Creating a DIY savings account with an investment account

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Topic Author
brw02005
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Joined: Fri Sep 11, 2020 12:02 pm

Creating a DIY savings account with an investment account

Post by brw02005 »

Well with the virus that may not be named messing with rates I am looking into creating very stable returns through a taxable account. This is my first crack at this so am open to input. I realize that investments have no FDIC insurance and my principal will not be guaranteed but I though of it as a fun exercise to create the most bullet proof returns I could preserving principal.

Here is my situation I though luck decided to buy CDs with half my 6 month emergency fund as it was only 9 month penalty if I needed to grab the cash when rates finally got to 3% and started to created a CD ladder. I had 5 rungs with longest term being five years. I have a 2.6% 24 month rung hitting maturity this October and not looking forward to putting it into my 0.70% savings account or locking in a 0.9% return for five years. My plan is with my Fidelity taxable account to create the most stable low interest returns I can and this is what I was thinking. Right now you can buy partial shares with no commission at Fidelity with the mobile app down to a dollar so will only lose the bid-ask spread on transactions.

Ticker Name Allocation
SPTM SPDR Port S&P 1500 Comps Stk Mkt ETF 6.00%
VGSH Vanguard Short-Term Treasury ETF 84.00%
VMBS Vanguard Mortgage-Backed Secs ETF 10.00%

I've heard people talk about series I bonds but those have a guaranteed payment of 0% right now. I really think my money is more at risk from the fed printing money while I have no return then if I go for this. This averages a 2.3% return with the worst draw down being 0.61% in the last ten years and worst return of 0.60%. I don't really know how to back test this before the funds existence but the theory is that if the little bit of stock lose value then treasuries will go up and when rates go up the stocks are doing well and it seems to balance pretty well. Putting the mortgage backed securities in there was mainly me trying to act more like a bank. Interested in input from you guys.

I know many stick to the montra of always have your emergency fund in a savings account but we have also never had the fed pump trillions into the economy like this.
nix4me
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Re: Creating a DIY savings account with an investment account

Post by nix4me »

I see no problem with it.

I keep 2 months in bank savings
I keep 2 months in brokerage BND
And I put everything else above maxing 401k, maxing Roth’s, and paying extra mortgage payment in Brokerage VTI.

Once my VTI holding started building I realized I didn’t really need an emergency fund anymore but I still keep it.
chrisdds98
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Location: Austin, TX

Re: Creating a DIY savings account with an investment account

Post by chrisdds98 »

I think there is a decent chance of inflation with the new change in fed policy so I will have one year of expenses in VTIP, short tips. negative real return but if we get bad inflation i'll have about the same purchasing power.

If you don't think inflation is an issue I think your plan is fine. Don't know that it would be much better then a high yield savings account though with additional risk
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

I looked in VTIP. In a deflation situation it could be quite terrible and like I said high interest savings accounts right now are paying 0.70% so think the risk is worth getting 2.3% to keep up with at least normal inflation. Hard to say what is coming though.
aristotelian
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Re: Creating a DIY savings account with an investment account

Post by aristotelian »

Any amount of your emergency fund that you invest in stocks is really in effect decreasing your emergency fund. Seems like 90% STT/10% MBS is not going to move the needle but go for it if you don't mind. I have been buying some QLTA in lieu of cash.

Have you maxed I Bonds for the year? I might wait til Nov to see what fixed rate they offer.
mega317
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Re: Creating a DIY savings account with an investment account

Post by mega317 »

There is a lot unsaid in your post such as what is the purpose of the money? How do you define bulletproof?

The SEC yield on VGSH is 0.11% so it's kind of hard to look past that to the rest of your idea when it's 84% of your proposal. Why do you prefer a non-guaranteed 0.11% to a guaranteed 0.9%?

The bottom line is that rates are low, and there is no way around that nor the fact that for higher returns you need to take more risk. But it kind of sounds like inflation is your major concern. The answer to that is not short-term treasuries.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
chrisdds98
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Re: Creating a DIY savings account with an investment account

Post by chrisdds98 »

brw02005 wrote: Fri Sep 11, 2020 3:08 pm I looked in VTIP. In a deflation situation it could be quite terrible and like I said high interest savings accounts right now are paying 0.70% so think the risk is worth getting 2.3% to keep up with at least normal inflation. Hard to say what is coming though.
would it be terrible? I guess relative to cash it would be bad but wouldn't purchasing power be pretty similar even in a deflationary environment?
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

Yeah I don't typically look at that way as my mortgage would be the same and medical expenses tend to increase as you get older. I guess you can save money on food and gas but they are not what our money goes to mainly.
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anon_investor
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Re: Creating a DIY savings account with an investment account

Post by anon_investor »

brw02005 wrote: Fri Sep 11, 2020 12:42 pm Well with the virus that may not be named messing with rates I am looking into creating very stable returns through a taxable account. This is my first crack at this so am open to input. I realize that investments have no FDIC insurance and my principal will not be guaranteed but I though of it as a fun exercise to create the most bullet proof returns I could preserving principal.

Here is my situation I though luck decided to buy CDs with half my 6 month emergency fund as it was only 9 month penalty if I needed to grab the cash when rates finally got to 3% and started to created a CD ladder. I had 5 rungs with longest term being five years. I have a 2.6% 24 month rung hitting maturity this October and not looking forward to putting it into my 0.70% savings account or locking in a 0.9% return for five years. My plan is with my Fidelity taxable account to create the most stable low interest returns I can and this is what I was thinking. Right now you can buy partial shares with no commission at Fidelity with the mobile app down to a dollar so will only lose the bid-ask spread on transactions.

Ticker Name Allocation
SPTM SPDR Port S&P 1500 Comps Stk Mkt ETF 6.00%
VGSH Vanguard Short-Term Treasury ETF 84.00%
VMBS Vanguard Mortgage-Backed Secs ETF 10.00%

I've heard people talk about series I bonds but those have a guaranteed payment of 0% right now. I really think my money is more at risk from the fed printing money while I have no return then if I go for this. This averages a 2.3% return with the worst draw down being 0.61% in the last ten years and worst return of 0.60%. I don't really know how to back test this before the funds existence but the theory is that if the little bit of stock lose value then treasuries will go up and when rates go up the stocks are doing well and it seems to balance pretty well. Putting the mortgage backed securities in there was mainly me trying to act more like a bank. Interested in input from you guys.

I know many stick to the montra of always have your emergency fund in a savings account but we have also never had the fed pump trillions into the economy like this.
You are looking at I Bonds the wrong way. While the fixed rate is 0%, the current inflation adjustment is 1.06%, so you are guaranteed 1.06% until the next rate adjustment (every 6 months). If inflation goes up, then the inflation adjustment should also increase.
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

mega317 wrote: Fri Sep 11, 2020 4:24 pm There is a lot unsaid in your post such as what is the purpose of the money? How do you define bulletproof?

The SEC yield on VGSH is 0.11% so it's kind of hard to look past that to the rest of your idea when it's 84% of your proposal. Why do you prefer a non-guaranteed 0.11% to a guaranteed 0.9%?

The bottom line is that rates are low, and there is no way around that nor the fact that for higher returns you need to take more risk. But it kind of sounds like inflation is your major concern. The answer to that is not short-term treasuries.
That is the 30 day yield. Yield for this year is 1.6 and change.
Blue456
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Re: Creating a DIY savings account with an investment account

Post by Blue456 »

brw02005 wrote: Fri Sep 11, 2020 12:42 pm Well with the virus that may not be named messing with rates I am looking into creating very stable returns through a taxable account. This is my first crack at this so am open to input. I realize that investments have no FDIC insurance and my principal will not be guaranteed but I though of it as a fun exercise to create the most bullet proof returns I could preserving principal.

Here is my situation I though luck decided to buy CDs with half my 6 month emergency fund as it was only 9 month penalty if I needed to grab the cash when rates finally got to 3% and started to created a CD ladder. I had 5 rungs with longest term being five years. I have a 2.6% 24 month rung hitting maturity this October and not looking forward to putting it into my 0.70% savings account or locking in a 0.9% return for five years. My plan is with my Fidelity taxable account to create the most stable low interest returns I can and this is what I was thinking. Right now you can buy partial shares with no commission at Fidelity with the mobile app down to a dollar so will only lose the bid-ask spread on transactions.

Ticker Name Allocation
SPTM SPDR Port S&P 1500 Comps Stk Mkt ETF 6.00%
VGSH Vanguard Short-Term Treasury ETF 84.00%
VMBS Vanguard Mortgage-Backed Secs ETF 10.00%

I've heard people talk about series I bonds but those have a guaranteed payment of 0% right now. I really think my money is more at risk from the fed printing money while I have no return then if I go for this. This averages a 2.3% return with the worst draw down being 0.61% in the last ten years and worst return of 0.60%. I don't really know how to back test this before the funds existence but the theory is that if the little bit of stock lose value then treasuries will go up and when rates go up the stocks are doing well and it seems to balance pretty well. Putting the mortgage backed securities in there was mainly me trying to act more like a bank. Interested in input from you guys.

I know many stick to the montra of always have your emergency fund in a savings account but we have also never had the fed pump trillions into the economy like this.
I was thinking along same lines about 1 year ago. I quickly changed my mind when I figured out that this is unnecessarily complicated. Right now all emergency fund is in I-Bonds.
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

You are looking at I Bonds the wrong way. While the fixed rate is 0%, the current inflation adjustment is 1.06%, so you are guaranteed 1.06% until the next rate adjustment (every 6 months). If inflation goes up, then the inflation adjustment should also increasse.
True but in deflation it could also go to 0. The purpose of this is steady consistent return like a bank account. If you go all bonds you will be hurt when interest rates rise and if you go all inflation protection you will be hurt in deflation. I have yet to see a balanced approach represented here.
humblecoder
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Re: Creating a DIY savings account with an investment account

Post by humblecoder »

brw02005 wrote: Fri Sep 11, 2020 7:36 pm
You are looking at I Bonds the wrong way. While the fixed rate is 0%, the current inflation adjustment is 1.06%, so you are guaranteed 1.06% until the next rate adjustment (every 6 months). If inflation goes up, then the inflation adjustment should also increasse.
True but in deflation it could also go to 0. The purpose of this is steady consistent return like a bank account. If you go all bonds you will be hurt when interest rates rise and if you go all inflation protection you will be hurt in deflation. I have yet to see a balanced approach represented here.
Trying to figure out what your goal is. In your original post you say that you are worried about the fed printing money ( ie inflation). If so then I Bonds are the perfect, simple solution. It gives you a steady consistent return that matches inflation. Plus in a deflationary situation they won’t go below zero returns so they protect you on the downside. So if interest rates are say -2% and I bonds pay 0% then you are actually earning 2% in real (ie after inflation) terms.

I think the fundamental confusion may be that you are mixing up real returns and nominal returns. With I bonds even if the nominal interest rate changes your real after inflation return stays consistent. Plus you have the downside protection that I mentioned above.
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

Trying to figure out what your goal is. In your original post you say that you are worried about the fed printing money ( ie inflation). If so then I Bonds are the perfect, simple solution. It gives you a steady consistent return that matches inflation. Plus in a deflationary situation they won’t go below zero returns so they protect you on the downside. So if interest rates are say -2% and I bonds pay 0% then you are actually earning 2% in real (ie after inflation) terms.

I think the fundamental confusion may be that you are mixing up real returns and nominal returns. With I bonds even if the nominal interest rate changes your real after inflation return stays consistent. Plus you have the downside protection that I mentioned
You keep saying principal is at risk with this portfolio but cannot provide a single example of when it would go down. If you do 6% total mkt and 94% short term treasuries it has produced a positive return for the last twenty years. Is there a point in history where this would lose money or some theoretical black swan? Is there any source for I bond inflation indexing over the years?

My main complaint is I do not know how the return compares. Locking in an I bond at 0% guaranteed return appears foolish if I don't know what that has paid out in the past. I would think buying these with a higher guaranteed rate would be a much better deal over the long run but locking in a 0 now appears foolish as this looks like one of the worst times in history to buy them as you get inflation protection and would never do any better. I do understand that they can never lose money though and that is very good attribute.
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

Trying to figure out what your goal is. In your original post you say that you are worried about the fed printing money ( ie inflation). If so then I Bonds are the perfect, simple solution. It gives you a steady consistent return that matches inflation. Plus in a deflationary situation they won’t go below zero returns so they protect you on the downside. So if interest rates are say -2% and I bonds pay 0% then you are actually earning 2% in real (ie after inflation) terms.

I think the fundamental confusion may be that you are mixing up real returns and nominal returns. With I bonds even if the nominal interest rate changes your real after inflation return stays consistent. Plus you have the downside protection that I mentioned
You keep saying principal is at risk with this portfolio but cannot provide a single example of when it would go down. If you do 6% total mkt and 94% short term treasuries it has produced a positive return for the last twenty years. Is there a point in history where this would lose money or some theoretical black swan? Is there any source for I bond inflation indexing over the years?

My main complaint is I do not know how the return compares. Locking in an I bond at 0% guaranteed return appears foolish if I don't know what that has paid out in the past. I would think buying these with a higher guaranteed rate would be a much better deal over the long run but locking in a 0 now appears foolish as this looks like one of the worst times in history to buy them as you get inflation protection and would never do any better. I do understand that they can never lose money though and that is very good attribute.
dbr
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Re: Creating a DIY savings account with an investment account

Post by dbr »

brw02005 wrote: Sat Sep 12, 2020 12:14 pm
My main complaint is I do not know how the return compares. Locking in an I bond at 0% guaranteed return appears foolish if I don't know what that has paid out in the past. I would think buying these with a higher guaranteed rate would be a much better deal over the long run but locking in a 0 now appears foolish as this looks like one of the worst times in history to buy them as you get inflation protection and would never do any better. I do understand that they can never lose money though and that is very good attribute.
Yes, this is a bad time to lock in I bonds. Once upon a time the rate was 3% and there wasn't even a purchase limit. But you are not going to see what amounts to 3% real yield any time soon. Note by comparison TIPS, CDs, and nominal bonds have mostly negative real interest rates or about the same zero that I bonds have and without the advantages.

Because I bonds have a purchase limit not buying now doesn't help very much. You can't put the money somewhere else and then shift a lump sum to I bonds when the yield is better. However, you can always redeem the bonds any time later if you want something else instead. It is not really locked in.
humblecoder
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Re: Creating a DIY savings account with an investment account

Post by humblecoder »

brw02005 wrote: Sat Sep 12, 2020 12:14 pm
You keep saying principal is at risk with this portfolio but cannot provide a single example of when it would go down. If you do 6% total mkt and 94% short term treasuries it has produced a positive return for the last twenty years. Is there a point in history where this would lose money or some theoretical black swan? Is there any source for I bond inflation indexing over the years?

My main complaint is I do not know how the return compares. Locking in an I bond at 0% guaranteed return appears foolish if I don't know what that has paid out in the past. I would think buying these with a higher guaranteed rate would be a much better deal over the long run but locking in a 0 now appears foolish as this looks like one of the worst times in history to buy them as you get inflation protection and would never do any better. I do understand that they can never lose money though and that is very good attribute.
I don’t know who the “you” is in your first sentence (“you keep saying”) but it ain’t me! That was my first comment on this thread and I never said such a thing. Feel free to quote where I stated that. I actually AGREE with your statement that a portfolio of 94% short term treasuries is pretty safe.

All I suggested was that you take another look at I Bonds since they seem to satisfy your requirement of keeping up with inflation. That said, your approach seems reasonable too. There are more than one route to get to the same destination.
aristotelian
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Re: Creating a DIY savings account with an investment account

Post by aristotelian »

brw02005 wrote: Fri Sep 11, 2020 7:23 pm That is the 30 day yield. Yield for this year is 1.6 and change.
Why would you care what it has yielded over the last year? The current yield is the best estimate of the near term which is what you care about.
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

Why would you care what it has yielded over the last year? The current yield is the best estimate of the near term which is what you care about.
.11 X 12 = 1.32%. I said what it paid last year as I assumed you realized you multiply by 12 to get the estimate for next year. We are talking 1-3 year T notes and they were paying 1.61% last year.

QTLA lost 16% of its value during the last sell off before recovering. It does have a significantly superior yield but probably not something you want to sell when times are bad. Make lots of money before a pullback can be a successful strategy though so not going to completely discount this.
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brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

All I suggested was that you take another look at I Bonds since they seem to satisfy your requirement of keeping up with inflation. That said, your approach seems reasonable too. There are more than one route to get to the same destination.
Good point on I bonds I think I just need a good time to pick them up. Imagine if I was looking at them instead of 3% CDs I may not be complaining about yield now. The flexibility with selling them is quite good too.
trigger08
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Re: Creating a DIY savings account with an investment account

Post by trigger08 »

snip:
brw02005 wrote: Sat Sep 12, 2020 4:21 pm .11 X 12 = 1.32%. I said what it paid last year as I assumed you realized you multiply by 12 to get the estimate for next year.
I think you are misinterpreting the SEC yield - it is "30 days" in the sense that the calculation uses information about the bonds held by the fund over the last 30 days, but the calculated rate itself is already annualized. So a 0.11% SEC 30-day yield is what the fund is projected to earn over the next year (assuming all else equal and the fund held all the bonds to maturity).
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

I think you are misinterpreting the SEC yield - it is "30 days" in the sense that the calculation uses information about the bonds held by the fund over the last 30 days, but the calculated rate itself is already annualized. So a 0.11% SEC 30-day yield is what the fund is projected to earn over the next year (assuming all else equal and the fund held all the bonds to maturity).
A quick Google source the balance. Provide source of you're interpretation provided you have alternative explanation. A 30 yield is a 30 day yield unless your trying to bend definitions and treasuries tend to go up when the market goes down which is a very long term established trend although without fed cutting rates it might not be as pronounced.


"What Is the 30-Day SEC Yield? A mutual fund's 30-Day SEC Yield refers to a calculation that is based on the 30 days ending on the last day of the previous month. The yield figure reflects the dividends and interest earned during the period, after the deduction of the fund's expenses."
Topic Author
brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

Yeah this is just a formula for a 30 day yield. Your are mistaken if you think this in any way reflects the return for the year unless you multiply by 12 and even then can vary widely. It is a method of comparison to other bond funds but you never listed an alternative.
RyeBourbon
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Re: Creating a DIY savings account with an investment account

Post by RyeBourbon »

Please read the article I posted

"The SEC yield calculation for a bond fund is essentially an annualized version of the interest and dividends per share earned over the last month, divided by the share price."
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JoMoney
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Re: Creating a DIY savings account with an investment account

Post by JoMoney »

Putting money into stocks or bonds with longer maturities/duration then your expected need of the money is not in any way equivalent to a savings account or any other immediately liquid, stable value, government backed, cash account.

I'm not saying nobody should ever use those riskier investments for constantly rolling 'savings' or EF indefinitely, but there are risks that make these things categorically incomparable to a savings account or short-term cash.
When you start going down the road of doing that, you can come up with all sorts of risky ideas... <SARCASM> like paying for everything with a 2% cash back credit card, paying the balance on the card every month with your 'home equity line of credit', then refinancing the house every few years to reset that... because real estate ALWAYS goes up, and interest rates ALWAYS go down :P :twisted: :o :shock:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

RyeBourbon wrote: Tue Sep 15, 2020 8:12 am Please read the article I posted

"The SEC yield calculation for a bond fund is essentially an annualized version of the interest and dividends per share earned over the last month, divided by the share price."
You are correct I was wrong. The article linked in the Wikipedia article clearly laid it out. Must be finally buying new T notes as yield is no where near dividend and fees are not high.
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brw02005
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Re: Creating a DIY savings account with an investment account

Post by brw02005 »

JoMoney wrote: Tue Sep 15, 2020 8:27 am Putting money into stocks or bonds with longer maturities/duration then your expected need of the money is not in any way equivalent to a savings account or any other immediately liquid, stable value, government backed, cash account.

I'm not saying nobody should ever use those riskier investments for constantly rolling 'savings' or EF indefinitely, but there are risks that make these things categorically incomparable to a savings account or short-term cash.
When you start going down the road of doing that, you can come up with all sorts of risky ideas... <SARCASM> like paying for everything with a 2% cash back credit card, paying the balance on the card every month with your 'home equity line of credit', then refinancing the house every few years to reset that... because real estate ALWAYS goes up, and interest rates ALWAYS go down :P :twisted: :o :shock:
Keep in mind a savings account is not 100% either. FDIC guarantees the money but you can still lose access to the money should the bank become insolvent until it gets sorted. Right now large banks can borrow with no reserve and what kind of long term effects that may have are uncertain.

What banks do is not magic. Most things a bank invests in can be replicated nowadays even consumer loans and they rarely lose money. I see it as only a matter of time before people cut out the middle man. They are paying out to both employees and FDIC insurance and typically generating profits. I am not saying my portfolio represents what they have but I think people will eventually come out with something that matches.

Maybe my situation is unique but that money has been sitting there for a decade and will probably still be sitting there in 20 years. But yeah there is the off chance I could need it some day.
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