Thu Nov 09, 2017 8:47 am
I was considering using this like a savings/checking account. I don't care, if in the short term, it earns less than a savings account. But, over time, I am curious whether it would outperform. Accordingly, I would be buying and selling as paychecks come in and expenses need to be paid. I might try to limit the selling somewhat, and use it as a fund for "big expenses" like insurance premiums and real estate taxes, but still, it will be "raided" several times a year.
Have you used portfolio visualizer to compare your M1 Portfolio with that of say using 50% online savings account (cash) and that of a fund like say Vanguard Limited Term or Vanguard Intermediate Term Tax Exempt?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 4:55 pm

Grt2bOutdoors wrote:
Thu Nov 09, 2017 10:05 am
David Scubadiver wrote:
Thu Nov 09, 2017 8:47 am
I was considering using this like a savings/checking account. I don't care, if in the short term, it earns less than a savings account. But, over time, I am curious whether it would outperform. Accordingly, I would be buying and selling as paychecks come in and expenses need to be paid. I might try to limit the selling somewhat, and use it as a fund for "big expenses" like insurance premiums and real estate taxes, but still, it will be "raided" several times a year.
Have you used portfolio visualizer to compare your M1 Portfolio with that of say using 50% online savings account (cash) and that of a fund like say Vanguard Limited Term or Vanguard Intermediate Term Tax Exempt?
I don't know how to account for a high yield savings account using that program. But, using CASHX the 3 portfolios give the following:

Code: Select all

Portfolio performance statistics
#	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	US Mkt Correlation
M1	$10,000 	$12,957 	3.36% 	2.84%	8.53%		-2.38%		 -4.24%			1.13		 2.02		-0.31
Limited	$10,000 	$10,742 	0.92% 	0.70%	1.87%		 0.03%		-1.04%  		 1.12		1.78		 -0.19
Interim	$10,000 	$12,297 	2.67% 	1.82%	5.28%		 -0.68%		 -2.33% 		 1.39		2.56		 0.04
Of course that doesn't help very much with how they perform with more frequent buys and sells. I am not even sure what the data means other than that the M1 performs better.

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 5:02 pm

David Scubadiver wrote:
Thu Nov 09, 2017 4:55 pm
Grt2bOutdoors wrote:
Thu Nov 09, 2017 10:05 am
David Scubadiver wrote:
Thu Nov 09, 2017 8:47 am
I was considering using this like a savings/checking account. I don't care, if in the short term, it earns less than a savings account. But, over time, I am curious whether it would outperform. Accordingly, I would be buying and selling as paychecks come in and expenses need to be paid. I might try to limit the selling somewhat, and use it as a fund for "big expenses" like insurance premiums and real estate taxes, but still, it will be "raided" several times a year.
Have you used portfolio visualizer to compare your M1 Portfolio with that of say using 50% online savings account (cash) and that of a fund like say Vanguard Limited Term or Vanguard Intermediate Term Tax Exempt?
I don't know how to account for a high yield savings account using that program. But, using CASHX the 3 portfolios give the following:

Code: Select all

Portfolio performance statistics
#	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	US Mkt Correlation
M1	$10,000 	$12,957 	3.36% 	2.84%	8.53%		-2.38%		 -4.24%			1.13		 2.02		-0.31
Limited	$10,000 	$10,742 	0.92% 	0.70%	1.87%		 0.03%		-1.04%  		 1.12		1.78		 -0.19
Interim	$10,000 	$12,297 	2.67% 	1.82%	5.28%		 -0.68%		 -2.33% 		 1.39		2.56		 0.04
Of course that doesn't help very much with how they perform with more frequent buys and sells. I am not even sure what the data means other than that the M1 performs better.
Here is the link - not sure if it preserves the portfolios:
https://www.portfoliovisualizer.com/bac ... sisResults

Grt2bOutdoors
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by Grt2bOutdoors » Thu Nov 09, 2017 6:02 pm

Portfolio 3 offers the best returns for an acceptable level of risk. Look at the standard deviation of returns. If you take the CAGR, now deduct the standard deviation from it, that is what return could be when risk shows up. Look at the max draw down, are you comfortable with losing that much in any given year? For a safe portfolio, portfolio 1 gives me pause. Maybe you are okay with it?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 6:12 pm

Why do you subtract standard deviation from Cagr rather than just look at the worst year to see how bad things get when risk enters the picture?

I am not surprised a 50% cash portfolio is less risky. I don’t care overly much if I lose a couple percentage points once in a while if on average I am going to do better.
Last edited by David Scubadiver on Thu Nov 09, 2017 6:15 pm, edited 1 time in total.

Grt2bOutdoors
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by Grt2bOutdoors » Thu Nov 09, 2017 6:14 pm

It’s expected deviation, it’s not maximum drawdown.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 6:18 pm

Grt2bOutdoors wrote:
Thu Nov 09, 2017 6:14 pm
It’s expected deviation, it’s not maximum drawdown.
Max draw down of 4.2% means the most he account lost during the period? I’m ok with that.

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 6:21 pm

“It measures the largest single drop from peak to bottom in the value of a portfolio (before a new peak is achieved).” So that is better than the worst year in the sense that IF i am adding to it regularly it won’t be down as much as the worst possible year. ?

coincollector
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by coincollector » Thu Nov 09, 2017 6:46 pm

I think one thing to note is that a big part of the last recession was linked to MBS investments. We learned an important lesson then, MBS investments are not as safe as once advertised.

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 7:27 pm

Yet the worst year doesn’t reflect suxh awful returns.

Grt2bOutdoors
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by Grt2bOutdoors » Thu Nov 09, 2017 8:00 pm

David Scubadiver wrote:
Thu Nov 09, 2017 6:21 pm
“It measures the largest single drop from peak to bottom in the value of a portfolio (before a new peak is achieved).” So that is better than the worst year in the sense that IF i am adding to it regularly it won’t be down as much as the worst possible year. ?
No one knows what the future holds.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Thu Nov 09, 2017 8:52 pm

Grt2bOutdoors wrote:
Thu Nov 09, 2017 8:00 pm
David Scubadiver wrote:
Thu Nov 09, 2017 6:21 pm
“It measures the largest single drop from peak to bottom in the value of a portfolio (before a new peak is achieved).” So that is better than the worst year in the sense that IF i am adding to it regularly it won’t be down as much as the worst possible year. ?
No one knows what the future holds.
I meant, assuming one had purchased and sold regularly during the backtest period, it likely would have resulted in returns that were never as low as the worst year.

JBTX
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by JBTX » Thu Nov 09, 2017 8:58 pm

David Scubadiver wrote:
Thu Nov 09, 2017 8:47 am
I was considering using this like a savings/checking account. I don't care, if in the short term, it earns less than a savings account. But, over time, I am curious whether it would outperform. Accordingly, I would be buying and selling as paychecks come in and expenses need to be paid. I might try to limit the selling somewhat, and use it as a fund for "big expenses" like insurance premiums and real estate taxes, but still, it will be "raided" several times a year.
Seems like you would have a bit of a capital gains mess trading it as a cash account. A lot of paperwork/tracking/income tax reporting for a fairly trivial amount of capital gains and losses.

ThePrince
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by ThePrince » Thu Nov 09, 2017 9:33 pm

Perhaps look into Schwab Intelligent Portfolio’s “Build A Rainy Day Fund for Emergencies” or Betterment’s “Safety Net” portfolios.

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Fri Nov 10, 2017 4:04 pm

JBTX wrote:
Thu Nov 09, 2017 8:58 pm
David Scubadiver wrote:
Thu Nov 09, 2017 8:47 am
I was considering using this like a savings/checking account. I don't care, if in the short term, it earns less than a savings account. But, over time, I am curious whether it would outperform. Accordingly, I would be buying and selling as paychecks come in and expenses need to be paid. I might try to limit the selling somewhat, and use it as a fund for "big expenses" like insurance premiums and real estate taxes, but still, it will be "raided" several times a year.
Seems like you would have a bit of a capital gains mess trading it as a cash account. A lot of paperwork/tracking/income tax reporting for a fairly trivial amount of capital gains and losses.
The broker takes care of all the reporting. I just type in various-s for various short term and aggregate it all.

JBTX
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by JBTX » Fri Nov 10, 2017 4:16 pm

David Scubadiver wrote:
Fri Nov 10, 2017 4:04 pm
JBTX wrote:
Thu Nov 09, 2017 8:58 pm
David Scubadiver wrote:
Thu Nov 09, 2017 8:47 am
I was considering using this like a savings/checking account. I don't care, if in the short term, it earns less than a savings account. But, over time, I am curious whether it would outperform. Accordingly, I would be buying and selling as paychecks come in and expenses need to be paid. I might try to limit the selling somewhat, and use it as a fund for "big expenses" like insurance premiums and real estate taxes, but still, it will be "raided" several times a year.
Seems like you would have a bit of a capital gains mess trading it as a cash account. A lot of paperwork/tracking/income tax reporting for a fairly trivial amount of capital gains and losses.
The broker takes care of all the reporting. I just type in various-s for various short term and aggregate it all.
I prefer having a combination of ibonds and online savings accounts. Just seems a lot simpler.

Your portfolio will lag a bit if interest rates go up and longer term seems like they are more likely to trend up than down.

David Scubadiver
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Re: Bank Balance Sheet (M1 Finance Portfolio)

Post by David Scubadiver » Fri Nov 10, 2017 4:57 pm

I have some iBonds, but they are not exactly liquid for short term trading. I plan to use this more like a savings account to fund my check writing. If I did that with the iBonds I think i would eventually wind up liquidating something that resulted in a forfeiture of interest and otherwise wind up depleting my salable bonds. The portfolio is "dynamic" in the sense that if the banks change their holdings, so will the portfolio.

I will give it a go and see how it does.

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