Moving from cash to Long term or Intermediate term bonds

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psriniva
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Moving from cash to Long term or Intermediate term bonds

Post by psriniva »

Hi All,
About 20% of my assets is in cash. Mostly Savings accounts with less than 1% or close to 0% interest.
I am still working and save every month. Out of the 20%, at most I need only about 5% for my unexpected emergency needs such as job loss, health care etc. The other 15%, I don't think I need for another 10 years say. (I don't know for sure though)
Based on recently acquired knowledge, I am thinking of moving the money to Bond Index ETFs or Bond Indrex Mutual funds.
I realize that the interest rate is more likely to rise in the not too distant future and long term bonds will suffer more than short term bonds.
So, is it still better to move money from cash (0.5% interest) to Short term and Intermediate or Long term bonds.
I am thinking 5% in Short term Investment grade Corporate bond index fund and 15% in Long term Investment grade Corporate bond index fund.
Also, I am curious to know what is the likelihood that short term Investment grade Corporate bond fund will outperform CD's?
Your advice is much appreciated.
Thank you in advance.
Paddy
Last edited by psriniva on Sun Sep 06, 2020 9:07 am, edited 1 time in total.
[b]Paddy[/b]
dbr
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Re: Moving from cash to Long term or Intermediate term bonds

Post by dbr »

If you mean by time horizon that you might want this money back in cash without a loss as soon as five years, I would not be buying bonds at all. Savings and CDs are fine. Also remember that five years in, your ten years is now five years.

If you mean you are setting up long term investing, the best starting point is intermediate average duration, low cost bond funds. Long term investing for saving and retirement does not have a horizon, per se. You might better fall back on the famous Boglehead image of voyaging across an ocean where the horizon is always ahead, behind, and around you forever.
jimkinny
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Re: Moving from cash to Long term or Intermediate term bonds

Post by jimkinny »

I just took a quick look at the 30 day SEC yield of several bond funds. The yield does not seem worth the term/duration risk to own an intermediate fund vs a short term fund.

I would not buy a long term fund based upon a 5-10 year horizon.

Interests rates could go down further so the NAV of intermediate or long term bond funds could go up.
I think I am going to go to a short term fund.

If I could easily put every thing in some CDs at Ally or similar, I likely would do that.
Topic Author
psriniva
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Location: New York

Re: Moving from cash to Long term or Intermediate term bonds

Post by psriniva »

dbr wrote: Sun Sep 06, 2020 8:41 am If you mean by time horizon that you might want this money back in cash without a loss as soon as five years, I would not be buying bonds at all. Savings and CDs are fine. Also remember that five years in, your ten years is now five years.

If you mean you are setting up long term investing, the best starting point is intermediate average duration, low cost bond funds. Long term investing for saving and retirement does not have a horizon, per se. You might better fall back on the famous Boglehead image of voyaging across an ocean where the horizon is always ahead, behind, and around you forever.
Thank you dbr. I appreciate your well thought out response.
I think I will go with Intermediate term bond fund as I do not need to convert this to cash in 5 years. But, since this is money I may need in future, I will have to research maximum drawdown in any given year for intermediate term bonds.
[b]Paddy[/b]
Topic Author
psriniva
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Re: Moving from cash to Long term or Intermediate term bonds

Post by psriniva »

jimkinny wrote: Sun Sep 06, 2020 8:49 am I just took a quick look at the 30 day SEC yield of several bond funds. The yield does not seem worth the term/duration risk to own an intermediate fund vs a short term fund.

I would not buy a long term fund based upon a 5-10 year horizon.

Interests rates could go down further so the NAV of intermediate or long term bond funds could go up.
I think I am going to go to a short term fund.

If I could easily put every thing in some CDs at Ally or similar, I likely would do that.
Thank you Jim for your response.
I am definitely thinking Short term bond fund for part of my cash. It appears that the total performance of these short term bonds seems to be better than that of CDs. Am I wrong?
[b]Paddy[/b]
Topic Author
psriniva
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Re: Moving from cash to Long term or Intermediate term bonds

Post by psriniva »

dbr wrote: Sun Sep 06, 2020 8:41 am If you mean by time horizon that you might want this money back in cash without a loss as soon as five years, I would not be buying bonds at all. Savings and CDs are fine. Also remember that five years in, your ten years is now five years.

If you mean you are setting up long term investing, the best starting point is intermediate average duration, low cost bond funds. Long term investing for saving and retirement does not have a horizon, per se. You might better fall back on the famous Boglehead image of voyaging across an ocean where the horizon is always ahead, behind, and around you forever.
Thank you DBR. I appreciate you for taking the time to respond to my post and for providing your insight based on multiple years of experience I hope. By intermediate average duration, you are probably referring to bond fund ETFs such as VGIT or BIV?
[b]Paddy[/b]
dbr
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Re: Moving from cash to Long term or Intermediate term bonds

Post by dbr »

psriniva wrote: Thu Oct 08, 2020 5:25 am
dbr wrote: Sun Sep 06, 2020 8:41 am If you mean by time horizon that you might want this money back in cash without a loss as soon as five years, I would not be buying bonds at all. Savings and CDs are fine. Also remember that five years in, your ten years is now five years.

If you mean you are setting up long term investing, the best starting point is intermediate average duration, low cost bond funds. Long term investing for saving and retirement does not have a horizon, per se. You might better fall back on the famous Boglehead image of voyaging across an ocean where the horizon is always ahead, behind, and around you forever.
Thank you DBR. I appreciate you for taking the time to respond to my post and for providing your insight based on multiple years of experience I hope. By intermediate average duration, you are probably referring to bond fund ETFs such as VGIT or BIV?
To any of many bond mutual funds or ETFs including Total Bond Market funds, intermediate Treasury mutual funds or ETFs, etc., even an intermediate TIPS fund for those who particularly don't want inflation risk in the investment. I would not hold junk or high yield bond funds or only corporate bonds. There are lots of variations that all work more or less, so picking a particular fund is not very important. Cost matters, though.
Topic Author
psriniva
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Re: Moving from cash to Long term or Intermediate term bonds

Post by psriniva »

Thanks again DBR. :thumbsup
[b]Paddy[/b]
MikeG62
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Re: Moving from cash to Long term or Intermediate term bonds

Post by MikeG62 »

psriniva wrote: Sun Sep 06, 2020 4:11 pm
jimkinny wrote: Sun Sep 06, 2020 8:49 am I just took a quick look at the 30 day SEC yield of several bond funds. The yield does not seem worth the term/duration risk to own an intermediate fund vs a short term fund.

I would not buy a long term fund based upon a 5-10 year horizon.

Interests rates could go down further so the NAV of intermediate or long term bond funds could go up.
I think I am going to go to a short term fund.

If I could easily put every thing in some CDs at Ally or similar, I likely would do that.
Thank you Jim for your response.
I am definitely thinking Short term bond fund for part of my cash. It appears that the total performance of these short term bonds seems to be better than that of CDs. Am I wrong?
Keep in mind that interest rates have dropped dramatically over the last year or so and sit now around record lows. Unless rates go lower (which may mean negative) the future return on these bond funds won't resemble the past.

Returns on CD's are not subject to this risk. You'll get the coupon. Having said that, CD rates aren't all that attractive these days either. However, there are opportunities out there if one looks hard enough and is patient. I've written on them in the last two days in other threads so I won't repeat them here.
Real Knowledge Comes Only From Experience
atdharris
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Re: Moving from cash to Long term or Intermediate term bonds

Post by atdharris »

I just sold my long-term treasury fund. The downside risk far outweighs the upside at these levels, so I am just holding straight cash in my brokerage since short-term treasuries also pay 0%. My other cash is in a CD.
ivgrivchuck
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Re: Moving from cash to Long term or Intermediate term bonds

Post by ivgrivchuck »

psriniva wrote: Sun Sep 06, 2020 8:34 am So, is it still better to move money from cash (0.5% interest) to Short term and Intermediate or Long term bonds.
Many people (including me) have moved from bonds to cash recently due to risks increasing in the bond market and yields falling.

I don't recommend moving the other way.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
patrick
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Re: Moving from cash to Long term or Intermediate term bonds

Post by patrick »

There are bank accounts with higher yields than long term bonds:

Porte Bank pays 3% on balances up to $15,000 in their FDIC insured savings account. They require $1000 of deposits in a month (an ACH push from another of your own accounts seems to qualify) to open the account.

HMBradley pays 3% on balances up to $100,000 in their FDIC insured checking account. They require direct deposit every month (payroll or government benefits) and saving at least 20% of deposits (i.e. total withdrawals no more than 80 percent of total deposits), evaluated quarterly.

US savings bonds also have higher yields than regular bonds:

Series EE savings bonds pay 3.5% if you hold 20 years, with a $10,000 annual purchase limit and no withdrawals allowed in the first year. They also defer federal taxes and avoid state taxes completely.

Series I savings bonds track inflation, with a $10,000 annual purchase limit and no withdrawals allowed in the first year. They also defer federal taxes and avoid state taxes completely, and have a 0% floor on returns so will do better than inflation during any half year with negative inflation.
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