About to put $ in Fixed income, which one?

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William Million
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About to put $ in Fixed income, which one?

Post by William Million » Mon Nov 11, 2019 11:28 am

I have some CDs maturing and I'd like to put the money into fixed income.

Looking over Vanguard's current offerings, I see plain old Prime yields 1.82%. If I add some risk to my original investment by stretching it out to Intermediate Term Bond Admiral shares (VBILX), I only get 2.12%. It just doesn't seem worth taking the (albeit modest) risk for .4%. In fact, Short Term Bond Index Admiral (VBIRX) is actually yielding less than no-risk Prime at 1.72% - can't see why anyone would pick that over Prime at this time.

While I'd like a higher yield, I'm not sure the risk-reward equation makes sense. Am I overlooking anything?

Gill
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Re: About to put $ in Fixed income, which one?

Post by Gill » Mon Nov 11, 2019 11:31 am

William Million wrote:
Mon Nov 11, 2019 11:28 am
Am I overlooking anything?
Yes, the simple fact that the money market funds hold very short term instruments and the yield could drop quite rapidly.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

furwut
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Re: About to put $ in Fixed income, which one?

Post by furwut » Mon Nov 11, 2019 11:35 am

If you have the time, many here have taken to hunting for CD bonus offers to supplement their fixed income portfolio.

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William Million
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Re: About to put $ in Fixed income, which one?

Post by William Million » Mon Nov 11, 2019 11:43 am

Gill wrote:
Mon Nov 11, 2019 11:31 am
William Million wrote:
Mon Nov 11, 2019 11:28 am
Am I overlooking anything?
Yes, the simple fact that the money market funds hold very short term instruments and the yield could drop quite rapidly.
Gill
Thanks much for responding. If the money market yield drops, can't I just shift the funds into bonds?

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onthecusp
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Re: About to put $ in Fixed income, which one?

Post by onthecusp » Mon Nov 11, 2019 11:54 am

William Million wrote:
Mon Nov 11, 2019 11:43 am
Gill wrote:
Mon Nov 11, 2019 11:31 am
William Million wrote:
Mon Nov 11, 2019 11:28 am
Am I overlooking anything?
Yes, the simple fact that the money market funds hold very short term instruments and the yield could drop quite rapidly.
Gill
Thanks much for responding. If the money market yield drops, can't I just shift the funds into bonds?
Sure, but if you had held bonds and the interest rate drops, the value of the bonds would have gone up.
With the higher bond value the yield will have dropped a corresponding amount.

MM and CD are safest for your principle and probably better in a rising rate environment, worse in a falling rate environment. Trying to predict rates is market timing and unlikely to end well if you move in and out, such as "shifting funds into bonds" after a drop. You probably need to decide now which you are more comfortable with.

dbr
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Re: About to put $ in Fixed income, which one?

Post by dbr » Mon Nov 11, 2019 4:29 pm

Among the various alternatives is the question of whether you want to invest in a long term portfolio that over time is a combination of risk and return that you find suitable or do you want to continually shop for what appears to be the highest interest rate available. There is probably not anything really wrong with constantly surveying the scene for the highest CD or high yield savings rate but you would probably do as well or better with much less finagling to just hold a selected allocation to a low cost, diversified, intermediate duration bond fund. It is very difficult to find silver bullets in bond investing.

An alternative to think about is starting to build a position in I bonds, which are inflation indexed and earnings are tax deferred for thirty years. I bonds don't offer a uniquely large interest rate either right now, but there is an annual purchase limit. I bonds might be the one special exception to just investing in a bond fund.

I won't deny that CD shopping is very popular on the forum right now, and there is nothing wrong with that as far as it goes.

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Hector
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Re: About to put $ in Fixed income, which one?

Post by Hector » Mon Nov 11, 2019 7:26 pm

I prefer Vanguard Prime Money Market Fund for my bond allocation right now.

tibbitts
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Re: About to put $ in Fixed income, which one?

Post by tibbitts » Mon Nov 11, 2019 7:43 pm

If you can move money around to maintain your asset allocation and have a deferred plan with a stable value fund, it might pay more than Prime.

hudson
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Re: About to put $ in Fixed income, which one?

Post by hudson » Mon Nov 11, 2019 7:48 pm

William Million wrote:
Mon Nov 11, 2019 11:28 am
I have some CDs maturing and I'd like to put the money into fixed income.

Looking over Vanguard's current offerings, I see plain old Prime yields 1.82%. If I add some risk to my original investment by stretching it out to Intermediate Term Bond Admiral shares (VBILX), I only get 2.12%. It just doesn't seem worth taking the (albeit modest) risk for .4%. In fact, Short Term Bond Index Admiral (VBIRX) is actually yielding less than no-risk Prime at 1.72% - can't see why anyone would pick that over Prime at this time.

While I'd like a higher yield, I'm not sure the risk-reward equation makes sense. Am I overlooking anything?
You probably already know all of this...
VBILX is Vang. Risk Potential 2...that's usually good enough for me.
On Nov. 1st, it paid out 2.66%. Maybe look at the distribution yield history; I think it'll likely be paying well above the SEC Yield for a while.
It's 75% AAA/AA/A rated bonds. That's not high enough for me.

Would a muni fund fit your situation?
Last edited by hudson on Tue Nov 12, 2019 4:25 pm, edited 2 times in total.

hudson
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Re: About to put $ in Fixed income, which one?

Post by hudson » Mon Nov 11, 2019 7:55 pm

Vanguard's GNMA Fund Admiral Shares (VFIJX) paid out at an annual rate of 2.57% on Nov. 1st.
It's almost 100% government bonds. It might be worth a look? and the SEC Yield is 2.6%.

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Re: About to put $ in Fixed income, which one?

Post by illumination » Mon Nov 11, 2019 8:53 pm

I'm in the same boat where I would rather take a lower return in something like a CD or Money Market without the (remote) possibility of losing principal. Especially since to me it seems a trivial amount more for a similar bond fund. In the two examples, for every $10,000 in fixed income , it's a spread of like $30 between the money market and intermediate bond fund. In my view, that's cheap insurance. And if interest rates went up, you could lose way more that spread with the bond fund. Of course you could say the same if they went down and make money. But I'm not interested in speculating this way with my fixed income.

I like the concept that equities will be where I take my risks, but fixed income will be as close to no-risk as possible.

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Re: About to put $ in Fixed income, which one?

Post by rossington » Tue Nov 12, 2019 3:29 am

William Million wrote:
Mon Nov 11, 2019 11:28 am

While I'd like a higher yield, I'm not sure the risk-reward equation makes sense. Am I overlooking anything?
If you don't want to take on even the most minimal risk then you are confined to CD's and MM funds/accounts.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: About to put $ in Fixed income, which one?

Post by goblue100 » Tue Nov 12, 2019 5:14 am

William Million wrote:
Mon Nov 11, 2019 11:28 am

While I'd like a higher yield, I'm not sure the risk-reward equation makes sense. Am I overlooking anything?
A year ago everyone said short term was the place to be because interest rates are surely going to the moon. I ignored them and stayed in intermediate, and my one year return is 13%. Will it be 13% this year? Almost certainly not, but if you stay short term you will always end up with a lower total return compared to intermediate. Intermediate will end up with a lower total return than long term. It may be bumpier, but it is as certain as the sun will rise tomorrow. If your money will be invested for more than 5 years, intermediate or long is the place to be.

In April I could get a one year CD at Ally for 2.75% or a 5 year for 3%. It didn't look like it made a lot of sense to increase the term. I bought a one year and one 5 year. Now when the one year CD renews I'll be lucky to get 2%, while that 3% 5 year might be looking pretty good.

For some reason, everyone thinks they can time the bond market. But from my reading of posts on this board, they cant.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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Re: About to put $ in Fixed income, which one?

Post by dbr » Tue Nov 12, 2019 9:08 am

rossington wrote:
Tue Nov 12, 2019 3:29 am
William Million wrote:
Mon Nov 11, 2019 11:28 am

While I'd like a higher yield, I'm not sure the risk-reward equation makes sense. Am I overlooking anything?
If you don't want to take on even the most minimal risk then you are confined to CD's and MM funds/accounts.
Risk is defined as the variability in return which is tracking how the difference in asset value from year to year changes. If the interest earned varies from year to year there is risk. If CD rates are 3% one year and 2% on the next one you buy you got a 1% variation. Etc.

Also CDs and MM are at risk to inflation.

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David Jay
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Re: About to put $ in Fixed income, which one?

Post by David Jay » Tue Nov 12, 2019 9:52 am

As a new retiree, I keep everything I need to spend in the next 2 years in Prime MM. Beyond that (as my crystal ball is malfunctioning) my fixed income is in IT bonds.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: About to put $ in Fixed income, which one?

Post by Wiggums » Tue Nov 12, 2019 10:02 am

David Jay wrote:
Tue Nov 12, 2019 9:52 am
As a new retiree, I keep everything I need to spend in the next 2 years in Prime MM. Beyond that (as my crystal ball is malfunctioning) my fixed income is in IT bonds.
We do the same thing. I don’t expect my bonds to act like equities, but holding them has worked out for me.

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Re: About to put $ in Fixed income, which one?

Post by rossington » Tue Nov 12, 2019 2:29 pm

goblue100 wrote:
Tue Nov 12, 2019 5:14 am
William Million wrote:
Mon Nov 11, 2019 11:28 am

While I'd like a higher yield, I'm not sure the risk-reward equation makes sense. Am I overlooking anything?
A year ago everyone said short term was the place to be because interest rates are surely going to the moon. I ignored them and stayed in intermediate, and my one year return is 13%. Will it be 13% this year? Almost certainly not, but if you stay short term you will always end up with a lower total return compared to intermediate. Intermediate will end up with a lower total return than long term. It may be bumpier, but it is as certain as the sun will rise tomorrow. If your money will be invested for more than 5 years, intermediate or long is the place to be.

In April I could get a one year CD at Ally for 2.75% or a 5 year for 3%. It didn't look like it made a lot of sense to increase the term. I bought a one year and one 5 year. Now when the one year CD renews I'll be lucky to get 2%, while that 3% 5 year might be looking pretty good.
I agree with this and look at the current situation the same way. Others will disagree.
Ultimately it becomes a matter of personal risk tolerance and preference.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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