Diversification with cash held in vanguard money market

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RL1013
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Diversification with cash held in vanguard money market

Post by RL1013 » Wed Aug 08, 2018 11:51 pm

I have heard that holding bonds will serve more towards smoothing the ride when stock market gets choppy. Can we replace bond with cash in MM account? Are there any risks with this? Is holding bonds better to address inflation? I am currently 100% stocks. I am diversifying by putting a portion in VGSIX. For more diversification, I am thinking whether I should convert a small portion of my and my spouses portfolio to bonds or keep cash in MM.

longleaf
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Re: Diversification with cash held in vanguard money market

Post by longleaf » Thu Aug 09, 2018 1:11 am

I tried bond funds for a short time with a limited amount. I did not care for the lack of immediate liquidity and variation in value. I wanted a more stable asset, so I went back to money market. To be fair, I account this allocation to be part of my e-fund and consider my actual portfolio as 100% stock.

You can try it out and see how you like them; it all comes down to your goals and preferences.
Frugality, indexing, time.

gostars
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Re: Diversification with cash held in vanguard money market

Post by gostars » Thu Aug 09, 2018 2:05 am

The primary issue with money market accounts is the overall loss of purchasing power due to inflation. The overall CPI for June 2018 was up 2.9% over 2017. VMMXX is earning 2.05% right now, and it wasn't anywhere near that a year ago. VBTLX is at 3.14%. VMMXX is unlikely to decline except in the absolute worst of market conditions and any such declines will be short-term, while VBTLX is subject to fluctuations based on changes in interest rates and other factors. If you need the money within 3-5 years, VMMXX or a CD is probably the best choice in order to maintain the most value, while longer-term investors should look at a bond fund that might lose value for a while but will exceed in the longer-term due to higher rates.

RL1013
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Re: Diversification with cash held in vanguard money market

Post by RL1013 » Thu Aug 09, 2018 10:32 am

longleaf wrote:
Thu Aug 09, 2018 1:11 am
I tried bond funds for a short time with a limited amount. I did not care for the lack of immediate liquidity and variation in value. I wanted a more stable asset, so I went back to money market. To be fair, I account this allocation to be part of my e-fund and consider my actual portfolio as 100% stock.

You can try it out and see how you like them; it all comes down to your goals and preferences.
Thanks. Are there any advantages for MM if the money is held in taxable?

RL1013
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Re: Diversification with cash held in vanguard money market

Post by RL1013 » Thu Aug 09, 2018 9:39 pm

gostars wrote:
Thu Aug 09, 2018 2:05 am
The primary issue with money market accounts is the overall loss of purchasing power due to inflation. The overall CPI for June 2018 was up 2.9% over 2017. VMMXX is earning 2.05% right now, and it wasn't anywhere near that a year ago. VBTLX is at 3.14%. VMMXX is unlikely to decline except in the absolute worst of market conditions and any such declines will be short-term, while VBTLX is subject to fluctuations based on changes in interest rates and other factors. If you need the money within 3-5 years, VMMXX or a CD is probably the best choice in order to maintain the most value, while longer-term investors should look at a bond fund that might lose value for a while but will exceed in the longer-term due to higher rates.
Will VBTLX decline if the interest rates go up? Are there any tax advantages for using VBTLX VS VMMXX?

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whodidntante
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Re: Diversification with cash held in vanguard money market

Post by whodidntante » Thu Aug 09, 2018 9:55 pm

A MMF has little to no term risk and invests only in the highest quality instruments like commercial paper or T-bills. So it's unlikely to lose money, but you probably won't make much either. A bond fund like VBTLX has some term risk and some credit risk. There are different schools of thought about how much term risk and how much credit risk is sensible. Most people are loss averse and find they can't handle it when the risk shows up. But if you want more return, you have to take more risk.

radiowave
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Re: Diversification with cash held in vanguard money market

Post by radiowave » Thu Aug 09, 2018 10:07 pm

OP, you may want to consider either CDs or T-Bills. Just looked at auction today and 1 year T-Bill is 2.44% if in taxable, no state income tax. I just bought an Ally 1 yr CD at 2.40%. So there are "cash instruments" that may work for you.
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mega317
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Re: Diversification with cash held in vanguard money market

Post by mega317 » Thu Aug 09, 2018 11:27 pm

I think it would be fine to do that. I think it is likely that if you take less risk on the fixed-income side, and more risk on the stock side (by increasing your stock to FI ratio) you will end up about the same. Many people do a version of that by holding only treasuries and/or CDs for fixed income. IMO the decision on asset allocation has so many assumptions and uncertainties that you're just making a guess within a percentage range (who knows what will be better in terms of returns and your emotions between, say 50/50 and 60/40?), and altering the makeup of your bonds has little impact in comparison.

longleaf
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Re: Diversification with cash held in vanguard money market

Post by longleaf » Fri Aug 10, 2018 1:55 am

RL1013 wrote:
Thu Aug 09, 2018 10:32 am
longleaf wrote:
Thu Aug 09, 2018 1:11 am
I tried bond funds for a short time with a limited amount. I did not care for the lack of immediate liquidity and variation in value. I wanted a more stable asset, so I went back to money market. To be fair, I account this allocation to be part of my e-fund and consider my actual portfolio as 100% stock.

You can try it out and see how you like them; it all comes down to your goals and preferences.
Thanks. Are there any advantages for MM if the money is held in taxable?
The interest is taxable in VMMXX which is what I have selected. If you are in a high tax bracket, you may be better off in a municipal money market.

Tax Efficient Fund Placement
Frugality, indexing, time.

yousha
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Re: Diversification with cash held in vanguard money market

Post by yousha » Fri Aug 10, 2018 11:01 am

For myself, Money Market Funds do not have FDIC Insurance. Given that, it may not be a wise choice as with FDIC Bank Accounts.

RL1013
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Re: Diversification with cash held in vanguard money market

Post by RL1013 » Fri Aug 10, 2018 11:22 pm

yousha wrote:
Fri Aug 10, 2018 11:01 am
For myself, Money Market Funds do not have FDIC Insurance. Given that, it may not be a wise choice as with FDIC Bank Accounts.
I hear a lot about FDIC insurance but has it ever happened. That is an FDIC insured account bank goes bankrupt and FDIC refunded the account holder?

gostars
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Re: Diversification with cash held in vanguard money market

Post by gostars » Sat Aug 11, 2018 2:07 am

RL1013 wrote:
Fri Aug 10, 2018 11:22 pm
yousha wrote:
Fri Aug 10, 2018 11:01 am
For myself, Money Market Funds do not have FDIC Insurance. Given that, it may not be a wise choice as with FDIC Bank Accounts.
I hear a lot about FDIC insurance but has it ever happened. That is an FDIC insured account bank goes bankrupt and FDIC refunded the account holder?
https://www.fdic.gov/bank/individual/fa ... klist.html seems like a good place to start.

RL1013
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Re: Diversification with cash held in vanguard money market

Post by RL1013 » Sat Aug 11, 2018 4:15 am

gostars wrote:
Sat Aug 11, 2018 2:07 am
RL1013 wrote:
Fri Aug 10, 2018 11:22 pm
yousha wrote:
Fri Aug 10, 2018 11:01 am
For myself, Money Market Funds do not have FDIC Insurance. Given that, it may not be a wise choice as with FDIC Bank Accounts.
I hear a lot about FDIC insurance but has it ever happened. That is an FDIC insured account bank goes bankrupt and FDIC refunded the account holder?
https://www.fdic.gov/bank/individual/fa ... klist.html seems like a good place to start.
Good to know. Thanks.

am
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Re: Diversification with cash held in vanguard money market

Post by am » Sat Aug 11, 2018 9:19 am

longleaf wrote:
Fri Aug 10, 2018 1:55 am
RL1013 wrote:
Thu Aug 09, 2018 10:32 am
longleaf wrote:
Thu Aug 09, 2018 1:11 am
I tried bond funds for a short time with a limited amount. I did not care for the lack of immediate liquidity and variation in value. I wanted a more stable asset, so I went back to money market. To be fair, I account this allocation to be part of my e-fund and consider my actual portfolio as 100% stock.

You can try it out and see how you like them; it all comes down to your goals and preferences.
Thanks. Are there any advantages for MM if the money is held in taxable?
The interest is taxable in VMMXX which is what I have selected. If you are in a high tax bracket, you may be better off in a municipal money market.

Tax Efficient Fund Placement
Vang. Munipal mm has had very volatile sec yields, which has turned me away. I’m in a high bracket but it still often doesn’t beat the prime mm.

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welderwannabe
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Re: Diversification with cash held in vanguard money market

Post by welderwannabe » Sat Aug 11, 2018 9:46 am

RL1013 wrote:
Fri Aug 10, 2018 11:22 pm
yousha wrote:
Fri Aug 10, 2018 11:01 am
For myself, Money Market Funds do not have FDIC Insurance. Given that, it may not be a wise choice as with FDIC Bank Accounts.
I hear a lot about FDIC insurance but has it ever happened. That is an FDIC insured account bank goes bankrupt and FDIC refunded the account holder?
It has. It isn't that unusual, unfortunately. Money market failures, on the other hand, are. While they have happened it is very unusual...more unusual than a bank failing.

I keep almost all of my cash in various Vanguard money markets and I sleep like a baby at night.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

RL1013
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Re: Diversification with cash held in vanguard money market

Post by RL1013 » Sat Aug 11, 2018 10:55 am

welderwannabe wrote:
Sat Aug 11, 2018 9:46 am
RL1013 wrote:
Fri Aug 10, 2018 11:22 pm
yousha wrote:
Fri Aug 10, 2018 11:01 am
For myself, Money Market Funds do not have FDIC Insurance. Given that, it may not be a wise choice as with FDIC Bank Accounts.
I hear a lot about FDIC insurance but has it ever happened. That is an FDIC insured account bank goes bankrupt and FDIC refunded the account holder?
It has. It isn't that unusual, unfortunately. Money market failures, on the other hand, are. While they have happened it is very unusual...more unusual than a bank failing.

I keep almost all of my cash in various Vanguard money markets and I sleep like a baby at night.
That is good to know. Do you know if FDIC refunds all your money when one of the banks it insured goes bust?

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welderwannabe
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Re: Diversification with cash held in vanguard money market

Post by welderwannabe » Sat Aug 11, 2018 10:59 am

RL1013 wrote:
Sat Aug 11, 2018 10:55 am
That is good to know. Do you know if FDIC refunds all your money when one of the banks it insured goes bust?
Up to the limits of the insurance they do. The insurance limits vary depending on whether it is a joint account etc.

You can use the FDIC's insurance estimator called EDIE to calculate it out.

https://www5.fdic.gov/edie/
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Kenkat
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Re: Diversification with cash held in vanguard money market

Post by Kenkat » Sat Aug 11, 2018 11:05 am

RL1013 wrote:
Thu Aug 09, 2018 9:39 pm
gostars wrote:
Thu Aug 09, 2018 2:05 am
The primary issue with money market accounts is the overall loss of purchasing power due to inflation. The overall CPI for June 2018 was up 2.9% over 2017. VMMXX is earning 2.05% right now, and it wasn't anywhere near that a year ago. VBTLX is at 3.14%. VMMXX is unlikely to decline except in the absolute worst of market conditions and any such declines will be short-term, while VBTLX is subject to fluctuations based on changes in interest rates and other factors. If you need the money within 3-5 years, VMMXX or a CD is probably the best choice in order to maintain the most value, while longer-term investors should look at a bond fund that might lose value for a while but will exceed in the longer-term due to higher rates.
Will VBTLX decline if the interest rates go up? Are there any tax advantages for using VBTLX VS VMMXX?
Yes, it will. Over the longer run, returns on a fund like VBTLX (Vanguard Total Bond Index Adm) will be higher than the money market, so if you are looking for some LONG term diversification to 100% stocks, bonds are likely a better choice than a money market.

Note that VGSIX (REIT Index) is also interest rate sensitive to a degree and so only provides a relatively small diversification benefit. If stocks get clobbered, REIT will likely get clobbered as well.

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munemaker
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Re: Diversification with cash held in vanguard money market

Post by munemaker » Sat Aug 11, 2018 11:28 am

welderwannabe wrote:
Sat Aug 11, 2018 10:59 am
RL1013 wrote:
Sat Aug 11, 2018 10:55 am
That is good to know. Do you know if FDIC refunds all your money when one of the banks it insured goes bust?
Up to the limits of the insurance they do. The insurance limits vary depending on whether it is a joint account etc.

You can use the FDIC's insurance estimator called EDIE to calculate it out.

https://www5.fdic.gov/edie/
My experience is that FDIC insurance will cover your principle. If you have a CD with a guaranteed rate, the FDIC will not continue to pay the interest on the CD. The interest stops the day of the bank failure, even though it might take weeks/months to recover your assets. Doesn't mean much now, but when interest rates were 15% it was significant. It has been a long time, but that's how I remember it.

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welderwannabe
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Re: Diversification with cash held in vanguard money market

Post by welderwannabe » Sat Aug 11, 2018 11:31 am

munemaker wrote:
Sat Aug 11, 2018 11:28 am
My experience is that FDIC insurance will cover your principle. If you have a CD with a guaranteed rate, the FDIC will not continue to pay the interest on the CD. The interest stops the day of the bank failure, even though it might take weeks/months to recover your assets. Doesn't mean much now, but when interest rates were 15% it was significant. It has been a long time, but that's how I remember it.
I have never gone through it thankfully, but my understanding is that the FDIC pays out with days and not weeks/months.

Their stated goal is 2 business days.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

RAchip
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Re: Diversification with cash held in vanguard money market

Post by RAchip » Sat Aug 11, 2018 12:48 pm

I think that since interest rates seem to be heading up, keeping fixed income money in The VG prime mm is a good choice. It pays you over 2% and you have near instant liquidity with no meaningful chance of loss of principal. You can get a little higher rate putting the money in a bomd fund but you can lose money doing that. Not worth it to get an extra 1% or so.

lostdog
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Re: Diversification with cash held in vanguard money market

Post by lostdog » Sat Aug 11, 2018 1:44 pm

RAchip wrote:
Sat Aug 11, 2018 12:48 pm
I think that since interest rates seem to be heading up, keeping fixed income money in The VG prime mm is a good choice. It pays you over 2% and you have near instant liquidity with no meaningful chance of loss of principal. You can get a little higher rate putting the money in a bomd fund but you can lose money doing that. Not worth it to get an extra 1% or so.
+1

With a little bit of less risk you could also go with Vanguard Federal Money Market. It's securities are issued by U.S. government agencies. It's currently at 1.9%. Lately it consistently lags Prime MM by .10%.
Last edited by lostdog on Sat Aug 11, 2018 3:05 pm, edited 1 time in total.

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dm200
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Re: Diversification with cash held in vanguard money market

Post by dm200 » Sat Aug 11, 2018 2:16 pm

RL1013 wrote:
Fri Aug 10, 2018 11:22 pm
yousha wrote:
Fri Aug 10, 2018 11:01 am
For myself, Money Market Funds do not have FDIC Insurance. Given that, it may not be a wise choice as with FDIC Bank Accounts.
I hear a lot about FDIC insurance but has it ever happened. That is an FDIC insured account bank goes bankrupt and FDIC refunded the account holder?
Absolutely. I manage (part time) an organization with quite a lot (about $2 Million currently) of investments -mostly FDIC insured CDs with Vanguard. We had $100,000 CD in Indymac when it was closed down and got the full $100,000 back from the FDIC. Then, when the FDIC limit was $250,000 - we held over $500,000 FDIC insured CDs (at Vanguard) in three banks based in Puerto Rico. The three failed at once - and we received over $500,000 all fully insured) from FDIC.

So YES - It does happen.

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welderwannabe
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Re: Diversification with cash held in vanguard money market

Post by welderwannabe » Sat Aug 11, 2018 6:22 pm

dm200 wrote:
Sat Aug 11, 2018 2:16 pm
Absolutely. I manage (part time) an organization with quite a lot (about $2 Million currently) of investments -mostly FDIC insured CDs with Vanguard. We had $100,000 CD in Indymac when it was closed down and got the full $100,000 back from the FDIC. Then, when the FDIC limit was $250,000 - we held over $500,000 FDIC insured CDs (at Vanguard) in three banks based in Puerto Rico. The three failed at once - and we received over $500,000 all fully insured) from FDIC.

So YES - It does happen.
DO you recall how long it took for them to pay?
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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