Choice between two Vanguard funds for short term money

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ualdriver
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Choice between two Vanguard funds for short term money

Post by ualdriver » Sat May 23, 2020 1:30 am

Boglehead Brain Trust-

I have money in a 529 account for my daughter's college education. She starts college in about a year. I have enough saved in this 529 account to cover her expenses for a 4 year degree. I really have no desire to do anything with this money other than to keep it safe, so I want to transfer a significant portion of the money to the safest index, low cost investments available in the 529 plan- Vanguard Short-Term Inflation Protected Securities (VTSPX) and/or Vanguard Federal Money Market (VMFXX). I'd put the money in a FDIC insured investment if I could, but that is not an option in the plan. I feel like I have already "won" by having enough saved for my kid's college education, so I'm really not interested in taking much risk at all, even though I realize her education will continue at least 4 years into the future. I realize there will be little reward because I will be taking little risk and am OK with that.

My concern with Vanguard Federal Money Market (VMFXX) are the following words in the prospectus:

Principal Investment Strategies
The Fund invests primarily in high-quality, short-term money market instruments.
Under normal circumstances, at least 80% of the Fund’s assets are invested in
securities issued by the U.S. government and its agencies and instrumentalities.
Although these securities are high-quality, most of the securities held by the Fund are
neither guaranteed by the U.S. Treasury nor supported by the full faith and credit of
the U.S. government.


There seems to be a lack of "safety" here or am I reading this wrong? How can VMFXX be at least 80% invested in "securities issued by the US government and its agencies and instrumentalities," yet, "most of the securities held by the fund are neither guaranteed by the US Treasury nor supported by the full faith and credit of the US Government?" Those statements seem contradictory. Further, in a fund like this, where is the other potential 20% of investments kept?

My concern with Vanguard Short-Term Inflation Protected Securities (VTSPX) is duration and possible short term nominal losses. The duration is 2.7 years, and although I realize that it is impossible to determine the future movements of interest rates, my concern would be that if interest rates do go up over the next few years, that there could be a loss of principal. I see on Vanguard's site that this fund decreased in value between 2013-2016- not a lot, but I'd hope to avoid that with this short term money.

What are the collective thoughts about choosing one fund, or the other fund, or dividing between the two funds?

Thanks.

Triple digit golfer
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Re: Choice between two Vanguard funds for short term money

Post by Triple digit golfer » Sat May 23, 2020 4:46 am

I would put it in the federal money market and not think twice if safety was my only concern.

Here's what Vanguard says about the fund. Bold for emphasis:
Vanguard Federal Money Market Fund’s investment objective is to seek to provide current income while maintaining liquidity and a stable share price of $1. The fund invests at least 99.5% of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized solely by U.S. government securities or cash (collectively, government securities). As such it is considered one of the most conservative investment options offered by Vanguard. Although the fund invests in short-term U.S. government securities, the amount of income that a shareholder may receive will be largely dependent on the current interest rate environment. Investors who have a short-term savings goal and are interested in a fund that invests in securities issued by the U.S. government or its agencies may wish to consider this option.

increment
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Re: Choice between two Vanguard funds for short term money

Post by increment » Sat May 23, 2020 8:27 am

ualdriver wrote:
Sat May 23, 2020 1:30 am
How can VMFXX be at least 80% invested in "securities issued by the US government and its agencies and instrumentalities," yet, "most of the securities held by the fund are neither guaranteed by the US Treasury nor supported by the full faith and credit of the US Government?" Those statements seem contradictory. Further, in a fund like this, where is the other potential 20% of investments kept?
In the (semi-)annual report you can see for yourself what VMFXX holds (as of a few months ago). It includes debt issued by such entities as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. These are not the same as debt issued by the US Treasury. The phrase "full faith and credit" implies the government's strongest promise to repay (using any funds at its disposal), and these other forms of debt may not enjoy that.

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Toons
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Re: Choice between two Vanguard funds for short term money

Post by Toons » Sat May 23, 2020 8:29 am

I ditto what
Triple Digit Golfer
Had to say
:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Angst
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Re: Choice between two Vanguard funds for short term money

Post by Angst » Sat May 23, 2020 8:50 am

ualdriver wrote:
Sat May 23, 2020 1:30 am
My concern with Vanguard Short-Term Inflation Protected Securities (VTSPX) is duration and possible short term nominal losses. The duration is 2.7 years...
Not part of the "Brain Trust" here, but without thinking too hard, 2.7 years sounds to me like it might actually be a reasonable ballpark guess for the weighted average of a series of school expenses due over the course of 4 years. As far as concerns over nominal TIPS fund losses go (vs real losses in the MM fund), I just shrug my shoulders. What can you do, unless the school involved can provide you with more insight into what their charges will be over the next four years?

Personally, I might start with 2/3 ST TIPS and 1/3 MM Fund and draw from both of them such that in the final year or 18 months I'd be down to 100% MM Fund.
Last edited by Angst on Sat May 23, 2020 12:46 pm, edited 1 time in total.

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JoMoney
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Re: Choice between two Vanguard funds for short term money

Post by JoMoney » Sat May 23, 2020 9:13 am

I don't have concerns about the Federal Money Market fund.
The securities it invests in that are "NOT SUPPORTED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT" are things like repurchase agreements where the fund holds collateral that fully offsets any credit/counter-party risk, and some Government-Sponsored enterprises like Fannie Mae/Freddie Mac mortgage companies. Those enterprises are required by law to state their debt is "NOT SUPPORTED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT" ... and yet, the government has demonstrated them being 'bailed out' (I think they're still under government conservatorship), and if the government didn't (or people believed the government wouldn't actually bail them out) the cost for them to borrow money would skyrocket, they would fail to be able to perform the function congress chartered them to do, the mortgage market would go to shambles and since it represents an enormous amount of money/debt would create an enormous problem for the Federal Reserve to perform it's function controlling interest rates and money supply. The pseudo wink-wink implied backing status creates a very weird predicament, it's often brought up as something the government needs to sort out, but for the time being I don't think it poses a concern for investors, and it's not going to change quickly.

I DO have concerns with TIPs mutual funds. I just don't understand how the inflation protection works in them when they're constantly rolling forward at market rates which are priced based on market expectations of inflation relative to other bonds. I don't know how to fully explain my concern, I think it's easiest with a picture:
Image
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

retired@50
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Re: Choice between two Vanguard funds for short term money

Post by retired@50 » Sat May 23, 2020 9:57 am

ualdriver wrote:
Sat May 23, 2020 1:30 am

What are the collective thoughts about choosing one fund, or the other fund, or dividing between the two funds?

Thanks.
I'd use the Federal Money Market Fund and sleep well.

Until you can show me a single person who has ever lost even a single penny by using the Federal Money Market Fund, I'd say don't worry.

Edited to add:
Let's look at this in the simplest possible terms.
Price range for VMFXX since inception: High $1.00, Low $1.00
Price range for VTSPX since inception: High $25.24 Low $23.94

Which fund do YOU think could be sold for a potential loss?

Regards,
Last edited by retired@50 on Sat May 23, 2020 10:27 am, edited 2 times in total.
This is one person's opinion. Nothing more.

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grabiner
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Re: Choice between two Vanguard funds for short term money

Post by grabiner » Sat May 23, 2020 10:19 am

JoMoney wrote:
Sat May 23, 2020 9:13 am
I DO have concerns with TIPs mutual funds. I just don't understand how the inflation protection works in them when they're constantly rolling forward at market rates which are priced based on market expectations of inflation relative to other bonds. I don't know how to fully explain my concern, I think it's easiest with a picture:
Image
You'll see the March phenomenon, and similar volatility, with any other short-term bond fund. If a fund has a duration of three years, and short-term bond yields rise by 1%, the fund will lose 3% of its value (and make up that 3% loss if you hold the fund for three years). That happened to TIPS in March, although rates went back down in April.

The reason short-term TIPS have underperformed inflation is that the above-inflation yields on short-term TIPS were negative for most of the last eight years.
Wiki David Grabiner

grobertj
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Re: Choice between two Vanguard funds for short term money

Post by grobertj » Sat May 23, 2020 10:25 am

I have my short term reserve invented in Vanguard Short-Term Treasury Fund. It's over 97% invested in US Government Treasuries. And it delivers a better rate than VMMXX. I talked this will several Vanguard advisors, and they all agreed its a VERY safe investment.
The only constant is change.

nix4me
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Re: Choice between two Vanguard funds for short term money

Post by nix4me » Sat May 23, 2020 2:13 pm

grobertj wrote:
Sat May 23, 2020 10:25 am
I have my short term reserve invented in Vanguard Short-Term Treasury Fund. It's over 97% invested in US Government Treasuries. And it delivers a better rate than VMMXX. I talked this will several Vanguard advisors, and they all agreed its a VERY safe investment.
Yeah but the short term treasury fund is now down to 0.14% yield. So might as well just use money market.

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ualdriver
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Re: Choice between two Vanguard funds for short term money

Post by ualdriver » Sat May 23, 2020 2:17 pm

All through nix4me.........Thanks for your input. I feel better now, particularly about that Vanguard Federal Money Market Fund.

nix4me
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Re: Choice between two Vanguard funds for short term money

Post by nix4me » Sat May 23, 2020 2:31 pm

So if you want it all safe, with a little bit of a hedge for inflation, then throw in some equity.

Do like 95% money market and 5% s&p 500 index. Or 90/10.

I struggle with same decision and my daughter is a junior in college. I ultimately end up doing the math. Fund size x money market rate. Fund size x wishful 3% rate. The difference is the cost of a few pizzas or a couple hrs overtime at work. I’ll just write her a check for the interest i missed because of my safe decision.

I went 100% s%p 500 to 100% VMMXX in 2018 days before the big December dip. It’s been sitting there ever since. I’ve posted 3 times on this forum asking the same question. All 3 times I got same same answer, do the math and do nothing. :) I just pull funds each semester and send in the check. She is almost a senior and still plenty of money left. We won!

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ualdriver
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Re: Choice between two Vanguard funds for short term money

Post by ualdriver » Sat May 23, 2020 3:00 pm

nix4me wrote:
Sat May 23, 2020 2:31 pm
So if you want it all safe, with a little bit of a hedge for inflation, then throw in some equity.

Do like 95% money market and 5% s&p 500 index. Or 90/10.
Yeah, actually that is my plan. I just didn't mention that to keep the original post more simple. I thought I have read on this forum that combining 10-20% equities with 80-90% bonds actually "smooths" out the ups and downs a 100% bond-type portfolio has. I think there was a chart illustrating the point. I doubt I could find it, but your point is well taken.

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