Short term investments help

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unclescrooge
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Short term investments help

Post by unclescrooge » Fri Jan 25, 2019 5:24 pm

I have an extra $50,000 lying around over and above my usual emergency fund of $60k-75k.

I'm waiting to see how our tax situation shakes out before deciding what to do with it. We probably won't need and other than paying down my mortgage I don't have any good ideas of what to do with it.

We do not have a saving account, mainly because we're in a high tax bracket in a high-tax state so the after rate of savings wasn't worth any effort (for 2018, I expect marginal rates to be 32% Federal and 9.3% state).

However, now the short-end of the yield curve is increasing I think putting it in municipal bonds might be worth looking into.

I've narrowed it down to two funds,
SUB - iShares Short-Term National Muni Bond ETF
Duration : 2 years
SEC Yield: 1.78%
Credit quality : AA

MUB: iShares National Muni Bond ETF
Duration: 6.2 years
SEC Yield: 2.48%
Credit quality : AA

ER on both is 0.07% and I can buy them commission free at Chase.

I'm leaning towards the shorter duration fund.

Does any see anything wrong with these options?
Are there any other alternatives I should look at?

Thanks!

euroswiss
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Re: Short term investments help

Post by euroswiss » Fri Jan 25, 2019 6:01 pm

unclescrooge wrote:
Fri Jan 25, 2019 5:24 pm
I have an extra $50,000 lying around over and above my usual emergency fund of $60k-75k.

I'm waiting to see how our tax situation shakes out before deciding what to do with it. We probably won't need and other than paying down my mortgage I don't have any good ideas of what to do with it.

We do not have a saving account, mainly because we're in a high tax bracket in a high-tax state so the after rate of savings wasn't worth any effort (for 2018, I expect marginal rates to be 32% Federal and 9.3% state).

However, now the short-end of the yield curve is increasing I think putting it in municipal bonds might be worth looking into.

I've narrowed it down to two funds,
SUB - iShares Short-Term National Muni Bond ETF
Duration : 2 years
SEC Yield: 1.78%
Credit quality : AA

MUB: iShares National Muni Bond ETF
Duration: 6.2 years
SEC Yield: 2.48%
Credit quality : AA

ER on both is 0.07% and I can buy them commission free at Chase.

I'm leaning towards the shorter duration fund.

Does any see anything wrong with these options?
Are there any other alternatives I should look at?

Thanks!


Why don't you just open an online savings account with synchrony or ally? They pay 2.2%. Even after your tax hit, it's still over 1.35% and you can move the money anytime you want. Unless your muni funds are state-specific (i.e. specific to YOUR state), you still pay those 9.3% (plus the ER) on your muni funds. Pretty close - and pretty much risk-free

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unclescrooge
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Re: Short term investments help

Post by unclescrooge » Fri Jan 25, 2019 7:37 pm

euroswiss wrote:
Fri Jan 25, 2019 6:01 pm

Why don't you just open an online savings account with synchrony or ally? They pay 2.2%. Even after your tax hit, it's still over 1.35% and you can move the money anytime you want. Unless your muni funds are state-specific (i.e. specific to YOUR state), you still pay those 9.3% (plus the ER) on your muni funds. Pretty close - and pretty much risk-free
I didn't consider this because I'm an optimizer, not a satisficer.

There has to be a way to beat that.

Okay, maybe not, but indulge me while I explore the alternatives :wink:

If I use ICSH, short term corporates, the duration is 0.39 years, sec yield is 3% and credit is AA. So the after tax yield is 1.75% with little interest rate risk, and minor credit risk.

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willthrill81
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Re: Short term investments help

Post by willthrill81 » Fri Jan 25, 2019 9:44 pm

Four extra years of duration for an additional 70 basis points would be right on the margin for me. That's only about 16 basis points per additional year.

If rates went up another 1%, we would expect the longer duration fund to lose 4% more than the shorter duration fund. You would have to hold that fund for about six years to break even.

I'd probably go with the shorter duration fund.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dbr
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Re: Short term investments help

Post by dbr » Fri Jan 25, 2019 9:56 pm

An alternative is to invest the money in a stock index fund and adjust tax deferred investments to desired overall asset allocation.

I am a little unclear on the concept of "extra money lying around."

Another alternative is to spend the money. Maybe a kitchen remodel is in order. This is not offered as an entirely facetious remark.

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unclescrooge
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Re: Short term investments help

Post by unclescrooge » Fri Jan 25, 2019 10:38 pm

dbr wrote:
Fri Jan 25, 2019 9:56 pm
An alternative is to invest the money in a stock index fund and adjust tax deferred investments to desired overall asset allocation.

I am a little unclear on the concept of "extra money lying around."

Another alternative is to spend the money. Maybe a kitchen remodel is in order. This is not offered as an entirely facetious remark.
The money came from extra earnings, extra savings... It is what happens when you're too busy taking care of toddlers to actually spend any money.

I just spent hundreds of thousands of dollars remodeling/rebuilding a house. I think we are good for the next decade. Although we do need to spend money on the backyard, I'm not sure I have the appetite for the level of work it requires just yet.

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willthrill81
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Re: Short term investments help

Post by willthrill81 » Fri Jan 25, 2019 10:45 pm

unclescrooge wrote:
Fri Jan 25, 2019 10:38 pm
dbr wrote:
Fri Jan 25, 2019 9:56 pm
An alternative is to invest the money in a stock index fund and adjust tax deferred investments to desired overall asset allocation.

I am a little unclear on the concept of "extra money lying around."

Another alternative is to spend the money. Maybe a kitchen remodel is in order. This is not offered as an entirely facetious remark.
The money came from extra earnings, extra savings... It is what happens when you're too busy taking care of toddlers to actually spend any money.

I just spent hundreds of thousands of dollars remodeling/rebuilding a house. I think we are good for the next decade. Although we do need to spend money on the backyard, I'm not sure I have the appetite for the level of work it requires just yet.
Every dime we paid a landscaping company four years ago to work for a week in our yard was money very well spent. Their team did more in that week that we could have done in three months and a better job to boot.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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unclescrooge
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Re: Short term investments help

Post by unclescrooge » Fri Jan 25, 2019 11:03 pm

willthrill81 wrote:
Fri Jan 25, 2019 10:45 pm
unclescrooge wrote:
Fri Jan 25, 2019 10:38 pm
dbr wrote:
Fri Jan 25, 2019 9:56 pm
An alternative is to invest the money in a stock index fund and adjust tax deferred investments to desired overall asset allocation.

I am a little unclear on the concept of "extra money lying around."

Another alternative is to spend the money. Maybe a kitchen remodel is in order. This is not offered as an entirely facetious remark.
The money came from extra earnings, extra savings... It is what happens when you're too busy taking care of toddlers to actually spend any money.

I just spent hundreds of thousands of dollars remodeling/rebuilding a house. I think we are good for the next decade. Although we do need to spend money on the backyard, I'm not sure I have the appetite for the level of work it requires just yet.
Every dime we paid a landscaping company four years ago to work for a week in our yard was money very well spent. Their team did more in that week that we could have done in three months and a better job to boot.
I don't doubt it. When I meant appetite, I meant writing very large checks. I've gotten several quotes. They all said we needed a soil report that starts at $6k. Estimated work is about 10x more. And at least 30x more if we want a pool.

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unclescrooge
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Re: Short term investments help

Post by unclescrooge » Fri Jan 25, 2019 11:05 pm

willthrill81 wrote:
Fri Jan 25, 2019 9:44 pm
Four extra years of duration for an additional 70 basis points would be right on the margin for me. That's only about 16 basis points per additional year.

If rates went up another 1%, we would expect the longer duration fund to lose 4% more than the shorter duration fund. You would have to hold that fund for about six years to break even.

I'd probably go with the shorter duration fund.
That's a good way to look at it. Thanks!

What do you about a AA rated corporate bond fund with duration under a year and a 3% yield?

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willthrill81
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Re: Short term investments help

Post by willthrill81 » Fri Jan 25, 2019 11:21 pm

unclescrooge wrote:
Fri Jan 25, 2019 11:05 pm
willthrill81 wrote:
Fri Jan 25, 2019 9:44 pm
Four extra years of duration for an additional 70 basis points would be right on the margin for me. That's only about 16 basis points per additional year.

If rates went up another 1%, we would expect the longer duration fund to lose 4% more than the shorter duration fund. You would have to hold that fund for about six years to break even.

I'd probably go with the shorter duration fund.
That's a good way to look at it. Thanks!

What do you about a AA rated corporate bond fund with duration under a year and a 3% yield?
I prefer to take my risk on the equity side. Vanguard's short-term corporate bond fund VSCSX returned .88% last year despite its yield being about 2.5% this time last year if my calculations are correct. Granted, that was better than a TBM fund, but I'd be concerned about the correlation to stocks.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

dbr
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Re: Short term investments help

Post by dbr » Sat Jan 26, 2019 9:27 am

unclescrooge wrote:
Fri Jan 25, 2019 10:38 pm
dbr wrote:
Fri Jan 25, 2019 9:56 pm
An alternative is to invest the money in a stock index fund and adjust tax deferred investments to desired overall asset allocation.

I am a little unclear on the concept of "extra money lying around."

Another alternative is to spend the money. Maybe a kitchen remodel is in order. This is not offered as an entirely facetious remark.
The money came from extra earnings, extra savings... It is what happens when you're too busy taking care of toddlers to actually spend any money.

I just spent hundreds of thousands of dollars remodeling/rebuilding a house. I think we are good for the next decade. Although we do need to spend money on the backyard, I'm not sure I have the appetite for the level of work it requires just yet.
The remodeling was a quip for humor. The suggestion to invest the money according to an investment plan presumably holding stocks and bonds and probably stocks in taxable accounts is a serious suggestion. It goes back to what you really mean in your mind about extra money.

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unclescrooge
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Re: Short term investments help

Post by unclescrooge » Sat Jan 26, 2019 1:10 pm

dbr wrote:
Sat Jan 26, 2019 9:27 am

The remodeling was a quip for humor. The suggestion to invest the money according to an investment plan presumably holding stocks and bonds and probably stocks in taxable accounts is a serious suggestion. It goes back to what you really mean in your mind about extra money.
As of now it's part of an extended emergency fund, so short term bonds is where I'm looking.

dbr
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Re: Short term investments help

Post by dbr » Sat Jan 26, 2019 1:38 pm

unclescrooge wrote:
Sat Jan 26, 2019 1:10 pm
dbr wrote:
Sat Jan 26, 2019 9:27 am

The remodeling was a quip for humor. The suggestion to invest the money according to an investment plan presumably holding stocks and bonds and probably stocks in taxable accounts is a serious suggestion. It goes back to what you really mean in your mind about extra money.
As of now it's part of an extended emergency fund, so short term bonds is where I'm looking.
Makes sense.

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