Reacting to low interest rates

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
Triple digit golfer
Posts: 5289
Joined: Mon May 18, 2009 5:57 pm

Reacting to low interest rates

Post by Triple digit golfer » Mon May 11, 2020 7:15 pm

I assume that most Bogleheads are doing nothing different in response to low interest rates, and simply accepting that that's what the market is giving.

For those who are reacting to low interest rates, what are you doing differently?

A. Increasing equity allocation. You're taking more risk, but what choice do you have, right? Equities seem expensive (still), bonds are expensive, cash gives almost nothing and likely negative return after inflation, so might as well go with the investment that is likely to have a positive long-term real return.

B. Reducing emergency funds or cash savings to perhaps a month of expenses or less, knowing that if you invest more, you're likely to beat the return of cash. You know that you have a sufficient taxable account and can withdraw from it if needed. Inspired by: viewtopic.php?t=311324

C. Investing in higher yielding corporate bonds or perhaps even junk bonds. You aren't ready to jump into more equities, but you'll take on additional risk in the form of higher risk bonds with the bond portion of your long-term money.

Our (somewhat new; never had one before) IPS says to keep six months of expenses in savings outside of our portfolio, but as interest rates keep dropping, I keep questioning why I'm doing this. Our taxable account is roughly 3x annual expenses and besides the savings is all in the Vanguard 500 Index. Why wouldn't I just dump the "emergency fund" into our portfolio AA and then sell whatever's high in the case of an emergency? I'd save a bit on my income tax bill, would eliminate cash drag, and whenever I need money I just sell from the taxable account. If I need to sell bonds, I sell stocks in taxable and exchange bonds for stocks in tax-deferred.

Therefore, I am strongly considering B. This would involve dumping about $25k into the market right now, since we have around $30k sitting in an Ally Savings earning us a whopping 1.25% as of tomorrow. Our portfolio is about 2% light on stocks so "new" money would go to stocks.

mortfree
Posts: 2320
Joined: Mon Sep 12, 2016 7:06 pm

Re: Reacting to low interest rates

Post by mortfree » Mon May 11, 2020 7:17 pm

What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.

Topic Author
Triple digit golfer
Posts: 5289
Joined: Mon May 18, 2009 5:57 pm

Re: Reacting to low interest rates

Post by Triple digit golfer » Mon May 11, 2020 7:22 pm

mortfree wrote:
Mon May 11, 2020 7:17 pm
What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.
Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.

averagedude
Posts: 1139
Joined: Sun May 13, 2018 3:41 pm

Re: Reacting to low interest rates

Post by averagedude » Mon May 11, 2020 7:22 pm

Seems like you understand basic investing principals. Assuming your job is stable and your savings rate is in the double digits, option B seems reasonable to me.

jhsu802701
Posts: 148
Joined: Fri Apr 03, 2020 2:42 pm

Re: Reacting to low interest rates

Post by jhsu802701 » Mon May 11, 2020 7:27 pm

Buy international stocks! They're MUCH cheaper than large cap US stocks.

That said, you must keep enough in money market funds to ensure that you're never forced to sell cheap.

mortfree
Posts: 2320
Joined: Mon Sep 12, 2016 7:06 pm

Re: Reacting to low interest rates

Post by mortfree » Mon May 11, 2020 7:36 pm

Triple digit golfer wrote:
Mon May 11, 2020 7:22 pm
mortfree wrote:
Mon May 11, 2020 7:17 pm
What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.
Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.
What if it drops 30-40-50%?

It would be painful for ME to sell in that situation.

fatcoffeedrinker
Posts: 207
Joined: Mon Mar 23, 2020 2:03 pm

Re: Reacting to low interest rates

Post by fatcoffeedrinker » Mon May 11, 2020 7:47 pm

mortfree wrote:
Mon May 11, 2020 7:36 pm
Triple digit golfer wrote:
Mon May 11, 2020 7:22 pm
mortfree wrote:
Mon May 11, 2020 7:17 pm
What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.
Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.
What if it drops 30-40-50%?

It would be painful for ME to sell in that situation.
Bonds are going to drop 30-40-50%? Just keep bonds high quality.

frugalprof
Posts: 34
Joined: Tue Dec 04, 2012 2:32 pm

Re: Reacting to low interest rates

Post by frugalprof » Mon May 11, 2020 7:49 pm

Most of this year's contributions to my 403b are going to TIAA Traditional, guaranteed 3%. :D

mortfree
Posts: 2320
Joined: Mon Sep 12, 2016 7:06 pm

Re: Reacting to low interest rates

Post by mortfree » Mon May 11, 2020 7:49 pm

fatcoffeedrinker wrote:
Mon May 11, 2020 7:47 pm
mortfree wrote:
Mon May 11, 2020 7:36 pm
Triple digit golfer wrote:
Mon May 11, 2020 7:22 pm
mortfree wrote:
Mon May 11, 2020 7:17 pm
What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.
Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.
What if it drops 30-40-50%?

It would be painful for ME to sell in that situation.
Bonds are going to drop 30-40-50%? Just keep bonds high quality.
Bonds in taxable?

Grt2bOutdoors
Posts: 22549
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Reacting to low interest rates

Post by Grt2bOutdoors » Mon May 11, 2020 8:01 pm

jhsu802701 wrote:
Mon May 11, 2020 7:27 pm
Buy international stocks! They're MUCH cheaper than large cap US stocks.

That said, you must keep enough in money market funds to ensure that you're never forced to sell cheap.
They are cheaper for a reason!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Topic Author
Triple digit golfer
Posts: 5289
Joined: Mon May 18, 2009 5:57 pm

Re: Reacting to low interest rates

Post by Triple digit golfer » Mon May 11, 2020 8:38 pm

mortfree wrote:
Mon May 11, 2020 7:36 pm
Triple digit golfer wrote:
Mon May 11, 2020 7:22 pm
mortfree wrote:
Mon May 11, 2020 7:17 pm
What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.
Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.
What if it drops 30-40-50%?

It would be painful for ME to sell in that situation.
If stocks are lagging, you sell bonds. If stocks are ahead, it means you have gains or at least that stocks have outperformed bonds. You wouldn't be selling anything after a 30, 40, or 50% drop unless you had a significantly large emergency, in which case your portfolio is fair game anyway.

mortfree
Posts: 2320
Joined: Mon Sep 12, 2016 7:06 pm

Re: Reacting to low interest rates

Post by mortfree » Mon May 11, 2020 8:48 pm

Triple digit golfer wrote:
Mon May 11, 2020 8:38 pm
mortfree wrote:
Mon May 11, 2020 7:36 pm
Triple digit golfer wrote:
Mon May 11, 2020 7:22 pm
mortfree wrote:
Mon May 11, 2020 7:17 pm
What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.
Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.
What if it drops 30-40-50%?

It would be painful for ME to sell in that situation.
If stocks are lagging, you sell bonds. If stocks are ahead, it means you have gains or at least that stocks have outperformed bonds. You wouldn't be selling anything after a 30, 40, or 50% drop unless you had a significantly large emergency, in which case your portfolio is fair game anyway.
Ok. What bonds are you holding and are they in a taxable account?

Thanks for answering/responding.

Topic Author
Triple digit golfer
Posts: 5289
Joined: Mon May 18, 2009 5:57 pm

Re: Reacting to low interest rates

Post by Triple digit golfer » Mon May 11, 2020 8:50 pm

mortfree wrote:
Mon May 11, 2020 8:48 pm
Triple digit golfer wrote:
Mon May 11, 2020 8:38 pm
mortfree wrote:
Mon May 11, 2020 7:36 pm
Triple digit golfer wrote:
Mon May 11, 2020 7:22 pm
mortfree wrote:
Mon May 11, 2020 7:17 pm
What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.
Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.
What if it drops 30-40-50%?

It would be painful for ME to sell in that situation.
If stocks are lagging, you sell bonds. If stocks are ahead, it means you have gains or at least that stocks have outperformed bonds. You wouldn't be selling anything after a 30, 40, or 50% drop unless you had a significantly large emergency, in which case your portfolio is fair game anyway.
Ok. What bonds are you holding and are they in a taxable account?

Thanks for answering/responding.
Total Bond Index, in a tax deferred account.

To sell bonds, I would sell equities in my taxable account and simultaneously exchange bonds to equities in the tax deferred account.

Any issues with it that I'm not seeing? I welcome any criticisms.

flyingaway
Posts: 2714
Joined: Fri Jan 17, 2014 10:19 am

Re: Reacting to low interest rates

Post by flyingaway » Mon May 11, 2020 9:02 pm

I don't know what to do, so I am doing nothing.
Actually, working one more year solves all problems.

jhsu802701
Posts: 148
Joined: Fri Apr 03, 2020 2:42 pm

Re: Reacting to low interest rates

Post by jhsu802701 » Mon May 11, 2020 9:25 pm

Grt2bOutdoors wrote:
Mon May 11, 2020 8:01 pm
jhsu802701 wrote:
Mon May 11, 2020 7:27 pm
Buy international stocks! They're MUCH cheaper than large cap US stocks.

That said, you must keep enough in money market funds to ensure that you're never forced to sell cheap.
They are cheaper for a reason!
When there's irrational exuberance in the financial markets, there's never a shortage of rationalizations for it.

Grt2bOutdoors
Posts: 22549
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Reacting to low interest rates

Post by Grt2bOutdoors » Mon May 11, 2020 9:32 pm

jhsu802701 wrote:
Mon May 11, 2020 9:25 pm
Grt2bOutdoors wrote:
Mon May 11, 2020 8:01 pm
jhsu802701 wrote:
Mon May 11, 2020 7:27 pm
Buy international stocks! They're MUCH cheaper than large cap US stocks.

That said, you must keep enough in money market funds to ensure that you're never forced to sell cheap.
They are cheaper for a reason!
When there's irrational exuberance in the financial markets, there's never a shortage of rationalizations for it.
I've owned international equities for a very long time, very long......they have not come close in terms of performance as the domestic markets in terms of GDP growth. As I said before, there is a reason for it. Irrational exhuberance, maybe a bit of that and may be rationalization of what is growth and what is not.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

User avatar
joe8d
Posts: 4429
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: Reacting to low interest rates

Post by joe8d » Mon May 11, 2020 9:32 pm

Unfortunately,for us that want interest on our savings,this Pandemic will cause rates to be at the bottom to accommodate credit borrowers that will needed to restart the economy.
All the Best, | Joe

jhsu802701
Posts: 148
Joined: Fri Apr 03, 2020 2:42 pm

Re: Reacting to low interest rates

Post by jhsu802701 » Mon May 11, 2020 9:34 pm

Grt2bOutdoors wrote:
Mon May 11, 2020 9:32 pm
jhsu802701 wrote:
Mon May 11, 2020 9:25 pm
Grt2bOutdoors wrote:
Mon May 11, 2020 8:01 pm
jhsu802701 wrote:
Mon May 11, 2020 7:27 pm
Buy international stocks! They're MUCH cheaper than large cap US stocks.

That said, you must keep enough in money market funds to ensure that you're never forced to sell cheap.
They are cheaper for a reason!
When there's irrational exuberance in the financial markets, there's never a shortage of rationalizations for it.
I've owned international equities for a very long time, very long......they have not come close in terms of performance as the domestic markets in terms of GDP growth. As I said before, there is a reason for it. Irrational exhuberance, maybe a bit of that and may be rationalization of what is growth and what is not.
For how long have you owned international equities? There are cycles. Many people were giving on on large cap US stocks in 1974 and 1982.

KlangFool
Posts: 16603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Mon May 11, 2020 9:37 pm

Triple digit golfer wrote:
Mon May 11, 2020 7:22 pm
mortfree wrote:
Mon May 11, 2020 7:17 pm
What if everything is not high when you need the money for an emergency?

I’m sitting on 75k cash right now.
Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.
What if both bonds and stock drop at the same time and we have a short-term deflation?

CASH is a separate asset class. Diversification is a good thing.

I am diversified. I am prepared for deflation, inflation, hyperinflation, and anything in between.

KlangFool
Last edited by KlangFool on Mon May 11, 2020 9:39 pm, edited 1 time in total.

KlangFool
Posts: 16603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Mon May 11, 2020 9:38 pm

Triple digit golfer wrote:
Mon May 11, 2020 7:15 pm

I assume that most Bogleheads are doing nothing different in response to low interest rates, and simply accepting that that's what the market is giving.
Triple digit golfer,

How do you know that the interest rate could not go lower? For example, a negative interest rate.

KlangFool

anoop
Posts: 1429
Joined: Tue Mar 04, 2014 1:33 am

Re: Reacting to low interest rates

Post by anoop » Mon May 11, 2020 9:46 pm

I was buying individual t-bills but I have stopped. I'm trying to understand how munis work since they seem to pay a lot more interest. I intend to buy only highly rated ones. The only other alternative appears to be online savings account but I don't want to open a bunch of new accounts after only just closing all of them to consolidate everything at a single institution.

User avatar
whodidntante
Posts: 8300
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Reacting to low interest rates

Post by whodidntante » Mon May 11, 2020 9:57 pm

The days of expecting a positive real after-tax return on safe fixed income are in the past. They may come back, but if so, there will be a significant bond sell off to get there. So a reasonable "reaction" is to lower your return expectations for safe fixed income. Specifically, you should expect to lose purchasing power for every dollar of safe fixed income you own today. By knowing this, you should save more and assume lower withdrawals than your daddy did.

Angst
Posts: 2312
Joined: Sat Jun 09, 2007 11:31 am

Re: Reacting to low interest rates

Post by Angst » Mon May 11, 2020 9:59 pm

Should this be more of a "Do I Still Need an Emergency Fund" thread? If so, I think the answer might be "no". For people who have multiple years worth of taxable savings already I generally believe that "Emergency Funds", per se, are unnecessary. Have you already put dollars into I-Bonds? They have a lot going for them. I'd consider perhaps putting 20K of the 25K into them and maybe the rest into anything from equity to EE Bonds. Yes, that's quite a range. Another way of saying it just doesn't matter that much. Most everything is fairly "liquid" when it comes down to it. Hopefully those emergencies are infrequent and uncommon.

Grt2bOutdoors
Posts: 22549
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Reacting to low interest rates

Post by Grt2bOutdoors » Mon May 11, 2020 10:09 pm

jhsu802701 wrote:
Mon May 11, 2020 9:34 pm
Grt2bOutdoors wrote:
Mon May 11, 2020 9:32 pm
jhsu802701 wrote:
Mon May 11, 2020 9:25 pm
Grt2bOutdoors wrote:
Mon May 11, 2020 8:01 pm
jhsu802701 wrote:
Mon May 11, 2020 7:27 pm
Buy international stocks! They're MUCH cheaper than large cap US stocks.

That said, you must keep enough in money market funds to ensure that you're never forced to sell cheap.
They are cheaper for a reason!
When there's irrational exuberance in the financial markets, there's never a shortage of rationalizations for it.
I've owned international equities for a very long time, very long......they have not come close in terms of performance as the domestic markets in terms of GDP growth. As I said before, there is a reason for it. Irrational exhuberance, maybe a bit of that and may be rationalization of what is growth and what is not.
For how long have you owned international equities? There are cycles. Many people were giving on on large cap US stocks in 1974 and 1982.
I was not old enough to buy stock in those years mentioned, but have owned international equities from the time I was and their performance has been middling compared to US equities. If you want to talk about exhuberance, holding an even split domestic/international is to me, irrational, especially when the laws and financial disclosures and practices of certain countries are shall we say "questionable".
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

KlangFool
Posts: 16603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Mon May 11, 2020 10:32 pm

whodidntante wrote:
Mon May 11, 2020 9:57 pm
The days of expecting a positive real after-tax return on safe fixed income are in the past. They may come back, but if so, there will be a significant bond sell off to get there. So a reasonable "reaction" is to lower your return expectations for safe fixed income. Specifically, you should expect to lose purchasing power for every dollar of safe fixed income you own today. By knowing this, you should save more and assume lower withdrawals than your daddy did.
whodidntante,

If that is true, why the YTD return of my VFIUX is 7.26%?

Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX)
https://finance.yahoo.com/quote/VFIUX?p=VFIUX

Versus VTSAX YTD return of -10.38%

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool

User avatar
whodidntante
Posts: 8300
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Reacting to low interest rates

Post by whodidntante » Mon May 11, 2020 10:34 pm

KlangFool wrote:
Mon May 11, 2020 10:32 pm
whodidntante wrote:
Mon May 11, 2020 9:57 pm
The days of expecting a positive real after-tax return on safe fixed income are in the past. They may come back, but if so, there will be a significant bond sell off to get there. So a reasonable "reaction" is to lower your return expectations for safe fixed income. Specifically, you should expect to lose purchasing power for every dollar of safe fixed income you own today. By knowing this, you should save more and assume lower withdrawals than your daddy did.
whodidntante,

If that is true, why the YTD return of my VFIUX is 7.26%?

Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX)
https://finance.yahoo.com/quote/VFIUX?p=VFIUX

Versus VTSAX YTD return of -10.38%

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool
Because expected returns and YTD returns are not the same thing. Yields have fallen quite a bit YTD, so expected returns worse and YTD returns better.

KlangFool
Posts: 16603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Mon May 11, 2020 10:40 pm

Angst wrote:
Mon May 11, 2020 9:59 pm
Should this be more of a "Do I Still Need an Emergency Fund" thread? If so, I think the answer might be "no". For people who have multiple years worth of taxable savings already I generally believe that "Emergency Funds", per se, are unnecessary. Have you already put dollars into I-Bonds? They have a lot going for them. I'd consider perhaps putting 20K of the 25K into them and maybe the rest into anything from equity to EE Bonds. Yes, that's quite a range. Another way of saying it just doesn't matter that much. Most everything is fairly "liquid" when it comes down to it. Hopefully those emergencies are infrequent and uncommon.
Angst,

<<For people who have multiple years worth of taxable savings already I generally believe that "Emergency Funds", per se, are unnecessary. >>

Is this how you handle your portfolio or how you believe people should handle their portfolio?

I have multiple years of taxable savings in 100% stock plus 1 1/2 year of the Emergency fund.

<<Hopefully those emergencies are infrequent and uncommon.>>

Count on being lucky is a lousy planning strategy. Especially when we have 30+ million unemployed. We might have the greatest depression.

KlangFool

KlangFool
Posts: 16603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Mon May 11, 2020 10:43 pm

whodidntante wrote:
Mon May 11, 2020 10:34 pm
KlangFool wrote:
Mon May 11, 2020 10:32 pm
whodidntante wrote:
Mon May 11, 2020 9:57 pm
The days of expecting a positive real after-tax return on safe fixed income are in the past. They may come back, but if so, there will be a significant bond sell off to get there. So a reasonable "reaction" is to lower your return expectations for safe fixed income. Specifically, you should expect to lose purchasing power for every dollar of safe fixed income you own today. By knowing this, you should save more and assume lower withdrawals than your daddy did.
whodidntante,

If that is true, why the YTD return of my VFIUX is 7.26%?

Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX)
https://finance.yahoo.com/quote/VFIUX?p=VFIUX

Versus VTSAX YTD return of -10.38%

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool
Because expected returns and YTD returns are not the same thing. Yields have fallen quite a bit YTD, so expected returns worse and YTD returns better.
whodidntante,

You and I know that the expected return is not the same as actual real-world return.

KlangFool

User avatar
whodidntante
Posts: 8300
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Reacting to low interest rates

Post by whodidntante » Mon May 11, 2020 11:16 pm

KlangFool wrote:
Mon May 11, 2020 10:43 pm
whodidntante wrote:
Mon May 11, 2020 10:34 pm
KlangFool wrote:
Mon May 11, 2020 10:32 pm
whodidntante wrote:
Mon May 11, 2020 9:57 pm
The days of expecting a positive real after-tax return on safe fixed income are in the past. They may come back, but if so, there will be a significant bond sell off to get there. So a reasonable "reaction" is to lower your return expectations for safe fixed income. Specifically, you should expect to lose purchasing power for every dollar of safe fixed income you own today. By knowing this, you should save more and assume lower withdrawals than your daddy did.
whodidntante,

If that is true, why the YTD return of my VFIUX is 7.26%?

Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX)
https://finance.yahoo.com/quote/VFIUX?p=VFIUX

Versus VTSAX YTD return of -10.38%

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
https://finance.yahoo.com/quote/VTSAX?p=VTSAX

KlangFool
Because expected returns and YTD returns are not the same thing. Yields have fallen quite a bit YTD, so expected returns worse and YTD returns better.
whodidntante,

You and I know that the expected return is not the same as actual real-world return.

KlangFool
Yes, we do. We seem to disagree about when each one is useful, however.

fatcoffeedrinker
Posts: 207
Joined: Mon Mar 23, 2020 2:03 pm

Re: Reacting to low interest rates

Post by fatcoffeedrinker » Mon May 11, 2020 11:18 pm

Triple digit golfer wrote:
Mon May 11, 2020 8:50 pm
mortfree wrote:
Mon May 11, 2020 8:48 pm
Triple digit golfer wrote:
Mon May 11, 2020 8:38 pm
mortfree wrote:
Mon May 11, 2020 7:36 pm
Triple digit golfer wrote:
Mon May 11, 2020 7:22 pm


Then you sell whatever is higher. If desired AA is 80/20 and actual is 78/22, sell bonds first. If actual is 82/18, sell stocks first. In other words, you withdraw in the same manner as you contribute. If you contribute to the lagging asset class, you withdraw from the higher one.
What if it drops 30-40-50%?

It would be painful for ME to sell in that situation.
If stocks are lagging, you sell bonds. If stocks are ahead, it means you have gains or at least that stocks have outperformed bonds. You wouldn't be selling anything after a 30, 40, or 50% drop unless you had a significantly large emergency, in which case your portfolio is fair game anyway.
Ok. What bonds are you holding and are they in a taxable account?

Thanks for answering/responding.
Total Bond Index, in a tax deferred account.

To sell bonds, I would sell equities in my taxable account and simultaneously exchange bonds to equities in the tax deferred account.

Any issues with it that I'm not seeing? I welcome any criticisms.
Precisely.

kacang
Posts: 189
Joined: Fri Apr 20, 2018 7:43 am
Location: CA

Re: Reacting to low interest rates

Post by kacang » Mon May 11, 2020 11:35 pm

We came into some extra cash recently and had a similar question. Decided to use it to pay down the mortgage. I can't find anything that gives a comparable TEY (>5%) with equivalent risk/duration. A longer term benefit is being mortgage-free gives us more flexibility to managing cash flow, which will be important when DH joins me in retirement.

ballons
Posts: 330
Joined: Sun Aug 18, 2019 3:05 pm

Re: Reacting to low interest rates

Post by ballons » Tue May 12, 2020 12:38 am

Learned my lesson from 2008, hedge against future low interest rates by opening and funding add-on CD's with min amount. Very cheap as $250-$1000 locks in 5 years of rates. Do have the risk they renege though.

Van
Posts: 703
Joined: Wed Oct 27, 2010 9:24 am

Re: Reacting to low interest rates

Post by Van » Tue May 12, 2020 6:25 am

whodidntante wrote:
Mon May 11, 2020 9:57 pm
The days of expecting a positive real after-tax return on safe fixed income are in the past. They may come back, but if so, there will be a significant bond sell off to get there. So a reasonable "reaction" is to lower your return expectations for safe fixed income. Specifically, you should expect to lose purchasing power for every dollar of safe fixed income you own today. By knowing this, you should save more and assume lower withdrawals than your daddy did.
This seems like a dose of sobering reality to me.

KlangFool
Posts: 16603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Tue May 12, 2020 6:56 am

Van wrote:
Tue May 12, 2020 6:25 am
whodidntante wrote:
Mon May 11, 2020 9:57 pm
The days of expecting a positive real after-tax return on safe fixed income are in the past. They may come back, but if so, there will be a significant bond sell off to get there. So a reasonable "reaction" is to lower your return expectations for safe fixed income. Specifically, you should expect to lose purchasing power for every dollar of safe fixed income you own today. By knowing this, you should save more and assume lower withdrawals than your daddy did.
This seems like a dose of sobering reality to me.
Why should that be the same as the real world return? It is obvious if we hit extended severe unemployment, many 100/0 folks will capitulate. Those that survive with 60/40 will do very well.

KlangFool

User avatar
jeffyscott
Posts: 8856
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: Reacting to low interest rates

Post by jeffyscott » Tue May 12, 2020 9:30 am

Doing a little bit of "B", but retired and pensions are sufficient for us to live on, so it's a different situation from most. And it's not so much cash as other "safe" investments (CDs and TIPS) that I have reduced a bit.

We have had a few 3%+ CDs and TIPS mature this year. Some of the money went to stocks, as a partial rebalancing, while they were down. Some also went to managed bond funds, intermediate and ultrashort. I am not willing to accept the current CD, treasury, or money market yields. If it were not in an IRA, I might go for direct CD deals, EE/I bonds, or a savings account.

I have also maintained a residual amount in employer plan that is in a stable value fund, earning 2.34%. I had intended to roll the last of this out in 2019, but held off due to interest rates and have even considered rolling some back in.
Time is your friend; impulse is your enemy. - John C. Bogle

Rosencrantz1
Posts: 561
Joined: Tue Sep 10, 2019 12:28 pm

Re: Reacting to low interest rates

Post by Rosencrantz1 » Tue May 12, 2020 3:55 pm

Triple digit golfer wrote:
Mon May 11, 2020 7:15 pm

For those who are reacting to low interest rates, what are you doing differently?

A. Increasing equity allocation. You're taking more risk, but what choice do you have, right? Equities seem expensive (still), bonds are expensive, cash gives almost nothing and likely negative return after inflation, so might as well go with the investment that is likely to have a positive long-term real return.

B. Reducing emergency funds or cash savings to perhaps a month of expenses or less, knowing that if you invest more, you're likely to beat the return of cash. You know that you have a sufficient taxable account and can withdraw from it if needed. Inspired by: viewtopic.php?t=311324
Great, timely topic. We had 3+ years of expenses in HYS/CDs. I whittled that down to about two years with the latest market downturn then we received a small inheritance and now it's back up.

I've strongly considering DCAing into more equities - So, I suppose that's mostly "A". My DW won't want the cash accounts to get too low. I'm of the opinion that "B" is a fine idea - at least for us especially because our pension income is greater than our monthly expenses.

This last leg down in HYS interest has me actively looking for something better. I told my wife I feel like we're being 'herded' towards equities - - because there's really nowhere else to go. I've even looked into individual dividend 'aristocrat' companies (by far, our largest equity holdings are VOO/VTI).

For the time being, I'm moving a large chunk of cash over to Marcus and I'm going to get one of their 'no penalty' CDs (assuming they're still offered at 1.55% when the money shows up in the account)

7eight9
Posts: 1055
Joined: Fri May 17, 2019 7:11 pm

Re: Reacting to low interest rates

Post by 7eight9 » Tue May 12, 2020 4:06 pm

Rosencrantz1 wrote:
Tue May 12, 2020 3:55 pm
This last leg down in HYS interest has me actively looking for something better. I told my wife I feel like we're being 'herded' towards equities - - because there's really nowhere else to go.
It feels like 2008/9 all over again. Interest rates dropping and no good alternatives for those who don't want to invest, speculate, gamble on the stock market.

The Fed's low rates will punish people who save

"What the Fed continues to focus on is the stock market. They won't say that but they are concerned about the wealth effect and sentiment. They react when the stock market pukes," said Patrick Leary, chief market strategist at Incapital.

This is particularly problematic since people have been squirreling away more money into savings accounts in the past few months. The national savings rate now stands at 8.2% -- up from 7.5% at the end of 2019.

But investors earn next to nothing in these accounts. According to the latest figures from the Federal Deposit Insurance Corp. (FDIC), the average savings account pays just 0.07%. A money market doesn't get you much more bang for your buck. It pays an average interest rate of 0.1%.

If rates remain this low, investors (even those approaching retirement who can't afford to take on as much risk) may have no choice but to buy stocks and corporate bonds in order to generate higher levels of income.

https://www.cnn.com/2020/04/27/investin ... index.html
I guess it all could be much worse. | They could be warming up my hearse.

User avatar
grabiner
Advisory Board
Posts: 27132
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Reacting to low interest rates

Post by grabiner » Tue May 12, 2020 4:51 pm

My reaction to low interest rates was to make an investment which had always been available to me, and which had not lowered its interest rate: I paid off my mortgage.

For years, I could earn a higher after-tax yield on bonds than on mortgage prepayments, so there was no reason to pay off the mortgage early. This remained the case even after the new tax law, because I donate enough to charity that I would itemize deductions even without the mortgage, so the interest was still tax-deductible. But in March, interest rates were so low that I could no longer earn a higher yield on bonds, so I took the risk-free return of a mortgage payment instead, keeping the same dollar amount in stocks.
Wiki David Grabiner

frugalecon
Posts: 369
Joined: Fri Dec 05, 2014 12:39 pm

Re: Reacting to low interest rates

Post by frugalecon » Tue May 12, 2020 5:07 pm

grabiner wrote:
Tue May 12, 2020 4:51 pm
My reaction to low interest rates was to make an investment which had always been available to me, and which had not lowered its interest rate: I paid off my mortgage.

For years, I could earn a higher after-tax yield on bonds than on mortgage prepayments, so there was no reason to pay off the mortgage early. This remained the case even after the new tax law, because I donate enough to charity that I would itemize deductions even without the mortgage, so the interest was still tax-deductible. But in March, interest rates were so low that I could no longer earn a higher yield on bonds, so I took the risk-free return of a mortgage payment instead, keeping the same dollar amount in stocks.
I took advantage of my servicer’s no-fee recast, since I had already made sufficient extra principal payments to qualify, but I am continuing to shovel extra cash at the mortgage. The tax equivalent yield is just too tempting.

User avatar
grabiner
Advisory Board
Posts: 27132
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Reacting to low interest rates

Post by grabiner » Tue May 12, 2020 5:10 pm

frugalecon wrote:
Tue May 12, 2020 5:07 pm
grabiner wrote:
Tue May 12, 2020 4:51 pm
My reaction to low interest rates was to make an investment which had always been available to me, and which had not lowered its interest rate: I paid off my mortgage.

For years, I could earn a higher after-tax yield on bonds than on mortgage prepayments, so there was no reason to pay off the mortgage early. This remained the case even after the new tax law, because I donate enough to charity that I would itemize deductions even without the mortgage, so the interest was still tax-deductible. But in March, interest rates were so low that I could no longer earn a higher yield on bonds, so I took the risk-free return of a mortgage payment instead, keeping the same dollar amount in stocks.
I took advantage of my servicer’s no-fee recast, since I had already made sufficient extra principal payments to qualify, but I am continuing to shovel extra cash at the mortgage. The tax equivalent yield is just too tempting.
And the reason I paid mine off, rather than just making extra payments, is that it didn't cost me anything to do that. In March, not only were bond yields lower than my after-tax mortgage rate, but I also had stock I could sell for a capital loss or trivial gain which was enough to pay it off.
Wiki David Grabiner

index2max
Posts: 285
Joined: Mon Jan 21, 2019 11:01 pm

Re: Reacting to low interest rates

Post by index2max » Tue May 12, 2020 5:20 pm

If we're talking emergency taxable funds, I suggest looking at Deposit Accounts and find a rewards checking account with a high interest rate.

The best I've seen as of today May 12, 2020 give you 3% per year on a maximum of $20,000 deposited. Usually you have to get 10-20 transactions done with the credit union's debit and/or credit card.

The best credit unions don't specify a minimum transaction amount. Many say you must spend at least $5 each transaction An easy way to get this done would be to reload an Amazon online gift card balance in increments of $0.50. You can do this in minutes from the comfort of your own home.

I prefer using credit unions, as a US resident, because they don't have to pay corporate income tax like the banks do and they don't have outside shareholders to pay like banks do. Excess profit goes back into the hands of members or is reinvested in their operations.

Other than that, if you have excess emergency cash lying around that you won't need access to for the next 20 years or more, buy and hold some precious metals like gold or silver. This helps diversify your cash reserves away from fiat currencies if you're not sure the interest rates on deposits will keep your head above inflation. I recommend staying away from rare, collectible numismatic coins. Why pay a premium for an antique item when all you're buying it for is the market value of the metal itself?

Rosencrantz1
Posts: 561
Joined: Tue Sep 10, 2019 12:28 pm

Re: Reacting to low interest rates

Post by Rosencrantz1 » Tue May 12, 2020 5:22 pm

grabiner wrote:
Tue May 12, 2020 4:51 pm
My reaction to low interest rates was to make an investment which had always been available to me, and which had not lowered its interest rate: I paid off my mortgage.
Excellent idea. The problem (if one can call it that) for us is that we have no debt. We paid the mortgage off on the house the year we retired - about 3 years ago.

Question. Is anyone considering some kind of 'high yield' dividend ETF? Is VIG (dividend growth) a good choice? Perhaps instead of (or with) some HYS accounts?

I'll admit that I'm focused enough on getting some kind of better return on my cash allocation (EF), that I've given serious thought to individual high dividend 'aristocrat' stocks too. Of course, I realize the concentrated risk with doing this - I just hate the idea of getting practically nothing for what is currently about 3+ years of expense money. And the return seems to be getting worse with each passing week :annoyed

KlangFool
Posts: 16603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Tue May 12, 2020 7:18 pm

Rosencrantz1 wrote:
Tue May 12, 2020 5:22 pm
grabiner wrote:
Tue May 12, 2020 4:51 pm
My reaction to low interest rates was to make an investment which had always been available to me, and which had not lowered its interest rate: I paid off my mortgage.
Excellent idea. The problem (if one can call it that) for us is that we have no debt. We paid the mortgage off on the house the year we retired - about 3 years ago.

Question. Is anyone considering some kind of 'high yield' dividend ETF? Is VIG (dividend growth) a good choice? Perhaps instead of (or with) some HYS accounts?

I'll admit that I'm focused enough on getting some kind of better return on my cash allocation (EF), that I've given serious thought to individual high dividend 'aristocrat' stocks too. Of course, I realize the concentrated risk with doing this - I just hate the idea of getting practically nothing for what is currently about 3+ years of expense money. And the return seems to be getting worse with each passing week :annoyed
If you are going to do some active management, why don't you let the professional do it for you? Aka, just put your money into the Wellington or Wellesley fund.

KlangFool

anoop
Posts: 1429
Joined: Tue Mar 04, 2014 1:33 am

Re: Reacting to low interest rates

Post by anoop » Tue May 12, 2020 7:29 pm

I'm wondering if stock marked indexed CDs now become a no brainer. There don't seem to be very many of them around, though.

User avatar
mrspock
Posts: 1073
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Reacting to low interest rates

Post by mrspock » Tue May 12, 2020 7:42 pm

I am definitely taking more risk on my equity side. I run 70/30 instead of 60/40 due to the level of interest rates. My view is that my odds of going broke with 60/40 is higher than 70/30 in this interest rate environment.

My assumption is that interest rates will be sustained at low levels for the next 10-15 years. Do I know for sure? No... but I like my odds. In the case I’m wrong, I’ll end up having to stomach a bit more volatility, while winding up with a bit more money in my portfolio, if I’m right... I don’t end up going broke on retirement or eating porridge for 3 meals a day to get by on my SWR. Seems like good trade.

rockstar
Posts: 380
Joined: Mon Feb 03, 2020 6:51 pm

Re: Reacting to low interest rates

Post by rockstar » Tue May 12, 2020 7:46 pm

I'm paying down my mortgage slightly faster. In the past I would have been far more aggressive, but given our current economic situation, I don't want to go overboard since I can't tap that money easily.

Rosencrantz1
Posts: 561
Joined: Tue Sep 10, 2019 12:28 pm

Re: Reacting to low interest rates

Post by Rosencrantz1 » Tue May 12, 2020 7:58 pm

KlangFool wrote:
Tue May 12, 2020 7:18 pm
Rosencrantz1 wrote:
Tue May 12, 2020 5:22 pm
grabiner wrote:
Tue May 12, 2020 4:51 pm
My reaction to low interest rates was to make an investment which had always been available to me, and which had not lowered its interest rate: I paid off my mortgage.
Excellent idea. The problem (if one can call it that) for us is that we have no debt. We paid the mortgage off on the house the year we retired - about 3 years ago.

Question. Is anyone considering some kind of 'high yield' dividend ETF? Is VIG (dividend growth) a good choice? Perhaps instead of (or with) some HYS accounts?

I'll admit that I'm focused enough on getting some kind of better return on my cash allocation (EF), that I've given serious thought to individual high dividend 'aristocrat' stocks too. Of course, I realize the concentrated risk with doing this - I just hate the idea of getting practically nothing for what is currently about 3+ years of expense money. And the return seems to be getting worse with each passing week :annoyed
If you are going to do some active management, why don't you let the professional do it for you? Aka, just put your money into the Wellington or Wellesley fund.

KlangFool

Looks like the top 10 holdings are stocks. I think I can already replicate Wellington with something like my 70/30 portfolio - and without the 0.25%ER. Besides... I'm retired and need something to occupy some bandwidth.

KlangFool
Posts: 16603
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Tue May 12, 2020 8:07 pm

Rosencrantz1 wrote:
Tue May 12, 2020 7:58 pm
KlangFool wrote:
Tue May 12, 2020 7:18 pm
Rosencrantz1 wrote:
Tue May 12, 2020 5:22 pm
grabiner wrote:
Tue May 12, 2020 4:51 pm
My reaction to low interest rates was to make an investment which had always been available to me, and which had not lowered its interest rate: I paid off my mortgage.
Excellent idea. The problem (if one can call it that) for us is that we have no debt. We paid the mortgage off on the house the year we retired - about 3 years ago.

Question. Is anyone considering some kind of 'high yield' dividend ETF? Is VIG (dividend growth) a good choice? Perhaps instead of (or with) some HYS accounts?

I'll admit that I'm focused enough on getting some kind of better return on my cash allocation (EF), that I've given serious thought to individual high dividend 'aristocrat' stocks too. Of course, I realize the concentrated risk with doing this - I just hate the idea of getting practically nothing for what is currently about 3+ years of expense money. And the return seems to be getting worse with each passing week :annoyed
If you are going to do some active management, why don't you let the professional do it for you? Aka, just put your money into the Wellington or Wellesley fund.

KlangFool

Looks like the top 10 holdings are stocks. I think I can already replicate Wellington with something like my 70/30 portfolio - and without the 0.25%ER. Besides... I'm retired and need something to occupy some bandwidth.

Rosencrantz1,

<<I think I can already replicate Wellington with something like my 70/30 portfolio - and without the 0.25%ER. >>

https://finance.yahoo.com/quote/VWENX?p=VWENX
It is 0.17% with the admiral shares.

If you believe you can manage much better than Wellington fund management, good luck to you.

KlangFool

User avatar
dougger5
Posts: 391
Joined: Fri Nov 27, 2015 11:58 am
Location: Not far from Malvern

Re: Reacting to low interest rates

Post by dougger5 » Tue May 12, 2020 8:16 pm

Well, yesterday I got the email from Ally that I've been expecting for weeks: High yield savings interest headed south by 25 bps - which isn't as bad as I had been expecting. Nevertheless, it seemed like a good time to set up a CD ladder, before those things get knocked back. So that's what I did.

Today I see that the CD's at Ally are now lower...so I'm glad I acted.

That's how I responded to lower interest rates, and the extent to which I plan to for the time being.
"I've been ionized, but I'm okay now." -Buckaroo Banzai

Elena
Posts: 372
Joined: Mon Nov 21, 2016 5:42 pm

Re: Reacting to low interest rates

Post by Elena » Tue May 12, 2020 8:29 pm

I did a Roth conversion to be paid with cash. I am also trading short with a bit of money. If I can get 3% in this volatile environment in several days, yes,taxes will be higher, but chasing after inexistent higher rates for cash seems like wasted time. This is a small position, and by "short" I mean whatever the market gives, so no rush to buy or sell but short to turn 3-4% or higher is the goal. The rest is long-term, and all emergency funds are in place. The rest remains the same.

Post Reply