Investing Efunds ($50G)

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Topic Author
Mrxyz
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Joined: Wed Feb 29, 2012 5:12 am

Investing Efunds ($50G)

Post by Mrxyz »

Yes, I know, I know. This is an old topic with lots of prior threads. But I think I have read them all - 13 pages of google site search on 'emergency funds' is probably enough.
Firstly, thanks for all the threads, discussions and recommendations. Absolutely awesome!
(So much to learn, so much to read, not enough time. I am not sure how much time it takes to 'become' a boglehead! Or once you have read x pages and spend y time, you are 'coverted to the good side and are now a Jedi'!! I think I have read bogleheads.org forum thread everyday since I first joined)
But to my real questions;
I have decided to place my E fund into investments and make more money instead of CD (by taking more risk of course).
Plan A = I have read the wiki and livesofts 'method' to have the efund within total portfolio and sell taxable (http://www.bogleheads.org/wiki/Placing_ ... ed_Account). I think I understand how it works.But need someone to look at my numbers and tell me if I should use his method or stick to plan B. Also, the problem is how to explain it to spouse (but that could potentially start another thread!).
Plan B = The simpler option (in my/our mind ... easier to explain to spouse) Place the Efunds in I bonds and in VMLUX and VFIJX (more than 10G each to qualify for Admiral status). Or should I be looking at any other funds like TIPS. Also, any thoughts on how rising rates in future can 'affect' these funds. I can get check writing privileges with these funds.

For sake of my clarity, I have decided to address my portfolio in short steps and E funds is the first step. Thanks to all the recommendations in the past (especially YDNAL, KevinM, retiredjg).
Emergency funds = $50,000 (yes, we increased it from $40G)
My portfolio to see if Plan A is worthwhile???
Debts = Home $200,000 at 3.75% over 9 years
Car $30,000 at 1.99% over 4 years
Tax Filing Status = Married filing jointly, with 3 children
Tax Rate =35% Federal 6.45% State
Age= 46 yrs
Desired Asset allocation= 60% stocks/ 40% bonds (Not sure of the ratio)
Current portfolio -
1. Zero coupon (gift to us) of $10,000 matures in 2015 - NEED TO INVEST THIS WHEN IT MATURES
2. Savings = $20,000 in Vanguard 3 fund lazy portfolio [33% Total bond VBMFX (0.19%), 33% Total Stock VTSMX (0.15%) and 33% Total international VGTSX (0.20%)] - THIS IS START OF MY SAVINGS FOR FUTURE AND RETIREMENT
3. Bank Liquid = $47,000 savings account - THIS IS SLATED FOR HOUSE WORK($20k) AND 529 PLAN($18G). ONLY BIG SPENDING IN THE NEXT 5 YEARS WOULD BE A NEW CAR ($30G). WE KEEP OUR CARS FOR 10 YEARS PLUS.
4. Her IRA =$200,000 Vanguard Target retirement fund 2045 (VTTHX) (0.19%)
5. His IRA= $80,000 TIAA Cref lifecycle fund 2040 (TCLNX) (0.69%)
New annual Contributions
Her contributions – none – stay at home mother now
His IRA –
403b $15,000 Employer contribution
403b $17,000 Employee (my) contribution
457b $15,000 Employee (my) contribution
YES, ALL CONTRIBUTIONS WILL BE MAXED OUT EACH YEAR ($17K FOR THIS YEAR)
Total $89,900/yr in TIAA CREF accounts 2040 lifecycle fund (TCLNX) (0.69%)

Funds available in his 403(b) TIAA CREF funds -
Guaranteed-
TIAA TraditionalEquities 3%
Equities
CREF Stock 0.48%
CREF Global Equities 0.52%
CREF Growth 0.52%
CREF Equity Index TIQRX 0.32
TIAA-CREF Growth & Income Fund - Retirement Class TRGIX 0.72
TIAA-CREF International Equity Fund - Retirement Class TRERX 0.78
TIAA-CREF International Equity Index Fund - Retirement Class TRIEX 0.34
TIAA-CREF Large-Cap Growth Index Fund - Retirement Class TRIRX 0.33
TIAA-CREF Large-Cap Value Fund - Retirement Class TRLCX 0.72
TIAA-CREF Large-Cap Value Index Fund - Retirement Class TRCVX 0.33
TIAA-CREF Mid-Cap Growth Fund - Retirement Class TRGMX 0.74
TIAA-CREF Mid-Cap Value Fund - Retirement Class TRVRX 0.71
TIAA-CREF Real Estate Securities Fund - Retirement Class TRRSX 0.82
TIAA-CREF Small-Cap Blend Index Fund - Retirement Class TRBIX 0.33
TIAA-CREF Small-Cap Equity Fund - Retirement Class TRSEX 0.71
TIAA-CREF S&P 500 Index Fund - Retirement Class TISPX 0.07
Real Estate
TIAA-CREF Equity Index Fund - Retirement ClassReal Estate TRRSX 0.82
Fixed income
CREF Bond Market TBIRX 0.38
CREF Inflation-Linked Bond TIKRX 0.54
Money Market
CREF Money Market TIEXX 0.4
Multi-Asset
CREF Social Choice TRSCX 0.44
TIAA-CREF Lifecycle 2010 Fund - Retirement Class TCLEX 0.64
TIAA-CREF Lifecycle 2015 Fund - Retirement Class TCLIX 0.66
TIAA-CREF Lifecycle 2020 Fund - Retirement Class TCLTX 0.67
TIAA-CREF Lifecycle 2025 Fund - Retirement Class TCLFX 0.68
TIAA-CREF Lifecycle 2030 Fund - Retirement Class TCLNX 0.69
TIAA-CREF Lifecycle 2035 Fund - Retirement Class TCLRX 0.7
TIAA-CREF Lifecycle 2040 Fund - Retirement Class TCLOX 0.7
TIAA-CREF Lifecycle 2045 Fund - Retirement Class TTFRX 0.71
TIAA-CREF Lifecycle 2050 Fund - Retirement Class TLFRX 0.71
TIAA-CREF Lifecycle Retirement Income Fund - Rtmt Class TLIRX 0.63
TIAA-CREF Lifecycle 2055 Fund - Retirement Class TTRLX 0.72
Yearly savings or income to invest =
$80,000 after tax, mortgage (including extra payments), insurance, expenses and kids 529 contributions

YDNAL's recommendations were;
Taxable ($20K)
0% Vanguard Total US Mkt (VTSAX)
6% Vanguard Total International (VTIAX)
New contribution: $80K - $50K VTSAX, $30K VTIAX (or whatever split you want)

Her IRA ($200K)
40% Vanguard Total Bond Mkt (VBTLX)
15% Vanguard Total International (VTIAX)
10% Vanguard Extended Mkt (VEXAX) (completes CREF S&P 500)

TIAA-CREF ($90K)
0% CREF Bond Market TBIRX 0.38
29% TIAA-CREF S&P 500 Index Fund - Retirement Class TISPX 0.07
New contribution: $49K TBIRX

Kevin's recommendations were;
Based on your risk tolerance, 40% stocks, 60% fixed income.
Put stocks in taxable. Put 70% x 40% = 28% in Total Stock Market Index fund, and 30% x 40% = 12% in Total International Stock Index fund.
Assuming the 40% stocks will fill your taxable space, put all of your 403b/457 into Total Bond Market. I might use a different fund, but most Bogleheads probably would support using TBM.
In IRAs, if you have any, move it all, up to $200K, into an INOVA 6-year CD. Contribute max for you and spouse to IRAs each year, either directly to Roth if eligible, or using backdoor Roth if not. If more IRA space, put it in TBM.
In taxable, put the rest of your fixed income into some combination of the following, depending on your marginal tax rate and tolerance for price change due to changing interest rates:
I Bonds, for sure. $10K each for you and spouse, and another $10K if you have a living trust.
Vanguard Intermediate-Term Tax-Exempt bond fund, or perhaps a state specific muni bond fund if you are in a high-tax state and Vanguard offers a fund for your state. This is appropriate if your marginal tax rate is 25% or higher, and you can tolerate a temporary (up to several years) decrease in value if interest rates rise.
CDs, if lower marginal tax rate (seems doubtful based on what you're saying), or if you don't want the interest rate risk and credit risk of a tax-exempt bond fund. Use INOVA 6-year up to max federal insurance limits (minimum $250K, but can go higher with different types of accounts), then PenFed 7-year CD, then Ally 5-year CD.

I have great respect for your recommendations and suggestions but I need help in deciding where to keep the E funds. I/we can take the 'risk' of some 'loss' with potential for more gain than a CD.

I also would not mind if there were any recommendations on the total portfolio. To my untrained and mostly ignorant mind, YDNAL's recommendations 'appear' simpler and easier to initiate. Also, I am not sure how to 'convert' my current investments to suit Kevin's recommendations.

Thanks for reading!
Johm221122
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Re: Investing Efunds ($50G)

Post by Johm221122 »

If you think YDNAL is simpler,go for it.there is no right answer,nobody has crystal ball,there both good. Put EF in savings bonds(I) $20,000 a year.
FinanceFun
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Re: Investing Efunds ($50G)

Post by FinanceFun »

$30k in car debt at 1.99% is a better rate of return then you can get elsewhere with the same risk profile. That would be the first thing I would do.

You then have 20k in efund, and an efund should be VERY low risk. I use BSV as my efund, and take the tax hit. Others use ibonds, CD's, savings accounts, money markets, or short term munies. I highly doubt ANYONE here would recommend taking risk with you efund. Segregate it in something very low risk. Grow it back up to 6 months expenses, and leave it alone.

After you make these two moves, the rest of your plan starts to make more sense.
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Toons
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Re: Investing Efunds ($50G)

Post by Toons »

Id pay off the car if you plan on keeping it and use what is leftover to pay down mortgage :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Topic Author
Mrxyz
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Re: Investing Efunds ($50G)

Post by Mrxyz »

Mrxyz wrote: But to my real questions;
I have decided to place my E fund into investments and make more money instead of CD (by taking more risk of course).
Plan A = I have read the wiki and livesofts 'method' to have the efund within total portfolio and sell taxable (http://www.bogleheads.org/wiki/Placing_ ... ed_Account). I think I understand how it works.But need someone to look at my numbers and tell me if I should use his method or stick to plan B. Also, the problem is how to explain it to spouse (but that could potentially start another thread!).
Plan B = The simpler option (in my/our mind ... easier to explain to spouse) Place the Efunds in I bonds and in VMLUX and VFIJX (more than 10G each to qualify for Admiral status). Or should I be looking at any other funds like TIPS. Also, any thoughts on how rising rates in future can 'affect' these funds. I can get check writing privileges with these funds.

I have great respect for your recommendations and suggestions but I need help in deciding where to keep the E funds. I/we can take the 'risk' of some 'loss' with potential for more gain than a CD.

I also would not mind if there were any recommendations on the total portfolio. To my untrained and mostly ignorant mind, YDNAL's recommendations 'appear' simpler and easier to initiate. Also, I am not sure how to 'convert' my current investments to suit Kevin's recommendations.

Thanks for reading!
Thanks -Toons, FinanceFun and Johm221122 for your responses. I appreciate the feedback.
Any suggestions for the emergency fund placement options other than saving bond I fund?
FinanceFun wrote:$30k in car debt at 1.99% is a better rate of return then you can get elsewhere with the same risk profile. That would be the first thing I would do.

You then have 20k in efund, and an efund should be VERY low risk. I use BSV as my efund, and take the tax hit. Others use ibonds, CD's, savings accounts, money markets, or short term munies. I highly doubt ANYONE here would recommend taking risk with you efund. Segregate it in something very low risk. Grow it back up to 6 months expenses, and leave it alone.

After you make these two moves, the rest of your plan starts to make more sense.
BSV sounds fine being short term. However why not tax exempt funds or GNMA (VMLUX or VFIJX)?
Also, why should I pay off the car debt first which is of lower interest though shorter term than pay off part of the mortgage which is at higher interest?

Thanks
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Toons
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Location: Hills of Tennessee

Re: Investing Efunds ($50G)

Post by Toons »

I use VFSTX (Vanguard Short Term Investment Grade)for short term savings :happy

https://personal.vanguard.com/us/funds/ ... IntExt=INT
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
FinanceFun
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Re: Investing Efunds ($50G)

Post by FinanceFun »

Mrxyz wrote:
FinanceFun wrote:$30k in car debt at 1.99% is a better rate of return then you can get elsewhere with the same risk profile. That would be the first thing I would do.

You then have 20k in efund, and an efund should be VERY low risk. I use BSV as my efund, and take the tax hit. Others use ibonds, CD's, savings accounts, money markets, or short term munies. I highly doubt ANYONE here would recommend taking risk with you efund. Segregate it in something very low risk. Grow it back up to 6 months expenses, and leave it alone.

After you make these two moves, the rest of your plan starts to make more sense.
BSV sounds fine being short term. However why not tax exempt funds or GNMA (VMLUX or VFIJX)?
Also, why should I pay off the car debt first which is of lower interest though shorter term than pay off part of the mortgage which is at higher interest?

Thanks
I like the diversity of BSV. Low standard deviation. I care more about risk metric's and liquidity then I do about after tax yield. Also, look at how it reacts in a time of crisis, 2009, 2011. It's a "flight to safety play"... And one of the most likely scenario where I would need this fund is during an economic crisis... I.e. I lose my job because the market tanks, i don't want to be forced to sell depressed assets to get by. Having $35k in this + unemployment benefits + dividend yield (even a reduced one) gives me a long time to figure life out without sacrificing my future.

Re: Car. My preference is to free up cash flow; pay off any unsecured debt, or debt on depreciating assets, prior to touching the mortgage. Free cash flow gives you both strategic and tactical flexibility. Need to pay down the mortgage? Point the free cash flow at that. Need to do a house repair, re-point the cash flow at that. That flexibility is to me the important differentiator.
boglestan
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Re: Investing Efunds ($50G)

Post by boglestan »

I think Total Bond Market is the sweet spot for me. I currently have some of my E fund in Short Term, but I think this is slightly more conservative than necessary for my needs.

Short-term Investment Grade, on the other hand, behaved much worse in 2008 than either TBM or Short Term, while behaving more like Short Term outside of that time period. Seems like an unappealing choice.
Default User BR
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Re: Investing Efunds ($50G)

Post by Default User BR »

FinanceFun wrote:$30k in car debt at 1.99% is a better rate of return then you can get elsewhere with the same risk profile. That would be the first thing I would do.
My company stable-value fund is returning 2.71% at this time.


Brian
FinanceFun
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Re: Investing Efunds ($50G)

Post by FinanceFun »

Default User BR wrote:
FinanceFun wrote:$30k in car debt at 1.99% is a better rate of return then you can get elsewhere with the same risk profile. That would be the first thing I would do.
My company stable-value fund is returning 2.71% at this time.


Brian
Apples and oranges.

Take out taxes from your rate, and factor in that it has risk.
YDNAL
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Location: Biscayne Bay

Re: Investing Efunds ($50G)

Post by YDNAL »

Mrxyz wrote:I have decided to place my E fund into investments and make more money instead of CD (by taking more risk of course).
Plan A = I have read the wiki and livesofts 'method' to have the efund within total portfolio and sell taxable (http://www.bogleheads.org/wiki/Placing_ ... ed_Account). I think I understand how it works.But need someone to look at my numbers and tell me if I should use his method or stick to plan B. Also, the problem is how to explain it to spouse (but that could potentially start another thread!).
Plan B = The simpler option (in my/our mind ... easier to explain to spouse) Place the Efunds in I bonds and in VMLUX and VFIJX (more than 10G each to qualify for Admiral status). Or should I be looking at any other funds like TIPS. Also, any thoughts on how rising rates in future can 'affect' these funds. I can get check writing privileges with these funds.
XYZ,

To me, the emergency fund should help mitigate loss of job:
  • - not everyone's job, job skills, and demand for their skill is the same;
    - thus, job security is the not same.
Whether to place funds here/there, when EF is needed, is a minor decision... it is NOT a major decision.

Major decisions would be to determine the amount to be saved, establish the Asset Allocation (Stock/Bond split), get rid of debt.
Debts = Home $200,000 at 3.75% over 9 years
Car $30,000 at 1.99% over 4 years
Tax Rate =35% Federal 6.45% State
Age= 46 yrs
Desired Asset allocation= 60% stocks/ 40% bonds (Not sure of the ratio)
Since you are looking for suggestions, take the $50K to buy more Total Stock Mkt and Total International in Taxable and take a part of your Bond allocation in tax-deferred to use as a Short-Term Bond.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Topic Author
Mrxyz
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Joined: Wed Feb 29, 2012 5:12 am

Re: Investing Efunds ($50G)

Post by Mrxyz »

YDNAL wrote:
Mrxyz wrote:I have decided to place my E fund into investments and make more money instead of CD (by taking more risk of course).
Plan A = I have read the wiki and livesofts 'method' to have the efund within total portfolio and sell taxable (http://www.bogleheads.org/wiki/Placing_ ... ed_Account). I think I understand how it works.But need someone to look at my numbers and tell me if I should use his method or stick to plan B. Also, the problem is how to explain it to spouse (but that could potentially start another thread!).
Plan B = The simpler option (in my/our mind ... easier to explain to spouse) Place the Efunds in I bonds and in VMLUX and VFIJX (more than 10G each to qualify for Admiral status). Or should I be looking at any other funds like TIPS. Also, any thoughts on how rising rates in future can 'affect' these funds. I can get check writing privileges with these funds.
XYZ,

To me, the emergency fund should help mitigate loss of job:
  • - not everyone's job, job skills, and demand for their skill is the same;
    - thus, job security is the not same.
Whether to place funds here/there, when EF is needed, is a minor decision... it is NOT a major decision.

Major decisions would be to determine the amount to be saved, establish the Asset Allocation (Stock/Bond split), get rid of debt.
Debts = Home $200,000 at 3.75% over 9 years
Car $30,000 at 1.99% over 4 years
Tax Rate =35% Federal 6.45% State
Age= 46 yrs
Desired Asset allocation= 60% stocks/ 40% bonds (Not sure of the ratio)
Since you are looking for suggestions, take the $50K to buy more Total Stock Mkt and Total International in Taxable and take a part of your Bond allocation in tax-deferred to use as a Short-Term Bond.
So is this what the wiki is talking about? Also explained by livesoft in multiple threads.
In case of emergency sell the stocks in the taxable and either pay taxes on any earnings or do tax loss harvesting if any losses AND then switch similar amount from bonds to stock in the tax advantaged part of portfolio?? Thus, keeping stocks in taxable and bonds in tax advantaged accounts.
Or did I get this wrong?

Thanks
YDNAL
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Re: Investing Efunds ($50G)

Post by YDNAL »

Mrxyz wrote:
YDNAL wrote:Since you are looking for suggestions, take the $50K to buy more Total Stock Mkt and Total International in Taxable and take a part of your Bond allocation in tax-deferred to use as a Short-Term Bond.
So is this what the wiki is talking about? Also explained by livesoft in multiple threads.
In case of emergency sell the stocks in the taxable and either pay taxes on any earnings or do tax loss harvesting if any losses AND then switch similar amount from bonds to stock in the tax advantaged part of portfolio?? Thus, keeping stocks in taxable and bonds in tax advantaged accounts.
Or did I get this wrong?

Thanks
XYZ,

You got it!

Unlike livesoft, I rather have all capital gains and pay taxes than harvest a loss... it means that I made money, not lost money. :wink:

Seriously, if you have to sell in Taxable and have losers (individual tax lots), it makes sense to sell the losers and get a tax brake while you are at it.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Topic Author
Mrxyz
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Re: Investing Efunds ($50G)

Post by Mrxyz »

YDNAL wrote:
Mrxyz wrote:
YDNAL wrote: You got it!

Unlike livesoft, I rather have all capital gains and pay taxes than harvest a loss... it means that I made money, not lost money. :wink:

Seriously, if you have to sell in Taxable and have losers (individual tax lots), it makes sense to sell the losers and get a tax brake while you are at it.
YESSS! I am shocked that I took so long to figure this out and I think I am not the only one........
Of course, I want to make gains and pay taxes but I pray the emergency never comes.....

Anyway, to get this perfect- I just buy more (50G)of the total Stock and total international and then 'move' same amount (50G) in my bonds portfolio ( which is unfortunately TIAACREF), from total bond index to short term bonds? Or Do I keep it unchanged??
As a reference, I have my portfolio listed in my original post with changes highlighted.

Thanks
Default User BR
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Re: Investing Efunds ($50G)

Post by Default User BR »

FinanceFun wrote:
Default User BR wrote:
FinanceFun wrote:$30k in car debt at 1.99% is a better rate of return then you can get elsewhere with the same risk profile. That would be the first thing I would do.
My company stable-value fund is returning 2.71% at this time.
Apples and oranges.

Take out taxes from your rate, and factor in that it has risk.
Tax-deferred, so I don't know what those will be. Nothing for now. It has risk, but so small that it's comparable.

If you don't like that, then I-bonds. To me it's ludicrous to give up historically cheap debt.


Brian
YDNAL
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Re: Investing Efunds ($50G)

Post by YDNAL »

Mrxyz wrote:Anyway, to get this perfect- I just buy more (50G)of the total Stock and total international and then 'move' same amount (50G) in my bonds portfolio ( which is unfortunately TIAACREF), from total bond index to short term bonds? Or Do I keep it unchanged??
As a reference, I have my portfolio listed in my original post with changes highlighted.

Thanks
Regarding your question to keep Bonds unchanged, the amount of risk you take (interest rate, largely) is personal. Total Bond can drop 5%+ for every 1% rise in interest rates. ST Bond about 2% drop.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
FinanceFun
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Re: Investing Efunds ($50G)

Post by FinanceFun »

Default User BR wrote:
FinanceFun wrote:
Default User BR wrote:
FinanceFun wrote:$30k in car debt at 1.99% is a better rate of return then you can get elsewhere with the same risk profile. That would be the first thing I would do.
My company stable-value fund is returning 2.71% at this time.
Apples and oranges.

Take out taxes from your rate, and factor in that it has risk.
Tax-deferred, so I don't know what those will be. Nothing for now. It has risk, but so small that it's comparable.

If you don't like that, then I-bonds. To me it's ludicrous to give up historically cheap debt.


Brian
So you do the "sell stock in taxable, then transfer non taxable bond holdings to stock to maintain AA."

That is legitimate, however... Given there is no ticker, standard deviation, duration, or other information provided about your stable value fund... I can't see what risk you are exposed to over the same duration as the loan.. Most importantly interest rate risk.
Default User BR
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Re: Investing Efunds ($50G)

Post by Default User BR »

FinanceFun wrote:So you do the "sell stock in taxable, then transfer non taxable bond holdings to stock to maintain AA."

That is legitimate, however... Given there is no ticker, standard deviation, duration, or other information provided about your stable value fund... I can't see what risk you are exposed to over the same duration as the loan.. Most importantly interest rate risk.
Interest-rate risk? That's not normally what we mean by "risk" in these cases. I'll point out that paying off fixed-interest loans also carries such risk. If you pay it and interest rates go up, you lose out. I think that's a reasonably likely scenario.


Brian
FinanceFun
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Re: Investing Efunds ($50G)

Post by FinanceFun »

Default User BR wrote:
FinanceFun wrote:So you do the "sell stock in taxable, then transfer non taxable bond holdings to stock to maintain AA."

That is legitimate, however... Given there is no ticker, standard deviation, duration, or other information provided about your stable value fund... I can't see what risk you are exposed to over the same duration as the loan.. Most importantly interest rate risk.
Interest-rate risk? That's not normally what we mean by "risk" in these cases. I'll point out that paying off fixed-interest loans also carries such risk. If you pay it and interest rates go up, you lose out. I think that's a reasonably likely scenario.


Brian
It doesn't change what you are paying. On car debt, you still owe what you owe... You aren't going to refi. Your yield in the stable value fund on the other hand, will lose duration in NAV for every 1% interest rate increase. On a 3-5 year timeline, who comes out ahead? Care to share standard deviation, and duration on your fund? Put some pen to paper on it?
Default User BR
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Re: Investing Efunds ($50G)

Post by Default User BR »

FinanceFun wrote:It doesn't change what you are paying. On car debt, you still owe what you owe... You aren't going to refi.
You missed the point. If rates go up, then you the money you put into paying off the debt could be earning more than what you are paying in interest even in the safest assets, say CDs. That is a form of interest rate risk.
Your yield in the stable value fund on the other hand, will lose duration in NAV for every 1% interest rate increase. On a 3-5 year timeline, who comes out ahead? Care to share standard deviation, and duration on your fund? Put some pen to paper on it?
What standard deviation? It's a stable-value, it can't go down. It goes up in a fairly steady manner. The growth of $10000 graph is essentially a straight line upward (although a shallow angle).

The rate of course changes at times. The only real rate risk is that StV funds tend to lag changes in rates of the products that they use. Of course, that cuts both ways. When rates go down, as they have, it takes a while for them to catch up.


Brian
Topic Author
Mrxyz
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Re: Investing Efunds ($50G)

Post by Mrxyz »

Thanks for all your thoughts and recommendations.
But to get back to the question of bonds and their placement, I have some questions which will probably sound stupid to all the experienced and knowledgable investors out there but here goes......

-At present, interest rates are low and will eventually go up, but we do not know when
-If and when interest rates go up, the total returns from bond will reduce unless you hold the fund longer than than the average duration of the bond holding(s) in the fund to 'recoup principal/NAV loss'.
As explained by this quote from GR2BOUTDOORS;
"All things being equal, for every 1% change upwards in the current interest rate will result in the following NAV decline:
Short Term - Duration of say 1.4 years * 1% = a 1.4% decline in NAV, but over time the yield per share will rise and compensate you, though not immediately.
Limited Term - Duration of say 2.2 years * 1% = 2.2% decline in NAV, can take you 2.2 years to recoup principal loss in form of higher yield
Intermediate Term - Duration of say 5.4 years = 5.4% decline in NAV, can take you up to 5.4 years to recoup principal loss in form of higher dividends
Long Term - Duration of 6.8 years = 6.8% decline in NAV, can take up to 6.8 years to recoup principal loss in form of higher dividends"

-So you should not put part of your portfolio in such funds when interest rates are likely going up

Question 1 = But if you do so then you are 'timing the market' which is not a right thing to do?? correct?
Question 2 = Also, if you know you are going to lose money why not get out of bond market and move to CD/fixed income or all stock?? I mean, you will know when rates go up or down and will have time (I think) to move your money........?

Possible Answer = Unless I guess, you put money in Total Bond Market which contains all types of bonds?

To add to my confusion, the discussion threads on GNMA funds talk about "investor holding GNMA have no reason to regret" (quoting nisiprius)!
Question 3 = Why not place your bond portion of portfolio in GNMA instead of Total bond?

I appreciate your reading and responding.
FinanceFun
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Re: Investing Efunds ($50G)

Post by FinanceFun »

Default User BR wrote:
FinanceFun wrote:It doesn't change what you are paying. On car debt, you still owe what you owe... You aren't going to refi.
You missed the point. If rates go up, then you the money you put into paying off the debt could be earning more than what you are paying in interest even in the safest assets, say CDs. That is a form of interest rate risk.
Your yield in the stable value fund on the other hand, will lose duration in NAV for every 1% interest rate increase. On a 3-5 year timeline, who comes out ahead? Care to share standard deviation, and duration on your fund? Put some pen to paper on it?
What standard deviation? It's a stable-value, it can't go down. It goes up in a fairly steady manner. The growth of $10000 graph is essentially a straight line upward (although a shallow angle).

The rate of course changes at times. The only real rate risk is that StV funds tend to lag changes in rates of the products that they use. Of course, that cuts both ways. When rates go down, as they have, it takes a while for them to catch up.


Brian

So it's a magic investment that has never gone down, isn't exposed to interest rate risk, isn't affected by credit risk, and beats the 10y tres by over 70 basis points... Do they buy magic beans?

Return in a rising rate environment (1% rise):
Car debt year 1-5: 1.99%
Stable value y1: rate - duration
Stable value y2-5: rate

Which comes out ahead? Since I have no data on your fund, I have no idea. We are talking about a lump sum paid today, and measuring over the duration of the loan.
Grt2bOutdoors
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Re: Investing Efunds ($50G)

Post by Grt2bOutdoors »

Mrxyz wrote:Thanks for all your thoughts and recommendations.
But to get back to the question of bonds and their placement, I have some questions which will probably sound stupid to all the experienced and knowledgable investors out there but here goes......

-At present, interest rates are low and will eventually go up, but we do not know when
-If and when interest rates go up, the total returns from bond will reduce unless you hold the fund longer than than the average duration of the bond holding(s) in the fund to 'recoup principal/NAV loss'.
As explained by this quote from GR2BOUTDOORS;
"All things being equal, for every 1% change upwards in the current interest rate will result in the following NAV decline:
Short Term - Duration of say 1.4 years * 1% = a 1.4% decline in NAV, but over time the yield per share will rise and compensate you, though not immediately.
Limited Term - Duration of say 2.2 years * 1% = 2.2% decline in NAV, can take you 2.2 years to recoup principal loss in form of higher yield
Intermediate Term - Duration of say 5.4 years = 5.4% decline in NAV, can take you up to 5.4 years to recoup principal loss in form of higher dividends
Long Term - Duration of 6.8 years = 6.8% decline in NAV, can take up to 6.8 years to recoup principal loss in form of higher dividends"

-So you should not put part of your portfolio in such funds when interest rates are likely going up

Question 1 = But if you do so then you are 'timing the market' which is not a right thing to do?? correct?
Question 2 = Also, if you know you are going to lose money why not get out of bond market and move to CD/fixed income or all stock?? I mean, you will know when rates go up or down and will have time (I think) to move your money........?

Possible Answer = Unless I guess, you put money in Total Bond Market which contains all types of bonds?

To add to my confusion, the discussion threads on GNMA funds talk about "investor holding GNMA have no reason to regret" (quoting nisiprius)!
Question 3 = Why not place your bond portion of portfolio in GNMA instead of Total bond?

I appreciate your reading and responding.

Please do not misunderstand me. You had originally asked what occurs when rates change, that is the basis for my explanation which you quoted above. Most of us do not advocate market timing. We do advocate maintaining a diversified portfolio of investments, preferably low-cost or no-cost if you can find it that will best assist you in meeting your IPS and asset allocation plan. You take risk you are comfortable with. If you know your time-horizon is short as in the case of your 2-3 year stated time period, why would you place your money at higher than needed risk levels - a prudent person would not call that market timing.

Question 2 - There are many roads to Dublin, one does not need to be in a bond fund to be in fixed income. A CD is a form of fixed income as is commercial paper, Treasury instruments, bonds held to maturity, cash - the value is known, it has a stable value, can be easily liquidated in times of turbulence.

Question 3 - Suggest you search a thread where Larry Swedroe opines on GNMA - I believe he provides a thorough explanation on GNMA's.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Default User BR
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Re: Investing Efunds ($50G)

Post by Default User BR »

FinanceFun wrote:So it's a magic investment that has never gone down, isn't exposed to interest rate risk, isn't affected by credit risk, and beats the 10y tres by over 70 basis points... Do they buy magic beans?
It doesn't sound like you know what a stable-value fund is. It's a fund that uses high-quality debt instruments with insurance wrappers to guarantee the principal and periodic rate. There's no "magic". These funds have been around a long time, and through many different rate environments with very little trouble.
Stable value y1: rate - duration
Stable value y2-5: rate
What does rate-duration mean? Each day you get the annualized rate for the time period (in my plan the StV rate is set quarterly). Unless you're using "duration" in a non-standard manner, I don't see how that enters into it.


Brian
FinanceFun
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Re: Investing Efunds ($50G)

Post by FinanceFun »

Default User BR wrote:
FinanceFun wrote:So it's a magic investment that has never gone down, isn't exposed to interest rate risk, isn't affected by credit risk, and beats the 10y tres by over 70 basis points... Do they buy magic beans?
It doesn't sound like you know what a stable-value fund is. It's a fund that uses high-quality debt instruments with insurance wrappers to guarantee the principal and periodic rate. There's no "magic". These funds have been around a long time, and through many different rate environments with very little trouble.
Correct. I don't know what it is, which is what I have been asking for 4-5 posts now...

Default User BR wrote:Stable value y2-5: rate
What does rate-duration mean? Each day you get the annualized rate for the time period (in my plan the StV rate is set quarterly). Unless you're using "duration" in a non-standard manner, I don't see how that enters into it.


Brian
Rate minus duration... based on the assumptions i outlined.
Default User BR
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Re: Investing Efunds ($50G)

Post by Default User BR »

FinanceFun wrote:Correct. I don't know what it is, which is what I have been asking for 4-5 posts now...
http://www.bogleheads.org/wiki/Stable_Value_Fund
Rate minus duration... based on the assumptions i outlined.
How is that equation meaningful? What does "duration" mean in your calculation, and why would you subtract it from the rate?

Normally duration has to do with some average duration of the holdings, and is used to estimate the rate sensitivity of the principal (usually share NAV for funds). Stable-value funds have no such sensitivity because the principal neither rises nor falls based on rates.


Brian
FinanceFun
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Re: Investing Efunds ($50G)

Post by FinanceFun »

Default User BR wrote:
FinanceFun wrote:Correct. I don't know what it is, which is what I have been asking for 4-5 posts now...
http://www.bogleheads.org/wiki/Stable_Value_Fund
Ahh.. No wonder I never heard of it. Its never been an option for me. Sounds like a pretty awesome thing if its yielding 2.7%! I would probably double my e-fund if I had access to that rate of return at that risk profile.
Default User BR wrote:
Rate minus duration... based on the assumptions i outlined.
How is that equation meaningful? What does "duration" mean in your calculation, and why would you subtract it from the rate?

Normally duration has to do with some average duration of the holdings, and is used to estimate the rate sensitivity of the principal (usually share NAV for funds). Stable-value funds have no such sensitivity because the principal neither rises nor falls based on rates.

Brian
Again. I was operating under the assumption that your "stable value fund" was a bond fund (think BSV), and the assumption of a risk of 1% increase in interest rates. Therefore, your NAV would drop by the duration of the fund in this scenario - and I was looking to simplistically capture that concept in y1. Get it?
Default User BR
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Re: Investing Efunds ($50G)

Post by Default User BR »

FinanceFun wrote:Again. I was operating under the assumption that your "stable value fund" was a bond fund (think BSV), and the assumption of a risk of 1% increase in interest rates.
Understood.


Brian
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Pennstateclj1
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Re: Investing Efunds ($50G)

Post by Pennstateclj1 »

Tax Rate =35% Federal 6.45% State

At these tax rates, I'd be considering tax-exempt bonds for sure if bond funds are the route you decide to go.
Topic Author
Mrxyz
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Re: Investing Efunds ($50G)

Post by Mrxyz »

GRT2BOUTDOORS wrote:
Mrxyz wrote:Thanks for all your thoughts and recommendations.
But to get back to the question of bonds and their placement, I have some questions which will probably sound stupid to all the experienced and knowledgable investors out there but here goes......

-At present, interest rates are low and will eventually go up, but we do not know when
-If and when interest rates go up, the total returns from bond will reduce unless you hold the fund longer than than the average duration of the bond holding(s) in the fund to 'recoup principal/NAV loss'.
As explained by this quote from GR2BOUTDOORS;
"All things being equal, for every 1% change upwards in the current interest rate will result in the following NAV decline:
Short Term - Duration of say 1.4 years * 1% = a 1.4% decline in NAV, but over time the yield per share will rise and compensate you, though not immediately.
Limited Term - Duration of say 2.2 years * 1% = 2.2% decline in NAV, can take you 2.2 years to recoup principal loss in form of higher yield
Intermediate Term - Duration of say 5.4 years = 5.4% decline in NAV, can take you up to 5.4 years to recoup principal loss in form of higher dividends
Long Term - Duration of 6.8 years = 6.8% decline in NAV, can take up to 6.8 years to recoup principal loss in form of higher dividends"

-So you should not put part of your portfolio in such funds when interest rates are likely going up

Question 1 = But if you do so then you are 'timing the market' which is not a right thing to do?? correct?
Question 2 = Also, if you know you are going to lose money why not get out of bond market and move to CD/fixed income or all stock?? I mean, you will know when rates go up or down and will have time (I think) to move your money........?

Possible Answer = Unless I guess, you put money in Total Bond Market which contains all types of bonds?

To add to my confusion, the discussion threads on GNMA funds talk about "investor holding GNMA have no reason to regret" (quoting nisiprius)!
Question 3 = Why not place your bond portion of portfolio in GNMA instead of Total bond?

I appreciate your reading and responding.

Please do not misunderstand me. You had originally asked what occurs when rates change, that is the basis for my explanation which you quoted above. Most of us do not advocate market timing. We do advocate maintaining a diversified portfolio of investments, preferably low-cost or no-cost if you can find it that will best assist you in meeting your IPS and asset allocation plan. You take risk you are comfortable with. If you know your time-horizon is short as in the case of your 2-3 year stated time period, why would you place your money at higher than needed risk levels - a prudent person would not call that market timing.

Question 2 - There are many roads to Dublin, one does not need to be in a bond fund to be in fixed income. A CD is a form of fixed income as is commercial paper, Treasury instruments, bonds held to maturity, cash - the value is known, it has a stable value, can be easily liquidated in times of turbulence.

Question 3 - Suggest you search a thread where Larry Swedroe opines on GNMA - I believe he provides a thorough explanation on GNMA's.
Thanks for your reply.
No, I did not misunderstand what you had to say but THANKS for explaining the basics to me.
My questions stem from my ignorance rather than 'I think this is the way to do it'. So I am probing and confirming what I thought / understood was right or wrong (wrong in this case!). So again, thanks.

Going back to basics, I have decided to place funds in the manner described by wiki and reexplained by livesoft and YDNAL ==== place the funds in taxable and liquidate them in case of emergency, and switch from bonds to stocks in amount used in emergency or if not needed, leave them untouched.......keeping the AA of the whole portfolio unchanged.

I appreciate your advice.
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