Short Term Bond Index vs. Prime Money Market

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Eric76
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Short Term Bond Index vs. Prime Money Market

Post by Eric76 » Mon Apr 15, 2019 10:30 pm

The SEC yield on the VG Short Term Bond Index Fund is currently 2.5%.

The SEC yield on the VG Prime Money Market is currently 2.45%.

Why would someone invest in the Short Term Bond Index Fund and assume any risk for .05% above the (essentially) risk free money market?

Am I missing something?

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whodidntante
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Re: Short Term Bond Index vs. Prime Money Market

Post by whodidntante » Mon Apr 15, 2019 10:35 pm

It's not purely risk that it will go down. It's also risk that it will go up. Or maybe the investor is lazy and doesn't look or understand or care. As for me, I would prefer the MMF, or maybe something like ICSH.

venkman
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Re: Short Term Bond Index vs. Prime Money Market

Post by venkman » Mon Apr 15, 2019 11:55 pm

Eric76 wrote:
Mon Apr 15, 2019 10:30 pm
Why would someone invest in the Short Term Bond Index Fund and assume any risk for .05% above the (essentially) risk free money market?
Am I missing something?
You're missing the fact that interest rate risk is not the only type of risk associated with bonds...

Topic Author
Eric76
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Re: Short Term Bond Index vs. Prime Money Market

Post by Eric76 » Tue Apr 16, 2019 6:36 am

venkman wrote:
Mon Apr 15, 2019 11:55 pm
Eric76 wrote:
Mon Apr 15, 2019 10:30 pm
Why would someone invest in the Short Term Bond Index Fund and assume any risk for .05% above the (essentially) risk free money market?
Am I missing something?
You're missing the fact that interest rate risk is not the only type of risk associated with bonds...
I didn't miss that fact, which makes the bond fund even less appealing....

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J G Bankerton
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Re: Short Term Bond Index vs. Prime Money Market

Post by J G Bankerton » Tue Apr 16, 2019 6:45 am

Bonds gave me a real return, cash falls a few bases points short of a real return; still I sold my short bond fund for cash when cash went over 2%.
That said bonds may be a good "bet" now that the Federal Reserve will not raise rates until 2020.

livesoft
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Re: Short Term Bond Index vs. Prime Money Market

Post by livesoft » Tue Apr 16, 2019 6:48 am

One reason is availability. One might have the ST bond fund in their 401(k) and not have that money market fund in their 401(k).

OTOH, we can ask such questions all the time. Why use VMMXX when you can use VCSH sometimes? VCSH (another short-term bond fund) already has a total return of 2.65% YTD compared to 0.71% VMMXX.
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pdavi21
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Re: Short Term Bond Index vs. Prime Money Market

Post by pdavi21 » Tue Apr 16, 2019 7:11 am

The Money Market yield is likely to fall which would make the short term bond fund appreciate.

Then you are stuck with a 2% yield instead of being locked into a 2.5% yield for 2-3 years.

Just hold duration similar to your investment horizon. If you are saving less than year emergency fund, use money market. If you are planning on buying a house in 2-4 years, short term bonds are probably better.

But really, holdings in cash and even short term bonds should be minimal for most investors. Anything less risky than a Total Bond fund risks heavy underperformance over a 5-30 year horizon. (Unless 1980 comes back).
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

hlinee
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Re: Short Term Bond Index vs. Prime Money Market

Post by hlinee » Tue Apr 16, 2019 7:26 am

pdavi21 wrote:
Tue Apr 16, 2019 7:11 am
The Money Market yield is likely to fall which would make the short term bond fund appreciate.

Then you are stuck with a 2% yield instead of being locked into a 2.5% yield for 2-3 years.

Just hold duration similar to your investment horizon. If you are saving less than year emergency fund, use money market. If you are planning on buying a house in 2-4 years, short term bonds are probably better.

But really, holdings in cash and even short term bonds should be minimal for most investors. Anything less risky than a Total Bond fund risks heavy underperformance over a 5-30 year horizon. (Unless 1980 comes back).
How are you stuck with a 2% yield? Can't you just move your money to the bond fund if the rate difference becomes that large?

3funder
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Re: Short Term Bond Index vs. Prime Money Market

Post by 3funder » Tue Apr 16, 2019 7:38 am

You'll probably be fine with either.

Topic Author
Eric76
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Re: Short Term Bond Index vs. Prime Money Market

Post by Eric76 » Tue Apr 16, 2019 8:43 am

3funder wrote:
Tue Apr 16, 2019 7:38 am
You'll probably be fine with either.
I understand that they are both very low risk investments. I'm trying to understand the advantage of the bond fund over the mm fund with almost identical yields.

3funder
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Re: Short Term Bond Index vs. Prime Money Market

Post by 3funder » Tue Apr 16, 2019 9:20 am

Eric76 wrote:
Tue Apr 16, 2019 8:43 am
3funder wrote:
Tue Apr 16, 2019 7:38 am
You'll probably be fine with either.
I understand that they are both very low risk investments. I'm trying to understand the advantage of the bond fund over the mm fund with almost identical yields.
How long is your time frame? If it is longer than the duration of the bond fund, then it's probably more advantageous to go with that over the money market. If the price of the bond fund decreases, yields will be higher on newly purchased issues; if the price increases, you'll benefit from capital appreciation.

pascalwager
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Re: Short Term Bond Index vs. Prime Money Market

Post by pascalwager » Tue Apr 16, 2019 9:34 am

hlinee wrote:
Tue Apr 16, 2019 7:26 am
pdavi21 wrote:
Tue Apr 16, 2019 7:11 am
The Money Market yield is likely to fall which would make the short term bond fund appreciate.

Then you are stuck with a 2% yield instead of being locked into a 2.5% yield for 2-3 years.

Just hold duration similar to your investment horizon. If you are saving less than year emergency fund, use money market. If you are planning on buying a house in 2-4 years, short term bonds are probably better.

But really, holdings in cash and even short term bonds should be minimal for most investors. Anything less risky than a Total Bond fund risks heavy underperformance over a 5-30 year horizon. (Unless 1980 comes back).
How are you stuck with a 2% yield? Can't you just move your money to the bond fund if the rate difference becomes that large?
Yes, but the interest rates might fall instead, then the bond fund might have better returns than the MMF. Remember the price is fixed on MMF, but can rise, of course, on the bond fund.

Some like to balance inflation risk with reinvestment risk and stay at about 5 years maturity. There are different opinions on bond fund investing including: simply match duration with time horizon (if known).

Disclosure: My fixed income is 100% MMF right now due to the low yields on bonds, but I've always been short-term.

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J G Bankerton
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Re: Short Term Bond Index vs. Prime Money Market

Post by J G Bankerton » Tue Apr 16, 2019 9:39 am

Eric76 wrote:
Tue Apr 16, 2019 8:43 am
3funder wrote:
Tue Apr 16, 2019 7:38 am
You'll probably be fine with either.
I understand that they are both very low risk investments. I'm trying to understand the advantage of the bond fund over the mm fund with almost identical yields.
It is the inverted yield curve.

venkman
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Re: Short Term Bond Index vs. Prime Money Market

Post by venkman » Tue Apr 16, 2019 10:40 pm

Eric76 wrote:
Tue Apr 16, 2019 6:36 am
venkman wrote:
Mon Apr 15, 2019 11:55 pm
Eric76 wrote:
Mon Apr 15, 2019 10:30 pm
Why would someone invest in the Short Term Bond Index Fund and assume any risk for .05% above the (essentially) risk free money market?
Am I missing something?
You're missing the fact that interest rate risk is not the only type of risk associated with bonds...
I didn't miss that fact, which makes the bond fund even less appealing....
The MM fund is essentially a bond fund, just with extremely short-term bonds. It eliminates interest rate risk, but maxes out reinvestment risk. The yield curve is relatively flat right now because the market is willing to accept more interest rate risk as a hedge against reinvestment risk. The market may or may not be right, but it is efficient.

averagedude
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Re: Short Term Bond Index vs. Prime Money Market

Post by averagedude » Tue Apr 16, 2019 11:07 pm

3funder wrote:
Tue Apr 16, 2019 7:38 am
You'll probably be fine with either.
I like this answer. The Ivy league smart people that spend 50 hours a week pricing in what should be the yields in the various credit risks in the bond market should be the answer to your question. The markets are fairly efficient, and the people that are pricing the effects of future conditions of what will effect bond prices in the future are way smarter than i am. Of course you could be way smarter than these people, but me being an average dude, I am not. Good luck to you if you are smarter than me and these people. Acknowledging the fact that you are not as smart as the efficient markets, makes you leap years ahead of the average investor.

NYCwriter
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Re: Short Term Bond Index vs. Prime Money Market

Post by NYCwriter » Wed Apr 17, 2019 1:25 am

Are you holding short-term funds with the desire for no principal loss in a given timeframe? The one benefit of the MM is not losing principal, but possibly sacrificing some yield. So, the difference is really in fund purpose and/or expected duration of holding. Bond funds increase risk/reward.

For treasuries, the one advantage would be a tax benefit in taxable.

Currently, Vanguard's ultra-short funds pay slightly more yield than Prime.

pascalwager
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Re: Short Term Bond Index vs. Prime Money Market

Post by pascalwager » Mon Apr 22, 2019 4:40 pm

I listed the current average maturities (years) for some of the DFA short-term bond funds (5-years maximum). The maturities are based on current yield curves under the guidance of Steven Pleshka, longtime DFA bond funds manager. I use them as a guide in selecting my Vanguard bond funds overall maturity. I typically use a Vanguard bond fund/money market fund barbell to ride the yield curve after referring to the DFA maturities.

3.50 DFA five-year global (1-5 year benchmark)
1.29 DFA two-year global
0.58 DFA one-year fixed income
0.92 DFA two-year fixed income
0.88 DFA two-year govt
1.53 DFA short-term govt (1-5 year benchmark)

8.3 Vanguard Total Bond Market Index
2.9 Vanguard Short-Term Bond Index

Lee_WSP
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Re: Short Term Bond Index vs. Prime Money Market

Post by Lee_WSP » Mon Apr 22, 2019 6:11 pm

With Online HYS accounts yielding 2.45%, it doesn't make sense to put money in either with their associated expense ratios at this point in time. IMO. Unless you want to be able to move money between funds quickly.

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J G Bankerton
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Re: Short Term Bond Index vs. Prime Money Market

Post by J G Bankerton » Mon Apr 22, 2019 7:54 pm

Lee_WSP wrote:
Mon Apr 22, 2019 6:11 pm
With Online HYS accounts yielding 2.45%, ....
Read the fine print.

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joe8d
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Re: Short Term Bond Index vs. Prime Money Market

Post by joe8d » Mon Apr 22, 2019 8:16 pm

I use the Short Term Investment Grade Bond Fund.I use Index for Stocks,VG Active for bonds.
All the Best, | Joe

Lee_WSP
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Re: Short Term Bond Index vs. Prime Money Market

Post by Lee_WSP » Mon Apr 22, 2019 8:18 pm

J G Bankerton wrote:
Mon Apr 22, 2019 7:54 pm
Lee_WSP wrote:
Mon Apr 22, 2019 6:11 pm
With Online HYS accounts yielding 2.45%, ....
Read the fine print.
What? The minimum balance? Cit savings builder yields 2.45% as long as you either keep 20k or contribute $100 per month or so.

Sure, they can end the program, but so what? Move the money then.

foamypirate
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Re: Short Term Bond Index vs. Prime Money Market

Post by foamypirate » Mon Apr 22, 2019 8:21 pm

Lee_WSP wrote:
Mon Apr 22, 2019 6:11 pm
With Online HYS accounts yielding 2.45%, it doesn't make sense to put money in either with their associated expense ratios at this point in time. IMO. Unless you want to be able to move money between funds quickly.
Returns are net of expense ratio, so this isn't a factor.

Lee_WSP
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Re: Short Term Bond Index vs. Prime Money Market

Post by Lee_WSP » Mon Apr 22, 2019 8:24 pm

foamypirate wrote:
Mon Apr 22, 2019 8:21 pm
Lee_WSP wrote:
Mon Apr 22, 2019 6:11 pm
With Online HYS accounts yielding 2.45%, it doesn't make sense to put money in either with their associated expense ratios at this point in time. IMO. Unless you want to be able to move money between funds quickly.
Returns are net of expense ratio, so this isn't a factor.
I've been confused about the sec yield and er. The yield takes the expense ratio into account?

Still, I'd take fdic insured at the same yield..05% is very little on the bond side.

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J G Bankerton
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Re: Short Term Bond Index vs. Prime Money Market

Post by J G Bankerton » Tue Apr 23, 2019 7:07 am

Lee_WSP wrote:
Mon Apr 22, 2019 8:18 pm
J G Bankerton wrote:
Mon Apr 22, 2019 7:54 pm
Lee_WSP wrote:
Mon Apr 22, 2019 6:11 pm
With Online HYS accounts yielding 2.45%, ....
Read the fine print.
What? The minimum balance? Cit savings builder yields 2.45% as long as you either keep 20k or contribute $100 per month or so.

Sure, they can end the program, but so what? Move the money then.
The fine print says;
"**Interest Rate is 2.421% during the Introductory Period and 0.995% thereafter."

Lee_WSP
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Re: Short Term Bond Index vs. Prime Money Market

Post by Lee_WSP » Tue Apr 23, 2019 9:26 am

J G Bankerton wrote:
Tue Apr 23, 2019 7:07 am
Lee_WSP wrote:
Mon Apr 22, 2019 8:18 pm
J G Bankerton wrote:
Mon Apr 22, 2019 7:54 pm
Lee_WSP wrote:
Mon Apr 22, 2019 6:11 pm
With Online HYS accounts yielding 2.45%, ....
Read the fine print.
What? The minimum balance? Cit savings builder yields 2.45% as long as you either keep 20k or contribute $100 per month or so.

Sure, they can end the program, but so what? Move the money then.
The fine print says;
"**Interest Rate is 2.421% during the Introductory Period and 0.995% thereafter."
I don't know where you are seeing that. Please cite the source.

Their landing page states the following:
Continue earning up to 2.45% APY by:
Maintaining a balance of $25,000 or more
OR
Making at least one monthly deposit of $100 or more
The "fine print" which is actually normal type (there is no fine print on this particular page) says this about the interest rate:
Introductory Interest Rate
During the Introductory Period, all new Savings Builder accounts will be paid the Upper Tier interest rate. After the Introductory Period ends, accounts will be evaluated on the first Evaluation Day to determine the interest rate to be paid for the next Evaluation Period.

Monthly Determination of Interest Rate
On each Evaluation Day the interest rate applicable for the next Evaluation Period will be determined. Accounts with an end-of-day balance of at least $25,000 on the Evaluation Day or with at least one deposit of $100 or more that posts to the account during the Evaluation Period will earn the Upper Tier interest rate during the next Evaluation Period. Accounts with an end-of-day balance less than $25,000 on an Evaluation Day without a deposit of $100 or more that posts to the account during the Evaluation Period will earn the Base Tier interest rate for the next Evaluation Period. This process will occur every month.
The upper tier is the 2.45 APY

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welderwannabe
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Re: Short Term Bond Index vs. Prime Money Market

Post by welderwannabe » Tue Apr 23, 2019 9:59 am

J G Bankerton wrote:
Tue Apr 16, 2019 9:39 am
It is the inverted yield curve.
+1
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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J G Bankerton
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Re: Short Term Bond Index vs. Prime Money Market

Post by J G Bankerton » Tue Apr 23, 2019 10:43 am

Lee_WSP wrote:
Tue Apr 23, 2019 9:26 am
J G Bankerton wrote:
Tue Apr 23, 2019 7:07 am
Lee_WSP wrote:
Mon Apr 22, 2019 8:18 pm
J G Bankerton wrote:
Mon Apr 22, 2019 7:54 pm
Lee_WSP wrote:
Mon Apr 22, 2019 6:11 pm
With Online HYS accounts yielding 2.45%, ....
Read the fine print.
What? The minimum balance? Cit savings builder yields 2.45% as long as you either keep 20k or contribute $100 per month or so.

Sure, they can end the program, but so what? Move the money then.
The fine print says;
"**Interest Rate is 2.421% during the Introductory Period and 0.995% thereafter."
I don't know where you are seeing that. Please cite the source.

Their landing page states the following:
Continue earning up to 2.45% APY by:
Maintaining a balance of $25,000 or more
OR
Making at least one monthly deposit of $100 or more
The "fine print" which is actually normal type (there is no fine print on this particular page) says this about the interest rate:
Introductory Interest Rate
During the Introductory Period, all new Savings Builder accounts will be paid the Upper Tier interest rate. After the Introductory Period ends, accounts will be evaluated on the first Evaluation Day to determine the interest rate to be paid for the next Evaluation Period.

Monthly Determination of Interest Rate
On each Evaluation Day the interest rate applicable for the next Evaluation Period will be determined. Accounts with an end-of-day balance of at least $25,000 on the Evaluation Day or with at least one deposit of $100 or more that posts to the account during the Evaluation Period will earn the Upper Tier interest rate during the next Evaluation Period. Accounts with an end-of-day balance less than $25,000 on an Evaluation Day without a deposit of $100 or more that posts to the account during the Evaluation Period will earn the Base Tier interest rate for the next Evaluation Period. This process will occur every month.
The upper tier is the 2.45 APY
The source is the "banks" fine print. Look for the "**" double asterisk. That "*" is the most important thing in any contract.

"**Interest Rate is 2.421% during the Introductory Period and 0.995% thereafter." is a copy and paste from.
https://www.cit.com/cit-bank/bank/savin ... r-account/
I would post all the fine print but it would be a waste of bandwidth.

Lee_WSP
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Re: Short Term Bond Index vs. Prime Money Market

Post by Lee_WSP » Tue Apr 23, 2019 10:52 am

J G Bankerton wrote:
Tue Apr 23, 2019 10:43 am
Lee_WSP wrote:
Tue Apr 23, 2019 9:26 am
J G Bankerton wrote:
Tue Apr 23, 2019 7:07 am
Lee_WSP wrote:
Mon Apr 22, 2019 8:18 pm
J G Bankerton wrote:
Mon Apr 22, 2019 7:54 pm
Read the fine print.
What? The minimum balance? Cit savings builder yields 2.45% as long as you either keep 20k or contribute $100 per month or so.

Sure, they can end the program, but so what? Move the money then.
The fine print says;
"**Interest Rate is 2.421% during the Introductory Period and 0.995% thereafter."
I don't know where you are seeing that. Please cite the source.

Their landing page states the following:
Continue earning up to 2.45% APY by:
Maintaining a balance of $25,000 or more
OR
Making at least one monthly deposit of $100 or more
The "fine print" which is actually normal type (there is no fine print on this particular page) says this about the interest rate:
Introductory Interest Rate
During the Introductory Period, all new Savings Builder accounts will be paid the Upper Tier interest rate. After the Introductory Period ends, accounts will be evaluated on the first Evaluation Day to determine the interest rate to be paid for the next Evaluation Period.

Monthly Determination of Interest Rate
On each Evaluation Day the interest rate applicable for the next Evaluation Period will be determined. Accounts with an end-of-day balance of at least $25,000 on the Evaluation Day or with at least one deposit of $100 or more that posts to the account during the Evaluation Period will earn the Upper Tier interest rate during the next Evaluation Period. Accounts with an end-of-day balance less than $25,000 on an Evaluation Day without a deposit of $100 or more that posts to the account during the Evaluation Period will earn the Base Tier interest rate for the next Evaluation Period. This process will occur every month.
The upper tier is the 2.45 APY
The source is the "banks" fine print. Look for the "**" double asterisk. That "*" is the most important thing in any contract.

"**Interest Rate is 2.421% during the Introductory Period and 0.995% thereafter." is a copy and paste from.
https://www.cit.com/cit-bank/bank/savin ... r-account/
I would post all the fine print but it would be a waste of bandwidth.
You can interpret it however you want, but the double asterisk refers to balances below 25,000. If your balance is below that you can earn the higher tier of you meet the $100 deposit requirement for the evaluation period you'll get it for the next earning period.

Sure it's not straightforward like money market under 25k, but it's fdic insured.

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J G Bankerton
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Re: Short Term Bond Index vs. Prime Money Market

Post by J G Bankerton » Tue Apr 23, 2019 11:13 am

Lee_WSP wrote:
Tue Apr 23, 2019 10:52 am

You can interpret it however you want, but the double asterisk refers to balances below 25,000.
You didn't mention that in your original post, you left out all the "*" in the fine print.
Lee_WSP wrote:
Tue Apr 23, 2019 10:52 am
Cit savings builder yields 2.45% as long as you either keep 20k or contribute $100 per month or so.
If one has the time and reads what the "*" says it may work for a time but it is never as easy as it seems.

Lee_WSP
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Re: Short Term Bond Index vs. Prime Money Market

Post by Lee_WSP » Tue Apr 23, 2019 11:31 am

I'm just going to say that asterisk is not saying what think it is saying. I accept the fact that I will not be able to convince you other wise.

To everyone else, you have the link, read it for yourself.

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J G Bankerton
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Re: Short Term Bond Index vs. Prime Money Market

Post by J G Bankerton » Tue Apr 23, 2019 1:04 pm

Lee_WSP wrote:
Tue Apr 23, 2019 11:31 am
I'm just going to say that asterisk is not saying what think it is saying. I accept the fact that I will not be able to convince you other wise.

To everyone else, you have the link, read it for yourself.
See you and I agree; there are "*"; life is full of "*". :(

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