Author Topic: Cash vs Bonds to hedge against a crash; investing tax money  (Read 2490 times)

YoungStache

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Cash vs Bonds to hedge against a crash; investing tax money
« on: September 23, 2018, 06:53:40 PM »
So I have a large chunk of cash that I've just been keeping in the bank. I was looking into real estate, but stopped after buying one duplex all cash, as it's been 10 years of a bull market and numbers are pointing to a recession.

 I'll have to pay about 2/5 of that chunk of cash to the IRS as taxes come tax season, but is there anything I could invest in and liquidate when April comes around? I already have almost double that amount of cash in Vanguard index funds. I was holding cash in preparation to buy a subsequent dip or crash, but I'm wondering if bonds are better. Or maybe a money market account for higher interest?

How do bonds perform during a recession or crash?

Any creative things to do with the money?

Also, side question - anyone switching over to Fidelity for fee-free index funds?
« Last Edit: September 23, 2018, 07:10:56 PM by YoungStache »

PizzaSteve

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #1 on: September 23, 2018, 07:17:03 PM »
Anyone that responds claiming to know what assets will perform best short term is not offering good advice.  You likely know the options, CD or savings bond gets you a few %, stocks are an unknown.

Im curious to know how you predict a recession. A leading market analyst I just saw lecture thinks the opposite, at least for the next year or two.

YoungStache

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #2 on: September 23, 2018, 07:20:18 PM »
Anyone that responds claiming to know what assets will perform best short term is not offering good advice.  You likely know the options, CD or savings bond gets you a few %, stocks are an unknown.

Im curious to know how you predict a recession. A leading market analyst I just saw lecture thinks the opposite, at least for the next year or two.

So in a recession bonds will drop too, but just not as volatile as stocks right? I'm just wondering if I should keep my spare cash in bonds for extra interest.

I'm not claiming to predict a recession at all, but personally I'm willing to guess we're "due" for a recession within the next 1-3 years so I'm holding off buying index funds/real estate at these prices (unless of course there's a really good deal).


PizzaSteve

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #3 on: September 23, 2018, 07:25:18 PM »
Sorry I cant help you.  If you believe a recession will occur, a general rule is that holding cash is better than holding stocks or bonds, which can lose value.  Cash isnt always bad, especially in short term situations.  Over the long term you lose purchasing power, so you should make sure you have enough cash to meet needs, plus some for inflation, assuming you are retired and living off the funds.

Andy R

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #4 on: September 23, 2018, 07:44:16 PM »
How do bonds perform during a recession or crash?

I think I read that at some point during the GFC bonds were dropping at 2% per month. But please go and check because I could be wrong.
I think HISA pays close to bonds right now, so if you have the funds earmarked for something, I wonder what the allure of bonds would be?

Having said that, there's a thread over on the boggleheads forum of someone who exited equities in 2015 because "a crash is coming!" and is still in cash. If there is a market drop now of 30%, he still would have been ahead if he just left his money in.

YoungStache

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #5 on: September 23, 2018, 07:52:05 PM »
Thing is I'm not trying to exit my positions. I just have a bunch of spare cash I acquired this year (some of which I'll have to pay to IRS come tax season). And not sure if I should just hold it, or dump into index funds/ real estate. What are the top interest rates on money market accounts nowadays?


How do bonds perform during a recession or crash?

I think I read that at some point during the GFC bonds were dropping at 2% per month. But please go and check because I could be wrong.
I think HISA pays close to bonds right now, so if you have the funds earmarked for something, I wonder what the allure of bonds would be?

Having said that, there's a thread over on the boggleheads forum of someone who exited equities in 2015 because "a crash is coming!" and is still in cash. If there is a market drop now of 30%, he still would have been ahead if he just left his money in.

ILikeDividends

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #6 on: September 23, 2018, 08:42:03 PM »
How do bonds perform during a recession or crash?
If you hold them to maturity, they're worth exactly what you paid for them; plus you keep whatever interest they paid while you held them.

US treasury bonds don't pay a whole lot of interest, but then they are also considered risk-free rates; no chance of losing.  You only lose money on bonds, apart from losing buying power to inflation, is if you need to sell them before they mature.  Treasuries offer terms-to-maturity measured in weeks, months, and years.

You could pick a treasury with the longest date to maturity you can find that ends some time before you need to write that check to the IRS.  Also, no state tax on interest from treasuries.

« Last Edit: September 23, 2018, 08:48:08 PM by ILikeDividends »

YoungStache

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #7 on: September 23, 2018, 09:02:27 PM »
Interesting... never really looked into bonds.

Where do you buy your bonds? Does Vanguard offer US Treasury bonds? Are they much better than money market interest?


How do bonds perform during a recession or crash?
If you hold them to maturity, they're worth exactly what you paid for them; plus you keep whatever interest they paid while you held them.

US treasury bonds don't pay a whole lot of interest, but then they are also considered risk-free rates; no chance of losing.  You only lose money on bonds, apart from losing buying power to inflation, is if you need to sell them before they mature.  Treasuries offer terms-to-maturity measured in weeks, months, and years.

You could pick a treasury with the longest date to maturity you can find that ends some time before you need to write that check to the IRS.  Also, no state tax on interest from treasuries.

ILikeDividends

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #8 on: September 23, 2018, 09:10:48 PM »
Interesting... never really looked into bonds.

Where do you buy your bonds? Does Vanguard offer US Treasury bonds? Are they much better than money market interest?
Google is your friend.  I don't mean to be dismissive of your question, but  I have yet to have a reason to invest in individual treasuries (or even in individual corporate bonds, for that matter).

Apart from my previous post, we're starting from about the same place, in terms of comparing returns on different debt assets; though I would assume a MM fund pays substantially less than treasuries, simply because an MM fund is much more liquid than any bond.  In your case, liquidity is not a worry.  You know exactly when you're going to need that investment converted back into cash.

I'm also assuming all the big brokers let you buy treasuries.  Furthermore, I've read on this forum that Schwab allows you to buy them fee-free.  That's where I'll shop if/when I need to buy treasuries.  I don't know anything more, specifically about Vanguard, than what I've read here; but I'm sure Vanguard would be more than happy to answer your questions. ;)
« Last Edit: September 23, 2018, 09:33:24 PM by ILikeDividends »

svosavvy

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #9 on: September 24, 2018, 07:23:05 AM »
I am having a hard time understanding what your expectations are or how much you are dealing with.  Not that it concerns me how much, just when it comes to transactional costs in bonds know that a commission free bond transaction is not a "free" transaction.  When it comes to brokers they have a giant leeway in what is called the price/offer (aka bid/ask in equities) spread also it is my experience they make their retail bond platform convoluted to discourage limit orders.  What I'm trying to say is if you are making a giant bond buy getting a limit order and paying upfront commission of a few bucks instead of a no commission where your broker skins your knees for hundreds without you knowing it is sometimes better.  Bond commissions are way more complex than retail stock commissions.  Honestly if you want bonds a low cost bond fund (vanguard) is probably the way to go.  It is really easy to lose money in bonds if you don't know what you are doing.  Don't forget not gaining is a form of "losing."  I recommend "The Bond Book" by Annette Thau.  The book is getting dated, but, imo it is the most easy reading cogent book on an unnecessarily esoteric financial topic.  The rates are rising albeit slowly. This is a headwind for bonds especially long dated.  12 month CDs are paying out 2.5% (capital one also I think "Marcus" read:GS retail) no risk and then you get your money back to play again later in case rates rise.  Or online savings at 1.85% no risk.  Bear in mind there are different kinds of crashes/meltdowns etc also.  08-09 was a liquidity crisis no one had money like an auction where all the bidders are broke.  Right now imo we are swimming in a sea of liquidity you might find a dynamic where all bidders at the auction have full pockets.  When I was younger I loved going to physical auctions.  The fear/greed concepts rhyme with financial markets.  There is also your dividend aristocrats defensive stocks.  Your dividends would be taxed at the preferred "qualified" div instead of "regular" div think long term capital tax rate.  Happy hunting.

YoungStache

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #10 on: September 24, 2018, 05:53:47 PM »
Thank you for the book recommendation and the reply. I guess I don't know much about bonds and was just wondering where to stash my cash to maintain buying power vs inflation. I am thinking of just doing the Vanguard Prime Money Market Fund Admiral shares for the 2% dividends and easy liquidity.

I have 500K between Vanguard US and International (60/40), have 100% equity in a rental duplex worth about 160K, and about 400K cash just sitting, but I estimate that I'll need to pay around 120K to the IRS come April. I was wondering if I should just put the sitting cash in the Vanguard Prime Money Market Fund, and liquidate what I need to pay taxes when the time comes. Overall looking for the best strategy. I'm a bit hesitant to go heavy on stocks or real estate at this point due to having been in such a long bull market, but may consider putting some more into VTSAX.

I am starting a high paying job in a few weeks, with both a 403(b) and 457 that I will be maxing out in index funds. It will be a busy transition so I don't want to take on more headaches and time with out-of-state rental property investing.

I am having a hard time understanding what your expectations are or how much you are dealing with.  Not that it concerns me how much, just when it comes to transactional costs in bonds know that a commission free bond transaction is not a "free" transaction.  When it comes to brokers they have a giant leeway in what is called the price/offer (aka bid/ask in equities) spread also it is my experience they make their retail bond platform convoluted to discourage limit orders.  What I'm trying to say is if you are making a giant bond buy getting a limit order and paying upfront commission of a few bucks instead of a no commission where your broker skins your knees for hundreds without you knowing it is sometimes better.  Bond commissions are way more complex than retail stock commissions.  Honestly if you want bonds a low cost bond fund (vanguard) is probably the way to go.  It is really easy to lose money in bonds if you don't know what you are doing.  Don't forget not gaining is a form of "losing."  I recommend "The Bond Book" by Annette Thau.  The book is getting dated, but, imo it is the most easy reading cogent book on an unnecessarily esoteric financial topic.  The rates are rising albeit slowly. This is a headwind for bonds especially long dated.  12 month CDs are paying out 2.5% (capital one also I think "Marcus" read:GS retail) no risk and then you get your money back to play again later in case rates rise.  Or online savings at 1.85% no risk.  Bear in mind there are different kinds of crashes/meltdowns etc also.  08-09 was a liquidity crisis no one had money like an auction where all the bidders are broke.  Right now imo we are swimming in a sea of liquidity you might find a dynamic where all bidders at the auction have full pockets.  When I was younger I loved going to physical auctions.  The fear/greed concepts rhyme with financial markets.  There is also your dividend aristocrats defensive stocks.  Your dividends would be taxed at the preferred "qualified" div instead of "regular" div think long term capital tax rate.  Happy hunting.
« Last Edit: September 24, 2018, 05:57:39 PM by YoungStache »

effigy98

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #11 on: September 24, 2018, 07:30:00 PM »
If you want something conservative that has the best chance to lose little money during a downturn, but still has respectable gains, check out these asset allocations.

All seasons/weather
https://portfoliocharts.com/portfolio/all-seasons-portfolio/
https://www.youtube.com/watch?v=jVwna1aO3Dw (bunch of videos explaining the theories)

I like this one in taxable for money I might need in 5 years, except using muni bonds instead.
https://portfoliocharts.com/portfolio/larry-portfolio/

This is my favorite long term portfolio for both accumulation and retirement and most of my portfolios revolve around this one with a few tweaks depending on my goals.
https://portfoliocharts.com/portfolio/golden-butterfly/



YoungStache

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #12 on: September 24, 2018, 09:33:21 PM »
I'm 28 so I'm still trying to be aggressive. What do you think about REITS? VS just dumping more into VTSAX?

If you want something conservative that has the best chance to lose little money during a downturn, but still has respectable gains, check out these asset allocations.

All seasons/weather
https://portfoliocharts.com/portfolio/all-seasons-portfolio/
https://www.youtube.com/watch?v=jVwna1aO3Dw (bunch of videos explaining the theories)

I like this one in taxable for money I might need in 5 years, except using muni bonds instead.
https://portfoliocharts.com/portfolio/larry-portfolio/

This is my favorite long term portfolio for both accumulation and retirement and most of my portfolios revolve around this one with a few tweaks depending on my goals.
https://portfoliocharts.com/portfolio/golden-butterfly/

svosavvy

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #13 on: September 26, 2018, 02:31:12 PM »
I think you are onto something with that money market account.  2% div is pretty respectable on those accounts/funds.  Just noticed the fed chair Powell stated he isn't worried about inflation when they upped the rate by a quarter point.  I'm definitely no professional hence I don't give "advice" but this kind of tells me to just hang back collect div's or interest. Kind of enjoy the ride for a little bit here without getting real aggressive.  I do wonder how the tariff thing is going to play out.  I like div's better than straight interest because the taxation is better.  It wouldn't surprise me to see the online savings account rates get a little sweeter in the next week or so.  I have taken my stock exposure down somewhat (reap some gains) and swept the proceed into short term corporate bond funds, online savings accounts, and 12 month CD's.  My hat is off to you land lording.  I feel like I just don't have the stomach for it, but, the returns have to be nice.  Good luck, you are doing awesome to have a fat pile like that so early in your life.


TwistedEther

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #15 on: September 26, 2018, 10:48:11 PM »
Buy 26 week tbill at auction  on sept 27th thru oct 1st. Buy directly from vanguard. No fee, no state tax,2.3%.


I am new to this. I looked around on the Vanguard site, but couldn't figure out where to buy them when they become available. Could you please share how exactly to purchase them at VG?

K-ice

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #16 on: September 26, 2018, 11:02:34 PM »
Id shop around for the best 6 month CD or savings account for the $120K you think you need for taxes. One Canada bank has a 3% e-savings promo for 6 months.

Then invest the rest according to your general risk tolerance & investment plan.

One

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #17 on: September 26, 2018, 11:44:20 PM »
Buy 26 week tbill at auction  on sept 27th thru oct 1st. Buy directly from vanguard. No fee, no state tax,2.3%.


I am new to this. I looked around on the Vanguard site, but couldn't figure out where to buy them when they become available. Could you please share how exactly to purchase them at VG?

It's difficult to find, follow the link below, click on treasuries at top, click on auction and then search at bottom. During trading hours you'll see BUY next to the 6 month tbill, if you click on that you can enter the amount of tbills you want to buy. 1 tbill will pay $1000 dollars at maturity but you are purchasing at a discount so the price you pay is $1000 minus the interest. You have to hold the tbill the full 6 months to get the rate of the auction. You should call vanguard and ask for fixed income. They can answer questions.  I'll add a link to a weird video that does a good job explaining how treasury auctions work.

https://personal.vanguard.com/us/FixedIncomeHome

Treasury auction explained
https://m.youtube.com/watch?v=Wgcv_wJOLcA
« Last Edit: September 27, 2018, 04:27:31 AM by One »

Indexer

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #18 on: September 27, 2018, 06:11:23 PM »
A few thoughts.

1. You can't predict recessions with any certainty. Have a portfolio that helps you achieve your goals AND is something you are comfortable holding onto whenever a crisis does come.

2. Safe bonds tend do well in a recession, but this isn't true for all bonds. Corporate bonds will likely go down, but not as much as stocks. The lower the credit quality the more they will go down in a recession. Government bonds on the other hand tend to go up in value during a crisis. One reason is because investors are moving money from 'risky' assets to 'safe' assets, but for investors with millions of dollars(or institutional investors) 250k of FDIC doesn't offer the same level of protection as millions(billions) of dollars in bonds backed by the full faith and credit of the US Government. All of that money moving from stocks to government bonds pushes the bond prices up. The other reason is that the Fed lowers rates in a recession, which pushes government bond prices up.

3. Given #2, if you are building an efficient portfolio bonds trump cash. In the average year(there are exceptions), bonds give better returns than cash, and when stocks crash high quality bonds tend to do well. This means a stock/bond portfolio has had higher average returns than a stock/cash portfolio and it will likely also be less volatile in a recession.

Vanguard's Total Bond index fund was up 5.15% in 2008.
Their short term bond index was up 5.51%.
Their short term treasury(only Government bonds) fund was up 6.68%.

On the other hand, Vanguard's Prime money market only yielded 2.77% in 2008, which was a decrease in yield from the previous year's 5.14%.
« Last Edit: September 28, 2018, 06:41:40 AM by Indexer »

YoungStache

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #19 on: September 27, 2018, 11:29:48 PM »
Interesting. I don't know enough about bonds. My main questions would be on liquidity and holding periods, like what are the requirements/fine print? I'm going to read "The Bond Book" at some point.

It sounds like adding the government bonds would be a good hedge against a recession, and since it's been such a long bull market, it wouldn't be a bad idea to allocate new money into bonds (unless stocks or real estate start dipping).

Based on what you said, Vanguard offers treasury bonds, and that would a better choice than the Total Bond Index because of corporate exposure (since I'm heavy on VTSAX and VTIAX with 0 bond)?

A few thoughts.

1. You can't predict recessions with any certainty. Have a portfolio that helps you achieve your goals AND is something you are comfortable holding onto whenever a crisis does come.

2. Safe bonds tend do well in a recession, but this isn't true for all bonds. Corporate bonds will likely go down, but not as much as stocks. The lower the credit quality the more they will go down in a recession. Government bonds on the other hand tend to go up in value during a crisis. One reason is because investors are moving money from 'risky' assets to 'safe' assets, but for investors with millions of dollars(or institutional investors) 250k of FDIC doesn't offer the same level of protection as millions(billions) of dollars in bonds backed by the full faith and credit of the US Government. All of that money moving from stocks to government bonds pushes the bond prices up. The other reason is that the Fed lowers rates in a recession, which pushes government bond prices up.

3. Given #2, if you are building an efficient portfolio bonds trump cash. In the average year(there are exceptions), bonds give better returns than cash, and when stocks crash high quality bonds tend to do well. This means a stock/bond portfolio has had higher average returns than a stock/cash portfolio and it will likely also be less volatile in a recession.

Vanguard's Total Bond index fund was up 5.15% in 2008.
Their short term bond index was up 5.51%.
Their short term treasury(only Government bonds) index was up 6.68%.

On the other hand, Vanguard's Prime money market only yielded 2.77% in 2008, which was a decrease in yield from the previous year's 5.14%.

Indexer

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #20 on: September 28, 2018, 06:41:17 AM »
Quote
My main questions would be on liquidity and holding periods, like what are the requirements/fine print?

Bond funds like Vanguard's are just as liquid as their stock funds. You can sell them any day the market is open. Bonds also fluctuate a lot less than stocks so you don't have to worry as much about a sudden drop right when you need the money. While stocks can be down 20.. 30... 40... 50% in a crisis, the worst year Total bond had in the past 10 years was -2.15%.

Before interest rates started improving(and mmkts started paying 2%) I was using a short-term bond fund for most of my emergency money(I still kept 2k at the bank). A 2% drop in your 6 month emergency fund is a loss of 3 1/2 days worth of expenses. I was comfortable taking that risk to get more interest.

Based on what you said, Vanguard offers treasury bonds, and that would a better choice than the Total Bond Index because of corporate exposure (since I'm heavy on VTSAX and VTIAX with 0 bond)?

It depends. A treasury bond fund will likely act as a better hedge than Total bond during a recession. However, Total bond will likely have higher returns over time. This is because corporate bonds pay higher interest and longer term bonds pay higher interest. Total bond includes governments and corporates across short, intermediate, and long term maturities. Being an index fund, it holds them till maturity and uses the proceeds to buy new bonds. It's like the ultimate bond ladder.

Short term treasury 10 yr return(VFISX): 1.37%
Total bond 10 yr return(VBTLX): 3.66%

The short term treasury did a little better in 2008, but Total bond is still a good hedge against stock market volatility. The main reason I included the two short term bond funds is that I know a lot of people are concerned about rising rates. I think Total bond is the better fund for the long term, but if someone is hesitant about rising rates either of the short term funds is a good compromise.

I need to make one small correction to my previous post. Vanguard's short term treasury index wasn't around in 2008. The returns I quoted were for the short-term treasury fund(VFISX) which is actively managed so I shouldn't have called it an index fund. I realized the mistake when I pulled the fund back up this morning.

YoungStache

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #21 on: September 28, 2018, 02:37:56 PM »
Where is the best place to hold Vanguard Total Bond Index? Taxable account or employer retirement account?

Quote
My main questions would be on liquidity and holding periods, like what are the requirements/fine print?

Bond funds like Vanguard's are just as liquid as their stock funds. You can sell them any day the market is open. Bonds also fluctuate a lot less than stocks so you don't have to worry as much about a sudden drop right when you need the money. While stocks can be down 20.. 30... 40... 50% in a crisis, the worst year Total bond had in the past 10 years was -2.15%.

Before interest rates started improving(and mmkts started paying 2%) I was using a short-term bond fund for most of my emergency money(I still kept 2k at the bank). A 2% drop in your 6 month emergency fund is a loss of 3 1/2 days worth of expenses. I was comfortable taking that risk to get more interest.

Based on what you said, Vanguard offers treasury bonds, and that would a better choice than the Total Bond Index because of corporate exposure (since I'm heavy on VTSAX and VTIAX with 0 bond)?

It depends. A treasury bond fund will likely act as a better hedge than Total bond during a recession. However, Total bond will likely have higher returns over time. This is because corporate bonds pay higher interest and longer term bonds pay higher interest. Total bond includes governments and corporates across short, intermediate, and long term maturities. Being an index fund, it holds them till maturity and uses the proceeds to buy new bonds. It's like the ultimate bond ladder.

Short term treasury 10 yr return(VFISX): 1.37%
Total bond 10 yr return(VBTLX): 3.66%

The short term treasury did a little better in 2008, but Total bond is still a good hedge against stock market volatility. The main reason I included the two short term bond funds is that I know a lot of people are concerned about rising rates. I think Total bond is the better fund for the long term, but if someone is hesitant about rising rates either of the short term funds is a good compromise.

I need to make one small correction to my previous post. Vanguard's short term treasury index wasn't around in 2008. The returns I quoted were for the short-term treasury fund(VFISX) which is actively managed so I shouldn't have called it an index fund. I realized the mistake when I pulled the fund back up this morning.

svosavvy

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #22 on: September 28, 2018, 06:37:14 PM »
when it comes to where to hold a bond fund a tax advantaged instrument is preferable due to taxes paid on the interest being deferred.  However if you need the money or plan on spending it that makes it tough to do if it is trapped in a retirement account.  Everyone has brought up good points.  Something I would mention (I may have already) is that the price of your bond on the open market will generally wither (go down in value) in a rising interest rate environment like now.  This is a funny little time here as rates are going up but at a snails pace.  I shovel a fair amount of my "cash equivalents" into the vanguard short term corporate bond fund ETF (vcsh) expense ratio .07%.  The fund is made up of highly investment grade corporate paper of an average maturity of 3-5 years some less some more.  This yields 2.5%'ish.  This funds value has been steadily going down for a couple of years now.  I personally am happy to stay in as it is my belief that as the bonds "rollover" i.e. the older lower yielding bonds mature and give way to the funds rules of buying more bonds to replace the maturing ones hence "rollover."  When these new bonds are bought they are higher yielding as to compete with current rates. Thus my overall yield increases.  I have seen this glacial increase the past few years as it it was under 2% a couple years ago and slowly increases.  This is why I really really do not want long dated bonds now.  When you buy it you own it till you sell it on the market or hold it until maturity.  I would also mention the reason I personally like corporate as opposed to treasury here is that imo high quality corporate is yielding much more than its commensurate T-bond.  You won't pay federal taxes on the T but they yield much less.  I am comfortable taking the risk now as I feel we are swimming in a sea of liquidity and default risk seems low right now even on junk.  This could change anytime and I would have to change my stance then.  I dance a jig to pay my taxes as we have two wonderful little tax breaks running around and my meager nursing income puts me in a nice bracket with plenty of deductible room for my interest and dividends on my taxable side, and the lion share in tax sheltered instruments. 

Adam Zapple

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #23 on: September 28, 2018, 06:57:41 PM »
In 2008 "bonds" as in most broad index bond funds, did not perform much better than stocks.  I second the earlier post regarding an "all weather" portfolio like the one outlined by Ray Dalio in "Money Master the Game" by Tony Robbins.  This has great downside protection and allows you to (potentially) still capitalize on some short-term gains.  This asset allocation has never lost more than 3 percent in any bear market and has a respectable average annual return of around 10 percent over the past several decades.  Dalio backtested this mix across historical data from the U.S. and other developed markets.  Critics state that we are at the end of a 40 year bond run so future returns may not be as good.  When tested against previos periods of rising interest rates returns were somewhere around 6 percent if I remember correctly.  I'm not an expert, just parroting what I recently read on the subject.

30% Equities,
40% Long-Term Treasuries,
15% Intermediate-Term Treasuries,
7.5% Gold
7.5% Diversified Commodities.
« Last Edit: September 29, 2018, 03:52:54 PM by Adam Zapple »

Radagast

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #24 on: September 28, 2018, 09:55:10 PM »
In 2008 "bonds" as in most broad index bond funds, did not perform much better than stocks.
That is just incorrect, and you should at least spend a few seconds to type in "VBTLX" to a search engine before posting something like that. Here are some intermediate term bond funds during the 2008 crash. Which was the one you were saying was Illuvatar's gift, and which is the one that approximated the stock funds? I still have a JPEG in my desktop called VBMFX from the last time someone said something ignorant about the fund, they said it would be terrible in a rising rate environment which was easy to falsify as well. Backtesting doesn't show the future, but it can be really useful for the low hanging fruit of checking basic statements. Broad index bond funds are not the world's greatest investment, but they are very boring in all respects.


The All-Weather portfolio has post-inflation expected returns of about 5% for US stocks, 0.5% for intermediate term and long treasuries, 0% for commodities and gold, and we'll say an 0.5% rebalancing bonus to be nice. Your percentages don't add to 100%, but that gives an expected return of about 2.5% real, with a loooot of risk from 55% in bonds with an effective duration of about 15 years.
https://quotes.morningstar.com/chart/fund/chart.action?t=VBMFX&region=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A11%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00FQH%7CFOUSA02SNG%7CFOUSA02TYB%7CFOUSA00L83%7CFEUSA0000M%7CFOUSA00KIR%22%2C%22type%22%3A%22FO%7CFO%7CFO%7CFO%7CFE%7CFO%22%2C%22region%22%3A%22USA%22%2C%22name%22%3A%22XNAS%3AVBMFX%7CXNAS%3AVFIUX%7CXNAS%3AVBILX%7CXNAS%3AVTSAX%7CARCX%3AIJS%7CXNAS%3AVGTSX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%22%2C%22%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2209%2F28%2F2007%22%2C%22endDay%22%3A%2209%2F27%2F2012%22%2C%22chartWidth%22%3A955%2C%22SMA%22%3A%5B%5D%7D

Sorry that was a little blunt. After youve seen enough posts there are always recurring themes and posts about how scary total bond funds are is one of them.
« Last Edit: September 28, 2018, 10:36:55 PM by Radagast »

HeartlandBrad

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #25 on: September 29, 2018, 07:51:30 AM »
Thing is I'm not trying to exit my positions. I just have a bunch of spare cash I acquired this year (some of which I'll have to pay to IRS come tax season). And not sure if I should just hold it, or dump into index funds/ real estate.

You really have two questions.  1) whether or not now's the time to invest in equities, and 2) what should you do with the fixed income portion of your portfolio.  The answer to the first question that no one knows whether or not now's the time to invest in equities.  You should decide upon a equity/fixed-income allocation and stick with it.  Then make your decision based upon bringing your actual allocation back to your target.

For the answer to the second question, I rely upon advice from one of the people I respect most in the investing world, William Berstein.
If the pupose of the fixed-income portion of your portfolio is to counterbalance equities, then go with short-term treasuries or a treasury money-market fund.  Corporate bonds do go down in a market drop.  In a severe market event they could go down a lot.  So, even though they pay higher rates in steady markets, their effectivness is a counterweight, just when you need them most, is less than ideal.  William Bernstein says he doesn't know why anyone would own corporate bonds.

If the purpose of the fixed-income portion of your portfolio is to generate income, that's a very differnent purpose than acting as a counterweight to equities.  In that case, a combination of a ladder of individual TIPS and dividend stock index funds should be up for consideration.  The reason for a bond ladder of individual bonds vs. a bond fund is that you can match the term of the bonds to your liabilities and (if they're treasuries) you always get your money back when the bonds mature.  In a bond fund, you can lose capital.  As an individual, you'll probably never have a large enough portfolio to properly diversify the risk of individual long-term corporate bonds to make up for the slighty higher returns than from TIPS.  Again, William Bernstein says he doesn't know why anyone would own corporate bonds.

Personally, I don't want to own any mid-term or long-term bond funds for any reason.  If I have a need for mid-term or long-term guaranteed income, I'd want a TIPS ladder matched to my income needs.  If I have a need to counter-balance equities, I'd want short-term or money market treasuries.

Shane

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #26 on: September 29, 2018, 11:57:08 AM »
Jim Collins' Stock Series, Part XII: Bonds

PizzaSteve

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #27 on: September 29, 2018, 12:16:40 PM »
Jim Collins' Stock Series, Part XII: Bonds

Super +1

So well written.

The golden point "Bonds are in our portfolio to provide a deflation hedge.  Deflation is one of the two big macro risks to your money. Inflation is the other."

While recent history may make people think the risk of deflation is 0, this is not the case.  It is probably one of the more important threats for long term retirees to watch out for and understand.  A recession plus deflation can really hurt 100% stock portfolios being lived on.  Stocks and mortgages are great inflation hedges, but what provides a good deflation hedge?  Bonds.  No debt!

PS.  We havent seen a deflationary economy for a long time, largely because our government has gotten pretty good at printing enough money to keep mild inflation going.  This is likely to continue, IMHO, decreasing needs for deflation hedging and limiting the scenarios where bonds crush all other asset types, but nothing is certain.  For example, a pre ww2 era German/Japanese who happened to have held us treasuries (or cash) as a safe harbor could have bought half his town, relative to his 100% (german or Japanese) stock neighbor.  If he held German/yen bonds, not so much. So not all bonds are created equal as a hedge either.  Sometimes you want currency and national stability hedges along with returns on the debt.
« Last Edit: September 29, 2018, 05:37:46 PM by PizzaSteve »

Adam Zapple

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #28 on: September 29, 2018, 03:48:28 PM »
In 2008 "bonds" as in most broad index bond funds, did not perform much better than stocks.
That is just incorrect, and you should at least spend a few seconds to type in "VBTLX" to a search engine before posting something like that. Here are some intermediate term bond funds during the 2008 crash. Which was the one you were saying was Illuvatar's gift, and which is the one that approximated the stock funds? I still have a JPEG in my desktop called VBMFX from the last time someone said something ignorant about the fund, they said it would be terrible in a rising rate environment which was easy to falsify as well. Backtesting doesn't show the future, but it can be really useful for the low hanging fruit of checking basic statements. Broad index bond funds are not the world's greatest investment, but they are very boring in all respects.


The All-Weather portfolio has post-inflation expected returns of about 5% for US stocks, 0.5% for intermediate term and long treasuries, 0% for commodities and gold, and we'll say an 0.5% rebalancing bonus to be nice. Your percentages don't add to 100%, but that gives an expected return of about 2.5% real, with a loooot of risk from 55% in bonds with an effective duration of about 15 years.
https://quotes.morningstar.com/chart/fund/chart.action?t=VBMFX&region=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A11%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00FQH%7CFOUSA02SNG%7CFOUSA02TYB%7CFOUSA00L83%7CFEUSA0000M%7CFOUSA00KIR%22%2C%22type%22%3A%22FO%7CFO%7CFO%7CFO%7CFE%7CFO%22%2C%22region%22%3A%22USA%22%2C%22name%22%3A%22XNAS%3AVBMFX%7CXNAS%3AVFIUX%7CXNAS%3AVBILX%7CXNAS%3AVTSAX%7CARCX%3AIJS%7CXNAS%3AVGTSX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%22%2C%22%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2209%2F28%2F2007%22%2C%22endDay%22%3A%2209%2F27%2F2012%22%2C%22chartWidth%22%3A955%2C%22SMA%22%3A%5B%5D%7D

Sorry that was a little blunt. After you’ve seen enough posts there are always recurring themes and posts about how scary total bond funds are is one of them.

You are 100% correct in regards to the bond funds.  The blunt response was well deserved.  I have no defense other than to say my memory must have played tricks on me.  I've held that belief for quite some time, I'm ashamed to admit.  BTW, where are you getting your inflation adjusted return estimates from?  Also, the gold and commodity portions of the portfolio should be 7.5%, not 5%.
« Last Edit: September 29, 2018, 03:51:18 PM by Adam Zapple »

Radagast

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #29 on: September 29, 2018, 07:58:08 PM »
BTW, where are you getting your inflation adjusted return estimates from?  Also, the gold and commodity portions of the portfolio should be 7.5%, not 5%.
I mostly made them up :). US stocks have PE10 of about 30, giving 3-3.5% expected but those can be a little pessimistic, and forward looking PE is more like 6% but that can be more optimistic. Long run global stocks have been about 5%, the US so far like 6.7% or something, eventually there should be mean reversion to those. Bonds have been roughly 0.5% greater than inflation recently, but who knows where inflation goes in the future. They could be more like 1% if it goes back to 2%. Gold has a long history of matching inflation with a Roman Centurion earning a similar number of gold ounces to a US Army captain, and suits, horses, and bread have also vaguely tracked gold from the century to today. So gold is 0% return minus expenses. Commodities are futures which are beyond my area of expertise, but since they became popular investments have been returning basically 0%. All with wide margins of error.

bilmar

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #30 on: September 30, 2018, 11:34:17 AM »
What about an unused Home Equity loan?

I too have just relied on having 'enough' cash to keep me for 6-9 months but that money is wasted in that it never earns real interest.

What if we were to eliminate a substantial cash reserve and invest it & just borrow if and when needed? 
Yes you pay perhaps 5% when needed but I suspect that you would still end up making money in the long run since most of the time your lost reserve is earning interest.

Bill

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #31 on: October 02, 2018, 09:43:01 AM »
Depending on how you aquired these funds, you likely owe the IRS tax pre-payment the quarter you got it. (if it exceed a certain percent of your total income). If not you'll be charged a penalty in April. (don't ask how i know...)

wheezle

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #32 on: October 02, 2018, 11:41:45 AM »
I think that sitting entirely in cash, waiting for stocks to get cheap is a TERRIBLE mistake (that I have been known to make). The simple truth is that stocks are likely to keep on performing, and that you'll be able to trim your exposure in time to avoid the pains of recession. The stock market is never "binary," and you should probably never be entirely out of it.

I used to think that AA didn't matter, but now it's all I care about.

And FWIW, I think recession risk is at ~15%. Which means that if you're generally 100% in stocks, you should be at 100% - 15% = 85% right now.

Scale in and out. But don't ever sit out the stock market.

Shane

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #33 on: October 02, 2018, 07:20:36 PM »
What about an unused Home Equity loan?

I too have just relied on having 'enough' cash to keep me for 6-9 months but that money is wasted in that it never earns real interest.

What if we were to eliminate a substantial cash reserve and invest it & just borrow if and when needed? 
Yes you pay perhaps 5% when needed but I suspect that you would still end up making money in the long run since most of the time your lost reserve is earning interest.

Bill

@bilmar , You may find ERN's explanation of his non-traditional position on emergency funds interesting.

One

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Re: Cash vs Bonds to hedge against a crash; investing tax money
« Reply #34 on: October 03, 2018, 05:27:45 AM »
I think that sitting entirely in cash, waiting for stocks to get cheap is a TERRIBLE mistake (that I have been known to make). The simple truth is that stocks are likely to keep on performing, and that you'll be able to trim your exposure in time to avoid the pains of recession. The stock market is never "binary," and you should probably never be entirely out of it.

I used to think that AA didn't matter, but now it's all I care about.

And FWIW, I think recession risk is at ~15%. Which means that if you're generally 100% in stocks, you should be at 100% - 15% = 85% right now.

Scale in and out. But don't ever sit out the stock market.

Good points, I'm close to FI, currently taking a little off the table, taking some gains and shifting to short term bonds.
https://www.cnbc.com/2018/10/01/bull-run-has-echoes-of-1920s-nobel-prize-winning-economist-shiller.html