Author Topic: Where should you put your short-term investment money? (0-2 years)  (Read 2193 times)

COEE

  • Pencil Stache
  • ****
  • Posts: 537
There are many questions here about where to invest short-term money where the goal is to preserve principal and maximize risk-free return.  This money is usually a large sum that is needed within 0-2 years to make a big purchase such as a home, property, vehicles, etc.  Rather than try to make similar responses to each post, I thought I'd make a single post with the most popular options and start pointing these questions to this post.

This is certainly not a definitive list of options, but it gives an overview of the current popular options and current typical rates, pros, and cons of each.  I will update occasionally as necessary.  Please feel free to make recommendations to changes I should make.

For the most part there are five options
  • Savings accounts are offered with competitive rates by several different banks.  Rates are currently around 1.85% for an account that doesn't require much work.
    Pros:
    • FDIC Insured
    • Money is liquid.
    Cons:
    • Only $250k per account is FDIC insured.
    • Taxed at the Federal and State levels.
  • Money Market Funds are funds that generally invest in short-term government and commercial securities and are available through your preferred broker.  Both taxable and non-taxable funds are available.  Funds are currently returning around 2% for taxable and have a similar equivalent yield in non-taxable (but can be better if you're in a higher tax bracket)*.  Funds are also available that are state and tax free if you live in certain states.
    Pros:
    • Can purchase funds that generate tax-free income
    • Good liquidity - can usually have your money the next day.
    Cons:
    • Not insured, but generally considered low risk due to primarily being invested in short-term government and commercial securities.
    • Some funds have high minimum investments.
  • Treasury bills are available for purchase directly from the US government through Treasury Direct or through your broker**.  They are offered a in 4, 8, 13, 26, and 52 week bills with slightly increasing yields, and yields are currently starting at a little over 2.1% and going to about 2.6%.  Treasury notes with a 2 year maturity are also available.
    Pros:
    • Backed by the US government.
    • Income is not taxed at the state and local levels.
    • Minimum investment is $100 through treasury direct.
    • No real maximum limit.
    • Can be bought and sold through your broker.**
    Cons:
    • Can lose value if you don't hold the bill to maturity.  More information can be found here.
    • If purchased through Treasury Direct it's more difficult to sell you bills if needed.
    • Brokers generally require purchase/sales in increments of $1000 with maximum limits as well.
  • Certificates of Deposit (CD's) are available through many outlets: banks, brokers, insurance companies, etc.  Returns are up to ~3%. 
    Pros:
    • Highest Returns
    • Can be FDIC insured up to $250k per account
    Cons:
    • Taxed at Federal and State levels.
    • Rules/restrictions vary with CD and company
    • Can lose value if withdrawn early (varies by company and type of CD) - Read the fine print.
  • High-Yield Savings and Checking Accounts may return 3% or more.
    Pros:
    • Better yields than a normal savings or checking account.
    • FDIC insured up to $250k per account
    Cons:
    • Generally many monthly hoops to jump through.  Often requiring a direct deposit, certain number of transactions, minimum balance, maximum balance, or some combination thereof to be eligible for the advertised rate.
    • Can return 0% if all of the requirements aren't met. - Read the fine print.
    • Usually results in additional accounts and book keeping
    • Many of these rates are introductory and get smaller with time.
    • Taxed at the Federal and State levels.

Now that I've tried to give unbiased information, I will say that I personally*** don't like option #4 and #5.  There's just too much overhead and work and not enough additional return to compensate.  I err on the side of keeping it simple.  The first two options are very simple.  Option #3 is not as simple, but can offer a bit higher return without too much risk or work.  I also personally think that if you are interested in option #3 that you should start by purchasing a $100 4-week bill through Treasury Direct just so you can see how the whole process works before investing further money.

* - To calculate equivalent yield make the following calculation:
Equivalent Yield = Stated Yield / (1 - tax bracket)

** - It is highly advised to speak with a representative at your brokerage of choice before buying or selling treasuries on the secondary market.  It is important to understand all of the nuances (fees, bid-ask-spread, yield-to-maturity, potential losses, trade schedule, etc) of investing in this manner before purchasing.  While not particularly complicated, there is more to it than simply buying and holding at Treasury Direct.

*** - I am not your financial adviser.  You make elections on which investment vehicle you will choose on your own behalf.  I am simply providing information so that you can make a more informed decision on what vehicle works best for you.
« Last Edit: October 26, 2018, 12:15:10 AM by COEE »

jacoavluha

  • Stubble
  • **
  • Posts: 232
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #1 on: October 02, 2018, 08:27:44 AM »
regarding T bills, there are 26 week bills not 24, and I believe an 8 week bill is coming soon. These are not likely to "lose" value even if not held to maturity, but when you sell you won't get the full face value. For simplicity you might buy a $1000 T bill for $990, and if sold early maybe you only get $995, instead of the $1000 if held to maturity. Make sense? Also, at brokerages you can usually only buy in $1000 increments. I would also add the "purchase" factor is a little more involved. You can't just go buy one any day. They're auctioned and issued on certain days. You can enter purchase orders ahead of time, but at a brokerage, only after the auction is announced. So at a brokerage the 4 week auction may be announced Monday and happen Tuesday. You only have one day to actually enter the order. Scheduling purchases and reinvesting is much easier at Treasury Direct.

regarding high yield savings and checking I would argue "can often return 3% or more" is not true. I would change "can often" to "may*"

COEE

  • Pencil Stache
  • ****
  • Posts: 537
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #2 on: October 02, 2018, 09:41:43 AM »
regarding T bills, there are 26 week bills not 24, and I believe an 8 week bill is coming soon. These are not likely to "lose" value even if not held to maturity, but when you sell you won't get the full face value. For simplicity you might buy a $1000 T bill for $990, and if sold early maybe you only get $995, instead of the $1000 if held to maturity. Make sense? Also, at brokerages you can usually only buy in $1000 increments. I would also add the "purchase" factor is a little more involved. You can't just go buy one any day. They're auctioned and issued on certain days. You can enter purchase orders ahead of time, but at a brokerage, only after the auction is announced. So at a brokerage the 4 week auction may be announced Monday and happen Tuesday. You only have one day to actually enter the order. Scheduling purchases and reinvesting is much easier at Treasury Direct.

regarding high yield savings and checking I would argue "can often return 3% or more" is not true. I would change "can often" to "may*"

Great feedback!  Thanks jacoavluha!

I will make some corrections and gather a bit more information.  I have not bought t-bills through a brokerage, only through TD.  So I'll admit that my experience with buying/selling bonds through brokers is extremely limited.  I did realize that auctions only happen periodically, but I didn't realize the trading of bills through brokerage was also limited to those action days.  Do I have that right?  Can you provide me more information on this, perhaps some literature?

A t-bill is essentially a short-term bond.  Bond values go down with lack of demand.  I assumed (perhaps incorrectly since I've never sold a bill) that if you bought a bill for $980 you could end up selling the bond for less than $980 if that's the going rate.  The "going rate" is tied to the current interest rate.  Example: Imagine I purchase a $10k 52-week bill with a 3% coupon rate.  At the next auction (4-weeks later) 52-week bills are selling at a 4% coupon rate, resulting in a lack of demand in my bill.  To remain competitive I would have to sell my bill at a reduced price.  I will lose equity if I sell because the new bills are worth more.  I'd have to calculate the exact amount to figure out how much, but I'm short on time, and I've hopefully framed the scenario adequately.

haflander

  • Stubble
  • **
  • Posts: 210
  • Age: 28
  • Location: Dallas
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #3 on: October 02, 2018, 09:49:15 AM »
Thanks COEE, great info as always. I'll refer to this myself when needed; it'll be useful to just post it to new threads that ask the same thing over and over again. Maybe we could even make this a sticky thread?

YearninAndLearning

  • 5 O'Clock Shadow
  • *
  • Posts: 3
  • Location: Houston, TX
    • Sun Cruisin' RV
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #4 on: October 02, 2018, 10:27:15 AM »
This is something that I consider every year and I have been to fearful to pull the trigger. I share an online bank account with my high school aged child through an account called Simple. It is a part of BBVA Compass. Recently I was made aware that they offer a 2.02% APY savings account with a $2k balance or more. It seems pretty straight forward and, thanks to your breakdown above, I think I am going to try it. Does anyone have any experience with Simple?

VoteCthulu

  • Bristles
  • ***
  • Posts: 409
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #5 on: October 02, 2018, 10:36:20 AM »
If this does get stickied, I suggest adding a quick comparison ranking at the start of each entry. For example:
1) Savings account
Rate: 2/5 (1.85% as of 10/2018)
Simplicity: 5/5 (Extremely easy to manage)
Insured: 4/5 (up to $250k)
Tax: 1/5 (full state and federal taxes)
Liquidity: 5/5 (money is available the same day)

If there's any disagreement on the ranking we can discuss them, but I think making the options as easy to compare as possible is important.
« Last Edit: October 02, 2018, 10:38:55 AM by VoteCthulu »

terran

  • Handlebar Stache
  • *****
  • Posts: 1661
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #6 on: October 02, 2018, 10:42:13 AM »
Great post!

I think one thing also worth mentioning is the definition of "need" one uses in making these decisions. While the options you've laid out are absolutely where money that is NEEDED should go, it can be appropriate to invest money that is "needed" in the stock market assuming the "need" is actually a WANT. That is to say, often these questions come in the form of "I'd plan to buy a house in the next two years if I find something I like. What should I do with the downpayment?" The question one should ask themselves in a situation like this is whether loss of some of the money is acceptable? Are you going to buy the house no matter what the broader economy is doing? Or are you likely to actually prefer buying during a depressed economy? Then sticking the money somewhere safe is your best bet. Are you willing to take the chance that the money isn't there when you want it, and if that's the case you'll be flexible and put off the purchase? In that case investing the money could be a viable (or even preferable) option.

jacoavluha

  • Stubble
  • **
  • Posts: 232
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #7 on: October 02, 2018, 10:51:30 AM »

I did realize that auctions only happen periodically, but I didn't realize the trading of bills through brokerage was also limited to those action days.  Do I have that right? 

There's a difference between buying new issue treasuries (purchased at auction) and buying/selling on the secondary market. Buying new issues is limited to auction days. You can buy and sell on the secondary market whenever. But it's not as straightforward as buying and selling equities. Further discussion of this is not necessary here. For people considering short term savings they should really only consider buying new issue bills at auction and holding to maturity. If you have to sell before maturity then you probably should not have bought in the first place.

A t-bill is essentially a short-term bond.  Bond values go down with lack of demand.  I assumed (perhaps incorrectly since I've never sold a bill) that if you bought a bill for $980 you could end up selling the bond for less than $980 if that's the going rate.  The "going rate" is tied to the current interest rate.  Example: Imagine I purchase a $10k 52-week bill with a 3% coupon rate.  At the next auction (4-weeks later) 52-week bills are selling at a 4% coupon rate, resulting in a lack of demand in my bill.  To remain competitive I would have to sell my bill at a reduced price.  I will lose equity if I sell because the new bills are worth more.  I'd have to calculate the exact amount to figure out how much, but I'm short on time, and I've hopefully framed the scenario adequately.

Not really. You will sell your bill and the interest you will have earned will have been less than the rate purchased at. For simplicity, consider a 26 week bill earning 3%, and the interest just happens to be $100. You want to sell at 13 weeks. So if you sold for $50 more than purchase price, you earned 3% interest, right? And the guy that buys it gets the other $50 when it matures. Well, instead, you're going to sell for maybe $40 more than purchase price, and the buyer gets the other $60 when it matures. So you earned less than 3% and buyer earned more. But you still didn't lose money.

Make sense?

You can see this by going to your broker now and looking at T bill prices on the secondary market. They don't sell for less than purchase price.

One

  • Stubble
  • **
  • Posts: 171
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #8 on: October 02, 2018, 12:36:58 PM »
I buy treasuries directly through vanguards website.  Yes, you can only buy on auction dates. On the Cons: you said bonds can go down if you sell early. Bonds can also go up in value if rates drop and you sell early. Backed by us gov with no limits vs savings account limit fdic $250,000.     

Schedule
https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/auctions.pdf

Vanguard fixed income/rates/purchase here no fees
https://personal.vanguard.com/us/FixedIncomeHome

Auctions explained
https://www.youtube.com/watch?v=Wgcv_wJOLcA

« Last Edit: October 02, 2018, 12:56:40 PM by One »

Systems101

  • Stubble
  • **
  • Posts: 149
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #9 on: October 02, 2018, 05:08:07 PM »
  • Money Market Funds are funds that generally invest in short-term government securities

This is incorrect.  They invest in short-term securities, which may result in them using commercial paper as well (Banks make money by loaning at high long term rates and borrowing at short term commercial rates).  This commercial paper is why the money markets froze in the 2008 crisis. (and why the government stepped in to provide guarantees to get the market functioning again, see: http://www.finra.org/investors/alerts/treasurys-guarantee-program-money-market-mutual-funds-what-you-should-know ).  If it was only government paper, it would have been fine.

  • Treasury bills are available for purchase directly from the US government through Treasury Direct or through your broker.  They can be bought and sold at any time (redacted for now - looking into the details) through your broker.  They are offered a in 4, 13, 26, and 52 week bills with slightly increasing yields, and yields are currently starting at a little over 2.1% and going to about 2.6%

Since your post refers to 0-2 years, you may also want to refer to 2 year Treasury Notes (Bills: <=52 weeks, Note: <= 10 years, Bond: >10 years).

Bills/Notes/Bonds are also available on a deep secondary market.  This allows them to effectively be bought and sold at any time through a broker. 

If you want to buy on the primary market, they are auctioned in various lengths at various times (see PDF posted by One), but various issues mature weekly, so you can buy after-market bills that mature every Thursday any time the market is open.

To give folks a place to find current rates, you should point to the daily treasury yield curve: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

  • Certificates of Deposit (CD's) are available through many outlets.  Returns are up to ~3%. 
    Pros:
    • Highest Returns
    • FDIC insured

Technically, they are not all FDIC insured.  It has to be issued by an FDIC insured bank.

Cons:
  • Can return 0% if withdrawn early (varies by company and type of CD)

Technically, you can LOSE money if you try to get out early.  You MUST read the CD literature and understand how you are acquiring the CD.  A CD may require it be sold on the open market if you want out early rather than just an interest penalty - so if interest rates rose significantly, you can lose principal.

For people considering short term savings they should really only consider buying new issue bills at auction and holding to maturity. If you have to sell before maturity then you probably should not have bought in the first place.

This is a silly restriction.  If you are buying any large quantity ($10K+), then there is little inefficiency in buying on the secondary market to hold to maturity.  In fact, the rates can be better at times than what results are at auction (and is worse at times as well). The advantage of the secondary market is that you can pick the exact week that the bonds will mature, and start earning interest immediately, rather than being stuck at the fixed increments of what is available at auction.

Not really. You will sell your bill and the interest you will have earned will have been less than the rate purchased at. For simplicity, consider a 26 week bill earning 3%, and the interest just happens to be $100. You want to sell at 13 weeks. So if you sold for $50 more than purchase price, you earned 3% interest, right? And the guy that buys it gets the other $50 when it matures. Well, instead, you're going to sell for maybe $40 more than purchase price, and the buyer gets the other $60 when it matures. So you earned less than 3% and buyer earned more. But you still didn't lose money.

This is also mathematically wrong. One counter-example (of many) occurred October 22, 2015. 

It is *highly unlikely* that you will lose money at current interest rates, but back when bills were yielding smaller values, that was certainly NOT a guarantee.  Some of them actually had negative interest rates for a while: https://www.reuters.com/article/markets-money-idUSL1E8NH6JJ20121217 ... the problem is if you bought at 0.2% interest, and half way through you want to sell, but short term rates jump to 0.4%, then you are pretty much are guaranteed to lose money, since there will be SOME transaction fee charged to get out of the bond, and all the interest will be expected by the buyer.

Edited to add:

There is a reason this isn't easy: The world is not simple.  There are other quirks and clever marketing that tries to deceive people into thinking they are getting one of the things in the original list.  I'm not implying that these are things that belong in the primary list, but the risk is that people need to know these things exist and are NOT the items above.

There are:

See also: http://www.finra.org/investors/certificates-deposit-cds

There are also Ultra short term Bond Funds, like SHV, which are in a similar category of short term investment, but I've generally found these fail to yield anywhere near as much as other items already on the list.
« Last Edit: October 02, 2018, 05:48:22 PM by Systems101 »

jacoavluha

  • Stubble
  • **
  • Posts: 232
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #10 on: October 02, 2018, 07:21:43 PM »

For people considering short term savings they should really only consider buying new issue bills at auction and holding to maturity. If you have to sell before maturity then you probably should not have bought in the first place.

This is a silly restriction.  If you are buying any large quantity ($10K+), then there is little inefficiency in buying on the secondary market to hold to maturity.  In fact, the rates can be better at times than what results are at auction (and is worse at times as well). The advantage of the secondary market is that you can pick the exact week that the bonds will mature, and start earning interest immediately, rather than being stuck at the fixed increments of what is available at auction.

Not really. You will sell your bill and the interest you will have earned will have been less than the rate purchased at. For simplicity, consider a 26 week bill earning 3%, and the interest just happens to be $100. You want to sell at 13 weeks. So if you sold for $50 more than purchase price, you earned 3% interest, right? And the guy that buys it gets the other $50 when it matures. Well, instead, you're going to sell for maybe $40 more than purchase price, and the buyer gets the other $60 when it matures. So you earned less than 3% and buyer earned more. But you still didn't lose money.

This is also mathematically wrong. One counter-example (of many) occurred October 22, 2015. 

It is *highly unlikely* that you will lose money at current interest rates, but back when bills were yielding smaller values, that was certainly NOT a guarantee.  Some of them actually had negative interest rates for a while: https://www.reuters.com/article/markets-money-idUSL1E8NH6JJ20121217 ... the problem is if you bought at 0.2% interest, and half way through you want to sell, but short term rates jump to 0.4%, then you are pretty much are guaranteed to lose money, since there will be SOME transaction fee charged to get out of the bond, and all the interest will be expected by the buyer.


All this is reasonable. I think for short term savings, focusing on new issue T bills is best, at least for a beginner.

degrom7

  • 5 O'Clock Shadow
  • *
  • Posts: 87
  • Location: NY
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #11 on: October 02, 2018, 08:12:56 PM »
I buy treasuries directly through vanguards website.  Yes, you can only buy on auction dates. On the Cons: you said bonds can go down if you sell early. Bonds can also go up in value if rates drop and you sell early. Backed by us gov with no limits vs savings account limit fdic $250,000.     

Schedule
https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/auctions.pdf

Vanguard fixed income/rates/purchase here no fees
https://personal.vanguard.com/us/FixedIncomeHome

Auctions explained
https://www.youtube.com/watch?v=Wgcv_wJOLcA

Which would you purchase from? Vanguard or US Treasury?

jacoavluha

  • Stubble
  • **
  • Posts: 232
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #12 on: October 02, 2018, 08:40:47 PM »
I buy treasuries directly through vanguards website.  Yes, you can only buy on auction dates. On the Cons: you said bonds can go down if you sell early. Bonds can also go up in value if rates drop and you sell early. Backed by us gov with no limits vs savings account limit fdic $250,000.     

Schedule
https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/auctions.pdf

Vanguard fixed income/rates/purchase here no fees
https://personal.vanguard.com/us/FixedIncomeHome

Auctions explained
https://www.youtube.com/watch?v=Wgcv_wJOLcA

Which would you purchase from? Vanguard or US Treasury?

Treasury Direct I prefer in almost all aspects. Except with the significant caveat that if you want/need to sell before maturity, you would have to transfer your holding to a brokerage, then sell there. I have no idea how easy this is to do. The website is also takes getting used to. Login isn't straightforward.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1263
  • Location: West of the Mountains, East of the Sea
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #13 on: October 02, 2018, 09:09:48 PM »
Good summary. I feel like ultra-short term bond funds should be on the list. Maybe even short term bond funds.

Systems101

  • Stubble
  • **
  • Posts: 149
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #14 on: October 02, 2018, 09:46:09 PM »
Which would you purchase from? Vanguard or US Treasury?

A lot of it is personal preference.  The financial result is the same, since your are placing a noncompetitive bid either way.

I now buy all of mine from a broker.  It allows me to purchase any date I want on the secondary market.  It places redeemed cash bask into my brokerage account (faster/easier to redeploy).  It keeps the vast majority of my non-401K funds in one place.

I have done TreasuryDirect in the past, and there is nothing wrong with it.   I have I-bonds there, since those can't be done in a brokerage.  The time when I used it for Treasury Bonds was just an era when my brokerage account wasn't the center of my financial universe (it's now the transfer hub of all my accounts)

COEE

  • Pencil Stache
  • ****
  • Posts: 537
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #15 on: October 13, 2018, 02:01:57 PM »
I just wanted to thank everyone for contributing to this thread and providing constructive feedback.  This has been quite a learning experience for me.  I've often glossed over some of the details, and I've had to really dig into some of the details thanks to your feedback!  Which I believe has made the original posting better.  Thanks so very much!

A few thoughts:
  • @VoteCthulu  I will not be providing a ranking system on the initial post.  Ranking systems for these things are highly dependent on the individual and their investment goals.  It is my intent for each reader to make their own educated decisions.
  • @terran  I agree that realizing and executing on not needing the money provides the potential of additional gains to the investor.  This is something worth noting to individuals that ask about their short term investment if it's applicable.  I don't feel like adding to an already long post, and since your post is early on in the thread, I will let your post provide this information to the reader.
  • @Systems101  Good inputs all around - I've made some minor corrections based on your inputs.
  • @Radagast  Bond funds of any type expose the investor to additional principle risk due to daily changing interest rates and will not be included in this list.  You've made note that they are another option for those that are willing to accept losses, and I will leave it at that - The purpose of this thread is to preserve principle and maximize interest.  The Ultra-Short Bond funds seemed to also have significantly less favorable returns than the other options that I've researched. Redacted.
  • @jacoavluha  As Systems101 has pointed out, and I believed before, you can lose principle on treasury bills if they are not held to maturity due to interest rate risk.  I agree that it's rare, but it can and does happen. It's rare enough that I have left this option on the list.

FYI, As a result of my research on this thread, I believe that I am going to make some changes to some of my own assets - after speaking to the wife of course.

I hope you are all having a great weekend!
COEE
« Last Edit: October 14, 2018, 12:25:38 PM by COEE »

COEE

  • Pencil Stache
  • ****
  • Posts: 537
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #16 on: October 13, 2018, 03:24:19 PM »
... I believe an 8 week bill is coming soon...
I just checked and TD is currently offering 8-week bills! - I updated the original post to include these as well!

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1263
  • Location: West of the Mountains, East of the Sea
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #17 on: October 13, 2018, 04:49:32 PM »
Bond funds of any type expose the investor to additional principle risk due to daily changing interest rates and will not be included in this list.  You've made note that they are another option for those that are willing to accept losses, and I will leave it at that - The purpose of this thread is to preserve principle and maximize interest.  The Ultra-Short Bond funds seemed to also have significantly less favorable returns than the other options that I've researched.[/li][/list]
I'll disagree. A rule of thumb is that bond funds are safe against losses in principal when held to their duration, and safe to provide at least their purchase yield when held to twice their duration (excluding credit risk, but that can apply to others on the list). Ultra-short bond funds are ideal for the 1-2 year end of the range (at which point, as I noted, they are safe from interest rate risk), and provide better yields than money market funds of similar credit quality. They fill the gap between short/total/aggregate bond funds (which typically sell bonds 1 year before maturity) and money market funds. Whether at 2.55% they are better than a high yield saving account at 2.00% or a 15-month CD at 2.6% I'll leave to individuals.

oldladystache

  • Pencil Stache
  • ****
  • Posts: 516
  • Age: 73
  • Location: coastal southern california
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #18 on: October 13, 2018, 06:38:05 PM »
Ally Bank has a no penalty 11 month CD at 2.1% for 25k or more. You can treat it just like a savings account and the interest won't go down for 11 months. If it goes up you just trade it in for a new one at the new rate. It's easy, I've been doing it as the rates go up.

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #19 on: October 14, 2018, 05:37:28 AM »
Depending on your tax situation, a tax-exempt money market fund might have higher yield.  For high tax states like NY and CA, Vanguard has state-specific money market funds (which hold municipal bonds only from the specific state, making it both Federal and State tax exempt).

If you're willing to take some level of risk, you could mix stock and bond funds.  Actually a mix of 90% bonds / 10% stocks is lower risk than an allocation of 100% bonds.  If you look at Portfolio Visualizer's data for the past 36 months, the stock market ("VTI") and bond market ("BND") were slightly negatively correlated.  The two don't tend to move in sync, but sometimes they move in opposite directions.

If you can delay your purchase, you could also take more equity risk.  You could invest 30% stocks and 70% bonds in the first year, and move towards 15% stock / 85% bonds for the second year.  If the overall value is impacted harshly, you delay the purchase.  If you need to be ready at any time in the next 0-2 years, then that won't work - it's only if the end date is flexible.

COEE

  • Pencil Stache
  • ****
  • Posts: 537
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #20 on: October 14, 2018, 12:24:10 PM »
The goal here is to preserve principle and maximize risk-free return.

T-bills are excellent for meeting both of these goals, as discussed earlier.  To be 100% sure you meet both of these goals, you MUST hold your bills to maturity.  The intent of this post is to encourage the reader to choose a term that you know you can hold to maturity.  If you sell your bill before maturity you open yourself up to interest rate risk and loss of principle.

How does this happen?  The general idea is that if interest rates have risen since you bought your bill then the value of your bill is worth less than what you paid.  In contrast, if interest rates decline then your bill value is worth more than what you paid.  But since we're trying to preserve principle, we will focus on reduction of principle.

Below is a table that shows how much you'd lose if you bought a $10k 52-week t-bill with a 3% coupon and it's approximate value each month.  1 month later (and all months after) interest rates are 4%.  It will take 3 months before you can even get your initial principle back.  Selling earlier will result in a loss.

month 3% coupon 4% coupon profit/gain equivalent rate
0$9,700.00$9,600.00N/AN/A
1$9,725.00$9,633.33-$66.67-8.00%
2$9,750.00$9,666.67-$33.33-2.00%
3$9,775.00$9,700.00$0.000.00%
4$9,800.00$9,733.33$33.331%
5$9,825.00$9,766.67$66.671.60%
6$9,850.00$9,800.00$100.002.00%
7$9,875.00$9,833.33$133.332.29%
8$9,900.00$9,866.67$166.672.50%
9$9,925.00$9,900.00$200.002.67%
10$9,950.00$9,933.33$233.332.80%
11$9,975.00$9,966.67$266.672.91%
12$10,000.00$10,000.00$300.003.00%

Hypothetical example:
Bob buys a 3% coupon 52-week t-bill for $9700.  One month later he decides to sell the bill, but in order to be competitive in the market he needs to sell closer to the current 4% rate for an 11 month bond - $9633.33.  If he does so, he will lock in a -$66.67 loss and have an equivalent return of -8.00%!  Note that this example is extreme, yields are not likely to increase by 100bps in 1 month, but they could. 

There are other factors that can result in the losses not being quite so bad, such as the buyer wanting a certain maturity date, and being okay with a lower yield as a result, meaning you (the seller) not seeing quite as bad of a loss as calculated.

I've really been considering if I should leave T-bills on the list because they are subject to inflation risk, as other suggestions also are - which I won't include in the list for a multitude of reasons.  But the main difference between t-bills and a bond-fund is that when you hold a bill to maturity you are guaranteed by the US government to get your principle back.  This makes them an excellent investment, and with maturities as short as 4-weeks, there is a maturity that is right for most people and scenarios - so they will stay on the list.

I'm hesitant to make recommendations on what term a person should buy because it can vary so much by risk tolerance, investment goals, etc.  However, I would suggest everyone purchase a term that you are 100% sure that you can hold until maturity.  If you are unsure how long a maturity you can handle, a 4-week bill is an excellent way to start and has very little interest rate risk.
« Last Edit: October 14, 2018, 12:40:54 PM by COEE »

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1263
  • Location: West of the Mountains, East of the Sea
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #21 on: October 14, 2018, 08:35:31 PM »
principle
Also FYI it is principal... maybe it was just a coincidence of spellcheck but at this point I thought I'd say it

COEE

  • Pencil Stache
  • ****
  • Posts: 537
Re: Where should you put your short-term investment money? (0-2 years)
« Reply #22 on: October 15, 2018, 07:06:17 PM »
principle
Also FYI it is principal... maybe it was just a coincidence of spellcheck but at this point I thought I'd say it
You must not have seen the shirt my coworkers gave me!