Cash instead of bonds for 3-fund

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28fe6
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Cash instead of bonds for 3-fund

Post by 28fe6 » Thu May 17, 2018 6:46 pm

My 401k asset allocation is 60% stock 40% bonds with 20% of my stock being international, and the bond allocation being entirely in a Fidelity intermediate-term bond fund.

My intermediate-term bond fund is -3% for the year.

It seems like cash would work just as well as a bond fund in terms of allowing rebalancing, being totally un-correlated to stocks, and preserving capital. Unfortunately my 401k doesn't have a good short-term treasury fund but it does have the Fidelity MM fund, which has pretty much zero yield, but zero yield is still better than -3% yield. So I'm thinking about selling all my bond position and leaving 40% in MM account. It would be the ultimate in "take risk of the equity side". If the 0% yield bothers me, then I could just go to 65/35.

Is this a terrible idea?

Gill
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Re: Cash instead of bonds for 3-fund

Post by Gill » Thu May 17, 2018 7:32 pm

Yes, it is. Don’t judge the fund by its recent performance in the wake of rising interest rates. It should do much better than a money market fund over the long term. I own an intermediate term bond fund as well and, yes, it’s worth less than it was a year ago but wouldn’t think of selling it.
Gill

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Tyler Aspect
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Re: Cash instead of bonds for 3-fund

Post by Tyler Aspect » Thu May 17, 2018 7:37 pm

Fidelity's money market funds have higher expenses compared to Vanguard's offering. Fidelity Government Money Market Fund has an expense ratio of 0.42%. You need to check the expense ratios of your 401k fund selections to make sure you still keep your costs low.

Patient waiting is a possible solution to the net asset loss you are experiencing. 7 years of extra dividend equalizes an upfront net asset value loss for an intermediate term bond fund. You just have to hold the fund for 7 years after the fund's yield reaches the highest point.
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ReallyLikeToSave
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Re: Cash instead of bonds for 3-fund

Post by ReallyLikeToSave » Thu May 17, 2018 7:42 pm

Do you plan to tax loss harvest your -3% (assuming this is in taxable) ? I'm in the same position and plan to do this.

28fe6
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Re: Cash instead of bonds for 3-fund

Post by 28fe6 » Thu May 17, 2018 7:49 pm

This is in a 401k so I think I can't TLH it.

I spent some time on portfoliovisualizer, and I found that a cash+stock portfolio has not done as well as a bond+stock portfolio even if you make the stock allocation quite a bit bigger.

I will stick with the intermediate-term bond fund.

ETadvisor
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Re: Cash instead of bonds for 3-fund

Post by ETadvisor » Thu May 17, 2018 8:00 pm

28fe6 wrote:
Thu May 17, 2018 7:49 pm
This is in a 401k so I think I can't TLH it.

I spent some time on portfoliovisualizer, and I found that a cash+stock portfolio has not done as well as a bond+stock portfolio even if you make the stock allocation quite a bit bigger.

I will stick with the intermediate-term bond fund.
Do you have EF invested HY savings account or CD in cash?

AlohaJoe
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Re: Cash instead of bonds for 3-fund

Post by AlohaJoe » Thu May 17, 2018 8:25 pm

28fe6 wrote:
Thu May 17, 2018 6:46 pm
Is this a terrible idea?
No, it isn't a terrible idea. Many respected authors (such as William Bernstein) have suggested that you should only have short-term bonds.

As you say, pithy quotes like "bonds are for safety" suggest that cash is perfectly fine and people need to come up with a good, nuanced argument for why someone should be using actual bonds at all. (Of what people mean by "cash" differs. But most definitions other than actual physical cash are probably okay.)

Kevin M uses CDs instead of bonds. CDs are "cash" for most people.

Nisiprius often points out that even during the massive inflation of the 1970s "cash" -- as in 1- or 3-month Treasuries -- did pretty okay.

You might be a somewhat worse return than using a bond fund. But you also might get somewhat lower return by not using Emerging Equities and lots of people make that tradeoff of return for comfort.

mjb
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Re: Cash instead of bonds for 3-fund

Post by mjb » Thu May 17, 2018 8:47 pm

Remember, the balance isn't stocks and bonds, it is equity and fixed income. Stocks are a form of equity. Bonds, CDs, and MMs are fixed income.

Historically, laddered CDs between 2 and 7 years maturity roughly match the return of treasuries of the same maturity. However, an advantage of intermediate funds is you can "ride the yield curve" for capital gains (or losses).

Ultimately it comes down to what you have available and what your goals are.

venkman
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Re: Cash instead of bonds for 3-fund

Post by venkman » Fri May 18, 2018 12:27 am

If a 3% loss over 5 months is enough to make you consider getting out of a particular investment, that 60% allocation to stocks might be too high...

Also, your bond fund is down 3% because it holds a bunch of bonds that were issued at lower interest rates, and would therefore command a lower price if sold. It doesn't mean you have irrevocably lost 3% of your investment. If you owned a single bond instead of a bond fund, its market value might also be down 3% right now. But that only matters if you sell it. If you hold it to maturity, the price will gradually increase until it gets back to par value. And a bond fund is simply a big collection of bonds--slightly more complicated, but operating on the same principle.

Not only that, but all the new money you put into the fund (dividends and new contributions) will be earning money at a higher yield. Rising interest rates may seem bad in the short term, but they're good in the long term for bond investors.

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Re: Cash instead of bonds for 3-fund

Post by UpperNwGuy » Fri May 18, 2018 12:35 am

venkman wrote:
Fri May 18, 2018 12:27 am
If a 3% loss over 5 months is enough to make you consider getting out of a particular investment, that 60% allocation to stocks might be too high...

Also, your bond fund is down 3% because it holds a bunch of bonds that were issued at lower interest rates, and would therefore command a lower price if sold. It doesn't mean you have irrevocably lost 3% of your investment. If you owned a single bond instead of a bond fund, its market value might also be down 3% right now. But that only matters if you sell it. If you hold it to maturity, the price will gradually increase until it gets back to par value. And a bond fund is simply a big collection of bonds--slightly more complicated, but operating on the same principle.

Not only that, but all the new money you put into the fund (dividends and new contributions) will be earning money at a higher yield. Rising interest rates may seem bad in the short term, but they're good in the long term for bond investors.
I have no personal experience with CDs, never having owned one, but if you owned a three or five year CD purchased a year ago, wouldn’t its market value also be down right now? If so, why invest in cash?
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AlohaJoe
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Re: Cash instead of bonds for 3-fund

Post by AlohaJoe » Fri May 18, 2018 12:37 am

UpperNwGuy wrote:
Fri May 18, 2018 12:35 am
I have no personal experience with CDs, never having owned one, but if you owned a three or five year CD purchased a year ago, wouldn’t its market value also be down right now? If so, why invest in cash?
There's no market for CDs, so there is no such thing as a "market value for CDs". Any given CD may or may not have early redemption penalties and those would need to be taken into account. But my impression is that avid CD shoppers can usually find CDs with no or negligible early redemption penalties.

venkman
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Re: Cash instead of bonds for 3-fund

Post by venkman » Fri May 18, 2018 12:53 am

UpperNwGuy wrote:
Fri May 18, 2018 12:35 am
I have no personal experience with CDs, never having owned one, but if you owned a three or five year CD purchased a year ago, wouldn’t its market value also be down right now? If so, why invest in cash?
Exactly. CD's can seem safer, because their market value isn't constantly adjusted. But if interest rates go up, you still have lost opportunity cost by continuing to own a CD at a lower rate. Those opportunity costs are reflected in bond pricing.

The only variable with a CD is the withdrawal penalty, which could make it better or worse than a bond if you wanted to cash it before maturity, depending on the situation.

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Re: Cash instead of bonds for 3-fund

Post by UpperNwGuy » Fri May 18, 2018 12:55 am

AlohaJoe wrote:
Fri May 18, 2018 12:37 am
UpperNwGuy wrote:
Fri May 18, 2018 12:35 am
I have no personal experience with CDs, never having owned one, but if you owned a three or five year CD purchased a year ago, wouldn’t its market value also be down right now? If so, why invest in cash?
There's no market for CDs, so there is no such thing as a "market value for CDs". Any given CD may or may not have early redemption penalties and those would need to be taken into account. But my impression is that avid CD shoppers can usually find CDs with no or negligible early redemption penalties.
There is a market value for a brokered CD, is there not?
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AlohaJoe
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Re: Cash instead of bonds for 3-fund

Post by AlohaJoe » Fri May 18, 2018 4:17 am

UpperNwGuy wrote:
Fri May 18, 2018 12:55 am
There is a market value for a brokered CD, is there not?
Hmmm, good point! I'm not actually sure how those work since I've never looked into them. But those probably do have a market, unlike bank CDs.

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Re: Cash instead of bonds for 3-fund

Post by oldcomputerguy » Fri May 18, 2018 5:14 am

AlohaJoe wrote:
Fri May 18, 2018 12:37 am
UpperNwGuy wrote:
Fri May 18, 2018 12:35 am
I have no personal experience with CDs, never having owned one, but if you owned a three or five year CD purchased a year ago, wouldn’t its market value also be down right now? If so, why invest in cash?
There's no market for CDs, so there is no such thing as a "market value for CDs". Any given CD may or may not have early redemption penalties and those would need to be taken into account. But my impression is that avid CD shoppers can usually find CDs with no or negligible early redemption penalties.
There are brokerable CDs that can be traded on the open market. I'm holding a brokerable five-year CD at Fidelity right now that was issued three years ago with a 2.2% rate; Fidelity shows its current value as down 1.35% from par.
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welderwannabe
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Re: Cash instead of bonds for 3-fund

Post by welderwannabe » Fri May 18, 2018 5:31 am

28fe6 wrote:
Thu May 17, 2018 6:46 pm
Is this a terrible idea?
Any stable value options? They can often be a nice middle of the road between a MM and a bond fund.
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28fe6
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Re: Cash instead of bonds for 3-fund

Post by 28fe6 » Fri May 18, 2018 6:34 am

No stable value options in my 401k. No CD options in my 401k either.

I would be somewhat interested in doing CDs in my Roth, but I have no idea how. I have some Ally CDs and I'm pretty happy with them.

indexonlyplease
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Re: Cash instead of bonds for 3-fund

Post by indexonlyplease » Fri May 18, 2018 6:38 am

Remember on top of the 0% yield what is the administrative cost for your 401k. So you also be in the negative yield with the mm.

Dandy
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Re: Cash instead of bonds for 3-fund

Post by Dandy » Fri May 18, 2018 7:25 am

I like a bit of diversification in my fixed income allocation. I think cash/cash-like products have a role in most allocations especially as one nears or is in retirement. I am also less interested in simplicity in fixed income - it really isn't that complex if you don't get too focused on rebalancing the sub allocations.

If the main purpose of your fixed income allocation is stability so you take most of your risk on the equity side - then some cash/cash-like allocations fit the bill. The downside is that they rarely keep up with inflation - so unless there are special needs you don't want to over allocate to it. It does add a bit of value in a rising rate environment since it tends to offset some of the decline in bond funds. It is also beneficial to have some cash/cash-like assets to handle unexpected expenses or to invest when other assets are down.

An argument against cash/cash-like assets is they are a drag on overall results. Everything that isn't in equities is a potential drag. That being said I would keep any allocation to cash/cash-like assets to 10% or less unless there are unusual circumstances. Keep in mind that your short/intermediate bond funds face a head wind in a rising rate environment but they will likely recover shortly after the rates stabilize and they should be a better longer term performer.

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whodidntante
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Re: Cash instead of bonds for 3-fund

Post by whodidntante » Fri May 18, 2018 7:30 am

My stable value fund allocation has covered most of my losses in TBM, at least on a nominal basis.

dbr
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Re: Cash instead of bonds for 3-fund

Post by dbr » Fri May 18, 2018 9:57 am

In principle cash could be an asset in a portfolio rather than bonds, but the fact that your bond fund is down a little in the recent short run is absolutely not a reason to shift to cash. The question of what best represents a "risk-free" asset in a portfolio is complex and is discussed some here: viewtopic.php?f=10&t=248269&hilit=hyperbola#p3904260

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Earl Lemongrab
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Re: Cash instead of bonds for 3-fund

Post by Earl Lemongrab » Fri May 18, 2018 1:02 pm

28fe6 wrote:
Thu May 17, 2018 6:46 pm
My 401k asset allocation is 60% stock 40% bonds with 20% of my stock being international, and the bond allocation being entirely in a Fidelity intermediate-term bond fund.

My intermediate-term bond fund is -3% for the year.

It seems like cash would work just as well as a bond fund in terms of allowing rebalancing, being totally un-correlated to stocks, and preserving capital. Unfortunately my 401k doesn't have a good short-term treasury fund but it does have the Fidelity MM fund, which has pretty much zero yield, but zero yield is still better than -3% yield. So I'm thinking about selling all my bond position and leaving 40% in MM account. It would be the ultimate in "take risk of the equity side". If the 0% yield bothers me, then I could just go to 65/35.

Is this a terrible idea?
So your plan is to lock in the losses? Don't try to time the markets. Any markets. The drop has happened and bailing out now won't fix that.

My fixed-income allocation is 50/50 bond index and stable value. I don't change allocation based on recent events.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Earl Lemongrab
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Re: Cash instead of bonds for 3-fund

Post by Earl Lemongrab » Fri May 18, 2018 1:02 pm

indexonlyplease wrote:
Fri May 18, 2018 6:38 am
Remember on top of the 0% yield what is the administrative cost for your 401k. So you also be in the negative yield with the mm.
That's generally not the case. The posted rate is usually net of fees.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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