What to do about interest rates

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skime
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What to do about interest rates

Post by skime »

Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
vas
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Re: What to do about interest rates

Post by vas »

Big difference between CDs and the SP500 from a risk perspective. These investments serve different purposes in your portfolio. CDs and Bonds still serve to stabilize your portfolio even though current returns are relatively low. Not much point worrying about the rates as everyone is in the same boat. Recommend focusing on your overall asset allocation and maintaining it where you want using bonds and CDs.
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sailaway
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Re: What to do about interest rates

Post by sailaway »

I think of cash and bonds as ballast, rather than "fixed income". They aren't there to earn X; they are there to keep a dip from dipping quite so low.
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ruralavalon
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Re: What to do about interest rates

Post by ruralavalon »

skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
My suggestion is I savings bonds. "The composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond", link.

In my opinion the primary purpose of a fixed income allocation is to decrease portfolio volatility and risk, not returns, so would not increase the equity allocation.
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anoop
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Re: What to do about interest rates

Post by anoop »

skime wrote: Wed Jun 09, 2021 2:09 pm I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.
There is a non-zero set of experts that think buying bonds now is the best thing because longer term rates are going much lower. They think the market will crash and the fed will be forced to go to zero at the long end and rates may even go negative.
AnEngineer
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Re: What to do about interest rates

Post by AnEngineer »

skime wrote: Wed Jun 09, 2021 2:09 pm I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.
I don't think it's market timing to look at the available interest rates and decide that it's not worth the constraints and/or risk.

Also, don't overlook cash/high-yield savings accounts. They offer pretty poor interest rates right now, but so does everything. Just because stocks are the only thing that may look like they'll produce a return doesn't mean your money should only go there.

But you also mention that if you move this money into stocks, you'd end up with 50/50 stock/bond AA. That seems very bond heavy to me.
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ruralavalon
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Re: What to do about interest rates

Post by ruralavalon »

anoop wrote: Wed Jun 09, 2021 2:30 pm
skime wrote: Wed Jun 09, 2021 2:09 pm I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.
There is a non-zero set of experts that think buying bonds now is the best thing because longer term rates are going much lower. They think the market will crash and the fed will be forced to go to zero at the long end and rates may even go negative.
Higher interest rates are good for the long-term bond fund investor.

Invest for the long-term, not on the basis of current market conditions or on the basis of anyone's predictions about what they think is about to happen with interest rates and bond fund share prices.
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Topic Author
skime
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Re: What to do about interest rates

Post by skime »

ruralavalon wrote: Wed Jun 09, 2021 2:26 pm
skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
My suggestion is I savings bonds. "The composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond", link.

In my opinion the primary purpose of a fixed income allocation is to decrease portfolio volatility and risk, not returns, so would not increase the equity allocation.
Interesting - what happens after six months? Is there a good place to learn about I Bonds other than the link you posted?
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ruralavalon
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Re: What to do about interest rates

Post by ruralavalon »

skime wrote: Wed Jun 09, 2021 2:38 pm
ruralavalon wrote: Wed Jun 09, 2021 2:26 pm
skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
My suggestion is I savings bonds. "The composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond", link.

In my opinion the primary purpose of a fixed income allocation is to decrease portfolio volatility and risk, not returns, so would not increase the equity allocation.
Interesting - what happens after six months? Is there a good place to learn about I Bonds other than the link you posted?
"Each I Bond's composite rate (fixed and inflation) remains in effect for a total of six months, and then changes to a combination of that I Bond's fixed rate plus the most recently announced inflation adjustment for the next six months. That cycle continues for the life of an I Bond".

See the first of the two links I gave you.
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retired@50
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Re: What to do about interest rates

Post by retired@50 »

skime wrote: Wed Jun 09, 2021 2:09 pm It also seems that equity valuations are already at ridiculous levels.
Today's stock market, with the S&P 500 index near 4,221 probably won't seem ridiculous in 20 years.

Invest according to your time horizon / asset allocation for the money.

Regards,
This is one person's opinion. Nothing more.
KlangFool
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Re: What to do about interest rates

Post by KlangFool »

OP,

Why does it matters one way or the other? It is only 8% of your portfolio. Even if it earns 0%, it won't matter. Ditto, if it earn 10%, it won't matter either.

It would not move the needle in any case.

KlangFool

P.S.: You should stick with your AA. If this 8% supposed to be CASH/FI, it should stay at CASH/FI. This is a test of whether you can stay with your AA or you choose "market timing".
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rich126
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Re: What to do about interest rates

Post by rich126 »

skime wrote: Wed Jun 09, 2021 2:38 pm
ruralavalon wrote: Wed Jun 09, 2021 2:26 pm
skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
My suggestion is I savings bonds. "The composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond", link.

In my opinion the primary purpose of a fixed income allocation is to decrease portfolio volatility and risk, not returns, so would not increase the equity allocation.
Interesting - what happens after six months? Is there a good place to learn about I Bonds other than the link you posted?
That is the problem. After 6 months you have a bond with a fixed rate portion set at 0% for the life of the bond + a rate based on inflation.

I see people flocking to, talking excitedly about I bonds but when you look at the numbers it really isn't worth much. You first have a limit (I think $10K) so that is only $354 of interest for an entire year or about $177 for the 6 months. Then who knows what the inflation rate will be at that time. You are netting a real return of about 0%.

I'm not snickering at 3.54% but with a $10K limit (mostly, with tax refunds maybe $15K), the fixed rate at 0%, I don't see it as a particularly useful item for many people here who often have portfolios at $500K+. An extra couple hundred dollars is less than 0.1% of that portfolio.
SteadyOne
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Re: What to do about interest rates

Post by SteadyOne »

rich126 wrote: Wed Jun 09, 2021 3:34 pm
skime wrote: Wed Jun 09, 2021 2:38 pm
ruralavalon wrote: Wed Jun 09, 2021 2:26 pm
skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
My suggestion is I savings bonds. "The composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond", link.

In my opinion the primary purpose of a fixed income allocation is to decrease portfolio volatility and risk, not returns, so would not increase the equity allocation.
Interesting - what happens after six months? Is there a good place to learn about I Bonds other than the link you posted?
That is the problem. After 6 months you have a bond with a fixed rate portion set at 0% for the life of the bond + a rate based on inflation.

I see people flocking to, talking excitedly about I bonds but when you look at the numbers it really isn't worth much. You first have a limit (I think $10K) so that is only $354 of interest for an entire year or about $177 for the 6 months. Then who knows what the inflation rate will be at that time. You are netting a real return of about 0%.

I'm not snickering at 3.54% but with a $10K limit (mostly, with tax refunds maybe $15K), the fixed rate at 0%, I don't see it as a particularly useful item for many people here who often have portfolios at $500K+. An extra couple hundred dollars is less than 0.1% of that portfolio.
It’s only 10k but 401k limit per year is not much more.
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surfstar
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Re: What to do about interest rates

Post by surfstar »

Buy your max I-bonds for the year, put rest in equity index funds.
You'd still be under 50% stocks per your OP. That's conservative enough, IMO.
SlowPoke
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Re: What to do about interest rates

Post by SlowPoke »

You could consider MYGAs as a CD replacement. Search for the recent thread on them by stinky.
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watchnerd
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Re: What to do about interest rates

Post by watchnerd »

skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
Yep.

Fixed income is no income.

Stocks are expensive.

What to do?

Spend your capital in ways that pull forward durable expenses from your inflated future.

Fight inflation by buying that new roof now, replacing that water heater, etc.

Run the math on solar.
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ChiKid24
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Re: What to do about interest rates

Post by ChiKid24 »

SteadyOne wrote: Wed Jun 09, 2021 3:50 pm
rich126 wrote: Wed Jun 09, 2021 3:34 pm
skime wrote: Wed Jun 09, 2021 2:38 pm
ruralavalon wrote: Wed Jun 09, 2021 2:26 pm
skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
My suggestion is I savings bonds. "The composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond", link.

In my opinion the primary purpose of a fixed income allocation is to decrease portfolio volatility and risk, not returns, so would not increase the equity allocation.
Interesting - what happens after six months? Is there a good place to learn about I Bonds other than the link you posted?

That is the problem. After 6 months you have a bond with a fixed rate portion set at 0% for the life of the bond + a rate based on inflation.

I see people flocking to, talking excitedly about I bonds but when you look at the numbers it really isn't worth much. You first have a limit (I think $10K) so that is only $354 of interest for an entire year or about $177 for the 6 months. Then who knows what the inflation rate will be at that time. You are netting a real return of about 0%.

I'm not snickering at 3.54% but with a $10K limit (mostly, with tax refunds maybe $15K), the fixed rate at 0%, I don't see it as a particularly useful item for many people here who often have portfolios at $500K+. An extra couple hundred dollars is less than 0.1% of that portfolio.
It’s only 10k but 401k limit per year is not much more.
Yeah I never understand why people see the $10k limit on i-bonds as a reason to avoid them. 401k limit is $19.5k but people see value in maxing that out. Roth IRA limit is only $6k, but nobody says don't bother with it because it's a small portion. Also, the ibond limit can actually be as high as $35k if you max out for each spouse, plus a trust, plus a tax refund.

The zero real return (or negative after taxes) is a fair argument. But if you are looking at this as a cash substitute like OP is doing (funds from a CD), then there isn't anything better out there right now. Some other benefits: Tax is deferred until they are redeemed or mature (30 years), they are exempt from state taxes, they can be exempt from federal taxes too if used for qualified education expenses (income limits apply).

For me the biggest headache is dealing with TreasuryDirect. But that can be it's own thread.
esteen
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Re: What to do about interest rates

Post by esteen »

sailaway wrote: Wed Jun 09, 2021 2:18 pm I think of cash and bonds as ballast, rather than "fixed income". They aren't there to earn X; they are there to keep a dip from dipping quite so low.
+1

I also vote sticking to your asset allocation in times like this. Yes the real returns are negative, but not as negative as hiding that cash under a mattress. Doesn't mean you have to invest in bonds - you could invest in other types of fixed income/capital preservation assets like MYGA's, CDs, even high-yield savings accounts that was suggested above. But I would not move my bond allocation into stocks just because I thought bonds were going to produce negative returns - that's market timing.
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skime
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Re: What to do about interest rates

Post by skime »

I appreciate all of the responses. Very helpful.
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watchnerd
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Re: What to do about interest rates

Post by watchnerd »

ChiKid24 wrote: Wed Jun 09, 2021 7:28 pm

Yeah I never understand why people see the $10k limit on i-bonds as a reason to avoid them.
Because I don't have a time machine.

I can't go back and accumulate 20 years of i Bonds at this point.

Do I regret that?

Nope.

Because over that 20 years I would have been putting (and did put) $10k more into stocks in taxable.

Which grew the portfolio far more than I bonds would have.

And now with a 7 figure portfolio, $10k a year to I bonds just doesn't move the needle on my bond allocation when I can just buy TIPS with no limits.
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ChiKid24
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Re: What to do about interest rates

Post by ChiKid24 »

watchnerd wrote: Wed Jun 09, 2021 10:13 pm
ChiKid24 wrote: Wed Jun 09, 2021 7:28 pm

Yeah I never understand why people see the $10k limit on i-bonds as a reason to avoid them.
Because I don't have a time machine.

I can't go back and accumulate 20 years of i Bonds at this point.

Do I regret that?

Nope.

Because over that 20 years I would have been putting (and did put) $10k more into stocks in taxable.

Which grew the portfolio far more than I bonds would have.

And now with a 7 figure portfolio, $10k a year to I bonds just doesn't move the needle on my bond allocation when I can just buy TIPS with no limits.
Agree there is no way to go backward, but you can look forward right? OP isn't asking about a past decision, he's asking what to do with the money. Your comment on putting the extra $10k into stock isn't really relevant. This is clearly the cash/bond portion of OPs asset allocation. Or are you saying we all should have just put 100% into stocks since they outperformed over the last 20 years?

If the 401k limits were upped to $30k next year, would you take advantage of the ability to put in an extra $10k (assuming you had the ability to do so)? I know I would. Sure this is after tax money, but it's tax advantaged in that it is deferred and exempt from state taxes, and pays more than any other bond/savings account out there. TIPS have a purpose, but from a tax perspective there is a portfolio drag as interest payments and inflation adjustments are taxable every year. They also currently have a negative real yield. Not sure why no limit purchases of negative yield is a good thing.
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Re: What to do about interest rates

Post by watchnerd »

ChiKid24 wrote: Wed Jun 09, 2021 11:18 pm

Agree there is no way to go backward, but you can look forward right? OP isn't asking about a past decision, he's asking what to do with the money. Your comment on putting the extra $10k into stock isn't really relevant. This is clearly the cash/bond portion of OPs asset allocation. Or are you saying we all should have just put 100% into stocks since they outperformed over the last 20 years?
I don't consider I-bonds to be cash equivalents at all.

They're inflation protected bonds.

As such, I think they should be compared to such.

As for contributions:

It takes 20+ years of I bonds to make a decent sized allocation.

For me, 20 years ago, I was 30.

I had 0 bonds at age 30, just stocks and an emergency fund.

By the time I started adding bonds at age 40, I would have missed out on 10 years of I bonds contributions already with no ability to change AA into them in a meaningful way.

I think most would be far better off with:

Cash + stocks

shifting to

cash + stocks + treasuries / TIPS

when you get closer to a 7 figure port.

I-bonds are just too much of a portfolio drag (like cash) when you're young.

And the annual limits mean you can't "catch up" by lump summing into them later in life.
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ChiKid24
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Re: What to do about interest rates

Post by ChiKid24 »

watchnerd wrote: Wed Jun 09, 2021 11:52 pm
ChiKid24 wrote: Wed Jun 09, 2021 11:18 pm

Agree there is no way to go backward, but you can look forward right? OP isn't asking about a past decision, he's asking what to do with the money. Your comment on putting the extra $10k into stock isn't really relevant. This is clearly the cash/bond portion of OPs asset allocation. Or are you saying we all should have just put 100% into stocks since they outperformed over the last 20 years?
I don't consider I-bonds to be cash equivalents at all.

They're inflation protected bonds.

As such, I think they should be compared to such.

As for contributions:

It takes 20+ years of I bonds to make a decent sized allocation.

For me, 20 years ago, I was 30.

I had 0 bonds at age 30, just stocks and an emergency fund.

By the time I started adding bonds at age 40, I would have missed out on 10 years of I bonds contributions already with no ability to change AA into them in a meaningful way.

I think most would be far better off with:

Cash + stocks

shifting to

cash + stocks + treasuries / TIPS

when you get closer to a 7 figure port.

I-bonds are just too much of a portfolio drag (like cash) when you're young.

And the annual limits mean you can't "catch up" by lump summing into them later in life.
OP is redeeming a CD. That's a cash equivalent. I suggested i-bonds, as a cash equivalent. You might not see i-bonds that way, but I (and others) do. Unlike a bond, there is virtually no principal risk. When savings accounts and CDs are yielding next to nothing, a guaranteed 3.5% that offers inflation protection, is tax deferred and state tax exempt, feels like a nice cash alternative to me. Only drawback when looking at it as cash is the 1-year hold period. But considering OP is coming from a CD, it sounds like this is cash that is looking for yield and they are ok with some time restriction / lock-up.
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watchnerd
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Re: What to do about interest rates

Post by watchnerd »

ChiKid24 wrote: Thu Jun 10, 2021 12:28 am

OP is redeeming a CD. That's a cash equivalent. I suggested i-bonds, as a cash equivalent. You might not see i-bonds that way, but I (and others) do. Unlike a bond, there is virtually no principal risk. When savings accounts and CDs are yielding next to nothing, a guaranteed 3.5% that offers inflation protection, is tax deferred and state tax exempt, feels like a nice cash alternative to me. Only drawback when looking at it as cash is the 1-year hold period. But considering OP is coming from a CD, it sounds like this is cash that is looking for yield and they are ok with some time restriction / lock-up.
You asked:

"I never understand why people see the $10k limit on i-bonds as a reason to avoid them."

I gave you my reasons why.
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AnEngineer
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Re: What to do about interest rates

Post by AnEngineer »

ruralavalon wrote: Wed Jun 09, 2021 2:38 pm Higher interest rates are good for the long-term bond fund investor.
This depends on how much I'm saving and how much I have. For bonds that I have now and hold long term (as in to maturity), future rates have zero impact on my return.
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Re: What to do about interest rates

Post by Rudedog »

I have several CDs maturing in July, some that are now paying 3%. I'm putting the money in high-yield savings account. I expect interest rates will go up, maybe in 2022. I hope.
7eight9
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Re: What to do about interest rates

Post by 7eight9 »

Since your funds were in CDs and munis you might want to consider fixed annuities (multi-year guaranteed annuities (MYGAs)). They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

There was a good thread recently titled Purchasing MYGAs (multi year guaranteed annuities) - mega thread that might be worth a look.
viewtopic.php?f=1&t=334589

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Re: What to do about interest rates

Post by exodusNH »

7eight9 wrote: Thu Jun 10, 2021 9:20 am Since your funds were in CDs and munis you might want to consider fixed annuities (multi-year guaranteed annuities (MYGAs)). They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

There was a good thread recently titled Purchasing MYGAs (multi year guaranteed annuities) - mega thread that might be worth a look.
viewtopic.php?f=1&t=334589

I've purchased from Blueprint Income and Canvas.
They're great if you're old enough or can afford having that money tied up until you're 59.5 (by continually exchanging into new MYGAs until you're old enough.)
Grt2bOutdoors
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Re: What to do about interest rates

Post by Grt2bOutdoors »

rich126 wrote: Wed Jun 09, 2021 3:34 pm
skime wrote: Wed Jun 09, 2021 2:38 pm
ruralavalon wrote: Wed Jun 09, 2021 2:26 pm
skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
My suggestion is I savings bonds. "The composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond", link.

In my opinion the primary purpose of a fixed income allocation is to decrease portfolio volatility and risk, not returns, so would not increase the equity allocation.
Interesting - what happens after six months? Is there a good place to learn about I Bonds other than the link you posted?
That is the problem. After 6 months you have a bond with a fixed rate portion set at 0% for the life of the bond + a rate based on inflation.

I see people flocking to, talking excitedly about I bonds but when you look at the numbers it really isn't worth much. You first have a limit (I think $10K) so that is only $354 of interest for an entire year or about $177 for the 6 months. Then who knows what the inflation rate will be at that time. You are netting a real return of about 0%.

I'm not snickering at 3.54% but with a $10K limit (mostly, with tax refunds maybe $15K), the fixed rate at 0%, I don't see it as a particularly useful item for many people here who often have portfolios at $500K+. An extra couple hundred dollars is less than 0.1% of that portfolio.
For someone in the accumulation mode and the capacity to purchase the maximum allocation to I bonds, it’s a viable alternative to a fluctuating bond fund if said individual wants near certainty of liquidity, flexibility and assurance that should there be a bad extended spell in the markets they could choose to liquidate the I bonds and leave the equities sufficient time to recover.
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dbr
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Re: What to do about interest rates

Post by dbr »

I agree that I bonds at 0% fixed rate are just as much a victim of low interest rates as anything else and do not provide escape from the cruel vicissitudes of history. 0% fixed is better than -1.5% real for a money market fund, but that is not saying much.

Note a problem with I bonds is that you can't liquidate a holding in I bonds and replace it with new I bonds at a better rate because the purchase limits prevent that.

That said, a gradual accumulation of I bonds can be a wise investment decision. Just exactly the purchase limit prevents committing too much to I bonds when the rate is historically low. Of course trying to guess what rates could be for the next 30-50 years is futile.
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Re: What to do about interest rates

Post by livesoft »

So moving this cash into S&P500 will result in an overall portfolio asset allocation of 50:50? Well, that's what I would do since my desired AA is 60:40 and now that I haven't worked for many years, I am not changing it.
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hudson
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Re: What to do about interest rates

Post by hudson »

skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
I go for the best available. Consider duration matching.

The muni fund VWIUX is still paying out around 2%.
Vanguard Total Bond is paying around 1.8%
10 Year Treasuries are paying around 1.5%
B++ MYGAs are paying over 2% maybe.
Regular TIPS are an option. I may go with a non rolling TIPS ladder when my CDs mature.
Live Oak Bank is paying .5% on savings.
EDV...extended treasury ETF is paying out 2.19%
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Wiggums
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Re: What to do about interest rates

Post by Wiggums »

skime wrote: Wed Jun 09, 2021 2:38 pm
ruralavalon wrote: Wed Jun 09, 2021 2:26 pm
skime wrote: Wed Jun 09, 2021 2:09 pm Call it poor planning or bad timing. Maybe a bit of both considering rates fell like a stone during a window when I had the potential for bond calls. I have about 8% of my liquid assets coming due in CDs or munis being called in advance of maturity this year.

I can reinvest back into CDs and munis and accept the lower rates or I can redeploy it into an S&P index fund. If I went down the index fund route, I'd be at about a 50/50 allocation.

I'm not sure what to do given that it almost makes zero sense to buy a bond or CD now. It also seems that equity valuations are already at ridiculous levels. If I wait for a year or two to decide, it seems I'm market timing. Yes, I could afford the lower income, but I'd be reinvesting far below the rate of inflation.

What to do, what to do...
My suggestion is I savings bonds. "The composite rate for I bonds issued from May 2021 through October 2021 is 3.54 percent. This rate applies for the first six months you own the bond", link.

In my opinion the primary purpose of a fixed income allocation is to decrease portfolio volatility and risk, not returns, so would not increase the equity allocation.
Interesting - what happens after six months? Is there a good place to learn about I Bonds other than the link you posted?
Treasury direct has a lot of information on I-bonds.

https://www.treasurydirect.gov/indiv/re ... dterms.htm

there are a couple of things to keep in mind.

1. there is a holding period of 1 year. after 1 year, and before 5 years, if you redeem, you will have to forfeit the last 3 months of interest.
2. Every SSN can buy only $10K.
3. Interest is compounded and right now the inflation portion is 3.4% but that is only lock for 6 months.
4. Interest grow tax free in the account as long as you don't redeem it
5. If you use the proceed in higher education, it might be used tax free depending on income level
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Stinky
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Re: What to do about interest rates

Post by Stinky »

exodusNH wrote: Thu Jun 10, 2021 9:28 am
7eight9 wrote: Thu Jun 10, 2021 9:20 am Since your funds were in CDs and munis you might want to consider fixed annuities (multi-year guaranteed annuities (MYGAs)). They pay much better than bank accounts, money market funds, CD and other low-risk fixed income investments.

There was a good thread recently titled Purchasing MYGAs (multi year guaranteed annuities) - mega thread that might be worth a look.
viewtopic.php?f=1&t=334589

I've purchased from Blueprint Income and Canvas.
They're great if you're old enough or can afford having that money tied up until you're 59.5 (by continually exchanging into new MYGAs until you're old enough.)
I agree with this. If you’re comfortable in CDs, at least check out MYGAs to see if they’ll fit into your situation.
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SteadyOne
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Re: What to do about interest rates

Post by SteadyOne »

watchnerd wrote: Wed Jun 09, 2021 10:13 pm
ChiKid24 wrote: Wed Jun 09, 2021 7:28 pm

Yeah I never understand why people see the $10k limit on i-bonds as a reason to avoid them.
Because I don't have a time machine.

I can't go back and accumulate 20 years of i Bonds at this point.

Do I regret that?

Nope.

Because over that 20 years I would have been putting (and did put) $10k more into stocks in taxable.

Which grew the portfolio far more than I bonds would have.

And now with a 7 figure portfolio, $10k a year to I bonds just doesn't move the needle on my bond allocation when I can just buy TIPS with no limits.
It may work for many others on this blog
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exodusNH
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Re: What to do about interest rates

Post by exodusNH »

SteadyOne wrote: Thu Jun 10, 2021 7:34 pm
watchnerd wrote: Wed Jun 09, 2021 10:13 pm
ChiKid24 wrote: Wed Jun 09, 2021 7:28 pm

Yeah I never understand why people see the $10k limit on i-bonds as a reason to avoid them.
Because I don't have a time machine.

I can't go back and accumulate 20 years of i Bonds at this point.

Do I regret that?

Nope.

Because over that 20 years I would have been putting (and did put) $10k more into stocks in taxable.

Which grew the portfolio far more than I bonds would have.

And now with a 7 figure portfolio, $10k a year to I bonds just doesn't move the needle on my bond allocation when I can just buy TIPS with no limits.
It may work for many others on this blog
Yep -- I'm using them (well, just bought some to use) as a way to cover property taxes and homeowner's insurance in the future.
jdamo
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Re: What to do about interest rates

Post by jdamo »

Taylor Larimore responded to one of my earlier threads (I was worried about opposite problem of rising interest rates, not low rates! But nevertheless...) with a history from 1976-2019 that showed the Total Bond Index did well and beat inflation from 1976-1985, 1988-1991, 2003-2008, 2011-12 and 2017. And that was just during the higher inflation periods of ~3-5%. The Total Bond index did suffer when inflation was 10-13% inflation for 3 years but still some yield.

We can't see the future in the cloudy crystal ball.....

This convinced me to stay the course and stick to my asset allocation of Total Bond index,SP500 and Intl stock index funds.

The threads to invest for the long term are good reminders...we tend to get caught up on the information age of constant information and data! Noise!
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Re: What to do about interest rates

Post by mbasherp »

watchnerd wrote: Wed Jun 09, 2021 11:52 pm
I don't consider I-bonds to be cash equivalents at all.

They're inflation protected bonds.

As such, I think they should be compared to such.

As for contributions:

It takes 20+ years of I bonds to make a decent sized allocation.

For me, 20 years ago, I was 30.

I had 0 bonds at age 30, just stocks and an emergency fund.

By the time I started adding bonds at age 40, I would have missed out on 10 years of I bonds contributions already with no ability to change AA into them in a meaningful way.

I think most would be far better off with:

Cash + stocks

shifting to

cash + stocks + treasuries / TIPS

when you get closer to a 7 figure port.

I-bonds are just too much of a portfolio drag (like cash) when you're young.

And the annual limits mean you can't "catch up" by lump summing into them later in life.
You’d actually have been better off by always holding I bonds as your emergency fund and never having the drag of cash.

Then later, you can keep the I bonds as cash, and maybe they can also fill some of that bond space you have too if inflation caused them to rise so substantially in value over time.
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