what to do with cash if very risk averse?

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leo28
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what to do with cash if very risk averse?

Post by leo28 » Tue Dec 18, 2018 4:05 pm

Current AA is something like this:

VTSAX - 76%
VBTLX - 18%
VTIAX - 5%

30 yr old.

I have just about half as much as in my portfolio as I do sitting in cash, but I am very reluctant to invest anymore in anything else risky. I also don't need any of this cash for a while.

What should I do? I already own some CD's. I want to diversify into something else with minimal risk with the rest of the cash. A portion of it will go into a high rate savings account and dollar cost average out of it into the market over the next few years but what are my options for the rest?

Thanks!

Teague
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Re: what to do with cash if very risk averse?

Post by Teague » Tue Dec 18, 2018 4:18 pm

You want minimal risk you say. Treasuries come to mind.
Semper Augustus

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greg24
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Re: what to do with cash if very risk averse?

Post by greg24 » Tue Dec 18, 2018 4:22 pm

Vanguard Prime Money Market has a current SEC yield of 2.35%.

Not the lowest risk in the world, but pretty darn close.

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KlingKlang
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Re: what to do with cash if very risk averse?

Post by KlingKlang » Tue Dec 18, 2018 4:25 pm

You can invest $10K/year into Series I US Savings Bonds through Treasury Direct plus $5K from your federal income tax refund. Current rate is 2.83%. Still time to make your 2018 contribution.

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Re: what to do with cash if very risk averse?

Post by GibsonL6s » Tue Dec 18, 2018 4:26 pm

leo28 wrote:
Tue Dec 18, 2018 4:05 pm
Current AA is something like this:

I have just about half as much as in my portfolio as I do sitting in cash, but I am very reluctant to invest anymore in anything else risky. I also don't need any of this cash for a while.

Really unless the cash is a legitimate emergency fund, you have an asset allocation of about 40% stocks 60% fixed income as I view it. Probably too conservative for a 30 YO. Ultimately you need to find the AA that makes sense for you and stick with it.

Carol88888
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Re: what to do with cash if very risk averse?

Post by Carol88888 » Tue Dec 18, 2018 4:32 pm

Vanguard treasury money market. Doesn't get safer than that but there is a $50,000 minimum, I think.

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leo28
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Re: what to do with cash if very risk averse?

Post by leo28 » Tue Dec 18, 2018 4:46 pm

Teague wrote:
Tue Dec 18, 2018 4:18 pm
You want minimal risk you say. Treasuries come to mind.
Whats the easiest way to get them?
greg24 wrote:
Tue Dec 18, 2018 4:22 pm
Vanguard Prime Money Market has a current SEC yield of 2.35%.

Not the lowest risk in the world, but pretty darn close.
Can get more from Ally savings account or some one year CD's even.
GibsonL6s wrote:
Tue Dec 18, 2018 4:26 pm
Really unless the cash is a legitimate emergency fund, you have an asset allocation of about 40% stocks 60% fixed income as I view it. Probably too conservative for a 30 YO. Ultimately you need to find the AA that makes sense for you and stick with it.
I know its conservative but I really am just not interested in doing any more stocks or bonds at this time.
Carol88888 wrote:
Tue Dec 18, 2018 4:32 pm
Vanguard treasury money market. Doesn't get safer than that but there is a $50,000 minimum, I think.
That sounds interesting, will look into it. Can you give me more details on this?

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Re: what to do with cash if very risk averse?

Post by gclancer » Tue Dec 18, 2018 5:35 pm

KlingKlang wrote:
Tue Dec 18, 2018 4:25 pm
You can invest $10K/year into Series I US Savings Bonds through Treasury Direct plus $5K from your federal income tax refund. Current rate is 2.83%. Still time to make your 2018 contribution.
+1 I Bonds seem to fit your risk profile and are different than the CDs/savings accounts/money market funds you already have.

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Re: what to do with cash if very risk averse?

Post by longleaf » Tue Dec 18, 2018 5:39 pm

Underneath the mattress.

Honestly if you dont need the cash then dump it into your AA.

If you absolutely must have it in cash, here’s another recommendation for VMMXX
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Re: what to do with cash if very risk averse?

Post by nisiprius » Tue Dec 18, 2018 5:58 pm

Honestly, as things stand, based on what you've said, I would just shop around for the best available FDIC-insured bank accounts and call it good.

I could make some of the suggestions that others have made, but I don't really see the point.

If "very" risk averse means you want something that never goes down in dollar value, money market funds do not. But the Vanguard Treasury Money Market Fund, VUSXX, has a $50,000 minimum, and currently only has an SEC yield of 2.25%. The Vanguard Federal Money Market Fund,VFMXX, 2.24%. Even the Vanguard Prime Money Market Fund, VMMXX, only 2.35%. They are probably safe enough even for someone who is "very risk averse," but they are not FDIC-insured and why fuss around when you can get rates just as high if you search banks at depositaccounts.com, almost as high without trying--and as you already know, higher rates on 1-year CDs.

I like series I savings bonds, bought the maximum this year and plan to buy the maximum, but they, too are a fussy extra detail for not an awful lot of advantage.

As I imagine you know, any bond fund can have fluctuations up and down and is subject to interest rate risk, e.g. the Vanguard Short-Term Treasury Fund,

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Re: what to do with cash if very risk averse?

Post by Kevin M » Tue Dec 18, 2018 5:59 pm

leo28 wrote:
Tue Dec 18, 2018 4:46 pm
greg24 wrote:
Tue Dec 18, 2018 4:22 pm
Vanguard Prime Money Market has a current SEC yield of 2.35%.
Can get more from Ally savings account or some one year CD's even.
Huh? Ally savings account rate is 2.00%. Yes, you can earn more on a 1-year CD, but that's not cash. Ally no-penalty CD at 2.25% is close enough to cash (after the 7-day lockup), but that's still lower than Prime MM at 2.35% (and climbing steadily).

Treasury MM could be better if you pay state income tax, as it is exempt from the latter. For example, at my state tax rate of 8% (and Fed 27%), Treasury MM at 2.25% is a taxable-equivalent yield (TEY) for me of 2.53%. This now is higher than a local savings account I have at 2.50%, so Treasury MM is my preferred vehicle for cash.

Just keep in mind that Vanguard won't let you transfer out new cash for 7-10 days, so it's kind of like the Ally no-penalty CD in that respect. You can use it to trade during this period, but can't withdraw it from Vanguard.

It's easy to buy Treasuries at auction at Vanguard (or Fidelity or Schwab). The most recent 6-month yield was 2.55%, which is a TEY of 2.87% for me, so higher than Treasury MM by about 30 basis points. We don't know for sure which will earn more over the next six months, since we don't know how fast or by how much the Treasury MM will increase, but you can always do some of each.

I Bonds have a 1-year lockup period, so not really cash. Also, there's a penalty of three months of interest for redemption in less than five years, and when this is factored in, you're likely to earn more on other 1-year fixed income alternatives if you're looking at shorter holding periods.

Heritage Bank has a reward checking account paying 3.33% on up to $25K if you don't mind jumping through the monthly hoops (easy for me).

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Re: what to do with cash if very risk averse?

Post by bluquark » Tue Dec 18, 2018 6:14 pm

nisiprius wrote:
Tue Dec 18, 2018 5:58 pm
If "very" risk averse means you want something that never goes down in dollar value, money market funds do not. But the Vanguard Treasury Money Market Fund, VUSXX, has a $50,000 minimum, and currently only has an SEC yield of 2.25%. The Vanguard Federal Money Market Fund,VFMXX, 2.24%. Even the Vanguard Prime Money Market Fund, VMMXX, only 2.35%. They are probably safe enough even for someone who is "very risk averse," but they are not FDIC-insured and why fuss around when you can get rates just as high if you search banks at depositaccounts.com, almost as high without trying--and as you already know, higher rates on 1-year CDs.
Well, they're SIPC-insured which insures against any contract-violating shenanigans on the broker side, and on the substantive side VUSXX and VFMXX are entirely US govt notes which are guaranteed not to lose value. So it seems to me they're fully backed by the US federal government, same as FDIC-insured savings accounts, it's just the manner they're backed differs a little.

Whether you choose one of these or an equivalent-return savings account comes down to A) convenience and B) whether you've already hit the SIPC insurance limit of $500K on Vanguard. Given that OP already has a Vanguard account, it may win on the convenience front.

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Re: what to do with cash if very risk averse?

Post by nix4me » Tue Dec 18, 2018 6:24 pm

Buy a house and rent it.

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Re: what to do with cash if very risk averse?

Post by WhiteMaxima » Tue Dec 18, 2018 6:26 pm

Do you have a mortgage? If yes, use cash to pre-pay.

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Re: what to do with cash if very risk averse?

Post by Teague » Tue Dec 18, 2018 8:21 pm

leo28 wrote:
Tue Dec 18, 2018 4:46 pm
Teague wrote:
Tue Dec 18, 2018 4:18 pm
You want minimal risk you say. Treasuries come to mind.
Whats the easiest way to get them?
To invest directly?
www.treasurydirect.gov

else a treasury-based bond or money market fund, if you're into that sort of thing.
Semper Augustus

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Re: what to do with cash if very risk averse?

Post by Bongleur » Tue Dec 18, 2018 8:33 pm

I'm just waking up after 5 or 6 years. Slept real peaceful like. Updated my Vanguard "other" accounts, hadn't done that since 2013 !
We are retired now & all I want to do right now is match inflation. We are not spending it.
Am in Vanguard Short Term Treasuries, and one of the Vanguard MM funds.
I hesitate to put Big Bucks into Ally or other online banks.

Reasons not to go out 5 or 10 years in actual Govt bonds?
Did I see something in Morningstar about the Yield Curve starting to invert?
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Re: what to do with cash if very risk averse?

Post by Kevin M » Tue Dec 18, 2018 8:39 pm

Teague wrote:
Tue Dec 18, 2018 8:21 pm
leo28 wrote:
Tue Dec 18, 2018 4:46 pm
Teague wrote:
Tue Dec 18, 2018 4:18 pm
You want minimal risk you say. Treasuries come to mind.
Whats the easiest way to get them?
To invest directly?
www.treasurydirect.gov

else a treasury-based bond or money market fund, if you're into that sort of thing.
Many of us prefer to use a broker rather than Treasury Direct. It's also very easy through a broker.

Even logging onto Treasury Direct is a pain, since I can't use something like LastPass to auto-enter the password. Some are also concerned that TD offers essentially no guarantee against fraud (one of the forum's biggest I Bond advocates, Mel Lindauer, won't use TD for this reason). I generally find working with TD much more cumbersome than working with a brokerage.

On the plus side, some like TD because of the smaller minimum, which I think is $100, while at a broker one Treasury is $1,000 face value, so the minimum is about $1,000. Others have mentioned that they like that they can schedule a purchase well in advance at TD, while at a broker you must wait for the auction to open (6-month Treasury auctions open on Thursday, and the auction usually closes early Monday morning--Tuesday if Monday is a holiday). Neither of these is an issue for me.

I bought my last batch of 6-month Treasuries in several accounts at Vanguard at the auction yesterday, having entered the orders over the weekend.

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Re: what to do with cash if very risk averse?

Post by tadamsmar » Tue Dec 18, 2018 8:52 pm

leo28 wrote:
Tue Dec 18, 2018 4:05 pm
Current AA is something like this:

VTSAX - 76%
VBTLX - 18%
VTIAX - 5%

30 yr old.

I have just about half as much as in my portfolio as I do sitting in cash, but I am very reluctant to invest anymore in anything else risky. I also don't need any of this cash for a while.

What should I do? I already own some CD's. I want to diversify into something else with minimal risk with the rest of the cash. A portion of it will go into a high rate savings account and dollar cost average out of it into the market over the next few years but what are my options for the rest?

Thanks!
Here is how I would think of your situation if it were me:

Your actual AA is about:

VTSAX - 51%
VBTLX - 12%
VTIAX - 3%
Cash - 34%

and the process that you refer to as "dollar cost average out of it into the market" really just amounts to moving to a risker AA over time as you age.

Typically, investors don't get less risk averse as they age, but that is your plan.

Your current risk is roughly equivalent to Target Retirement 2020 Fund (VTWNX).

Your actual risk is based on your whole AA, not on what you do with the cash portion of your AA.

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Re: what to do with cash if very risk averse?

Post by snailderby » Tue Dec 18, 2018 11:39 pm

leo28 wrote:
Tue Dec 18, 2018 4:05 pm
Current AA is something like this:

VTSAX - 76%
VBTLX - 18%
VTIAX - 5%

30 yr old.

I have just about half as much as in my portfolio as I do sitting in cash, but I am very reluctant to invest anymore in anything else risky. I also don't need any of this cash for a while.

What should I do? I already own some CD's. I want to diversify into something else with minimal risk with the rest of the cash. A portion of it will go into a high rate savings account and dollar cost average out of it into the market over the next few years but what are my options for the rest?

Thanks!
Does this mean your total asset allocation (including the cash) looks something like this?

67% Cash
25% VTSAX (total U.S. stock market)
02% VTIAX (total international ex-U.S. stock market)
06% VBTLX (total bond market)

Or this?

50% Cash
38% VTSAX
09% VTIAX
03% VBTLX

Either way, one option would be to invest all of your cash (except for an emergency fund) after increasing your allocation to short-term treasuries to a level that is commensurate with your risk tolerance. While short-term treasuries are not immune from drawdowns, replacing cash with short-term treasuries could decrease your overall portfolio volatility and maximum drawdown in (some) bear markets. See https://www.portfoliovisualizer.com/bac ... easury2=50 (the "Cash" in this example actually represents 1-month treasury bills). As always, YMMV.

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Re: what to do with cash if very risk averse?

Post by tadamsmar » Wed Dec 19, 2018 9:06 am

How much of your cash and mutual funds combined is in cash?

Is it 50% or 33% or 66%?

You said "I have just about half as much as in my portfolio as I do sitting in cash" and it is hard to parse that pharse.

Snailerby's general idea is good, if you put the cash in Vanguard Short-Term Treasury Fund Admiral Shares (VFIRX) then it will tend to decrease your overall risk relative some other safe choices. And, it will fulfill your desire for this cash have a very low risk of loss of significant value.

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Re: what to do with cash if very risk averse?

Post by leo28 » Thu Dec 20, 2018 6:19 pm

Hi everyone,

So I recalculated my AA including everything to clarify, my exact AA is like this:

VTSAX 20%
VBLTX 5%
VTIAX 1.5%

CD's 18.75%
Savings 39.85% (I know this is crazy, thats why Im here)

8.25 % in my own company
5% in Crypto (dont bash me)
2.25% in handpicked stocks

From all of your replies it seems like I should get some of each: IBonds, Treasury funds, and Treasuries directly.
Or this is all just extra hassle for very little advantage? Is the diversification of being in all these even worth it?









    nisiprius wrote:
    Tue Dec 18, 2018 5:58 pm
    ...
    I like series I savings bonds, bought the maximum this year and plan to buy the maximum, but they, too are a fussy extra detail for not an awful lot of advantage.

    As I imagine you know, any bond fund can have fluctuations up and down and is subject to interest rate risk, e.g. the Vanguard Short-Term Treasury Fund,

    I dont know much about ibonds, will look into it thanks.


    Kevin M wrote:
    Tue Dec 18, 2018 5:59 pm
    leo28 wrote:
    Tue Dec 18, 2018 4:46 pm
    greg24 wrote:
    Tue Dec 18, 2018 4:22 pm
    Vanguard Prime Money Market has a current SEC yield of 2.35%.
    Can get more from Ally savings account or some one year CD's even.
    Huh? Ally savings account rate is 2.00%. Yes, you can earn more on a 1-year CD, but that's not cash. Ally no-penalty CD at 2.25% is close enough to cash (after the 7-day lockup), but that's still lower than Prime MM at 2.35% (and climbing steadily).

    It's easy to buy Treasuries at auction at Vanguard (or Fidelity or Schwab). The most recent 6-month yield was 2.55%, which is a TEY of 2.87% for me, so higher than Treasury MM by about 30 basis points. We don't know for sure which will earn more over the next six months, since we don't know how fast or by how much the Treasury MM will increase, but you can always do some of each.

    I Bonds have a 1-year lockup period, so not really cash. Also, there's a penalty of three months of interest for redemption in less than five years, and when this is factored in, you're likely to earn more on other 1-year fixed income alternatives if you're looking at shorter holding periods.

    Heritage Bank has a reward checking account paying 3.33% on up to $25K if you don't mind jumping through the monthly hoops (easy for me).

    Kevin
    Im not looking for easy or quick access to the cash. I like the idea of doing some of everything but seems like a lot of hassle for little advantage as mentioned by almost everyone here...

    A little intimidated by buying i bonds at auction but will look into it.

    bluquark wrote:
    Tue Dec 18, 2018 6:14 pm
    nisiprius wrote:
    Tue Dec 18, 2018 5:58 pm


    Whether you choose one of these or an equivalent-return savings account comes down to A) convenience and B) whether you've already hit the SIPC insurance limit of $500K on Vanguard. Given that OP already has a Vanguard account, it may win on the convenience front.
    I have over 500k in Vanguard ( VBLTX , VTIAX , VTSAX )

    WhiteMaxima wrote:
    Tue Dec 18, 2018 6:26 pm
    Do you have a mortgage? If yes, use cash to pre-pay.
    No I move around a lot so I rent.
    Kevin M wrote:
    Tue Dec 18, 2018 8:39 pm
    Teague wrote:
    Tue Dec 18, 2018 8:21 pm
    leo28 wrote:
    Tue Dec 18, 2018 4:46 pm
    Teague wrote:
    Tue Dec 18, 2018 4:18 pm
    You want minimal risk you say. Treasuries come to mind.
    Whats the easiest way to get them?
    To invest directly?
    www.treasurydirect.gov

    else a treasury-based bond or money market fund, if you're into that sort of thing.
    On the plus side, some like TD because of the smaller minimum, which I think is $100, while at a broker one Treasury is $1,000 face value, so the minimum is about $1,000. Others have mentioned that they like that they can schedule a purchase well in advance at TD, while at a broker you must wait for the auction to open (6-month Treasury auctions open on Thursday, and the auction usually closes early Monday morning--Tuesday if Monday is a holiday). Neither of these is an issue for me.

    I bought my last batch of 6-month Treasuries in several accounts at Vanguard at the auction yesterday, having entered the orders over the weekend.

    Kevin
    Thanks for clarifying the difference, so I guess if I already have a vanguard account, will be doing more then 1k, and don't mind doing it on Thursday-Monday than Im good with just getting it at auction? Am I looking for a particular price when Im searching at auction?
    snailderby wrote:
    Tue Dec 18, 2018 11:39 pm

    ...Either way, one option would be to invest all of your cash (except for an emergency fund) after increasing your allocation to short-term treasuries to a level that is commensurate with your risk tolerance. While short-term treasuries are not immune from drawdowns, replacing cash with short-term treasuries could decrease your overall portfolio volatility and maximum drawdown in (some) bear markets. See https://www.portfoliovisualizer.com/bac ... easury2=50 (the "Cash" in this example actually represents 1-month treasury bills). As always, YMMV.
    Thanks for the link, looks like short term treasuries are a little better when compared to just cash...

    At this point I am just not sure if its all even worth the hassle but I gotta do something because I have way to much in Savings that I really dont need in the near future.

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    Re: what to do with cash if very risk averse?

    Post by BillyV001 » Thu Dec 20, 2018 7:09 pm

    Not sure if this interests you but Vanguard has a very good compare tool: https://personal.vanguard.com/us/funds/ ... tingFrom=5. A good tool for comparing returns between funds/ETFs; not too good for comparing risk.

    One feature it doesn't have and I wish it did is a max drawn down column (as another way to measure your risk). So you'd have to find that info another way.

    I'm holding some FPNIX as a proxy for some of my cash, the bulk of which is in VMFXX. Using the VG compare tool, the returns average ~2.5 times as much as VMFXX for 1, 3, 5 year periods.

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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Thu Dec 20, 2018 8:27 pm

    leo28 wrote:
    Thu Dec 20, 2018 6:19 pm
    Im not looking for easy or quick access to the cash.
    If I don't have easy and quick access to it, then I don't consider it cash. An I Bond with a one year lock is less cash than a 1-year CD or Treasury, which you can sell at any time (or do an early withdrawal from, in the case of a direct CD), so at least you can access for the first year. I don't consider anything with a 1-year maturity as cash (or anything with more than 0-year maturity, except for maybe a 7-day lock on something like a no-penalty CD). Some people consider anything with a maturity of less than one year as cash, but I don't.

    But that's OK, since you're considering taking a little bit of term risk (aka interest rate risk), for potentially earning a slightly higher return than in say Treasury money market fund.

    Just keep in mind that with an I Bond, you cannot access it at all for one year, while with 1-year Treasury, you could sell on the secondary market at any time if you needed cash (although you might earn less than the original yield, and maybe even lose a little). The shorter the term, the less the term risk, so the more likely you are to earn the original yield if you sell before maturity. Also remember that with an I Bond you pay a penalty of three months of interest if you redeem within five years, so there's a little term risk there even after one year.

    You can buy Treasuries at auction with terms as short as 1-month, which is the lowest term risk for a Treasury bought at auction. The 1-month yield shown at Treasury.gov is 2.42%, which is more than the Vanguard Treasury MM yield at 2.25%. You can buy even shorter-maturities on the secondary market. I bought some 20-day Treasuries at a yield of about 2.36% yesterday, which was higher than the Treasury.gov 1-month yield of 2.35%, but today the 1-month yield jumped to 2.42%.
    A little intimidated by buying i bonds at auction but will look into it.
    You don't buy I Bonds at auction, you can buy them any time at Treasury Direct.

    You buy marketable Treasuries at auction. These are completely different things. You can buy them at auction at Treasury Direct or at a broker.
    Thanks for clarifying the difference, so I guess if I already have a vanguard account, will be doing more then 1k, and don't mind doing it on Thursday-Monday than Im good with just getting it at auction? Am I looking for a particular price when Im searching at auction?
    That's what I would do (again, this is for marketable Treasuries, not for I-series savings bonds (I bonds for short), which can only be bought from Treasury Direct).

    No, you don't look for a particular price, you look for a particular maturity. Everyone pays the same price (and gets the same yield), which is determined at the auction. The yield usually will be pretty close to whatever it is the trading day before the auction. Vanguard shows an "indicative yield" on the Treasury auction page; lately the auction yields have been slightly higher, but then rates have been generally increasing.

    Since it's Thursday, you can see the open auctions at Vanguard now at this page: https://personal.vanguard.com/us/FixedIncomeHome. Click the Treasuries tab, then click the Auction radio button. Currently indicative yields are 2.376% for the 3-month and 2.530% for the 6-month. These are slightly lower than the 3-month and 6-month yields shown on the treasury.gov page, and lately the auction yield for the 6-month (26-week) usually has been even slightly higher than the treasury.gov yield shown on the Friday before the auction.

    To get to the Treasury auction page from your account, click Buy and Sell ->Trade bonds and CDs (or something like that), click the Treasury tab then click the Auction radio button. To buy, click the Buy link, enter the number of bonds/bills (remember 1 bond = $1,000 face value, so if you buy 10, you're buying $10,000 face value). Make sure you have enough to cover the trade in your settlement fund before settlement on Thursday.

    You can buy as little as 1 Bill, so if you're nervous about it, just buy 1 to see how it works.

    With Bills, you buy at a discount to face value, then receive face value at maturity. There is no coupon payment, so your return comes entirely from the difference between what you pay and what you receive at maturity. For example, at the last auction, the price for the 6-month was 98.743694 (per $100 of face value), so if you bought 10, you paid $9,874.37, and at maturity you will receive $10,000, which comes to an annualized return of 2.552%.
    At this point I am just not sure if its all even worth the hassle but I gotta do something because I have way to much in Savings that I really dont need in the near future.
    Do you pay state income tax, and if so, what are your marginal federal and state tax rates? This determines if the Treasury Money Market fund has a higher taxable-equivalent yield (TEY) for you than Prime MM. You could start by at least transferring most of your cash to whichever MM fund has the higher TEY--either one will earn more than an Ally savings account or even a no-penalty Ally CD (now up to 2.30% for $25K minimum, but Prime MM is at 2.36%, and TEY on Treasury MM might be even higher for you). Then you can continue to consider the other options.

    As has been pointed out, Prime MM is not FDIC-insured, but personally I wouldn't worry about it unless the financial climate starts to deteriorate seriously. I would consider Treasury MM as safe as an FDIC-insured deposit account.

    Kevin
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    Watty
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    Re: what to do with cash if very risk averse?

    Post by Watty » Thu Dec 20, 2018 8:56 pm

    WhiteMaxima wrote:
    Tue Dec 18, 2018 6:26 pm
    Do you have a mortgage? If yes, use cash to pre-pay.
    Or "recast the mortage" (Google this).

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    Re: what to do with cash if very risk averse?

    Post by flamesabers » Thu Dec 20, 2018 9:25 pm

    leo28 wrote:
    Tue Dec 18, 2018 4:05 pm
    I have just about half as much as in my portfolio as I do sitting in cash, but I am very reluctant to invest anymore in anything else risky. I also don't need any of this cash for a while.
    I think something to bear in mind is there is more then one type of risk. $100 will always be worth $100 but the question to ask yourself is how much purchasing power will $100 have in say 10, 20 or 30 years as compared to now. At least when your investments lose value you can use potentially use that loss as a tax write-off. In contrast, there is no tax write-off for having to spend more of your disposable income on necessities because groceries and fuel cost more then they used to.

    If you're not going to need the money for 5+ years, I would argue it's more risky to keep a significant percentage of your portfolio as cash then invest it in something that will at least keep up with inflation.

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    Re: what to do with cash if very risk averse?

    Post by justsomeguy2018 » Thu Dec 20, 2018 10:07 pm

    leo28 wrote:
    Tue Dec 18, 2018 4:05 pm
    Current AA is something like this:

    VTSAX - 76%
    VBTLX - 18%
    VTIAX - 5%

    30 yr old.

    I have just about half as much as in my portfolio as I do sitting in cash, but I am very reluctant to invest anymore in anything else risky. I also don't need any of this cash for a while.

    What should I do? I already own some CD's. I want to diversify into something else with minimal risk with the rest of the cash. A portion of it will go into a high rate savings account and dollar cost average out of it into the market over the next few years but what are my options for the rest?

    Thanks!
    Are you in a high federal tax bracket? Consider Municipal Bonds or the ETF MUB or an intermediate term municipal bond mutual fund. The interest earned is exempt from federal income tax.

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    Re: what to do with cash if very risk averse?

    Post by Bongleur » Fri Dec 21, 2018 1:04 am

    Kevin M wrote:
    Thu Dec 20, 2018 8:27 pm
    You can buy Treasuries at auction with terms as short as 1-month, which is the lowest term risk for a Treasury bought at auction. The 1-month yield shown at Treasury.gov is 2.42%, which is more than the Vanguard Treasury MM yield at 2.25%.
    Kevin
    But isn't that merely because the fund has a lot of bonds purchased in previous months, and rates are rising? Vanguard buys longer than 1 month, right?
    If you buy individual bonds every month, and rates keep rising, your overall rate of return would lag the current return in the same way.

    So the math involves the return of the fraction of total invested in "cash" at rates lower than both Treasury options, and the speed at which you convert that into either of the higher-paying Treasury choices, and guesses about how fast they will continue to rise & when they will cease rising. You want to be all-in to the fund just before the rates begin to drop. And losses from the taxation rate of each type.

    Maybe put half into the fund/individuals now, and roll 1/10 of the remainder every month to follow the rates up. When they drop put that month's 1/10 into the fund instead. Need to figure the "lost opportunity" cost of the un-invested portion kept in "cash." How long will it take you to "catch up" to that amount from the Treasury income?
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    Re: what to do with cash if very risk averse?

    Post by tadamsmar » Fri Dec 21, 2018 9:02 am

    leo28 wrote:
    Thu Dec 20, 2018 6:19 pm
    Hi everyone,

    So I recalculated my AA including everything to clarify, my exact AA is like this:

    VTSAX 20%
    VBLTX 5%
    VTIAX 1.5%

    CD's 18.75%
    Savings 39.85% (I know this is crazy, thats why Im here)

    8.25 % in my own company
    5% in Crypto (dont bash me)
    2.25% in handpicked stocks

    From all of your replies it seems like I should get some of each: IBonds, Treasury funds, and Treasuries directly.
    Or this is all just extra hassle for very little advantage? Is the diversification of being in all these even worth it?
    I'd say just put some in VFIRX and be done with it until you decide to change your AA, in your OP you said you were planning to move to ("dollar cost average" into) a riskier AA anyway.

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    Re: what to do with cash if very risk averse?

    Post by bondsr4me » Fri Dec 21, 2018 9:05 am

    Teague wrote:
    Tue Dec 18, 2018 4:18 pm
    You want minimal risk you say. Treasuries come to mind.
    +1

    about as "risk-free" (ie: loss of principal) as you can get.

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    Re: what to do with cash if very risk averse?

    Post by cryptormorf » Fri Dec 21, 2018 12:17 pm

    Kevin M wrote:
    Tue Dec 18, 2018 5:59 pm
    Treasury MM could be better if you pay state income tax, as it is exempt from the latter. For example, at my state tax rate of 8% (and Fed 27%), Treasury MM at 2.25% is a taxable-equivalent yield (TEY) for me of 2.53%. This now is higher than a local savings account I have at 2.50%, so Treasury MM is my preferred vehicle for cash.
    Kevin M,

    How are you calculating the TEY on the Treasury MM? For a state tax rate of 8%, that would be :

    (1 - .08) = .92

    Treasury MM at 2.25% would then be

    2.25 / .92 = 2.45%

    Just want to make sure I'm doing it right since your TEY calculation is 2.53%.

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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Fri Dec 21, 2018 1:10 pm

    cryptormorf wrote:
    Fri Dec 21, 2018 12:17 pm
    Kevin M wrote:
    Tue Dec 18, 2018 5:59 pm
    Treasury MM could be better if you pay state income tax, as it is exempt from the latter. For example, at my state tax rate of 8% (and Fed 27%), Treasury MM at 2.25% is a taxable-equivalent yield (TEY) for me of 2.53%. This now is higher than a local savings account I have at 2.50%, so Treasury MM is my preferred vehicle for cash.
    Kevin M,

    How are you calculating the TEY on the Treasury MM? For a state tax rate of 8%, that would be :

    (1 - .08) = .92

    Treasury MM at 2.25% would then be

    2.25 / .92 = 2.45%

    Just want to make sure I'm doing it right since your TEY calculation is 2.53%.
    Your calc would be correct if you itemized deductions and got a full deduction for state income tax on your marginal interest income. My calc assumes no itemizing (since I won't be itemizing in 2018), or, for example, you've hit the SALT cap, so don't get a state income tax deduction for marginal income.

    See this post for the derivations: Taxable Equivalent Yield (TEY).

    So the calc for me is 2.25% * (1-27%) / (1 - 27% - 8%) = 2.53%.

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Fri Dec 21, 2018 1:59 pm

    Bongleur wrote:
    Fri Dec 21, 2018 1:04 am
    Kevin M wrote:
    Thu Dec 20, 2018 8:27 pm
    You can buy Treasuries at auction with terms as short as 1-month, which is the lowest term risk for a Treasury bought at auction. The 1-month yield shown at Treasury.gov is 2.42%, which is more than the Vanguard Treasury MM yield at 2.25%.
    Kevin
    But isn't that merely because the fund has a lot of bonds purchased in previous months, and rates are rising? Vanguard buys longer than 1 month, right?
    No, that's not correct.
    Vanguard wrote:The SEC yield for a money market fund is calculated by annualizing its daily income distributions for the previous 7 days.
    (underline mine, for emphasis)

    So it doesn't matter when the securities held by the fund were purchased. All that matters is the annualized income over the previous 7 days.
    If you buy individual bonds every month, and rates keep rising, your overall rate of return would lag the current return in the same way.
    It's correct that the SEC yield will slightly understate the yield you're earning if yields have risen in the previous seven days. So what you say would be correct if you were able to hold a rolling 7-day Treasury ladder. It would not be correct for a 1-month Treasury ladder.

    The Treasury MM SEC yield has been 2.25% for four days (as of yesterday). It was 2.24% for two days before that and 2.23% for two days before that. So it has risen 2 basis points in the last seven days. So maybe the SEC yield understates the actual yield by a couple of basis points, but not by 10-15 basis points.

    I will note that the 2.42% Treasury.gov shows is more than you can actually get on a 1-month Treasury (and this also was true yesterday). For quotes I see at Schwab now, the ask yield for a Bill maturing 1/24/2019 is 2.369% (if you bought today, your trade would settle 12/24/2018, so this is a 1-month Bill). The treasury.gov yields are based on bid quotes, but even the bid quote for the indicated Treasury is only 2.391%.

    So add a couple of basis points to the Treasury MM fund, and call it 2.27%, so you get about 10 basis points of extra yield with a 1-month Treasury at about 2.37%.

    For the MM fund to beat the 1-month Treasury, the actual yield would have to increase by about 20 basis points in one month (so it would average about 10 basis points higher for the month). The SEC yield was 2.16% on 11/20/2018, so it rose 9 basis points in the one month until 12/20/2018. This was with high confidence that the target federal funds rate (FFR) would increase by 25 basis points in December, which of course it did yesterday.

    I would expect the MM yield to continue increasing at about the same rate at best, since I'd guess that the certainty of another FFR increase at the same pace is no higher--perhaps a bit lower--than it has been over the last few months. If that's the case, then you'll end up earning about 5 basis points more with the 1-month Treasury. Nothing to write home about for sure.

    But 10 bps of extra yield for one extra month of maturity (2.37%- 2.27%) is 120 basis points per extra year of maturity (12 months times 10 bps/month), which is much higher than the Swedroe maturity-extension guideline of 20 bps per extra year of maturity.

    Back to my purchase, the yield for the 20-day Treasury at 2.355% was strangely high on Wednesday. Today the high yield at Schwab for a 22-day Treasury is 2.335% as of now, so very-short yields are lower, even after the FFR increase on Thursday.

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by Econ1 » Fri Dec 21, 2018 2:07 pm

    American Express has a 2.75% money market. Easy to invest or remove cash.

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    Re: what to do with cash if very risk averse?

    Post by leo28 » Fri Dec 21, 2018 2:46 pm

    Kevin, that was very informative. I had to take your post to a google doc to make highlights and take notes. I feel much more confident about i bonds and treasuries. I’m investigating further into all this new information. Before I was overwhelmed with all the data and differences but now a more clear / concentrated path is piecing together for me. Thank You.
    Kevin M wrote:
    Thu Dec 20, 2018 8:27 pm
    If I don't have easy and quick access to it, then I don't consider it cash
    I guess it was incorrect to use the word “cash” here. I don’t need this money in cash and I don’t need access to most of it. I’m certain that I will not need to sell anything because I will need the cash anytime soon.
    Kevin M wrote:
    Thu Dec 20, 2018 8:27 pm
    ...The shorter the term, the less the term risk, so the more likely you are to earn the original yield if you sell before maturity. Also remember that with an I Bond you pay a penalty of three months of interest if you redeem within five years, so there's a little term risk there even after one year.
    Im not sure I quite understand this correctly. More specifically “Term risk” and how its “more likely am to earn the original yield if before maturity”.

    With IBonds I wasn’t aware about the five years, but I just read about it right there on TD - This seems very similar to a 5 year CD then. I should go into this with the mindset that the money will not be accessible for 5 years if I dont want to pay any penalties. Will the interest yield remain the same every year or will it keep adjusting throughout the 30 years, If I choose to hold it that long? I also noticed there is a $10,000 maximum that can be invested per SS per year? I can’t buy more?
    Lastly about Ibonds, when trying to buy at TD, up to the purchase review screen I have not seen any information on what yield and maturity. However on the website I found this: “The composite rate for I bonds issued from November 1, 2018 through April 30, 2019, is 2.83%. This rate applies for the first six months you own the bond.”
    So to recap if I buy this, I am getting an interest rate of 2.83%, but in April it will change? Or in April a new interest rate will only apply to Ibonds purchased after April 30? My interest rate will stay the same for 30yrs?

    Kevin M wrote:
    Thu Dec 20, 2018 8:27 pm
    The 1-month yield shown at Treasury.gov is 2.42%


    How does this work when you say 2.42% but its a 1 month term, so does that mean that at maturity I will have my principal + (2.42%/12) = 0.2% and I would have to keep rebuying every month to get 2.42 per year?

    Kevin M wrote:
    Thu Dec 20, 2018 8:27 pm
    You can buy as little as 1 Bill, so if you're nervous about it, just buy 1 to see how it works.


    Transferring Money to Vanguard to try it! Thanks for the detailed instructions.

    Kevin M wrote:
    Thu Dec 20, 2018 8:27 pm
    Do you pay state income tax, and if so, what are your marginal federal and state tax rates?


    Im not sure what its going to be this year yet. I'll keep this in mind. I still want to get some I bonds and treasuries just to learn how to do it for the future.

    Thanks again for all your help.

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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Fri Dec 21, 2018 3:17 pm

    Kevin M wrote:
    Fri Dec 21, 2018 1:59 pm
    The Treasury MM SEC yield has been 2.25% for four days (as of yesterday). It was 2.24% for two days before that and 2.23% for two days before that. So it has risen 2 basis points in the last seven days. So maybe the SEC yield understates the actual yield by a couple of basis points, but not by 10-15 basis points.
    If you have enough in the Treasury MM fund, you can calculate the actual yield using the Balances by date screen, and looking at the latest date and one day before. Here are the calculations for 12/20/2018:

    Code: Select all

    Date      Balance  Accrued    Total Balance
                       dividends
    12/19/18  $50,000.00  $30.79  $50,030.79
    12/20/18  $50,000.00  $33.89  $50,033.89
              Difference→  $3.10       $3.10
              Yield →       2.262%  
    
    Yield = 3.10 / 50,030.79 * 365 = 2.262%

    So at most about 1.7 basis points higher than the SEC yield, assuming that the SEC yield to 3 decimal places is 2.245% (rounds to 2.25%). So let's say 1-2 bps higher than the SEC yield.

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Fri Dec 21, 2018 3:21 pm

    leo28 wrote:
    Fri Dec 21, 2018 2:46 pm
    I am getting an interest rate of 2.83%, but in April it will change? Or in April a new interest rate will only apply to Ibonds purchased after April 30? My interest rate will stay the same for 30yrs?
    For now, I suggest you read this Bogleheads Wiki article on I Bonds: I savings bonds.

    The fixed rate stays the same for the life of the bond, but the inflation component, and thus the composite rate, changes every six months.

    I'll get back to your other questions later (PM me if I don't).

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by Northern Flicker » Fri Dec 21, 2018 3:35 pm

    Are you averse to inflation risk as well or just market risk?

    You may want to consider iBonds if in a taxable account or short-term TIPS in a tax-deferred account.
    Index fund investor since 1987.

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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Fri Dec 21, 2018 4:59 pm

    leo28 wrote:
    Fri Dec 21, 2018 2:46 pm
    Kevin M wrote:
    Thu Dec 20, 2018 8:27 pm
    ...The shorter the term, the less the term risk, so the more likely you are to earn the original yield if you sell before maturity. Also remember that with an I Bond you pay a penalty of three months of interest if you redeem within five years, so there's a little term risk there even after one year.
    Im not sure I quite understand this correctly. More specifically “Term risk” and how its “more likely I am to earn the original yield if I sell before maturity”.
    Try reading this Wiki article: Bonds:_advanced_topics. Focus on the Duration topic.

    Term risk, more commonly called "interest rate risk", is related to how much the bond price changes for a given change in the yield. The longer the term to maturity, the longer the duration (for a given coupon rate), and therefore the more the price will go down/up if the yield goes up/down.

    A 6-month Treasury Bill isn't going to change a huge amount in price as it approaches maturity, since the original duration is only 0.5 years, and the maturity/duration decreases every day. After three months, the duration is only 0.25 years. You know you will earn the original yield if you hold for six months.

    If you sell a 5-year note after six months, you could earn less than the original yield if the 4.5-year yield has increased enough (price has decreased enough)--you could even earn less than 0%, so a 5-year note has much more term risk than a 6-month bill.

    Usually you are compensated for more term risk with higher yield, but currently, the Treasury yield curve is very flat beyond 9-month maturity. You get little to no extra yield for extending from about 9-month maturity to about 5-year maturity.

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by cryptormorf » Fri Dec 21, 2018 6:29 pm

    Kevin M wrote:
    Fri Dec 21, 2018 1:10 pm
    cryptormorf wrote:
    Fri Dec 21, 2018 12:17 pm
    Kevin M wrote:
    Tue Dec 18, 2018 5:59 pm
    Treasury MM could be better if you pay state income tax, as it is exempt from the latter. For example, at my state tax rate of 8% (and Fed 27%), Treasury MM at 2.25% is a taxable-equivalent yield (TEY) for me of 2.53%. This now is higher than a local savings account I have at 2.50%, so Treasury MM is my preferred vehicle for cash.
    Kevin M,

    How are you calculating the TEY on the Treasury MM? For a state tax rate of 8%, that would be :

    (1 - .08) = .92

    Treasury MM at 2.25% would then be

    2.25 / .92 = 2.45%

    Just want to make sure I'm doing it right since your TEY calculation is 2.53%.
    Your calc would be correct if you itemized deductions and got a full deduction for state income tax on your marginal interest income. My calc assumes no itemizing (since I won't be itemizing in 2018), or, for example, you've hit the SALT cap, so don't get a state income tax deduction for marginal income.

    See this post for the derivations: Taxable Equivalent Yield (TEY).

    So the calc for me is 2.25% * (1-27%) / (1 - 27% - 8%) = 2.53%.

    Kevin
    Thank you! FWIW, that post is gem and should be in the WIKI. :beer

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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Fri Dec 21, 2018 7:03 pm

    leo28 wrote:
    Fri Dec 21, 2018 2:46 pm
    With IBonds I wasn’t aware about the five years, but I just read about it right there on TD - This seems very similar to a 5 year CD then. I should go into this with the mindset that the money will not be accessible for 5 years if I dont want to pay any penalties.
    Or just factor the penalty into your decision. I've bought many CDs with early withdrawal penalties because the yields were so much higher than Treasuries of the same maturity. Being able to get out early with a relatively small penalty can be less risky than only being able to sell on the secondary market, as would be the case with Treasuries or brokered CDs.

    An I Bond is less risky in real (inflation-adjusted) terms than a 5-year brokered CD. It is more directly comparable to a TIPS of a maturity equal to your intended holding period. You want to compare the real yields.

    Real yield on an I Bond is 0.50%, while real yield on a 1-year TIPS is greater than 1% (last time I checked). So a 1-year TIPS is a better deal than an I Bond for a 1-year holding period even before considering the I Bond penalty. Yield on a 5-year TIPS is about the same or maybe a bit lower at about 1.1%, and you take a lot more term risk with the 5-year maturity.

    Federal tax on I Bonds is deferred until redemption by default, while this is not the case for TIPS in a taxable account, so for holding period longer than one year, this is a factor to consider. Still, considering the I Bond penalty and the much higher TIPS yield, there's a good chance you'll come out ahead with a TIPS even in taxable. Better yet, hold the TIPS in an IRA if possible, and adjust your asset allocation accordingly by moving things around in taxable.
    I also noticed there is a $10,000 maximum that can be invested per SS per year? I can’t buy more?
    You can buy another $10K/year in the name of your living trust, so if you really want more I Bonds, you could set up a simple living trust yourself if for no other reason than to buy more I Bonds. I bought $20K/year this way back when I thought I Bonds were a good deal. Now I'm more likely to sell the ones I own than to buy more: When To Sell I Bonds (blog post by The Finance Buff).

    You may still be able to buy an additional $5K with a federal tax refund. I never did that, so haven't paid attention to the status of it.

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by Bongleur » Fri Dec 21, 2018 8:51 pm

    Kevin -- so the observed difference in yield is term risk between 7 day and 1 month instruments. But what I was trying to ask, is there any advantage to be gained by buying a fund vs buying individual instruments every period? Or deciding to put the money into the fund or an individual instrument, at the start of each period? Or not worth the time spent unless you like being a trader?
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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Sat Dec 22, 2018 12:48 pm

    Bongleur wrote:
    Fri Dec 21, 2018 8:51 pm
    Kevin -- so the observed difference in yield is term risk between 7 day and 1 month instruments.

    From the investor's perspective, it's the difference between 0-day and 1-month Treasuries. The seven days is only relevant to how the SEC yield is calculated. The actual maturities of the holdings of a money market fund doesn't really matter to the investor, since the fund shared price is maintained at $1, therefore there is no term risk.
    But what I was trying to ask, is there any advantage to be gained by buying a fund vs buying individual instruments every period? Or deciding to put the money into the fund or an individual instrument, at the start of each period? Or not worth the time spent unless you like being a trader?
    I don't think you can really replicate a money market fund as an individual investor, so I don't see a practical alternative to just holding the fund if yo.u want something with no term risk (0-year/month/day maturity).

    What we're talking about is taking a little term risk to potentially increase return a bit (not guaranteed, since we don't know what the average MM yield will be over the selected holding period--that's why it's called term risk). If you want to take some term risk with Treasuries, but less than one of the Vanguard short-term Treasury funds (average maturity about two years), then your only option is to use individual Treasuries.

    Normally I wouldn't mess around with something with a maturity as short as 20 days, but the yield on the Treasury I bought was unusually high that day, so I bought it. I probably will roll it into something a bit longer term when it matures.

    You can set up an automatic rolling Treasury ladder at Fidelity I believe, so if you wanted slightly higher expected return than a MM fund, but very little term risk, you could set up an automatic rolling ladder of 1-month Treasuries. There is no expense in such a ladder, as there is with a fund, so this boosts your expected return a bit more over just what you get from extending maturity. Once the ladder is established, there's no work involved, unless you decide to sell some of your holdings before maturity.

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by cryptormorf » Sat Dec 22, 2018 1:10 pm

    Kevin M wrote:
    Sat Dec 22, 2018 12:48 pm

    Normally I wouldn't mess around with something with a maturity as short as 20 days, but the yield on the Treasury I bought was unusually high that day, so I bought it. I probably will roll it into something a bit longer term when it matures.

    Kevin
    For an investor who is willing to take on a some term risk beyond MM yield (but still well below Vanguard short-term Treasury funds), what is your normal "back of the envelope" Treasury maturity/basis point spread for buying treasuries to be administratively worth the effort?

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    Re: what to do with cash if very risk averse?

    Post by ofckrupke » Sat Dec 22, 2018 1:23 pm

    Kevin M wrote:
    Sat Dec 22, 2018 12:48 pm
    If you want to take some term risk with Treasuries, but less than one of the Vanguard short-term Treasury funds (average maturity about two years), then your only option is to use individual Treasuries.
    A quick counterexample: IShares Short Treasury Bond ETF, SHV. The benchmark index is composed of treasuries w/maturity in the 1m to 1y range. Duration 0.4 years presently, expense ratio 0.15%. It's on the commission-free trade list for Vanguard brokerage accounts. Present SEC yield 2.32% so not much of a bump from Vanguard Treasury MMF (but no $50k barrier to entry either). A tiny fraction (1.26% of it in 2017) of the dividend income might be exposed to state taxation.

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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Sat Dec 22, 2018 1:53 pm

    ofckrupke wrote:
    Sat Dec 22, 2018 1:23 pm
    Kevin M wrote:
    Sat Dec 22, 2018 12:48 pm
    If you want to take some term risk with Treasuries, but less than one of the Vanguard short-term Treasury funds (average maturity about two years), then your only option is to use individual Treasuries.
    A quick counterexample: IShares Short Treasury Bond ETF, SHV. The benchmark index is composed of treasuries w/maturity in the 1m to 1y range. Duration 0.4 years presently, expense ratio 0.15%. It's on the commission-free trade list for Vanguard brokerage accounts. Present SEC yield 2.32% so not much of a bump from Vanguard Treasury MMF (but no $50k barrier to entry either). A tiny fraction (1.26% of it in 2017) of the dividend income might be exposed to state taxation.
    Thanks for sharing that. I figured that there would be some short-term Treasury funds, but was just looking at the Vanguard mutual funds.

    Buying Treasuries is so easy that I would prefer individual securities to save the 15 basis points of ER, which is larger than the 6 basis points of extra yield over the Treasury MM fund at 2.26%. I also like to be able to refine my selection of yield-curve points; currently you get little to no extra yield for extending from 9-month maturity to anywhere out to 5-year maturity, so given my aversion to term risk, I would not go beyond 9-month maturity at this point. I'm not saying that anyone else should follow this strategy, but it's my preference.

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Sat Dec 22, 2018 2:03 pm

    Kevin M wrote:
    Fri Dec 21, 2018 7:03 pm
    Real yield on an I Bond is 0.50%, while real yield on a 1-year TIPS is greater than 1% (last time I checked). So a 1-year TIPS is a better deal than an I Bond for a 1-year holding period even before considering the I Bond penalty. Yield on a 5-year TIPS is about the same or maybe a bit lower at about 1.1%, and you take a lot more term risk with the 5-year maturity.
    It occurred to me that we should see the TIPS inverted yield curve reflected in the SEC yields of the Vanguard short-term and intermediate-term TIPS funds. Sure enough, yield on the short-term fund, admiral shares, VTAPX, is 1.31%, while the yield on the intermediate-term fund, VIPSX, is 0.94%.

    So the short-term TIPS fund looks like a better deal than I Bonds if your intended holding period is a few years (duration is 2.5 years). A nice thing about a fund is that you don't have to worry about the tax accounting related to the "phantom income".

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by Kevin M » Sat Dec 22, 2018 2:18 pm

    cryptormorf wrote:
    Sat Dec 22, 2018 1:10 pm
    Kevin M wrote:
    Sat Dec 22, 2018 12:48 pm

    Normally I wouldn't mess around with something with a maturity as short as 20 days, but the yield on the Treasury I bought was unusually high that day, so I bought it. I probably will roll it into something a bit longer term when it matures.

    Kevin
    For an investor who is willing to take on a some term risk beyond MM yield (but still well below Vanguard short-term Treasury funds), what is your normal "back of the envelope" Treasury maturity/basis point spread for buying treasuries to be administratively worth the effort?
    It changes depending on the yield curve. Larry Swedroe's rule of thumb is to look for at least 20 basis points of extra yield per extra year of maturity, but the yield curve at the short end is much steeper than that--I think that's usually the case, so this guideline probably is more relevant when you're looking at extending at somewhat longer maturities.

    With my last look at Treasuries at Schwab, here's the way it looked out to about 1-year maturity:

    Image

    This is in terms of TEY for me. Note that the red points, right vertical scale, are bps per extra year of maturity, and that the shortest-term Treasury is over 200 bps/year. It falls off quickly to about 70 bps/year at 3-month maturity, about 60 bps/year at 6-month maturity, about 50 bps/year at 9-months, and about 40 bps/year at 12-month. These are all relative to a 0-year TEY of 2.54% for the VG Treasury MM fund.

    Kevin
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    Re: what to do with cash if very risk averse?

    Post by welderwannabe » Sat Dec 22, 2018 2:33 pm

    Econ1 wrote:
    Fri Dec 21, 2018 2:07 pm
    American Express has a 2.75% money market. Easy to invest or remove cash.
    You have a link for this product? I can't find it. I just see a 2.1% high yield savings.
    I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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    Re: what to do with cash if very risk averse?

    Post by Northern Flicker » Sat Dec 22, 2018 3:45 pm

    Usually you are compensated for more term risk with higher yield, but currently, the Treasury yield curve is very flat beyond 9-month maturity. You get little to no extra yield for extending from about 9-month maturity to about 5-year maturity.
    That’s because treasury market participants are concerned about term risk, inflation risk, and reinvestment risk (risk of bonds maturing when interest rates are low leading to reinvestment at the lower rate) when deciding on the price they are willing to pay for a bond (and inversely the yield they will accept).
    Index fund investor since 1987.

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    Re: what to do with cash if very risk averse?

    Post by cryptormorf » Sat Dec 22, 2018 3:59 pm

    Thank you Kevin, that's very helpful.

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