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For holding "cash" - should I keep loading into RPHYX?
@hank That's a pleasant way of looking at the situation. And it was pleasurable to note I have done pretty much the same thing, for the same reasons--- I just hadn't fully realized why until I read your comment! [I hope you are aware that, with such a temperament, you're gonna need an additional 5-10 yrs of living expenses in your retirement]
Now that the market is pulling back is a good time to gauge if your chosen cash substitute is performing to your expectations. Remember real cash will function much like a shock absorber for a portfolio in market declines as real cash offers a stable value where valuations for most other assets held follow their respectve market valuations.
Old_Skeet's overall portfolio allocation is now about 20% cash, 20% income, 50% equity, and 10% other.
Now that the market is pulling back is a good time to gauge if your chosen cash substitute is performing to your expectations. Remember real cash will function much like a shock absorber for a portfolio in market declines as real cash offers a stable value where valuations for most other assets held follow their respectve market valuations.
Old_Skeet's overall portfolio allocation is now about 20% cash, 20% income, 50% equity, and 10% other.
If you don't mind me asking, what is lurking in your "other" portion?
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of four sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve and a specialty sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and the amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole monthly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash distribution needs with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from, or settle to, the cash area.
Here is how I have my asset allocation currently broken out in percent ranges, by area. My neutral targets are cash 15%, income 30%, growth & income 35%, and growth 20%. I do an Instant Xray analysis of the portfolio monthly and make asset weighting adjustments as I feel warranted based upon my assesment of the market, my risk tolerance, cash needs, etc. Currently, I am heavy in the cash area, light in the income area and a little light in the equity area.
Cash Area (Weighting Range 5% to 25%) Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual) Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 20% to 40%) Fixed Income Sleeve: EVBAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX Hybrid Income Sleeve: AZNAX, CAPAX, FKINX, ISFAX, PASAX & PGBAX
Growth & Income Area (Weighting Range 25% to 45%) Global Equity Sleeve: CWGIX, DEQAX, EADIX & PGUAX Global Hybrid Sleeve: CAIBX, IGPAX & TIBAX Domestic Equity Sleeve: ANCFX, CFLGX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 30%) Global Sleeve: ANWPX, PGROX, THOAX, DEMAX, NEWFX & THDAX Large/Mid Cap Sleeve: AGTHX, BWLAX, HWAAX, IACLX, SPECX & VADAX Small/Mid Cap Sleeve: AJVAX, IIVAX, PCVAX & PMDAX Specialty Sleeve: CCMAX, JCRAX, LPEFX, SGGDX & TOLLX
Total number of mutual fund investment positions equal fifty three.
The "other" that I referenced in my portfolio's asset allocation, and is the subject of your inquiry, comes from Morningstar's Instant Xray analysis of the above positions for assets held that does not fit the categories of cash, bonds, or stocks.
Wait long enough, and a lot of what one has in mind will be said. Thanks to Hank for his most recent post above about what cash means. That was some of what I wanted to point out - that if you're thinking about cash as something used for paying bills, you need stable (or very nearly stable) prices. But if you're using "cash" for asset allocation, you can tolerate fluctuations.
In the latter case, these days I wonder about the use of bonds at all (rather than cash) for ballast. Is 1% or so extra return over cash worth the extra risk? While some people are wondering how to get any return on cash, I'm wondering whether 2% on short-intermediate term bond funds is worth the risk. If one does want to take that risk, I'd look at FPNIX - it's always been non-traditional, using derivatives as much to preserve capital as to improve returns.
Back to cash. Regarding I-bonds - which I think are great for cash allocation but not day-to-day cash (since you can't redeem them for a year) - not only can you buy $10K/year/SSN from Treasury Direct, but if you have a refund coming on your 1040, you can buy $5K more using Form 8888.
A similar idea to I-bonds (stable, insured, liquid albeit with penalty) is long term CDs. Many banks offer CDs where you come out ahead of cash even after a year or so (like an I-bond), even after penalty. But there are risks - being able to access your money (early withdrawal may be at the discretion of the bank), and interest rate risk (the bank could increase the early withdrawal penalty). Here's a good post on that. The site (depositaccounts.com) also has a CD calculator showing the net APY after penalty.
Comparing muni bond funds with RPHYX - BobC addressed this to some extent. He likes NEARX. I've been a little uncomfortable about the risk it seems to take (investing heavily in low graded states), but if memory serves, it seems to have cut back significantly on Illinois (lowest graded state), and generally gotten more conservative. Here's a nice graphic on state ratings (you'll need to zoom in to read it well). But NJ's rating (5% of NEARX) has dropped further than the graphic shows.
I tend to look at SEC yield, especially for investments that are not intended to be short term (i.e. used for monthly payrolls and the like) - this is a calculation that's designed to reflect total return (i.e. it accounts for increase/decrease in values of discount/premium bonds). Near the top of short term munis is Vanguard Ltd-Term (VMLUX, VMLTX), a more conservative muni fund that BobC has also suggested in the past as a conservative alternative to NEARX. I feel it offers better risk/reward, in the sense that even though its return is less, its risk is much less. And right now, its SEC yield tops most funds, including NEARX.
It does this, as you'd expect, with low costs. So its portfolio can be shorter term, and higher grade than any of the funds with similar SEC yields. Specifically, its average duration is 2.5 years, and average AA rated (M*). Its SEC yield is 0.86%. There are only two AA rated funds with SEC yields about 0.5% that are comparable - AUNAX (NTF at TDAmeritrade) 2.2 year duration, but high expense and high M* risk (volatile), and DFSMX 2.7 year duration, but 0.52% SEC yield and, well try to buy DFA funds.
Compared to cash (I use 1% as a baseline, since that's about what one can get in FDIC-insured online banks) and a 28% tax bracket, the expected return of 0.86% beats the 072% post tax cash return. Go shorter with munis and you won't beat cash; go longer and you'll be taking on higher interest rate risk that I feel pushes the fund too far away from cash. YMMV.
Background: Earlier, I had said: "Money-market funds use their capital to make relatively short-term loans, and, in the old days, their so-called "dividends" were really just a cut of the interest that the MF company obtained while lending those funds. While they also had disclaimers... it was generally believed to be with "a wink and a nod", as the MF companies tried very hard to maintain the $1.00 NAV, and generally succeeded."
And heezsafe replied: "Old_Joe your thinking about MMkt funds is incorrect (both pre-crisis and certainly post-crisis); but if I can find a good synopsis to go with other things I've found (hey, I realized I needed a refresher on this, too!), then I'll have a "package" of interesting things I'll post for you in the next few days." ••••••••••
@heezsafe- Hello there. I'll admit I just ran that off from memory, but your note inspired me to check Wickipedia for more info, and it seems to me to be pretty close to what I was saying: "A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are widely (though not necessarily accurately) regarded as being as safe as bank deposits yet providing a higher yield."
"[M]oney market funds are important providers of liquidity to financial intermediaries."
"The portfolio must maintain a weighted average maturity of 60 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements."
"Unlike most other financial instruments, money market funds seek to maintain a stable value of $1 per share. Funds are able to pay dividends to investors."
Investing in "short-term debt securities" is equivalent to making short term loans, yes?
In any case, this has been an interesting thread, and I'll look forward to your "package" of interesting things".
@Old_Joe I haven't forgotten you, really. It's just that what I've found is a lot different than what I expected, and I'm having to re-scale the package. The changes to money market function, and what various kinds of MMkt funds can hold, is so profound that I'm having to go to primary sources (rather large regulatory documents) to understand the what and why of things; if I were to simply post these, it would be a big turn-off for most, who would see the page length and flee. Fortunately, the writing is pretty good, so I think I need to finishing perusing them, and select the sections that describe what a typical retail investor would what/need to know to make an investment decision about MMkt funds. Maybe a couple extra days, please?
Humbling to learn how little I have understood how the different kinds of MMkt funds really worked, all these years. Surprising to learn that, in the past 25 years, there were 11 financial events severe enough to cause 158 MMkt funds to break the buck, had it not been for fund sponsors dashing in with cash to hide it and preserve the NAV at 1. In 2008-9, the industry simply ran out of luck--- their Black Swan flew in.
Thanks for all the great contributions. I've used the MFO risk tool to compare. I've restricted it to funds in the 1st risk group to approximate the risk category of RPHYX and organized them according to Martin Ratio. For the 3 year group, RPHYX is the winner. for five years, NTAUX. For the 20 year group, GSTGX is the winner. (Disclaimer: As clearly explained by others in the thread, an investment in one of these funds is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Unlike individual debt securities, which typically pay principal at maturity, the value of an investment in the fund will fluctuate. You could lose money by investing in the fund.)
Edit-I meant to include FNPIX, but somehow forgot.
I have about $100,000 outside of "emergency cash" that I want to do something with. I don't feel comfortable dropping that money into equities with the current valuations and market situation. I already own plenty of muni funds so I don't want to put all my eggs in that basket, either. I guess I could ladder some CDs over the next two years, or put it in something like LALDX for a few years.
Comments
Old_Skeet's overall portfolio allocation is now about 20% cash, 20% income, 50% equity, and 10% other.
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of four sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve and a specialty sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and the amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole monthly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash distribution needs with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from, or settle to, the cash area.
Here is how I have my asset allocation currently broken out in percent ranges, by area. My neutral targets are cash 15%, income 30%, growth & income 35%, and growth 20%. I do an Instant Xray analysis of the portfolio monthly and make asset weighting adjustments as I feel warranted based upon my assesment of the market, my risk tolerance, cash needs, etc. Currently, I am heavy in the cash area, light in the income area and a little light in the equity area.
Cash Area (Weighting Range 5% to 25%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 20% to 40%)
Fixed Income Sleeve: EVBAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: AZNAX, CAPAX, FKINX, ISFAX, PASAX & PGBAX
Growth & Income Area (Weighting Range 25% to 45%)
Global Equity Sleeve: CWGIX, DEQAX, EADIX & PGUAX
Global Hybrid Sleeve: CAIBX, IGPAX & TIBAX
Domestic Equity Sleeve: ANCFX, CFLGX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 30%)
Global Sleeve: ANWPX, PGROX, THOAX, DEMAX, NEWFX & THDAX
Large/Mid Cap Sleeve: AGTHX, BWLAX, HWAAX, IACLX, SPECX & VADAX
Small/Mid Cap Sleeve: AJVAX, IIVAX, PCVAX & PMDAX
Specialty Sleeve: CCMAX, JCRAX, LPEFX, SGGDX & TOLLX
Total number of mutual fund investment positions equal fifty three.
The "other" that I referenced in my portfolio's asset allocation, and is the subject of your inquiry, comes from Morningstar's Instant Xray analysis of the above positions for assets held that does not fit the categories of cash, bonds, or stocks.
I hope this is helpful.
Old_Skeet
In the latter case, these days I wonder about the use of bonds at all (rather than cash) for ballast. Is 1% or so extra return over cash worth the extra risk? While some people are wondering how to get any return on cash, I'm wondering whether 2% on short-intermediate term bond funds is worth the risk. If one does want to take that risk, I'd look at FPNIX - it's always been non-traditional, using derivatives as much to preserve capital as to improve returns.
Back to cash. Regarding I-bonds - which I think are great for cash allocation but not day-to-day cash (since you can't redeem them for a year) - not only can you buy $10K/year/SSN from Treasury Direct, but if you have a refund coming on your 1040, you can buy $5K more using Form 8888.
A similar idea to I-bonds (stable, insured, liquid albeit with penalty) is long term CDs. Many banks offer CDs where you come out ahead of cash even after a year or so (like an I-bond), even after penalty. But there are risks - being able to access your money (early withdrawal may be at the discretion of the bank), and interest rate risk (the bank could increase the early withdrawal penalty). Here's a good post on that. The site (depositaccounts.com) also has a CD calculator showing the net APY after penalty.
Comparing muni bond funds with RPHYX - BobC addressed this to some extent. He likes NEARX. I've been a little uncomfortable about the risk it seems to take (investing heavily in low graded states), but if memory serves, it seems to have cut back significantly on Illinois (lowest graded state), and generally gotten more conservative. Here's a nice graphic on state ratings (you'll need to zoom in to read it well). But NJ's rating (5% of NEARX) has dropped further than the graphic shows.
I tend to look at SEC yield, especially for investments that are not intended to be short term (i.e. used for monthly payrolls and the like) - this is a calculation that's designed to reflect total return (i.e. it accounts for increase/decrease in values of discount/premium bonds). Near the top of short term munis is Vanguard Ltd-Term (VMLUX, VMLTX), a more conservative muni fund that BobC has also suggested in the past as a conservative alternative to NEARX. I feel it offers better risk/reward, in the sense that even though its return is less, its risk is much less. And right now, its SEC yield tops most funds, including NEARX.
It does this, as you'd expect, with low costs. So its portfolio can be shorter term, and higher grade than any of the funds with similar SEC yields. Specifically, its average duration is 2.5 years, and average AA rated (M*). Its SEC yield is 0.86%. There are only two AA rated funds with SEC yields about 0.5% that are comparable - AUNAX (NTF at TDAmeritrade) 2.2 year duration, but high expense and high M* risk (volatile), and DFSMX 2.7 year duration, but 0.52% SEC yield and, well try to buy DFA funds.
Compared to cash (I use 1% as a baseline, since that's about what one can get in FDIC-insured online banks) and a 28% tax bracket, the expected return of 0.86% beats the 072% post tax cash return. Go shorter with munis and you won't beat cash; go longer and you'll be taking on higher interest rate risk that I feel pushes the fund too far away from cash. YMMV.
And heezsafe replied: "Old_Joe your thinking about MMkt funds is incorrect (both pre-crisis and certainly post-crisis); but if I can find a good synopsis to go with other things I've found (hey, I realized I needed a refresher on this, too!), then I'll have a "package" of interesting things I'll post for you in the next few days."
••••••••••
@heezsafe- Hello there. I'll admit I just ran that off from memory, but your note inspired me to check Wickipedia for more info, and it seems to me to be pretty close to what I was saying:
"A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are widely (though not necessarily accurately) regarded as being as safe as bank deposits yet providing a higher yield."
"[M]oney market funds are important providers of liquidity to financial intermediaries."
"The portfolio must maintain a weighted average maturity of 60 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements."
"Unlike most other financial instruments, money market funds seek to maintain a stable value of $1 per share. Funds are able to pay dividends to investors."
Investing in "short-term debt securities" is equivalent to making short term loans, yes?
In any case, this has been an interesting thread, and I'll look forward to your "package" of interesting things".
Regards- OJ
Humbling to learn how little I have understood how the different kinds of MMkt funds really worked, all these years. Surprising to learn that, in the past 25 years, there were 11 financial events severe enough to cause 158 MMkt funds to break the buck, had it not been for fund sponsors dashing in with cash to hide it and preserve the NAV at 1. In 2008-9, the industry simply ran out of luck--- their Black Swan flew in.
Edit-I meant to include FNPIX, but somehow forgot.
But Maurice. You have to listen to Mona's song if you haven't yet. Pretty cool.