eFund Again: Exploring Advanced Strategies to Maximize Returns

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TechFI
Posts: 114
Joined: Fri Jun 05, 2020 12:07 am

eFund Again: Exploring Advanced Strategies to Maximize Returns

Post by TechFI » Sun Jun 28, 2020 9:49 pm

Recent eFund discussions had me running further analysis, and the results do change my opinion somewhats.

Constraints:
- We are not doing the keep eFund as bonds in 401k and swap out by selling equities in taxable.
- We are still keeping a separate physical eFund (so no co-mingling with main portfolio).

The issue with keeping eFund as pure cash is the lack of returns. We can get around this by:
- Keeping eFund as cash and use various bank hacks to get higher than average returns, like doing multiple bank bonuses
- Keeping part of the eFund as a balanced fund

Bank Hacks Method
- I don't do bank hacks very regularly, but this year I'm projected to hit $1800 with a $50k capital.
- There are basically two type of bank bonuses, one require you to open a checking account and do some direct deposit usually with a small $1-5k deposit to avoid fees. The other type is opening a savings account and you deposit typically $10-50k to get the bonus.
- Based on my limited analysis it seems that the APY returns do not scale well beyond $25k. This is because the checking bonuses don't require more than $25k, and saving bonuses while are able to get more at $50k sometimes do not double the bonus
- Based on 2020 expected bonuses, $1800 per 50k that's 3.6% APY + 1% APY (the extra 1% is keeping money in savings account)
- Based on 2020 expected bonuses, If I were to adjust the capital to 25k, the bonus drops to $1200 per 25k that's 4.8% APY + 1% APY.
- Another bank hack method is to have rewards checking account that typically pay 3-5% APY, but the limit is also capped usually $10-50k max. So multiple rewards checking account are needed to scale.
- In either case, these methods require some overhead for maintenance.

Balanced Fund Method
- In this case, you keep part of your eFund in a balance fund, and the other part as cash (CDs/high-yield savings whatever).
- The biggest issue is if you do this and a recession hits you will be underwater compared to the pure cash approach.

Based on this data we can conclude the following:
- Even if I can sustain the bank hacking methods and get 4-5% total APY (for $50k), which I'm not fully certain if it's sustainable, it will underperform a balanced fund. Wellington gives 7.5% APY from 2005-2020.
- However because bank hacking methods scale well under $35k, I propose combining both methods.
- Here's the result of some projections from 2005-2020 using Wellington data, a hybrid 50/50 approach and pure AdvCash. For 'AdvCash' I use return brackets: 6% APY for under $35k, 5% for $35-50k and 4% APY for over $50k.

Image

- It looks even if we started a reasonably bad time of 2005, where the crash happened 3-years later, the hybrid method avoids the scenario of losing
substantially against AdvCash.
- But it may need as long as 8 years for the hybrid method to outperform AdvCash by a significant margin.
- The hybrid method also does not substantially underperform pure Wellington until 10+ years later. This is likely coming from the higher-than-expected APY from AdvCash.

Based on these new findings it seems like the better option for me is to keep 1st yr eFund ($25k) in AdvCash, but put the 2nd yr eFund in Wellington. Hopefully any unemployment in the future will not exceed 1yr, as this strategy works best if the Wellington portion remain untouched.
Last edited by TechFI on Sun Jun 28, 2020 10:04 pm, edited 2 times in total.

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climber2020
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Re: eFund Again: Exploring Advanced Strategies to Maximize Returns

Post by climber2020 » Sun Jun 28, 2020 10:03 pm

One alternative option is to very slightly increase your savings rate, invest that amount in a stock fund, keep your emergency fund in a regular bank savings account, and not worry about the complicated plan you described.

As time goes on, your emergency fund will become a smaller percentage of your net worth, so missing out on any potential gains will be negligible.

MotoTrojan
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Re: eFund Again: Exploring Advanced Strategies to Maximize Returns

Post by MotoTrojan » Sun Jun 28, 2020 10:08 pm

Mental gymnastics. Hold as much cash as you need to feel comfortable and put rest in your AA/equity.

ICSH is where I put my EF for a little more yield but holding more of a tax-inefficient fund with low equity exposure makes no logical sense to me.

Topic Author
TechFI
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Re: eFund Again: Exploring Advanced Strategies to Maximize Returns

Post by TechFI » Sun Jun 28, 2020 10:14 pm

Let's stick to the hard constraints. No co-mingling between eFund and portfolio.

tashnewbie
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Re: eFund Again: Exploring Advanced Strategies to Maximize Returns

Post by tashnewbie » Mon Jun 29, 2020 11:49 am

TechFI wrote:
Sun Jun 28, 2020 10:14 pm
Let's stick to the hard constraints. No co-mingling between eFund and portfolio.
I think climber2020's response satisfies that criterion:
climber2020 wrote:
Sun Jun 28, 2020 10:03 pm
One alternative option is to very slightly increase your savings rate, invest that amount in a stock fund, keep your emergency fund in a regular bank savings account, and not worry about the complicated plan you described.

As time goes on, your emergency fund will become a smaller percentage of your net worth, so missing out on any potential gains will be negligible.

Jack FFR1846
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Re: eFund Again: Exploring Advanced Strategies to Maximize Returns

Post by Jack FFR1846 » Mon Jun 29, 2020 12:00 pm

TechFI wrote:
Sun Jun 28, 2020 10:14 pm
Let's stick to the hard constraints. No co-mingling between eFund and portfolio.
Sorry, but my solution doesn't do this.

I have US Savings bonds as a large eFund (along with cash). I consider it part of my investments in bonds and I consider it immediate cash for emergencies. In my case, I only hold paper bonds because so long as my credit union is open, I can cash them and the funds are immediately available. I've dealt with Treasury Direct before and would not be happy to have to deal with them again.

I get the $5k in paper bonds as part of my federal return, but am otherwise just holding the bonds I own.
Bogle: Smart Beta is stupid

sycamore
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Re: eFund Again: Exploring Advanced Strategies to Maximize Returns

Post by sycamore » Mon Jun 29, 2020 12:19 pm

In addition to bank hacks, consider brokerage sign-up bonuses. It does require more overhead, of course, just like with bank bonuses.

If you're going to proceed with your proposal, consider using a balanced fund other than Wellington. It's a reasonably good fund in general but it may distribute capital gains in addition to dividends. Wellington as 65/35 AA. I would imagine Vanguard Tax-Managed Balanced Fund (50/50 AA) or the regular Balanced Fund (60/40) could work just as well but with less tax impacts.

ChrisBenn
Posts: 331
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Re: eFund Again: Exploring Advanced Strategies to Maximize Returns

Post by ChrisBenn » Mon Jun 29, 2020 12:53 pm

sycamore wrote:
Mon Jun 29, 2020 12:19 pm
In addition to bank hacks, consider brokerage sign-up bonuses. It does require more overhead, of course, just like with bank bonuses.

If you're going to proceed with your proposal, consider using a balanced fund other than Wellington. It's a reasonably good fund in general but it may distribute capital gains in addition to dividends. Wellington as 65/35 AA. I would imagine Vanguard Tax-Managed Balanced Fund (50/50 AA) or the regular Balanced Fund (60/40) could work just as well but with less tax impacts.
Was curious as to the difference in tax costs:
(Schwab's tax rate assumptions - highest federal, no state/local)

Fund / Avg yearly tax cost over last 10 years / Avg annual return last 10 years
VBIAX / 0.71% / 9.48%
https://www.schwab.com/public/schwab/in ... ol%3DVBIAX
Balanced

VWELX / 1.49% / 9.45%
https://www.schwab.com/public/schwab/in ... ol%3DVWELX
Wellington

VTMFX / 0.5% / 8.44%
https://www.schwab.com/public/schwab/in ... ol%3DVTMFX
Tax Managed Balanced

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