VMMXX and inflation/interest rates

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Calhoon
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VMMXX and inflation/interest rates

Post by Calhoon » Wed Jul 11, 2018 7:12 am

Does a money market account like the vanguard prime VMMXX do a good job of keeping up with inflation? I know right now it's at about 2 percent, which is in the ball park, but if inflation spiked would this fund keep pace?

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simplesimon
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Re: VMMXX and inflation/interest rates

Post by simplesimon » Wed Jul 11, 2018 7:27 am

Calhoon wrote:
Wed Jul 11, 2018 7:12 am
Does a money market account like the vanguard prime VMMXX do a good job of keeping up with inflation? I know right now it's at about 2 percent, which is in the ball park, but if inflation spiked would this fund keep pace?
No, it will usually lag changes in inflation. Refer to a period as recently as the last five years where it yielded almost 0% while inflation was about 1%. And we're not even talking about a "spike", which I define as unexpected inflation...so by definition it would not be able to keep up with it.

lack_ey
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Re: VMMXX and inflation/interest rates

Post by lack_ey » Wed Jul 11, 2018 8:15 am

Over the last 100+ years in the U.S., Treasury bill returns have beaten inflation by a bit over half a percent a year on average. But that includes about a 50-year period of cumulative losing to inflation. Note that the country was growing faster over this period than it is now, with respect to population and per capita GDP and so on. On average future rates may be biased in a direction relative to what we saw in the past, probably lower in the future relative to inflation.

Generally Vanguard Prime Money Market should have similar returns as T-bills, maybe slightly better than the short end.

Usually when inflation is higher, short rates are higher, but the relationship is not that strong and this is more about sustained inflation rather than spikes. If inflation spikes, over a shorter period of time you should probably expect cash returns to lag inflation.

It's not an investment that does a good job of keeping up with inflation in any sense, but it has a decent chance of keeping pace or better over a lot of periods, with other periods (when more accomodative monetary policy is needed) not so much.

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SimpleGift
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Re: VMMXX and inflation/interest rates

Post by SimpleGift » Wed Jul 11, 2018 8:59 am

Calhoon wrote:
Wed Jul 11, 2018 7:12 am
Does a money market account like the vanguard prime VMMXX do a good job of keeping up with inflation?
We have data going back to 1934 on 3-month Treasury bills, which are a fairly good proxy for money market fund returns. The chart below shows monthly T-bill rates adjusted for inflation.
  • Image
    Note: Chart shows 3-year rolling monthly returns.
    Data source: FRED
One can ignore the period of the 1940s, as the yields of T-bills were artificially capped by the Federal government at 0.375%, while inflation was averaging about 6% annually! But since the 1950s, T-bills have generally kept pace with inflation, as long as one was willing to stick with them for the long-term (say at least a decade or two).
Cordially, Todd

pascalwager
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Re: VMMXX and inflation/interest rates

Post by pascalwager » Wed Jul 11, 2018 9:09 am

The PortfolioCharts site shows cash heat maps starting at about 1970 and exceeding inflation for most years. So, I've been more inclined to consider my considerable cash as part of my portfolio and even more so currently with rising interest rates.

https://portfoliocharts.com/portfolio/bil/

gmaynardkrebs
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Re: VMMXX and inflation/interest rates

Post by gmaynardkrebs » Wed Jul 11, 2018 9:47 am

Calhoon wrote:
Wed Jul 11, 2018 7:12 am
Does a money market account like the vanguard prime VMMXX do a good job of keeping up with inflation? I know right now it's at about 2 percent, which is in the ball park, but if inflation spiked would this fund keep pace?
In a taxable account, you need to focus in the after tax yield, particularly if you are in a high federal tax bracket, or live in a high tax state. Unfavorable tax treatment can make them poor inflation hedges. Absent taxes (eg, an IRA), Prime should keep up pretty well with inflation.

garlandwhizzer
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Re: VMMXX and inflation/interest rates

Post by garlandwhizzer » Wed Jul 11, 2018 1:22 pm

MMF do a better job of keeping up with inflation/interest rates than do longer term bonds during environments of rising inflation and rising rates. MMF tend not to produce positive real returns during these periods but rather to suffer less in real inflation adjusted terms than do longer term bonds. For example, VMMXX has outperformed both Vanguard's Intermediate Treasury Fund and its TBM Funds by 2.8% - 2.9% over the last year. It is the only one of the three with a positive nominal return YTD (+0.9%). In such an environment--rising rates, rising inflation--MMF be an appropriate choice for a portion of one's fixed income allocation as are TIPS.

Assets that can keep up with inflation and possibly produce positive real returns in that environment include commodities, real assets, REITS, international diversification (inflation is often country specific, not worldwide), and to some extent US equity which tends to eventually catch up in real terms often after a roller coaster ride to get there. The problem with focusing too much on potential inflation risk and loading up on commodities, etc., is that commodities tend to produce lower long term returns than equities. Inflation protection is not free.

No investor gets rich during a long term period of rising rates and rising inflation. Nothing produces robust real returns, especially so in the case of stagflation like in the 1970s, something that one thinks about now except Alan Greenspan who sees that as our likely future. The goal is to minimize damage in real terms and wait it out. TIPS, MMF, and T Bills are tools to reduce fixed income damage as you wait for the rate/inflation tide to turn.

Garland Whizzer

Calhoon
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Re: VMMXX and inflation/interest rates

Post by Calhoon » Thu Jul 12, 2018 7:12 am

Thanks, that's exactly where I was at, debating between VMMXX and bonds after having took 40 percent of my money out of equities.

Had always been 100 percent equities, for thirty years, and never worried about it...but now in the current environment am getting nervous for the first time and decided to approach more of a traditional asset allocation given my age. Right now it's sitting in VMMXX, hence the question. Sure I'm wrong because who knows such things, but I really don't see how with everything going on interest rates and maybe inflation isn't going to rise.

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