BSV for cash portion

Discussion of the Cash portion of the Permanent Portfolio

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jalanlong
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BSV for cash portion

Post by jalanlong » Thu Jul 09, 2020 8:54 pm

https://investor.vanguard.com/etf/profile/BSV

What would be the downsides to using the Vanguard Short Term Bond Fund for the cash portion? It is 67% in treasuries with a 2 year duration. It held up well in 2008 and so far this year in comparison to a Treasury only ETF like SHY. And over a 10 year period is it averaging almost 1% more a year than SHY. The little boost you get from the 33% in corporate and agency bonds seems to really help!
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vnatale
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Re: BSV for cash portion

Post by vnatale » Thu Jul 09, 2020 9:23 pm

jalanlong wrote:
Thu Jul 09, 2020 8:54 pm
https://investor.vanguard.com/etf/profile/BSV

What would be the downsides to using the Vanguard Short Term Bond Fund for the cash portion? It is 67% in treasuries with a 2 year duration. It held up well in 2008 and so far this year in comparison to a Treasury only ETF like SHY. And over a 10 year period is it averaging almost 1% more a year than SHY. The little boost you get from the 33% in corporate and agency bonds seems to really help!
Biggest one is you jeopardize your most stable asset by taking on a lot more risk in the quest for a "little boost".

You have your three other components to give you return. Cash is to be your stabilizer. Your rock. Not the place you take risk for a slight increase in return.

Vinny
"I only regret that I have but one lap to give to my cats."
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mathjak107
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Re: BSV for cash portion

Post by mathjak107 » Fri Jul 10, 2020 2:46 am

i agree .

having lost money in a money market in 2008 when mine broke the buck , plus getting locked out for months , treasuries are treasuries .
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Kbg
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Re: BSV for cash portion

Post by Kbg » Fri Jul 10, 2020 8:14 am

jalanlong wrote:
Thu Jul 09, 2020 8:54 pm
https://investor.vanguard.com/etf/profile/BSV

What would be the downsides to using the Vanguard Short Term Bond Fund for the cash portion? It is 67% in treasuries with a 2 year duration. It held up well in 2008 and so far this year in comparison to a Treasury only ETF like SHY. And over a 10 year period is it averaging almost 1% more a year than SHY. The little boost you get from the 33% in corporate and agency bonds seems to really help!
Vinny said it quite well. Corporate bonds are stocks on anti-steroids. Bond ETFs dislocate a lot during financial stress periods as well...pull up a chart of a corporate bond fund in March and you'll see it (as do mutual funds, but just not as noticeably as they are only priced once a day). If you can ensure you won't need to tap those funds in such a time, you will be fine. If you think you may, stick with the government stuff.

I'm a BND user and like it quite well.

BND lost 15% and BSV 6% in about a week during the March unpleasantness. By comparison IEF lost 8% while SHY lost 1%. All have recovered their losses, with (div adjusted) corporate bond funds now up from their previous highs, while treasuries have flat lined.

There truly is no free lunch in the market, more return, more risk, that simple.
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Re: BSV for cash portion

Post by sophie » Fri Jul 10, 2020 8:38 am

In general, you shouldn't go chasing yields with cash - safety is more important. Also, corporate bonds behave too much like stocks. There's really no point in owning them, in my view. Take your stock risk in the stock allocation, that's what it's there for.

However, Treasuries with duration longer than 1 year can make sense for "deep" cash, i.e. the bottom 1/3 of the cash allocation that you don't expect to have to rebalance out of or dip into for emergencies. I prefer to use US savings bonds for that rather than 2-3 year bonds, though, because the longer bond durations don't increase your yield by enough to make them worthwhile. At the moment, anyway.
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Re: BSV for cash portion

Post by PP67 » Fri Jul 10, 2020 9:14 am

I have a sizable amount of my "cash" allocation in a 401k Mass Mutual stable value/Fixed Account that guarantees 3%/yr. "The Fixed Account is not a mutual fund. It is an investment choice available through a group annuity contract or group funding agreement." My plan was to draw from it as needed. It is definitely not Treasuries but I just couldn't give up the 3% return on this. Should this be considered a big risk and/or not within the philosophical bounds of a PP (actually GP for me).
I'd appreciate your thoughts. Thanks!
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Re: BSV for cash portion

Post by Kbg » Fri Jul 10, 2020 10:06 am

PP67 wrote:
Fri Jul 10, 2020 9:14 am
I have a sizable amount of my "cash" allocation in a 401k Mass Mutual stable value/Fixed Account that guarantees 3%/yr. "The Fixed Account is not a mutual fund. It is an investment choice available through a group annuity contract or group funding agreement." My plan was to draw from it as needed. It is definitely not Treasuries but I just couldn't give up the 3% return on this. Should this be considered a big risk and/or not within the philosophical bounds of a PP (actually GP for me).
I'd appreciate your thoughts. Thanks!
U.S. Cash and short term treasuries are considered the safety instruments for good reasons (mainly the govt can print money to pay off its debts). Anything not in those categories have more risk and should not be considered in the ultra-safe category. Anything backed by a corporate entity of any kind is more risky, full stop. Whether you are actually holding a "big risk" would require really understanding the annuity contract and who/what is backing it. Could be quite risky to very low risk. However, philosophically, definitely not considered PP safe.
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Re: BSV for cash portion

Post by flyingpylon » Fri Jul 10, 2020 12:43 pm

PP67 wrote:
Fri Jul 10, 2020 9:14 am
I have a sizable amount of my "cash" allocation in a 401k Mass Mutual stable value/Fixed Account that guarantees 3%/yr. "The Fixed Account is not a mutual fund. It is an investment choice available through a group annuity contract or group funding agreement." My plan was to draw from it as needed. It is definitely not Treasuries but I just couldn't give up the 3% return on this. Should this be considered a big risk and/or not within the philosophical bounds of a PP (actually GP for me).
I'd appreciate your thoughts. Thanks!
I have access to this same account and have wondered about it from time to time. But knowing that nothing is "free" I assume there is inherently more risk involved. I move all of my cash into the brokerage account associated with the plan and invest in treasury funds.

I'll admit that I have not taken the time to thoroughly review the details.
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Kbg
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Re: BSV for cash portion

Post by Kbg » Fri Jul 10, 2020 1:44 pm

Free (and good financial thoughts)...dig deep into the details of the contract, find out who is offering it, who is backing it, what level of insurance does it have if any, what it holds for assets, how they are invested (investment policy), what is your state's involvement (I think i read it was govt affiliated, if not ignore), can the annuity be shut down, for what reasons, how are assets disposed of if it is shutdown, what would make it shutdown etc. etc.

Generally, annuities are heavily based on actuarial science, are safe and return what they say they will. However, almost always what is going on in the background is someone is risking up something, paying out part of it and skimming the delta as the annuity management fee. The real challenge for annuities going forward is that a good portion of the "guaranteed" part to annuity holders came from bonds. That is a MUCH tougher proposition now given interest rates are so low. Depending on the investment policy (strategy) you can do the same thing as your own personal annuity and save the management fee.

Some googling will give you a lot more info on what to look for.
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sophie
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Re: BSV for cash portion

Post by sophie » Sat Jul 11, 2020 9:51 am

I'd consider a cash annuity investment from a company like TIAA-CREF to be reasonably safe, but if there's a limited history I'm not so sure I'd trust it. If the pool of people buying in starts to dry up, the whole thing could go south very quickly. With TIAA-CREF that is exceedingly unlikely given its lock on educational 403b accounts, and also very high level of trust built over many years. The stable value fund offered in government retirement accounts is also a good choice.

Assuming the level of risk is reasonable, this is a great place to park deep cash, or even "medium" cash if there's a way to rebalance out of it. That is NOT the case with TIAA-CREF - they will only let you shed 10% of TIAA Traditional in any one year.
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Re: BSV for cash portion

Post by jhogue » Tue Jul 14, 2020 8:42 am

I had a stable value fund for three years before I retired. The fund was indeed stable and the yield was 1-2% above what short term Treasurys yielded at the time.

I bought the fund because it was a better choice than anything else available in my employer’s 457b plan. I had already maxed out my 403b account and Roth IRAs. I wanted more tax deferral space. And I knew when I retired that I could roll the entire 457b into my traditional IRA where I had complete freedom to choose the funds I wanted.

The problem with all of these Cash alternatives-whether stable value funds or something like BSV—is that the investment/insurance company has to invest in something riskier than short term Treasurys in order to get you that higher advertised return and make a profit for the company.

In a monetary crisis, you will want to have a big pile of very safe and very liquid Cash. That’s what you get if you stick with STTs. What you get with Cash alternatives in a monetary crisis is that sickening feeling in the pit of your stomach when you realize that your “hot” high yield money market fund has gone belly up and your account is going to be locked for 6 months while the FDIC figures out the mess. Or you read the find print and discover that the insurance contracts that underwrite your stable value fund are filled with below-junk-grade corporate bonds that crater during the next market crash.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: BSV for cash portion

Post by Kevin K. » Wed Jul 29, 2020 11:26 am

I'm sticking with T Bills yielding nothing and a chunk of NCUA-insured CD's yielding ~1% but crazy as it may sound I'd choose this ultra-conservative Vanguard fund-of-funds over BSV or anything else containing corporates if I were desperate for yield:

https://investor.vanguard.com/mutual-fu ... olio/vasix

This is an obscure fund but if you look at the components and performance (including during market crises) it's a pretty resilient way to generate (just barely, admittedly) a real return above inflation for the least possible risk in a plain vanilla portfolio.
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