1-2 year investment suggestions

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richard_texan
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1-2 year investment suggestions

Post by richard_texan » Sat Mar 10, 2018 2:27 pm

Hello Bogleheads -

I'm considering options for what to do with a six figure sum of cash (this is a taxable account, not retirement). We would like to have access to this cash in roughly 1-2 years, but definitely not before then. So we're looking to park the money somewhere where it won't just lose out due to inflation but of course want to avoid risky investments like stocks at this point.

The options I have considered thus far are CDs and T Bills. The rates seem approximately the same both options for the 1-2 year timeline, so due to the tax advantage of T Bills (we live in CA), I am considering going that route.

However with this strategy it feels like at best we're keeping up with inflation or ever so slightly beating it. Especially if we do a 3,6,9,12 month ladder strategy - we might even fall behind inflation.

I'm wondering if there is a great 3rd option that I'm missing?

And if it seems like interest rates are slowly creeping up, what is the best strategy to avoid missing out on those potential gains - would it still be a ladder strategy even given the low rates that we have today for shorter term CDs / T Bills?

Your thoughts are greatly appreciated. Thank you in advance. :sharebeer

chevca
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Re: 1-2 year investment suggestions

Post by chevca » Sat Mar 10, 2018 2:35 pm

Over 1 to 2 years, "lose to inflation" isn't really a concern, IMO.

Online savings accounts are creeping upward for APY. I'd simply put it in one of those and call it good.

But, I'm a simple guy and over that time frame return of principal is more important to me than return on principal.

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Tyler Aspect
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Re: 1-2 year investment suggestions

Post by Tyler Aspect » Sat Mar 10, 2018 2:39 pm

I would say taking a look at US Treasury notes on the secondary market. 15 month maturity is yielding around 2.1% at this moment.
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Megamill
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Re: 1-2 year investment suggestions

Post by Megamill » Sat Mar 10, 2018 2:52 pm

richard_texan wrote:
Sat Mar 10, 2018 2:27 pm
Hello Bogleheads -

I'm considering options for what to do with a six figure sum of cash (this is a taxable account, not retirement). We would like to have access to this cash in roughly 1-2 years, but definitely not before then. So we're looking to park the money somewhere where it won't just lose out due to inflation but of course want to avoid risky investments like stocks at this point.

The options I have considered thus far are CDs and T Bills. The rates seem approximately the same both options for the 1-2 year timeline, so due to the tax advantage of T Bills (we live in CA), I am considering going that route.

However with this strategy it feels like at best we're keeping up with inflation or ever so slightly beating it. Especially if we do a 3,6,9,12 month ladder strategy - we might even fall behind inflation.

I'm wondering if there is a great 3rd option that I'm missing?

And if it seems like interest rates are slowly creeping up, what is the best strategy to avoid missing out on those potential gains - would it still be a ladder strategy even given the low rates that we have today for shorter term CDs / T Bills?

Your thoughts are greatly appreciated. Thank you in advance. :sharebeer
We are in the same boat. I found a credit union in our area that is running a 25 month CD special @ 2.25 apy

3funder
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Re: 1-2 year investment suggestions

Post by 3funder » Sat Mar 10, 2018 2:56 pm

1-2 yrs? Checking, savings, or money market account.

Dottie57
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Re: 1-2 year investment suggestions

Post by Dottie57 » Sat Mar 10, 2018 3:16 pm

No investments. Put in some form of savings in a bank or credit union.

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welderwannabe
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Re: 1-2 year investment suggestions

Post by welderwannabe » Sat Mar 10, 2018 3:29 pm

Nothing wrong with rolling 3 or 6 month bills. You could go through the effort of a ladder too, but over 1-2 years the difference is negligible. I have a slug of cash that is in multiple 3 month (13 week) bills on auto-roll at Fidelity.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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randomizer
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Re: 1-2 year investment suggestions

Post by randomizer » Sat Mar 10, 2018 4:04 pm

CDs would certainly be simpler, but the tax advantage of treasuries would incline me to just go that way.
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Kevin M
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Re: 1-2 year investment suggestions

Post by Kevin M » Sat Mar 10, 2018 4:51 pm

Treasuries are a pretty good deal these days, especially in high-tax states like California.

To get the inflation concern out of the way up front, you can't know for sure how you'll do with respect to inflation (i.e., real return) unless you invest in TIPS or I Bonds. For money you won't need for at least one year, you can put $10K per person (and $10 per living trust) per year into I Bonds and earn 0.1% real. The composite (nominal) rate for the first six months currently is 2.58%, but that rate will change every six months. Still, it's a good real rate considering the term risk is minimal after one year (three months of interest lost before five years), and you get the state tax deduction on top of the quoted yields.

The shortest-term TIPS I see at Fidelity is a little over one year (matures 4/15/19), at a real yield of 0.011%. Most people don't seem to like the tax complications of TIPS in a taxable account.

The Treasury yield curve is very steep at the short end. Your taxable-equivalent yield (TEY) depends on your federal and state marginal tax rates if you don't itemize deductions, and only on your marginal state tax rate if you do. For me, the TEY for a 3-month Treasury is 1.93% (based on 1.72% yield I see at Fidelity), which is a hefty premium over the 1.56% yield on Prime money market (no term risk). All yields quoted here are for quantities of at least 100 (100,000 face value), and you'll get a few basis points less for smaller quantities on the secondary market. You can get the same yields as institutional investors if you buy at auction.

The Treasury yield curve becomes less steep as you extend maturity, but still is reasonably steep out to one year, with the 1-year yield at 2.36% TEY for me (based on 2.10% yield). My TEY for 2-year Treasury is 2.57% (2.29% yield), and 3-year is 2.75% (2.45% yield). Again, yields will be a few basis points less for quantities of less than 100.

Treasuries beat new-issue brokered CDs out to 9-month maturity even before state tax savings, and tie them at 1-year. Treasury TEYs for me are slightly higher out to 5-year maturity compared to new-issue CDs, but probably can beat Treasuries with CDs on the secondary market by a smidge. For example, on Friday I bought a 3-year secondary CD (in tax-advantaged) at about 2.8%, so slightly higher than the 3-year Treasury TEY of 2.75% in taxable.

Kevin
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richard_texan
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Re: 1-2 year investment suggestions

Post by richard_texan » Wed Mar 14, 2018 12:59 am

Thanks all, especially Kevin. When looking at the TEY, t bills make a lot more sense right now given our high state tax rate in California. So I think we'll go that route.

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