Reacting to low interest rates

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palanzo
Posts: 815
Joined: Thu Oct 10, 2019 4:28 pm

Re: Reacting to low interest rates

Post by palanzo » Tue May 12, 2020 8:37 pm

grabiner wrote:
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.
I paid my mortgage off last week and I am glad I did. I did so for that same reasons.

palanzo
Posts: 815
Joined: Thu Oct 10, 2019 4:28 pm

Re: Reacting to low interest rates

Post by palanzo » Tue May 12, 2020 8:46 pm

KlangFool wrote:
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
Using Wellesley Income instead of TBM in an IRA does seem appealing.

index2max
Posts: 286
Joined: Mon Jan 21, 2019 11:01 pm

Re: Reacting to low interest rates

Post by index2max » Tue May 12, 2020 10:04 pm

dougger5 wrote:
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.
If you don't mind jumping through a few hoops, I recommend signing up for a rewards checking account with a credit union instead of using a bank.

Someone else on Boglehead forums informed me about Deposit Account's website. It's a good resource for finding high-interest checking and savings accounts

palanzo
Posts: 815
Joined: Thu Oct 10, 2019 4:28 pm

Re: Reacting to low interest rates

Post by palanzo » Tue May 12, 2020 10:19 pm

index2max wrote:
Tue May 12, 2020 10:04 pm
dougger5 wrote:
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.
If you don't mind jumping through a few hoops, I recommend signing up for a rewards checking account with a credit union instead of using a bank.

Someone else on Boglehead forums informed me about Deposit Account's website. It's a good resource for finding high-interest checking and savings accounts
Agreed but I did not find the 3% rate quoted above.

index2max
Posts: 286
Joined: Mon Jan 21, 2019 11:01 pm

Re: Reacting to low interest rates

Post by index2max » Tue May 12, 2020 10:36 pm

palanzo wrote:
Tue May 12, 2020 10:19 pm
index2max wrote:
Tue May 12, 2020 10:04 pm
dougger5 wrote:
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.
If you don't mind jumping through a few hoops, I recommend signing up for a rewards checking account with a credit union instead of using a bank.

Someone else on Boglehead forums informed me about Deposit Account's website. It's a good resource for finding high-interest checking and savings accounts
Agreed but I did not find the 3% rate quoted above.
If you're looking for a high-interest checking account paying 3% annual interest, go to the home page of deposit accounts, hover your cursor over "checking accounts" and select rewards checking accounts.

From there you can filter your search by zip code or state, amount you want to deposit, banks and/or credit unions and whether you want an online-only institution. Still make sure to double check a credit union's website to verify their interest rate matches what you're expecting.

sycamore
Posts: 700
Joined: Tue May 08, 2018 12:06 pm

Re: Reacting to low interest rates

Post by sycamore » Wed May 13, 2020 9:00 am

Rosencrantz1 wrote:
Tue May 12, 2020 5:22 pm
...

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
I've owned VIG (Vanguard Divdend Appreciation fund) for many years. It's part of my high-risk investments, along with my other stock fund holdings. It's not really a high dividend fund -- look at its yield and see it's about the same as a Total Stock or SP500 fund. VIG and other 'aristocrat' funds are more focused on companies that have paid increasing dividends rather than on companies have paid relatively high yields. The former are more "quality-ish" than the latter.

Personally I wouldn't treat any stock fund (even Wellesley or Wellington) as a substitute for fixed income or savings. I would however consider upping the stock part of my AA (and accepting the added risk).

Topic Author
Triple digit golfer
Posts: 5323
Joined: Mon May 18, 2009 5:57 pm

Re: Reacting to low interest rates

Post by Triple digit golfer » Wed May 13, 2020 10:42 am

Going back to the OP, if Option B is done, eliminating or reducing an emergency fund, and suddenly cash is needed, does the decision to go with Option B change if there are large unrealized capital gains in the taxable account?

As an example, I just tax-loss harvested $24,000 worth of losses in my taxable account in March. Since then, there are significant gains, around $30k. If I need a year's worth of expenses, it would be around $10k in gains. Would that change whether eliminating the emergency fund is a good idea?

My logic is I have $24k in losses booked already, and even needing a year of expenses still only has me incurring $10k in gains, so I still have $14k in losses to carry forward. In other words, yes, I could get burned and only give myself $14k in losses in future years, but is holding a larger cash amount in a taxable account and creating cash drag worth it just to avoid that scenario?

I think not, but wanted some opinions. In my opinion, assume the most likely event, but be able to cover emergencies. I certainly would be able to cover, although a large capital gain offsetting some of my losses would sting a little. Is that "little sting" a reason to avoid eliminating or reducing my cash emergency fund?

Topic Author
Triple digit golfer
Posts: 5323
Joined: Mon May 18, 2009 5:57 pm

Re: Reacting to low interest rates

Post by Triple digit golfer » Wed May 13, 2020 1:03 pm

Me again. I just reduced my savings down to 2-2.5 months of expenses, which ultimately meant investing a fairly large (1.4% of total portfolio) lump sum into the market, since in my AA stocks were a few percent light.

I'm just not content with any significant amount earning 1.25% and paying ordinary income tax on it to boot. The after-tax rate ends up being 0.91%.

I keep remind myself of the goals of an emergency fund as stated in this excellent post: viewtopic.php?f=10&t=311324
1. Have enough cash in hand to cover immediate expenses
2. Be able to withstand a period of up to a year with no income
3. After the above two goals are met, maximize net worth over time
With 2-2.5 months in savings, we've got #1 met.
With a taxable account 2.5x annual expenses, we've got #2 met.
By reducing savings and investing it into my portfolio, I am satisfying #3.

KlangFool
Posts: 16641
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Wed May 13, 2020 1:21 pm

Triple digit golfer wrote:
Wed May 13, 2020 1:03 pm
Me again. I just reduced my savings down to 2-2.5 months of expenses, which ultimately meant investing a fairly large (1.4% of total portfolio) lump sum into the market, since in my AA stocks were a few percent light.

I'm just not content with any significant amount earning 1.25% and paying ordinary income tax on it to boot. The after-tax rate ends up being 0.91%.

I keep remind myself of the goals of an emergency fund as stated in this excellent post: viewtopic.php?f=10&t=311324
1. Have enough cash in hand to cover immediate expenses
2. Be able to withstand a period of up to a year with no income
3. After the above two goals are met, maximize net worth over time
With 2-2.5 months in savings, we've got #1 met.
With a taxable account 2.5x annual expenses, we've got #2 met.
By reducing savings and investing it into my portfolio, I am satisfying #3.
Triple digit golfer,

1) <<With a taxable account 2.5x annual expenses, we've got #2 met.>>

How much will you lose if you are unemployed for 2 years?

2) Have you ever been unemployed and run out of the emergency fund at the same time? Aka, have to sell your investment at a loss every month while looking for a new job.

It is stressful enough to be unemployed. The additional stress of having to sell your investment to cover your expense may stop you from sleeping.

KlangFool

Topic Author
Triple digit golfer
Posts: 5323
Joined: Mon May 18, 2009 5:57 pm

Re: Reacting to low interest rates

Post by Triple digit golfer » Wed May 13, 2020 1:25 pm

KlangFool wrote:
Wed May 13, 2020 1:21 pm
Triple digit golfer wrote:
Wed May 13, 2020 1:03 pm
Me again. I just reduced my savings down to 2-2.5 months of expenses, which ultimately meant investing a fairly large (1.4% of total portfolio) lump sum into the market, since in my AA stocks were a few percent light.

I'm just not content with any significant amount earning 1.25% and paying ordinary income tax on it to boot. The after-tax rate ends up being 0.91%.

I keep remind myself of the goals of an emergency fund as stated in this excellent post: viewtopic.php?f=10&t=311324
1. Have enough cash in hand to cover immediate expenses
2. Be able to withstand a period of up to a year with no income
3. After the above two goals are met, maximize net worth over time
With 2-2.5 months in savings, we've got #1 met.
With a taxable account 2.5x annual expenses, we've got #2 met.
By reducing savings and investing it into my portfolio, I am satisfying #3.
Triple digit golfer,

1) <<With a taxable account 2.5x annual expenses, we've got #2 met.>>

How much will you lose if you are unemployed for 2 years?

2) Have you ever been unemployed and run out of the emergency fund at the same time? Aka, have to sell your investment at a loss while looking for a new job.

It is stressful enough to be unemployed. The additional stress of having to sell your investment to cover your expense may stop you from sleeping.

KlangFool
I feel like we sometimes pay more for insurance than the actual loss is likely to be. Assuming your mortgage company would allow it or you own your home outright, at what point would you not carry homeowners insurance? Say your house is worth $300k and insurance costs $1k a year. What if it went to $5k? $10k? $20k? $50k? At what point would you simply not carry the insurance or reduce your coverage so that the premiums are lower?

What if I'm unemployed for 3 years? Or 5 years? Or 10 years?

At what point does opportunity cost come into play?

KlangFool
Posts: 16641
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Wed May 13, 2020 1:33 pm

Triple digit golfer wrote:
Wed May 13, 2020 1:25 pm

I feel like we sometimes pay more for insurance than the actual loss is likely to be. Assuming your mortgage company would allow it or you own your home outright, at what point would you not carry homeowners insurance? Say your house is worth $300k and insurance costs $1k a year. What if it went to $5k? $10k? $20k? $50k? At what point would you simply not carry the insurance or reduce your coverage so that the premiums are lower?

What if I'm unemployed for 3 years? Or 5 years? Or 10 years?

At what point does opportunity cost come into play?
Triple digit golfer,

<<Assuming your mortgage company would allow it or you own your home outright, at what point would you not carry homeowners insurance? >>

The answer is never. Besides homeowner insurance, I have to carry umbrella insurance too.

<<What if I'm unemployed for 3 years? Or 5 years? Or 10 years? >>

The standard rule of thumb is to assume 2 years of unemployment in a recession. It is possible that we are heading towards the greatest depression. 30+ million of unemployment is much more than the accumulated unemployment of the whole 2 years of 2008/2009 GFC.

<<At what point does opportunity cost come into play?>>

I asked you for a simple and straight forward question. Have you ever been unemployed and run out of the emergency fund at the same time? At your current plan, you will hit that stage with 3 months of unemployment. Can you sleep if that happened?

How long can you last if you cannot sleep?

What much do you think that 1+% of your portfolio can do for you if you are right?

How much sleep can you lose if you are wrong?

The risk versus reward is no good.

KlangFool

rascott
Posts: 2112
Joined: Wed Apr 15, 2015 10:53 am

Re: Reacting to low interest rates

Post by rascott » Wed May 13, 2020 1:37 pm

anoop wrote:
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.

Be wary..... municipal budgets likely going to look horrid through this situation.

Topic Author
Triple digit golfer
Posts: 5323
Joined: Mon May 18, 2009 5:57 pm

Re: Reacting to low interest rates

Post by Triple digit golfer » Wed May 13, 2020 1:38 pm

KlangFool wrote:
Wed May 13, 2020 1:33 pm
Triple digit golfer wrote:
Wed May 13, 2020 1:25 pm

I feel like we sometimes pay more for insurance than the actual loss is likely to be. Assuming your mortgage company would allow it or you own your home outright, at what point would you not carry homeowners insurance? Say your house is worth $300k and insurance costs $1k a year. What if it went to $5k? $10k? $20k? $50k? At what point would you simply not carry the insurance or reduce your coverage so that the premiums are lower?

What if I'm unemployed for 3 years? Or 5 years? Or 10 years?

At what point does opportunity cost come into play?
Triple digit golfer,

<<Assuming your mortgage company would allow it or you own your home outright, at what point would you not carry homeowners insurance? >>

The answer is never. Besides homeowner insurance, I have to carry umbrella insurance too.

<<What if I'm unemployed for 3 years? Or 5 years? Or 10 years? >>

The standard rule of thumb is to assume 2 years of unemployment in a recession. It is possible that we are heading towards the greatest depression. 30+ million of unemployment is much more than the accumulated unemployment of the whole 2 years of 2008/2009 GFC.

<<At what point does opportunity cost come into play?>>

I asked you for a simple and straight forward question. Have you ever been unemployed and run out of the emergency fund at the same time? At your current plan, you will hit that stage with 3 months of unemployment. Can you sleep if that happened?

How long can you last if you cannot sleep?

What much do you think that 1+% of your portfolio can do for you if you are right?

How much sleep can you lose if you are wrong?

The risk versus reward is no good.

KlangFool
I already have 2+ years in bonds as well.

anoop
Posts: 1447
Joined: Tue Mar 04, 2014 1:33 am

Re: Reacting to low interest rates

Post by anoop » Wed May 13, 2020 1:45 pm

rascott wrote:
Wed May 13, 2020 1:37 pm
anoop wrote:
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.
Be wary..... municipal budgets likely going to look horrid through this situation.
Good point. I also find that they seem to be priced really weird. Some of the ones I saw had a 5% coupon but were expected to sell at higher than face value bringing the effective return down to < 1%.

KlangFool
Posts: 16641
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reacting to low interest rates

Post by KlangFool » Wed May 13, 2020 1:47 pm

Triple digit golfer wrote:
Wed May 13, 2020 1:38 pm

I already have 2+ years in bonds as well.
Triple digit golfer,

Why do you think that the stock and the bond cannot drop at the same time?

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

In any case, I do not care about the low-interest rate and/ow low expected return. There will be plenty of people that will be pushed into stock and/or high-risk bond. They will capitulate when they are unemployed. This story repeats itself in every recession.

Good luck! Make sure that you calculate the reward and the risk is worth it.

KlangFool

anoop
Posts: 1447
Joined: Tue Mar 04, 2014 1:33 am

Re: Reacting to low interest rates

Post by anoop » Wed May 13, 2020 1:53 pm

Triple digit golfer wrote:
Wed May 13, 2020 1:25 pm
KlangFool wrote:
Wed May 13, 2020 1:21 pm
Triple digit golfer wrote:
Wed May 13, 2020 1:03 pm
Me again. I just reduced my savings down to 2-2.5 months of expenses, which ultimately meant investing a fairly large (1.4% of total portfolio) lump sum into the market, since in my AA stocks were a few percent light.

I'm just not content with any significant amount earning 1.25% and paying ordinary income tax on it to boot. The after-tax rate ends up being 0.91%.

I keep remind myself of the goals of an emergency fund as stated in this excellent post: viewtopic.php?f=10&t=311324
1. Have enough cash in hand to cover immediate expenses
2. Be able to withstand a period of up to a year with no income
3. After the above two goals are met, maximize net worth over time
With 2-2.5 months in savings, we've got #1 met.
With a taxable account 2.5x annual expenses, we've got #2 met.
By reducing savings and investing it into my portfolio, I am satisfying #3.
Triple digit golfer,

1) <<With a taxable account 2.5x annual expenses, we've got #2 met.>>

How much will you lose if you are unemployed for 2 years?

2) Have you ever been unemployed and run out of the emergency fund at the same time? Aka, have to sell your investment at a loss while looking for a new job.

It is stressful enough to be unemployed. The additional stress of having to sell your investment to cover your expense may stop you from sleeping.

KlangFool
I feel like we sometimes pay more for insurance than the actual loss is likely to be. Assuming your mortgage company would allow it or you own your home outright, at what point would you not carry homeowners insurance? Say your house is worth $300k and insurance costs $1k a year. What if it went to $5k? $10k? $20k? $50k? At what point would you simply not carry the insurance or reduce your coverage so that the premiums are lower?

What if I'm unemployed for 3 years? Or 5 years? Or 10 years?

At what point does opportunity cost come into play?
Depending on age and field of work, it might make sense to position oneself for a forced early retirement.

Topic Author
Triple digit golfer
Posts: 5323
Joined: Mon May 18, 2009 5:57 pm

Re: Reacting to low interest rates

Post by Triple digit golfer » Wed May 13, 2020 2:04 pm

KlangFool wrote:
Wed May 13, 2020 1:47 pm
Triple digit golfer wrote:
Wed May 13, 2020 1:38 pm

I already have 2+ years in bonds as well.
Triple digit golfer,

Why do you think that the stock and the bond cannot drop at the same time?

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

In any case, I do not care about the low-interest rate and/ow low expected return. There will be plenty of people that will be pushed into stock and/or high-risk bond. They will capitulate when they are unemployed. This story repeats itself in every recession.

Good luck! Make sure that you calculate the reward and the risk is worth it.

KlangFool
I don't think they can't drop at the same time. Of course they can. On the off chance that they do, I doubt that bonds will be by much. If I try to insure against every bad thing that could happen, no matter how unlikely it may be, I will be sacrificing returns. In the last few years my bonds have outperformed cash, so even if they drop, I'm likely ahead of where I would be had I had those two years in cash. If they drop 10% and I need $50k of living expenses, I guess I just lost another $5k. At some point, unless one has enough in cash to live the rest of his or her life, there are risks being taken.

I already hold 2+ years in bonds (80/20 portfolio), which is more than target retirement funds recommend.

Even if I used a 12 month emergency fund (really, the most that you see recommended in most places) and put the rest in a Vanguard target date fund (again a very widely recommended strategy) and considered my emergency fund separate from my investments, I would hold significantly less bonds+cash than I do now. Should I somehow feel "safer" because the 12 months is separate and in cash in that scenario? I think that's a mistake. My portfolio as-is is more conservative than that, holding 2.5 months in cash and an 80/20 portfolio otherwise.

protagonist
Posts: 6467
Joined: Sun Dec 26, 2010 12:47 pm

Re: Reacting to low interest rates

Post by protagonist » Wed May 13, 2020 3:11 pm

One thing overlooked is that the only thing that really matters is REAL return, not NOMINAL.

12 month USA inflation rate ending April, 2020 was 0.3%, and I imagine it will be lower when the June figures come out.

If you are getting 1% vs. a 0.3% inflation rate you are beating inflation. Which is better? 1-2% interest with a 0.3% inflation rate? Or 3% interest with a 3% inflation rate? The answer is obvious. You may not be doing as badly as you think....especially if we head into deflation which is certainly a real possibility.

palanzo
Posts: 815
Joined: Thu Oct 10, 2019 4:28 pm

Re: Reacting to low interest rates

Post by palanzo » Wed May 13, 2020 3:27 pm

Triple digit golfer wrote:
Wed May 13, 2020 2:04 pm
KlangFool wrote:
Wed May 13, 2020 1:47 pm
Triple digit golfer wrote:
Wed May 13, 2020 1:38 pm

I already have 2+ years in bonds as well.
Triple digit golfer,

Why do you think that the stock and the bond cannot drop at the same time?

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

In any case, I do not care about the low-interest rate and/ow low expected return. There will be plenty of people that will be pushed into stock and/or high-risk bond. They will capitulate when they are unemployed. This story repeats itself in every recession.

Good luck! Make sure that you calculate the reward and the risk is worth it.

KlangFool
I don't think they can't drop at the same time. Of course they can. On the off chance that they do, I doubt that bonds will be by much. If I try to insure against every bad thing that could happen, no matter how unlikely it may be, I will be sacrificing returns. In the last few years my bonds have outperformed cash, so even if they drop, I'm likely ahead of where I would be had I had those two years in cash. If they drop 10% and I need $50k of living expenses, I guess I just lost another $5k. At some point, unless one has enough in cash to live the rest of his or her life, there are risks being taken.

I already hold 2+ years in bonds (80/20 portfolio), which is more than target retirement funds recommend.

Even if I used a 12 month emergency fund (really, the most that you see recommended in most places) and put the rest in a Vanguard target date fund (again a very widely recommended strategy) and considered my emergency fund separate from my investments, I would hold significantly less bonds+cash than I do now. Should I somehow feel "safer" because the 12 months is separate and in cash in that scenario? I think that's a mistake. My portfolio as-is is more conservative than that, holding 2.5 months in cash and an 80/20 portfolio otherwise.
It's not an off chance. Bonds dropped in March of 2020. This year. Some by 10%. To me that's not a little. And they dropped at just the wrong time if you wanted to rebalance.

palanzo
Posts: 815
Joined: Thu Oct 10, 2019 4:28 pm

Re: Reacting to low interest rates

Post by palanzo » Wed May 13, 2020 3:29 pm

protagonist wrote:
Wed May 13, 2020 3:11 pm
One thing overlooked is that the only thing that really matters is REAL return, not NOMINAL.

12 month USA inflation rate ending April, 2020 was 0.3%, and I imagine it will be lower when the June figures come out.

If you are getting 1% vs. a 0.3% inflation rate you are beating inflation. Which is better? 1-2% interest with a 0.3% inflation rate? Or 3% interest with a 3% inflation rate? The answer is obvious. You may not be doing as badly as you think....especially if we head into deflation which is certainly a real possibility.
Good point. The expected 10 year inflation rate is now 1%.

garlandwhizzer
Posts: 2863
Joined: Fri Aug 06, 2010 3:42 pm

Re: Reacting to low interest rates

Post by garlandwhizzer » Wed May 13, 2020 8:51 pm

I agree that deflation/economic growth stagnation rather than inflation/overheating economy appears the be our biggest risk for the foreseeable future. The possibility of negative US rates is real. Europe and Japan have them now. Mr. Powell says no now but that could change.

How long will the economic lockdown continue? Will this recession/recovery will be a V shape, a U shape, a W shape or some other? Lots of questions, lots of opinions, very little certainty.

When we do recover and return to a semi-normal economy which may take months or a couple of years or more--who knows--we expect that both rates and inflation will rise slightly from the their essentially zero levels at present. The robust consumer demand for goods and services that have long driven US economic growth may not be as strong after this is over as it was in the past. This sudden disaster has pointed out just how fragile living paycheck to paycheck can be. Now people see that it is important not just to spend but to have and maintain savings for a rainy day. Consumer sentiment may take a long term hit in favor of household savings.

There are other powerful secular forces that are aligned to keep inflation, rates, and economic growth low going forward perhaps for a decade or more. Bond yields are ridiculously low essentially zero real. Not much for bond lovers to crow about but not a disaster either. Likely to stay that way.

Garland Whizzer

simplesauce
Posts: 318
Joined: Tue Jan 17, 2017 8:22 am

Re: Reacting to low interest rates

Post by simplesauce » Wed May 13, 2020 10:15 pm

It is challenging to stick with the timeless recommendations of using Total Bond Market. At the same time, I quite like the point made above which indicates that bond returns are low, but so is inflation.

I would like to share what Dr. Burton Malkiel said when he declared he could no longer recommend Total Bond Market and instead recommends Emerging Markets Bonds, Corporate Bonds, and Dividend Stocks for his fixed income:

"Extremely low interest rates present a daunting challenge for bond investors. All the developed countries of the world are burdened with excessive amounts of debt"..."We have seen this movie before. At the end of World War II, the United States deliberately kept interest rates at very low levels to help service the debt that had accumulated during the war. By doing so, the United States reduced its debt-to-GDP ratio from 122 percent in 1946 to 33 percent in 1980. But it was achieved at the expense of bondholders. This is what is meant by the term "financial repression"..."During periods of financial repression the standard recommendations regarding bonds need to be fine-tuned and a partial substitution of stocks for bonds in that part of the portfolio designed for lower risk may be appropriate.”

pascalwager
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Re: Reacting to low interest rates

Post by pascalwager » Wed May 13, 2020 10:18 pm

KlangFool wrote:
Wed May 13, 2020 1:47 pm
Triple digit golfer wrote:
Wed May 13, 2020 1:38 pm

I already have 2+ years in bonds as well.
Triple digit golfer,

Why do you think that the stock and the bond cannot drop at the same time?

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

In any case, I do not care about the low-interest rate and/ow low expected return. There will be plenty of people that will be pushed into stock and/or high-risk bond. They will capitulate when they are unemployed. This story repeats itself in every recession.

Good luck! Make sure that you calculate the reward and the risk is worth it.

KlangFool
I wouldn't think "capitulate" to be the right term. This assumes that they are using total return-type withdrawals, of course: selling both stocks and bonds. Or, if they were 100% stocks, then they're simply making withdrawals for physical survival.

Capitulation means selling stocks to reduce portfolio risk after a market plunge. It's an overpowering fear response rather than selling proportionally to meet current expenses.

KlangFool
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Re: Reacting to low interest rates

Post by KlangFool » Thu May 14, 2020 7:21 am

pascalwager wrote:
Wed May 13, 2020 10:18 pm
KlangFool wrote:
Wed May 13, 2020 1:47 pm
Triple digit golfer wrote:
Wed May 13, 2020 1:38 pm

I already have 2+ years in bonds as well.
Triple digit golfer,

Why do you think that the stock and the bond cannot drop at the same time?

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

In any case, I do not care about the low-interest rate and/ow low expected return. There will be plenty of people that will be pushed into stock and/or high-risk bond. They will capitulate when they are unemployed. This story repeats itself in every recession.

Good luck! Make sure that you calculate the reward and the risk is worth it.

KlangFool
I wouldn't think "capitulate" to be the right term. This assumes that they are using total return-type withdrawals, of course: selling both stocks and bonds. Or, if they were 100% stocks, then they're simply making withdrawals for physical survival.

Capitulation means selling stocks to reduce portfolio risk after a market plunge. It's an overpowering fear response rather than selling proportionally to meet current expenses.
Have you ever been unemployed and run out of the emergency fund? Why do you think you can sell proportionally every month? Capitulation is the right word. It happened in every recession. The 100% folks will sell all at one shot when they can no longer stand the stress and they need to sleep.

I had been through too many recessions.

KlangFool

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Re: Reacting to low interest rates

Post by Call_Me_Op » Thu May 14, 2020 7:34 am

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.
Seems like the only things one can do are reach for yield in fixed-income, put more in stocks, or put money in more exotic investments. All of these things increase risk. I prefer to hold my nose and stay the course.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

pascalwager
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Re: Reacting to low interest rates

Post by pascalwager » Thu May 14, 2020 8:57 pm

KlangFool wrote:
Thu May 14, 2020 7:21 am
pascalwager wrote:
Wed May 13, 2020 10:18 pm
KlangFool wrote:
Wed May 13, 2020 1:47 pm
Triple digit golfer wrote:
Wed May 13, 2020 1:38 pm

I already have 2+ years in bonds as well.
Triple digit golfer,

Why do you think that the stock and the bond cannot drop at the same time?

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

In any case, I do not care about the low-interest rate and/ow low expected return. There will be plenty of people that will be pushed into stock and/or high-risk bond. They will capitulate when they are unemployed. This story repeats itself in every recession.

Good luck! Make sure that you calculate the reward and the risk is worth it.

KlangFool
I wouldn't think "capitulate" to be the right term. This assumes that they are using total return-type withdrawals, of course: selling both stocks and bonds. Or, if they were 100% stocks, then they're simply making withdrawals for physical survival.

Capitulation means selling stocks to reduce portfolio risk after a market plunge. It's an overpowering fear response rather than selling proportionally to meet current expenses.
Have you ever been unemployed and run out of the emergency fund? Why do you think you can sell proportionally every month? Capitulation is the right word. It happened in every recession. The 100% folks will sell all at one shot when they can no longer stand the stress and they need to sleep.

I had been through too many recessions.

KlangFool
I get it.

No, I've never been laid-off or unemployed. During the previous recessions, I was hardly even aware except when I saw my quarterly investment statements. But this one has my attention, of course.

Good luck.

JBTX
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Re: Reacting to low interest rates

Post by JBTX » Thu May 14, 2020 9:13 pm

What am I doing differently? Not much yet.

Things I am considering-

-Bought Ibonds at 0.2%
-considering eebonds
-given passing thought to start paying down 3.25% mortgage
- while i haven't done anything about it I'm unlikely to increase allocation to conventional bonds at these rates

7eight9
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Re: Reacting to low interest rates

Post by 7eight9 » Thu May 14, 2020 9:21 pm

I've been thinking about Multi-Year Guaranteed Annuities (MYGAs) and Secondary Market Annuities (SMA).
I guess it all could be much worse. | They could be warming up my hearse.

FoolStreet
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Re: Reacting to low interest rates

Post by FoolStreet » Thu May 14, 2020 10:41 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.

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.
I think you should stay the course. A millionaire with an 80/20 would have 20% in bonds, which are now basically the same as cash. You wouldn’t change your AA just because bonds are paying less. Assume you are retired and pulling a SFR of 4%. You want 5 years of stability. That 20% is your cash fund. About the same rate as bonds, but you aren’t going to go buy stocks because the rates are low.

Just get comfortable with a short-medium term bond fund, possibly munis depending on placement, and let it ride.

VBILX is intermediate bonds are paying 1.44 with a 6yr duration. It is what it is.

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Leif
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Re: Reacting to low interest rates

Post by Leif » Thu May 14, 2020 10:51 pm

Not much change. I'm moving my cash from money market funds to "high yield savings". Holding cash for 1 to 2 years for residual living expenses. Did some THL, but that is reacting to equity price not low interest rates. I'm expecting interest rates to stay at zero for the next few years so I'm continuing to add to my TBM fund instead of a short term bond for fixed income. AA remaining the same. FYI, Retired, pre-RMD.

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Leif
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Re: Reacting to low interest rates

Post by Leif » Thu May 14, 2020 11:10 pm

Triple digit golfer wrote:
Mon May 11, 2020 8:50 pm
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.
I'm working hard to get equities out of my tIRA by using Roth conversions and selling tIRA equities and buying taxable equities (same AA). This is to reduce the balance and also reduce my expected return in my tIRA (for the purpose of reduced RMDs/taxes).

So I would not find it pleasant to be buying equities in my tIRA. Once my SS and RMDs kick in my cash levels should be lower than today yet still provide 1-2 years of residual living expenses.

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