Best options for Cash to beat inflation (other than CD) for short term 1-3 years

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InvestVS
Posts: 12
Joined: Fri Jan 05, 2018 3:19 pm

Best options for Cash to beat inflation (other than CD) for short term 1-3 years

Post by InvestVS » Thu Sep 13, 2018 5:03 pm

I have 11% of my portfolio in cash currently which I keep in cash with the thought of investing them into Real Estate (not my primary residence, I already have one) if the market goes down in near term (real estate market) as there are already some signs of cooling down in some areas. That cash is currently in Ally's Flexible CD and earning 2%, however interested on that CD will be taxed at my tax rate (highest bracket) and is below inflation. I live in Bay Area CA and some advisor at Charles Schwab told me last week that Bay Area CA inflation is 3.7%.

Another angle on this is that my portfolio is low on bonds and I was advised to buy bonds to keep well-diversified portfolio but not sure this is the right time to buy bonds /bond funds as Interest Rates are going high. I understand bogleheads suggest 80% stocks, 20% bonds for my age and my situation, and I am trying to use that cash or sell some of the stocks to bring my bond % high (though I am still not sure if bonds are good options as Interest Rates are going high, but if not Bonds/Bond funds or CD then what?) How much return I can expect on bonds in 1-3 years, will it be able to beat inflation?

My current portfolio (My age 44):
US Stocks ~ 65%
International Stocks ~14%
Bonds Funds ~ 6%
REIT - 4%
Cash - 11%

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EddieGee
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Re: Best options for Cash to beat inflation (other than CD) for short term 1-3 years

Post by EddieGee » Thu Sep 13, 2018 5:11 pm

If your time horizon is that short you really can't "beat inflation" as such. Sure, you can buy TIPS but they are bonds that can go down as well as up. The best you can do is find a good CD rate and go with it (or a treasury note which will be roughly equal in interest rate). If you are getting 2.7% on your CD and inflation is 3.7% yes you are losing a little to inflation but that's the price you pay for such a short term horizon. The good news is that over 3 years at 1% loss per year you only lose 3% of purchasing power.

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ruralavalon
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Location: Illinois

Re: Best options for Cash to beat inflation (other than CD) for short term 1-3 years

Post by ruralavalon » Thu Sep 13, 2018 5:15 pm

InvestVS wrote:
Thu Sep 13, 2018 5:03 pm
I have 11% of my portfolio in cash currently which I keep in cash with the thought of investing them into Real Estate (not my primary residence, I already have one) if the market goes down in near term (real estate market) as there are already some signs of cooling down in some areas. That cash is currently in Ally's Flexible CD and earning 2%, however interested on that CD will be taxed at my tax rate (highest bracket) and is below inflation. I live in Bay Area CA and some advisor at Charles Schwab told me last week that Bay Area CA inflation is 3.7%.

Another angle on this is that my portfolio is low on bonds and I was advised to buy bonds to keep well-diversified portfolio but not sure this is the right time to buy bonds /bond funds as Interest Rates are going high. I understand bogleheads suggest 80% stocks, 20% bonds for my age and my situation, and I am trying to use that cash or sell some of the stocks to bring my bond % high (though I am still not sure if bonds are good options as Interest Rates are going high, but if not Bonds/Bond funds or CD then what?) How much return I can expect on bonds in 1-3 years, will it be able to beat inflation?

My current portfolio (My age 44):
US Stocks ~ 65%
International Stocks ~14%
Bonds Funds ~ 6%
REIT - 4%
Cash - 11%
I don't think that there is any cash equivalent (savings account, money market fund, or short-term CD) which will beat a 3.7% inflation rate. Certainly there is no cash equivalent which will beat 3.7% after taxes.

Taxable short-term bond funds from Vanguard currently have SEC Yields in the range 2.4% to 3.3%.

Vanguard California Tax-Exempt Intermediate-term Fund Admiral Shares (VCADX) has a current SEC Yield = 2.22%.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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grabiner
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Location: Columbia, MD

Re: Best options for Cash to beat inflation (other than CD) for short term 1-3 years

Post by grabiner » Thu Sep 13, 2018 7:53 pm

EddieGee wrote:
Thu Sep 13, 2018 5:11 pm
If your time horizon is that short you really can't "beat inflation" as such. Sure, you can buy TIPS but they are bonds that can go down as well as up.
Three-year TIPS are yielding 0.725%; if you hold to maturity, you won't lose principal by the end. (For that matter, CDs also change value as rates change, but the change in value is not reported on your statement. If rates have risen, your CD is worth less than the current balance, since you could buy a new CD with the current balance that would yield more, while you would pay a penalty if you broke the CD and thus you cannot withdraw the current balance.)
Wiki David Grabiner

InvestVS
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Joined: Fri Jan 05, 2018 3:19 pm

Re: Best options for Cash to beat inflation (other than CD) for short term 1-3 years

Post by InvestVS » Thu Sep 13, 2018 9:17 pm

grabiner wrote:
Thu Sep 13, 2018 7:53 pm
EddieGee wrote:
Thu Sep 13, 2018 5:11 pm
If your time horizon is that short you really can't "beat inflation" as such. Sure, you can buy TIPS but they are bonds that can go down as well as up.
Three-year TIPS are yielding 0.725%; if you hold to maturity, you won't lose principal by the end. (For that matter, CDs also change value as rates change, but the change in value is not reported on your statement. If rates have risen, your CD is worth less than the current balance, since you could buy a new CD with the current balance that would yield more, while you would pay a penalty if you broke the CD and thus you cannot withdraw the current balance.)
I have No Penalty CD from Ally which let me break the CD anytime after first 6 days. So if CD rates rise, I can break the earlier CD and get its return till that date and then reinvest the money in a No Penalty CD with new Rates. Its rates are little lower (No Penalty CD 2% and With Penalty CD 2.5% for 12 months) than Non-flexible CD but it does provide me liquidity and flexibility to raise my rate when rate rises.

saver007
Posts: 109
Joined: Fri Nov 07, 2014 9:18 pm

Re: Best options for Cash to beat inflation (other than CD) for short term 1-3 years

Post by saver007 » Thu Sep 13, 2018 9:47 pm

If you take little more risk and invest in short duration ETFs, you can earn little more yield. I use ICSH . It has effective duration of .42 so risk of principal loss is low except for financial crises situation. It invest in commercial papers (same stuff prime minister of market funds invest in) . I get about 2.8% yield from ICSH with IB stock yield enhancement program boost. 2.5 sec yield plus .3 SYEP.That is close to 10 year Treasury rate but still won't be at your inflation hurdle..

venkman
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Joined: Tue Mar 14, 2017 10:33 pm

Re: Best options for Cash to beat inflation (other than CD) for short term 1-3 years

Post by venkman » Thu Sep 13, 2018 10:23 pm

InvestVS wrote:
Thu Sep 13, 2018 9:17 pm
I have No Penalty CD from Ally which let me break the CD anytime after first 6 days. So if CD rates rise, I can break the earlier CD and get its return till that date and then reinvest the money in a No Penalty CD with new Rates. Its rates are little lower (No Penalty CD 2% and With Penalty CD 2.5% for 12 months) than Non-flexible CD but it does provide me liquidity and flexibility to raise my rate when rate rises.
1-month Treasury bills are currently yielding 2% and aren't subject to state taxes.

random_walker_77
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Joined: Tue May 21, 2013 8:49 pm

Re: Best options for Cash to beat inflation (other than CD) for short term 1-3 years

Post by random_walker_77 » Thu Sep 13, 2018 10:48 pm

I agree with the others. There's no way to beat inflation, especially on an after-tax basis, without taking on risk. In the CA bay area, between state and federal taxes, it wouldn't be unusual to have 40+% marginal tax rates. Investments necessarily involve a risk vs reward tradeoff, and the low returns are what you pay in exchange for preservation of principal (in nominal terms).

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