Is VSBSX too risky for 6 months?

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michaeljmroger
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Is VSBSX too risky for 6 months?

Post by michaeljmroger » Tue Feb 12, 2019 1:12 am

I have some cash I need to park safely for maximum 6 months. VUSXX is my default choice for that kind of use case but I’m tempted to go with VSBSX instead to benefit from the slightly higher yield. Would it be unreasonably risky given my short-term needs?

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Re: Is VSBSX too risky for 6 months?

Post by SoonerD » Tue Feb 12, 2019 2:11 am

michaeljmroger wrote:
Tue Feb 12, 2019 1:12 am
I have some cash I need to park safely for maximum 6 months. VUSXX is my default choice for that kind of use case but I’m tempted to go with VSBSX instead to benefit from the slightly higher yield. Would it be unreasonably risky given my short-term needs?
you're seeking 19 bps of yield and risking 2-year duration to get it. 19 bps will get you $95.00 per $100,000 invested in 6-months plus or minus any NAV change in VSBSX. A 0.25% (quarter-point)increase in interest rates might cause the NAV to decline by 0.475% or ($475)

if this is money that can not suffer a loss in your 6-month window for you to meet your short-term goal then you've answered your own question.

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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Tue Feb 19, 2019 11:52 pm

It’s hard for me to pretend I’m not aware the Fed officially paused its rate hikes, so I’m more and more tempted to take some credit risk with these funds since I’ll only hold them for a few months.

I’m now looking at Vanguard’s CA Intermediate-Term Tax-Exempt Fund (VCADX), which would yield approximately 0.6% more after taxes than VUSXX (assuming my math is correct). I’m not gonna lie: it’s a tempting premium.

Am I crazy to take such a risk? This money needs to be mostly safe, but I could tolerate a small loss if the Fed would suddenly change its mind.

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Re: Is VSBSX too risky for 6 months?

Post by UpperNwGuy » Tue Feb 19, 2019 11:55 pm

Yes, you are crazy to take a risk for six months when the additional return is not significant.

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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 12:00 am

UpperNwGuy wrote:
Tue Feb 19, 2019 11:55 pm
Yes, you are crazy to take a risk for six months when the additional return is not significant.
You’re probably right, but it’s a bit hard for me to determine what’s “significant” (we’re talking about 7-figures so even 60 basis points translate to big money).

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Re: Is VSBSX too risky for 6 months?

Post by SevenBridgesRoad » Wed Feb 20, 2019 12:09 am

OK, I’ll bite. It’s more than a million bucks and you’ve done the math, as you state. Since you’ve asked for advice, what are the dollars you will make for each option you are considering? We can then give you our opinions on whether we think it’s significant.
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Re: Is VSBSX too risky for 6 months?

Post by aspiringboglehead » Wed Feb 20, 2019 12:16 am

michaeljmroger wrote:
Wed Feb 20, 2019 12:00 am
UpperNwGuy wrote:
Tue Feb 19, 2019 11:55 pm
Yes, you are crazy to take a risk for six months when the additional return is not significant.
You’re probably right, but it’s a bit hard for me to determine what’s “significant” (we’re talking about 7-figures so even 60 basis points translate to big money).
The corresponding risk is greater then, too. It's hard to answer definitively, however, without having a sense of how bad a shortfall after 6 months would be. In general, you are engaging in speculation from a liability-matching perspective if you accept a duration further away than the planned expense; it may not be a particularly risky gamble, but it is still a gamble.

In case it's helpful, VUSFX would be very slightly more of a gamble on credit risk and very slightly less of a gamble on interest-rate risk.
Last edited by aspiringboglehead on Wed Feb 20, 2019 12:24 am, edited 1 time in total.

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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 12:20 am

SevenBridgesRoad wrote:
Wed Feb 20, 2019 12:09 am
OK, I’ll bite. It’s more than a million bucks and you’ve done the math, as you state. Since you’ve asked for advice, what are the dollars you will make for each option you are considering? We can then give you our opinions on whether we think it’s significant.
The after-tax difference would only be $5500 actually. I was expecting more :?

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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 12:24 am

aspiringboglehead wrote:
Wed Feb 20, 2019 12:16 am
michaeljmroger wrote:
Wed Feb 20, 2019 12:00 am
UpperNwGuy wrote:
Tue Feb 19, 2019 11:55 pm
Yes, you are crazy to take a risk for six months when the additional return is not significant.
You’re probably right, but it’s a bit hard for me to determine what’s “significant” (we’re talking about 7-figures so even 60 basis points translate to big money).
The corresponding risk is greater then, too. It's hard to answer definitively, however, without having a sense of how bad a shortfall after 6 months would be. In general, however, you are engaging in speculation from a liability-matching perspective if you accept a duration further away than the planned expense; it may not be a particularly risky gamble, but it is still a gamble.

In case it's helpful, VUSFX would be very slightly more of a gamble on credit risk and very slightly less of a gamble on interest-rate risk.
Given my high tax-bracket, a taxable bond wouldn’t be a good option for me.

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Re: Is VSBSX too risky for 6 months?

Post by aspiringboglehead » Wed Feb 20, 2019 12:31 am

michaeljmroger wrote:
Wed Feb 20, 2019 12:24 am
aspiringboglehead wrote:
Wed Feb 20, 2019 12:16 am
michaeljmroger wrote:
Wed Feb 20, 2019 12:00 am
UpperNwGuy wrote:
Tue Feb 19, 2019 11:55 pm
Yes, you are crazy to take a risk for six months when the additional return is not significant.
You’re probably right, but it’s a bit hard for me to determine what’s “significant” (we’re talking about 7-figures so even 60 basis points translate to big money).
The corresponding risk is greater then, too. It's hard to answer definitively, however, without having a sense of how bad a shortfall after 6 months would be. In general, however, you are engaging in speculation from a liability-matching perspective if you accept a duration further away than the planned expense; it may not be a particularly risky gamble, but it is still a gamble.

In case it's helpful, VUSFX would be very slightly more of a gamble on credit risk and very slightly less of a gamble on interest-rate risk.
Given my high tax-bracket, a taxable bond wouldn’t be a good option for me.
Ah, I was just looking at your original post. An intermediate-term, single-state muni fund is a very different proposition from a short-term Treasury fund or a money market. The straight comparison to VUSXX for you would be VCTXX as to taxable vs. tax-free bonds. (VUSXX and VSBSX, of course, are taxable at the federal but not the state level.) Beyond that, you can choose to gamble on the stability of interest rates if you'd like, but it's just a gamble.

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Re: Is VSBSX too risky for 6 months?

Post by SevenBridgesRoad » Wed Feb 20, 2019 12:48 am

michaeljmroger wrote:
Wed Feb 20, 2019 12:20 am
SevenBridgesRoad wrote:
Wed Feb 20, 2019 12:09 am
OK, I’ll bite. It’s more than a million bucks and you’ve done the math, as you state. Since you’ve asked for advice, what are the dollars you will make for each option you are considering? We can then give you our opinions on whether we think it’s significant.
The after-tax difference would only be $5500 actually. I was expecting more :?
Hmmm. $5,500? Really? Not understanding. Are you talking a risk free after tax difference? If so, no brainer.
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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 12:51 am

SevenBridgesRoad wrote:
Wed Feb 20, 2019 12:48 am
Hmmm. $5,500? Really? Not understanding. Are you talking a risk free after tax difference? If so, no brainer.
Which part are you “not understanding” ?

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Re: Is VSBSX too risky for 6 months?

Post by SevenBridgesRoad » Wed Feb 20, 2019 1:12 am

Why not make $5,500?
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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 1:16 am

SevenBridgesRoad wrote:
Wed Feb 20, 2019 1:12 am
Why not make $5,500?
Well, because VUSXX is a lot safer than VCADX.

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Re: Is VSBSX too risky for 6 months?

Post by SevenBridgesRoad » Wed Feb 20, 2019 1:20 am

Safer?

So, 5,500 is the upside. What is the downside? Including why do you need the principal?
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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 1:56 am

The downside is that I could lose close to $25,000 if interest rates increase by 0.25%. It seems like it won't happen in the short term, but it wouldn't be a good surprise if it did...

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Re: Is VSBSX too risky for 6 months?

Post by SevenBridgesRoad » Wed Feb 20, 2019 2:44 am

Ok, upside (5500) vs unlikely but possible downside (25000) established. And why do you need the principal?
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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 7:41 am

SevenBridgesRoad wrote:
Wed Feb 20, 2019 2:44 am
Ok, upside (5500) vs unlikely but possible downside (25000) established. And why do you need the principal?
To buy a house.

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Re: Is VSBSX too risky for 6 months?

Post by Therapist Investor » Wed Feb 20, 2019 9:47 am

michaeljmroger wrote:
Wed Feb 20, 2019 7:41 am
SevenBridgesRoad wrote:
Wed Feb 20, 2019 2:44 am
Ok, upside (5500) vs unlikely but possible downside (25000) established. And why do you need the principal?
To buy a house.
Seems like an unnecessary risk. VUSXX is currently earning 2.34%. VSBSX is currently earning 2.50% with significantly more downside risk. Why not just buy a 6 month T-bill from Treasury Direct? The most recent 6 month treasuries are yielding 2.52%. You'd have the added advantage of no downside risk, the tax advantage of a T-bill, and the higher interest rate all in one.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

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Re: Is VSBSX too risky for 6 months?

Post by dbr » Wed Feb 20, 2019 10:02 am

michaeljmroger wrote:
Tue Feb 19, 2019 11:52 pm

Am I crazy to take such a risk? This money needs to be mostly safe, but I could tolerate a small loss if the Fed would suddenly change its mind.
You haven't given us any idea of what you mean by safe. In fact the word is meaningless.

If for some bizarre reason you can't tolerate getting back even one penny less than you put in, then VSBXS is not safe. If a couple of percent up or down is of no consequence then it absolutely does not matter which investment you choose. If for some other bizarre reason you need to get back 102.5% a year then VUSXX is 100% risk because you won't get back what you need by a shortfall of 0.16% expected, and who knows what in fact. If you care about the purchasing power of your investment both of these funds could fail to match inflation. Anyway, someone else suggested some alternatives that are "safe" and higher yielding, maybe.

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Re: Is VSBSX too risky for 6 months?

Post by MotoTrojan » Wed Feb 20, 2019 10:08 am

michaeljmroger wrote:
Tue Feb 12, 2019 1:12 am
I have some cash I need to park safely for maximum 6 months. VUSXX is my default choice for that kind of use case but I’m tempted to go with VSBSX instead to benefit from the slightly higher yield. Would it be unreasonably risky given my short-term needs?
Perhaps use the Andrews 6-month CD. Think it was 3.25% and expires any day now.

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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 10:10 am

I presumably have a bit more cash than needed, which is why I'm tempted to take some credit risk, especially since this risk seems very low right now:
New York Fed President John Williams on Tuesday said he was comfortable with the level U.S. interest rates are at now, and sees no need to raise them again unless growth or inflation shift to an unexpectedly higher gear.

(Source: CNBC)

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Re: Is VSBSX too risky for 6 months?

Post by livesoft » Wed Feb 20, 2019 10:13 am

If the FFR goes up 0.25%, I imagine that any house prices will drop by about the same amount.

I would take the risk especially if I had other assets or income that could fill in the loss.
Last edited by livesoft on Wed Feb 20, 2019 10:19 am, edited 1 time in total.
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Re: Is VSBSX too risky for 6 months?

Post by dbr » Wed Feb 20, 2019 10:14 am

A different perspective that is actually very important is that if "safety" is the issue then one should not even be looking at the return.

I am not one to invest by mantra but in this case the principle is "What counts is return of principal and not return on principal." By looking at return you are getting twisted up over amounts that are negligible relative to the prospective transaction of buying a house.

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Re: Is VSBSX too risky for 6 months?

Post by dbr » Wed Feb 20, 2019 10:15 am

livesoft wrote:
Wed Feb 20, 2019 10:13 am
If the FFR goes up 0.25%, I imagine that any house prices will drop by about the same amount.

I would take the risk especially if I had other assets or income that could fill in the loss.
In this case the assessment is that "safe" is a sufficiently loose term that it doesn't matter much which investment is chosen, so you pay your money and you take your choice.

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Re: Is VSBSX too risky for 6 months?

Post by pdavi21 » Wed Feb 20, 2019 10:18 am

There is a risk that interest rates will fall and longer duration will outperform. When duration yield premiums fall, it's because investors expect longer term rates to fall. This leads to outperformance in bonds that lock in higher rates for longer.

NEVER assume duration risk is not adequately rewarded, and NEVER TIME THE BOND MARKET.

Buy the fund with the risk level you want (or total bond) and stick with it.
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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 10:22 am

dbr wrote:
Wed Feb 20, 2019 10:14 am
A different perspective that is actually very important is that if "safety" is the issue then one should not even be looking at the return.

I am not one to invest by mantra but in this case the principle is "What counts is return of principal and not return on principal." By looking at return you are getting twisted up over amounts that are negligible relative to the prospective transaction of buying a house.
Relativity is a fascinating concept. On one hand, you're obviously right: the potential premium we're discussing is negligible compared to the total funds. On the other hand, earning more than $5k after tax for just a couple of clicks feels like an outstanding return that's hard to ignore, no matter the initial funds.

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Re: Is VSBSX too risky for 6 months?

Post by livesoft » Wed Feb 20, 2019 10:24 am

I was looking at some YTD returns of fixed income funds this morning:

1.27% VBTLX total US bond market index
1.40% VSCSX Short-term corporate bond index
0.34% VMMXX Prime money market
1.05% FLRN floating rate investment grade
0.29% BIL 1-3 month T-bill

The numbers don't predict future returns, but they do suggest something to me.
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Re: Is VSBSX too risky for 6 months?

Post by dbr » Wed Feb 20, 2019 10:26 am

michaeljmroger wrote:
Wed Feb 20, 2019 10:22 am
dbr wrote:
Wed Feb 20, 2019 10:14 am
A different perspective that is actually very important is that if "safety" is the issue then one should not even be looking at the return.

I am not one to invest by mantra but in this case the principle is "What counts is return of principal and not return on principal." By looking at return you are getting twisted up over amounts that are negligible relative to the prospective transaction of buying a house.
Relativity is a fascinating concept. On one hand, you're obviously right: the potential premium we're discussing is negligible compared to the total funds. On the other hand, earning more than $5k after tax for just a couple of clicks feels like an outstanding return that's hard to ignore, no matter the initial funds.
Well, you can't use the word "safe" about an investment and then start thinking how nice it would be to get a windfall of some extra money.

This thread might be quite different if the original question was "How much money maximum could I make in six months if I really tried." It would be understood that recommendations to put it all on red at the casino are frivolous.

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Re: Is VSBSX too risky for 6 months?

Post by student » Wed Feb 20, 2019 10:27 am

For 6 months, I would just put it in a high yield online saving account.

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Re: Is VSBSX too risky for 6 months?

Post by dbr » Wed Feb 20, 2019 10:32 am

student wrote:
Wed Feb 20, 2019 10:27 am
For 6 months, I would just put it in a high yield online saving account.
Actually, that is exactly what I would do as well.

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Re: Is VSBSX too risky for 6 months?

Post by livesoft » Wed Feb 20, 2019 10:34 am

Here is another way to think about all this:

Instead of thinking how much can I make in a bond fund investment in the next 6 months?
One could think this way:
Can I make double the total return of VSBSX after taxes at some point in the next 6 months?
Or:
Can I make double the total return of a high-yield savings account after taxes at some point in the next 6 months?

That is, one doesn't have to buy today; Nor does one have to sell in exactly 6 months. If one sees they have made their goal early, then sell and invest in VSBSX or a tax-exempt money market fund or something less risky.
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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Wed Feb 20, 2019 2:46 pm

The Fed just released the minutes from their last meeting and it's now official they're keeping interest rates on hold, so it looks like I wouldn't take a big risk by moving to a bond fund for the next 6 months.

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Re: Is VSBSX too risky for 6 months?

Post by zuma » Thu Feb 21, 2019 3:22 am

Therapist Investor wrote:
Wed Feb 20, 2019 9:47 am
michaeljmroger wrote:
Wed Feb 20, 2019 7:41 am
SevenBridgesRoad wrote:
Wed Feb 20, 2019 2:44 am
Ok, upside (5500) vs unlikely but possible downside (25000) established. And why do you need the principal?
To buy a house.
Seems like an unnecessary risk. VUSXX is currently earning 2.34%. VSBSX is currently earning 2.50% with significantly more downside risk. Why not just buy a 6 month T-bill from Treasury Direct? The most recent 6 month treasuries are yielding 2.52%. You'd have the added advantage of no downside risk, the tax advantage of a T-bill, and the higher interest rate all in one.
This seems like the best answer to me.

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Re: Is VSBSX too risky for 6 months?

Post by nisiprius » Thu Feb 21, 2019 10:20 pm

michaeljmroger wrote:
Wed Feb 20, 2019 2:46 pm
The Fed just released the minutes from their last meeting and it's now official they're keeping interest rates on hold, so it looks like I wouldn't take a big risk by moving to a bond fund for the next 6 months.
1) It is not "official that they're keeping interest rates on hold." The Fed said nothing of the kind. This is what the Fed said:
In light of global economic and financial developments and muted inflation pressures, [the Fed's policy committee] will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.
2) The bonds in the fund have an average maturity of two years. The Fed doesn't control the two-year interest rate. The two-year interest rate is set by the market. Even if you think you know what the Fed will do (and they can, should, and in the past, have changed their minds if something about the economy changed--in fact, they did change between December and January), that only tells you what will happen with the overnight rate, not the two-year rate.

3) The duration of the fund is 1.9 years. That means it is a reasonably safe place to put money that you will not need for 1.9 years. You say you need to "park it safely for six months." This fund is not suitable if you do not want to risk losing some money during that six months.

4) Forget interest rate predictions, just look at the actual performance of this fund. Instead of the silky-smooth growth of a money-market fund or a bank account, it looks like a torn piece of paper. And the ups and downs didn't synchronize with Fed meetings.

Source

Image

It is plain to the eyeball, first, that on a $10,000 initial investment, the brokerage balance in this fund has jinked up and down frequently by amounts as large as $100. That is to say, over and over again it has lost amounts on the order of half a percent to one percent over fairly short periods of time.

Even more important, you can pick out many places on this chart where an investment would have lost money over a six-month period.

If you put your money into this fund, six months later you might have less money than when you started.

Probably not a big loss, but a loss. I don't know what you mean by "safely." But, in your desire to get more, you could end up getting less, that's definitely in the cards. If it would really bother you to end up with less money than you started with, don't do it.
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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Fri Feb 22, 2019 12:46 am

nisiprius wrote:
Thu Feb 21, 2019 10:20 pm
michaeljmroger wrote:
Wed Feb 20, 2019 2:46 pm
The Fed just released the minutes from their last meeting and it's now official they're keeping interest rates on hold, so it looks like I wouldn't take a big risk by moving to a bond fund for the next 6 months.
1) It is not "official that they're keeping interest rates on hold." The Fed said nothing of the kind. This is what the Fed said:
In light of global economic and financial developments and muted inflation pressures, [the Fed's policy committee] will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.
2) The bonds in the fund have an average maturity of two years. The Fed doesn't control the two-year interest rate. The two-year interest rate is set by the market. Even if you think you know what the Fed will do (and they can, should, and in the past, have changed their minds if something about the economy changed--in fact, they did change between December and January), that only tells you what will happen with the overnight rate, not the two-year rate.

3) The duration of the fund is 1.9 years. That means it is a reasonably safe place to put money that you will not need for 1.9 years. You say you need to "park it safely for six months." This fund is not suitable if you do not want to risk losing some money during that six months.

4) Forget interest rate predictions, just look at the actual performance of this fund. Instead of the silky-smooth growth of a money-market fund or a bank account, it looks like a torn piece of paper. And the ups and downs didn't synchronize with Fed meetings.

Source

Image

It is plain to the eyeball, first, that on a $10,000 initial investment, the brokerage balance in this fund has jinked up and down frequently by amounts as large as $100. That is to say, over and over again it has lost amounts on the order of half a percent to one percent over fairly short periods of time.

Even more important, you can pick out many places on this chart where an investment would have lost money over a six-month period.

If you put your money into this fund, six months later you might have less money than when you started.

Probably not a big loss, but a loss. I don't know what you mean by "safely." But, in your desire to get more, you could end up getting less, that's definitely in the cards. If it would really bother you to end up with less money than you started with, don't do it.
Thanks for your great answer! I pulled the trigger yesterday though and actually moved to VWIUX so I guess I’m taking even more risk than with VSBSX, but I’m fine with it. I have an EF I could use if things go really badly, but I must say I’m fairly optimistic. We’ll see!

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Re: Is VSBSX too risky for 6 months?

Post by nisiprius » Fri Feb 22, 2019 7:30 am

michaeljmroger wrote:
Fri Feb 22, 2019 12:46 am
...Thanks for your great answer! I pulled the trigger yesterday though and actually moved to VWIUX so I guess I’m taking even more risk than with VSBSX, but I’m fine with it. I have an EF I could use if things go really badly, but I must say I’m fairly optimistic. We’ll see!
Imagine putting 95% of your money into something that's like a 2.32% (SEC yield) bank account, but taking the remaining 5% to the casino. You've got half a chance of winning at the casino, and if you lose at the casino you've got a decent chance of losing less than the bank account makes. You've done something like that.

If it goes up and earns more than a money market fund, we will learn nothing because that's quite possible. Worse yet, you may learn the wrong lesson, because it will have been luck, but you may kid yourself that it was because you figured out the Fed and the bond market.

VWIUX is an intermediate-term fund, and it is indeed riskier than VSBSX. You should at least make a point of familiarizing yourself with Vanguard's own guidance. You should take it only as guidance, but you should be aware of it:

VSBSX

Image

VWIUX

Image

And if you click on the underlined purple words, which are a link:
Conservative to moderate funds Risk level 2

Vanguard funds classified as conservative to moderate are subject to low to moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (4 to 10 years).
So, Vanguard is saying that this fund is appropriate for money you will not need for four to ten years, and you are using it for money you will need in six months.

Your dimensions of risk are that because it is an investment-grade bond fund and not a stock fund, the largest losses I see as having occurred in recent six-month periods have been only $700 on a $10,000 investment, so that's a reasonable guess on what could happen in a bad case, and because the duration, five years, is so much longer than your holding period, overall losses in six months are very possible.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Is VSBSX too risky for 6 months?

Post by nisiprius » Fri Feb 22, 2019 9:20 am

So, I've done a little work.

Vanguard Intermediate-Term Tax-Exempt Fund, VWIUX
VWIUX: 10/31/1977 through 12/31/2018, monthly data, there have been a total of 489 overlapping six-month periods.
VWIUX lost money 91 times, i.e. a 19% probability of losing money.
Including only the 91 losses, the average loss was -2.90%.
The worst loss was -15.79%, and it occurred between 9/30/1979 and 3/31/1980.

Source

Image

Vanguard Short-Term Treasury Index, Admiral shares, VSBSX
VSBSX: 12/31/2009 through 12/31/2018, monthly data, there have been a total of 103 overlapping six-month periods.
VSBSX lost money 18 times, a 17% probability of losing money.
Looking only at the 18 losses, the average loss was -0.24%.
The worst loss was -0.84%, and it occurred between 8/31/2017 and 2/18/2018.
Last edited by nisiprius on Fri Feb 22, 2019 1:23 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Fri Feb 22, 2019 10:02 am

nisiprius wrote:
Fri Feb 22, 2019 9:20 am
So, I've done a little work.

VWIUX: 10/31/1977 through 12/31/2018, monthly data, there have been a total of 489 overlapping six-month periods.
VWIUX lost money 91 times, i.e. a 19% probability of losing money.
Including only the 91 losses, the average loss was -5.62%.
The worst loss was -29%, and it occurred between 9/30/1979 and 3/31/1980.
I find that -29% loss astonishing, by the way. I wouldn't have expected anything anywhere near that bad. I don't know what happened then.

source
Image

VSBSX: 12/31/2009 through 12/31/2018, monthly data, there have been a total of 103 overlapping six-month periods.
VSBSX lost money 18 times, a 17% probability of losing money.
Looking only at the 18 losses, the average loss was -0.48%.
The worst loss was -1.67%, and it occurred between 8/31/2017 and 2/18/2018.
Thank you! Aren't these losses almost always related to interest rate increases?

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Re: Is VSBSX too risky for 6 months?

Post by dbr » Fri Feb 22, 2019 10:12 am

michaeljmroger wrote:
Fri Feb 22, 2019 10:02 am

Thank you! Aren't these losses almost always related to interest rate increases?
If the market says the yield on those bonds in the fund is not high enough, then the price of the bonds will fall to where the market is willing to buy/trade them. Those are interest rate increases in a sense of the word.

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Re: Is VSBSX too risky for 6 months?

Post by nisiprius » Fri Feb 22, 2019 1:34 pm

Oops, michaeljroger, the numbers I stated earlier are double what they should have been. I've corrected them. (The interesting figures are the actual "loss over six months" and I had inadvertently converted them to annualize rates).

Also, if we begin at 1983 to remove an anomalous period, which people educated me about here, the results for VWIUX become:

426 overlapping six-month periods
Losses in 60 periods = 14% probability
Average loss -1.61%
Maximum loss -5.66%, occurring 3/31/1987-9/30/1987.

The answer to your question is twofold. It is misleading to say they are caused by interest rate changes. It is better to regard them as market fluctuations similar to other market fluctuations.

Point #1: the interest rates that matter for a bond fund are the interest rates that apply to the duration of the bond fund, about 5 years for VWIUX. Thus the rates that matter are not the rates set by the Fed, but the 5-year rate. This is set by the market. It is influenced by Fed actions, but the coupling is loose. As a matter of fact, talk about the yield curve being normal, or flattening, or inverted is another way of saying that short-term and long-term rates do not move in lockstep. So even if you know for sure what the Fed will do, which you do not, that doesn't tell you a lot about what 5-year rates will do, which is what matters for VWIUX.

Point #2: In April of 2014, Bloomberg polled a panel of 68 economists for their forecasts of what the 10-year treasury rate would do over the next six months. 68 out of 68, 100%, unanimous, every single one said that interest rates would go up. Interest rates went down. In short, experts are very bad at predicting interest rate movements.

You have a good chance of doing just fine with VWIUX, and even if you lose money it probably will only be a few percent. However, you are mistaken in thinking that the Fed's rather weasel-worded statement is a guarantee of "safety," if "safety" means "not losing any money over a six-month period."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Is VSBSX too risky for 6 months?

Post by michaeljmroger » Fri Feb 22, 2019 11:31 pm

nisiprius wrote:
Fri Feb 22, 2019 1:34 pm
Oops, michaeljroger, the numbers I stated earlier are double what they should have been. I've corrected them. (The interesting figures are the actual "loss over six months" and I had inadvertently converted them to annualize rates).

Also, if we begin at 1983 to remove an anomalous period, which people educated me about here, the results for VWIUX become:

426 overlapping six-month periods
Losses in 60 periods = 14% probability
Average loss -1.61%
Maximum loss -5.66%, occurring 3/31/1987-9/30/1987.

The answer to your question is twofold. It is misleading to say they are caused by interest rate changes. It is better to regard them as market fluctuations similar to other market fluctuations.

Point #1: the interest rates that matter for a bond fund are the interest rates that apply to the duration of the bond fund, about 5 years for VWIUX. Thus the rates that matter are not the rates set by the Fed, but the 5-year rate. This is set by the market. It is influenced by Fed actions, but the coupling is loose. As a matter of fact, talk about the yield curve being normal, or flattening, or inverted is another way of saying that short-term and long-term rates do not move in lockstep. So even if you know for sure what the Fed will do, which you do not, that doesn't tell you a lot about what 5-year rates will do, which is what matters for VWIUX.

Point #2: In April of 2014, Bloomberg polled a panel of 68 economists for their forecasts of what the 10-year treasury rate would do over the next six months. 68 out of 68, 100%, unanimous, every single one said that interest rates would go up. Interest rates went down. In short, experts are very bad at predicting interest rate movements.

You have a good chance of doing just fine with VWIUX, and even if you lose money it probably will only be a few percent. However, you are mistaken in thinking that the Fed's rather weasel-worded statement is a guarantee of "safety," if "safety" means "not losing any money over a six-month period."
Thanks again for your comprehensive explanation!

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