Author Topic: VMMXX vs. VMSXX and Expense Ratio vs. Return  (Read 8842 times)

Badass by 41

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VMMXX vs. VMSXX and Expense Ratio vs. Return
« on: March 06, 2014, 05:02:07 PM »
Hi all,  I'm hoping someone can help me with a few questions about these funds.

Vanguard Prime Money Market Fund (VMMXX)
Vanguard Tax-Exempt Money Market Fund (VMSXX)

1. Given the state of interest rates, is there still a meaningful tax benefit to VTSXX? (I can't see one)
2. Given the state of interest rates, aren't investors guaranteed a LOSS in these funds with an expense ratio of 0.17%/0.16% respectively, and a return of 0.01%?
3. As far as I can tell these are the most common recommendations for liquid asset allocation. What are you using for the cash portion of your AA? Are there better options out there?

Cheers
- James

ThermionicScott

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Re: VMMXX vs. VMSXX and Expense Ratio vs. Return
« Reply #1 on: March 06, 2014, 09:02:41 PM »
Hi all,  I'm hoping someone can help me with a few questions about these funds.

Vanguard Prime Money Market Fund (VMMXX)
Vanguard Tax-Exempt Money Market Fund (VMSXX)

1. Given the state of interest rates, is there still a meaningful tax benefit to VTSXX? (I can't see one)
2. Given the state of interest rates, aren't investors guaranteed a LOSS in these funds with an expense ratio of 0.17%/0.16% respectively, and a return of 0.01%?
3. As far as I can tell these are the most common recommendations for liquid asset allocation. What are you using for the cash portion of your AA? Are there better options out there?

Cheers
- James

The bigger guaranteed loss to worry about is inflation, which will be an order of magnitude over those expense ratios at the least.  Bond and MM funds that use tax-exempt bonds usually have a slightly-lower return, so that's generally a wash for us non-institutional investors.

I keep a grand or two in my checking account for expenses, and invest everything else in worthwhile things like Vanguard Total Stock, Total International Stock, Total Bond, and TIPS.  Once your 'stash grows enough, you can weather short-term emergencies without needing a big buffer of cash.  :^)

Badass by 41

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Re: VMMXX vs. VMSXX and Expense Ratio vs. Return
« Reply #2 on: March 06, 2014, 11:15:13 PM »
I keep a grand or two in my checking account for expenses, and invest everything else in worthwhile things like Vanguard Total Stock, Total International Stock, Total Bond, and TIPS.  Once your 'stash grows enough, you can weather short-term emergencies without needing a big buffer of cash.  :^)

Thanks for the quick and useful response.  That makes total sense to me.

One additional question, can you give me an example of what mechanism you would use for emergencies given a big enough 'stash?  Is there a specific type of asset you imagine being part of that portfolio?  Say a Roth IRA?  Or are you suggesting that with a large enough 'stash selling stocks to cover emergencies becomes less of a big deal?

Thanks!

soccerluvof4

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Re: VMMXX vs. VMSXX and Expense Ratio vs. Return
« Reply #3 on: March 07, 2014, 04:48:34 AM »
I use the VMSXX as a transfer account. Money doesnt sit there long but I always have some type of balance so on big dip days i can add to my portfolio. I have a higher portfolio so percentage wise its not much.

Sounds Like Badass and I as far as Index funds are probably in the same ones as well. I use a 4 Index portfolio as opposed to 3.  As far as for emergencies for everyone its different. Some peoples emergencies could equate to being more based on social economics. So you want to keep what you feel you might need or can get access to quickly for like if a furnace went out. So for everyone that might be different depending on transfer times. I keep some cash....minimal, Checking....minimal but if i got hit buy something bigger by the time I had to pay the bill i could get the money wired from my VMSXX for example or my trading platform from a stock sale or money I have sitting in there as well.  But the more you have the smaller the percentage becomes.

nottoolatetostart

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Re: VMMXX vs. VMSXX and Expense Ratio vs. Return
« Reply #4 on: March 07, 2014, 05:11:13 AM »
I use the VMSXX as a transfer account. Money doesnt sit there long but I always have some type of balance so on big dip days i can add to my portfolio. I have a higher portfolio so percentage wise its not much.


This is what I use VMSXX for as well. Just a holding spot for money to be invested. We have 2 incomes right now, so for the foreseeable future, we just would not invest that month or cut back investing in our taxable account that month if we have a <$8K emergency. Otherwise, we have some money in a checking account to use as reserve.

Badass by 41

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Re: VMMXX vs. VMSXX and Expense Ratio vs. Return
« Reply #5 on: March 07, 2014, 11:02:44 AM »
Thanks for the great feedback everyone.

I keep some cash....minimal, Checking....minimal but if i got hit buy something bigger by the time I had to pay the bill i could get the money wired from my VMSXX for example or my trading platform from a stock sale or money I have sitting in there as well.  But the more you have the smaller the percentage becomes.

So is the reason you keep the money in VMSXX primarily for immediate access for trading?  While it's not much, my bank account is earning ~1% interest vs the .01% interest VMSXX is earning.  Is the opportunity cost worth more than having your money working harder for you, even at these small %'s?

Also, what is your reason for choosing VMSXX over VMMXX?

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Re: VMMXX vs. VMSXX and Expense Ratio vs. Return
« Reply #6 on: March 07, 2014, 03:49:19 PM »
Thanks for the great feedback everyone.

I keep some cash....minimal, Checking....minimal but if i got hit buy something bigger by the time I had to pay the bill i could get the money wired from my VMSXX for example or my trading platform from a stock sale or money I have sitting in there as well.  But the more you have the smaller the percentage becomes.

So is the reason you keep the money in VMSXX primarily for immediate access for trading?  While it's not much, my bank account is earning ~1% interest vs the .01% interest VMSXX is earning.  Is the opportunity cost worth more than having your money working harder for you, even at these small %'s?

Also, what is your reason for choosing VMSXX over VMMXX?

The choice of the two funds was what was recommended to my by Vanguard based on what i wanted to do. In Vanguard you can move money around at no charge so if your bank will transfer for no charge and that difference in % matters do what is comfortable. For me its minimal and just easier .

Badass by 41

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Re: VMMXX vs. VMSXX and Expense Ratio vs. Return
« Reply #7 on: March 07, 2014, 04:19:20 PM »
The choice of the two funds was what was recommended to my by Vanguard based on what i wanted to do. In Vanguard you can move money around at no charge so if your bank will transfer for no charge and that difference in % matters do what is comfortable. For me its minimal and just easier .

Ah, ok.  Thanks for the info.