Author Topic: Cash vs Bonds to hedge against a crash; investing tax money  (Read 461 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/