Best Vanguard fund for holding short term investments

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bertilak
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Best Vanguard fund for holding short term investments

Post by bertilak » Sat Mar 10, 2018 8:00 pm

A relative is starting to invest at Vanguard. There are two types of investment he is interested in:
  1. Long term for eventual retirement. I think I can sort this out for him. (Target date, Life Strategy, 3-fund or similar)
  2. Ongoing known medical expenses of about $3K per year.
What would be the best VG fund for the ongoing medical expenses? The point is to avoid draw downs, especially in bad years. This fund can be replenished in a variety of ways.
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livesoft
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Re: Best Vanguard fund for holding short term investments

Post by livesoft » Sat Mar 10, 2018 8:09 pm

2. Maybe Vanguard Prime Money Market fund?
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Re: Best Vanguard fund for holding short term investments

Post by bloom2708 » Sat Mar 10, 2018 8:50 pm

Limited-term tax-exempt index?
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Kevin M
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Re: Best Vanguard fund for holding short term investments

Post by Kevin M » Sat Mar 10, 2018 9:58 pm

Any bond fund will have drawdowns at some point. If you want no drawdowns, then a money market fund is it. If relatively small drawdowns are acceptable in return for slightly higher expected returns, then a short-term bond fund might be OK.

Vanguard has an ultra-short term bond fund, but I don't know how it compares to similarly named funds that did horribly during the financial crisis; other than that, it has the shortest duration of all VG bond funds at 0.9 years. If in a higher tax bracket, short-term tax-exempt has duration of 1.2 years.

If willing to deal with individual securities, Treasuries with maturities of less than one year provide more yield than prime money market fund, and you know the money will be there at maturity. Can buy Treasuries at auction through Vanguard and get same yields as institutional investors. Taxable equivalent yields are even better if in a state with state taxes.

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Dominic
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Re: Best Vanguard fund for holding short term investments

Post by Dominic » Sat Mar 10, 2018 10:52 pm

Regarding Vanguard Ultra-Short Term Bond, it has only 4% Treasuries. Obviously I can't say for sure, but I suspect it would get nailed in a market downturn.

For a retirement portfolio, Vanguard's Target Retirement funds are an excellent place to start, and will probably outperform almost any portfolio that most people would put together on their own.

For the medical expenses, I'd have 80-100% in bonds and/or cash. Keep the bonds high-quality (Treasuries, CDs, or municipals are best; something like 50% high-grade corporate bonds as in Vanguard Total Bond Index is fine). To give a little extra growth and improve tax efficiency without giving up too much volatility, your friend could toss in up to a 20% equity allocation.

Consider something like:
70% Intermediate-Term Treasuries
10% Cash (T-Bills or Money Market)
15% Total US Stock Market
5% Total International Stock Market

In Monte Carlo simulations, $75,000 in that portfolio would have sustained $3,000 in inflation-adjusted annual withdrawals in 92% of 50 year periods. I got here basically by choosing the historical tangency portfolio between US Stocks and long-term Treasuries, which is about 20% equities and 80% Treasuries. I made the bonds intermediate-term, shifted some of the bonds into cash, and moved some of the US stocks into international. All of these changes should reduce tail risks, but come at the cost of returns. For something similar in a one-fund portfolio, Vanguard's LifeStrategy Income fund should perform about the same as what I suggested, and over the last 20 years, it returned only a little bit less than my portfolio, with some bigger drawdowns. Still, if they would prefer a no-maintenance portfolio, the LifeStrategy fund is a great choice.

Mind you, if this is very short term, hold mostly cash. I'm assuming it's a long term account with withdrawals beginning in the near term.
Last edited by Dominic on Sun Mar 11, 2018 12:55 am, edited 1 time in total.

smectym
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Re: Best Vanguard fund for holding short term investments

Post by smectym » Sun Mar 11, 2018 12:53 am

Agree with Kevin M, go with one of Vanguard’s several great money market fund (MMF) offerings. For money that will be needed, and must reliably be there, to fund near-term obligations, a stable $1.00 share price MMF from a low-cost provider like Vanguard is the responsible choice. In deciding such matters, it can be a good thought experiment to project into the future and find your decision-making the subject of scrutiny and potential second-guessing. On the facts set forth by OP, you want to be able to truthfully say “I chose the lowest-risk, lowest-cost, and most reputable option out there.”

As to which Vanguard MMF: if possible, Treasury MMF (VUSSX), a pure play on U.S. Treasury bills, and exempt from post-crisis regs requiring funds to restrict or penalize investor withdrawals under certain situations of constrained liquidity.

If the high $50,000 minimum for VUSSX causes heartburn, check out Federal MMF (VMFXX) which invests in a broader range of government agency securities and repos—which securities are safe, even very safe, but not backed by the full faith and credit of the U.S. government.

Prime MMF (VMMXX) is a great fund. It is conservatively run. It is also quite safe. And it has a bit higher yield, because it invests in corporate commercial paper, both domestic and foreign, as well as other types of very short term securities. But because under the regs, Prime could find itself in the situation of being required to either restrict investor withdrawals or administer a cash haircut designed to deter withdrawals, or both, I would not recommend. Below find a link to Vanguard’s own cheat sheet on this issue. As investor memories of 2007-2009 start to fade (and new investors come online who were just kids at the time) an occasional refresher of not only what CAN happen, but not so long ago DID happen, will not come amiss.

https://personal.vanguard.com/pdf/VGMMR.pdf

Smectym

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Re: Best Vanguard fund for holding short term investments

Post by Kevin M » Sun Mar 11, 2018 3:25 pm

smectym wrote:
Sun Mar 11, 2018 12:53 am
Prime MMF (VMMXX) is a great fund. It is conservatively run. It is also quite safe. And it has a bit higher yield, because it invests in corporate commercial paper, both domestic and foreign, as well as other types of very short term securities. But because under the regs, Prime could find itself in the situation of being required to either restrict investor withdrawals or administer a cash haircut designed to deter withdrawals, or both, I would not recommend. Below find a link to Vanguard’s own cheat sheet on this issue. As investor memories of 2007-2009 start to fade (and new investors come online who were just kids at the time) an occasional refresher of not only what CAN happen, but not so long ago DID happen, will not come amiss.

https://personal.vanguard.com/pdf/VGMMR.pdf

Smectym
I'm quite comfortable with Prime MM. From the linked Vanguard article:
Although Vanguard has two years to comply with the
liquidity fees and redemption gates rules, we don’t
anticipate much change to our funds. We’ve always
put safety and liquidity ahead of a few extra basis points
in yield. In 2010, we increased the liquidity of our
funds above their customarily high levels. We expect
to be able to manage our funds without fees and gates.
(Highlight mine).

Again, if you want the extra safety and don't mind a little extra work, you can roll 1-month Treasuries, which currently have about the same yield as Prime MM.

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Re: Best Vanguard fund for holding short term investments

Post by bondsr4me » Sun Mar 11, 2018 3:34 pm

Kevin M wrote:
Sat Mar 10, 2018 9:58 pm
Any bond fund will have drawdowns at some point. If you want no drawdowns, then a money market fund is it. If relatively small drawdowns are acceptable in return for slightly higher expected returns, then a short-term bond fund might be OK.

Vanguard has an ultra-short term bond fund, but I don't know how it compares to similarly named funds that did horribly during the financial crisis; other than that, it has the shortest duration of all VG bond funds at 0.9 years. If in a higher tax bracket, short-term tax-exempt has duration of 1.2 years.

If willing to deal with individual securities, Treasuries with maturities of less than one year provide more yield than prime money market fund, and you know the money will be there at maturity. Can buy Treasuries at auction through Vanguard and get same yields as institutional investors. Taxable equivalent yields are even better if in a state with state taxes.

Kevin
+1 on the above.

rkhusky
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Re: Best Vanguard fund for holding short term investments

Post by rkhusky » Sun Mar 11, 2018 7:55 pm

For $3000, just put it in Prime Money Market. The current SEC yield is 1.5%+. The other options are a CD or a savings account. For such a small amount, I wouldn't spend too much time on the decision. Just go with what is easiest.

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Toons
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Re: Best Vanguard fund for holding short term investments

Post by Toons » Sun Mar 11, 2018 8:00 pm

Agree Prime Money Market Fund :happy
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Re: Best Vanguard fund for holding short term investments

Post by cfs » Sun Mar 11, 2018 8:05 pm

bertilak wrote:
Sat Mar 10, 2018 8:00 pm
. . .Ongoing known medical expenses of about $3K per year . . .
Mister Bertilak, in this case, as discussed by previous posters, Vanguard Prime Money Market Fund is a good option. Good luck, y gracias por leer ~cfs~
~ Member of the Active Retired Force since 2014 ~

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Re: Best Vanguard fund for holding short term investments

Post by welderwannabe » Mon Mar 12, 2018 6:08 am

Another vote for Vanguard Prime MM Fund. If that doesn't work for you I would go with Vanguard Ultra-Short-Term Bond Fund Investor Shares (VUBFX).
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Re: Best Vanguard fund for holding short term investments

Post by Da5id » Mon Mar 12, 2018 7:48 am

Depends on how hard he likes to push his money. VBIRX (short term bond) has a duration of 2.7 yrs. Worst year since inception is -0.77%, max drawdown is 1.83%. He can get 2.5% in that vs 1.5% in Vanguard Prime MM.

Thing is, 3K account is pretty small in the big picture. Honestly if he stuffs it in his mattress, how bad is that? We are talking < $75 interest per year total. Personally I'd put it in Prime MM. If it isn't mandated to be at Vanguard, I'd use a high yield savings account as that is slightly more convenient than Vanguard.

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bertilak
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Re: Best Vanguard fund for holding short term investments

Post by bertilak » Mon Mar 12, 2018 8:12 am

Thanks all for the ideas. I think I can work it out. I just need to be able to show him a plan that includes both saving for known expenses and investing for the future.
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Re: Best Vanguard fund for holding short term investments

Post by midareff » Mon Mar 12, 2018 8:17 am

For ongoing medical I like an Ally Savings account better. No risk of loss and the money is available instantly.

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