1-3 yrs bond ladder

Discussion of the Cash portion of the Permanent Portfolio

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1-3 yrs bond ladder

Post by D » Wed Jan 12, 2011 2:45 am

Most of my cash is in a HSA. I'd like to switch to treasuries. It seems the best risk/benefit is with a 1-3 yrs ladder. Given current rates, and a need to have some money easily available, I'm thinking about keeping 1/3 in a HSA, 1/3 in a 2 yrs t-bill, and 1/3 in a 3yrs bill and then each year buying a new 3 yrs t-bill. Is this a good plan? Any better suggestions on handling cash part using a HSA and direct investments in t-bills? Is 1-5 years ladder much riskier?
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Re: 1-3 yrs bond ladder

Post by Austen Heller » Wed Jan 12, 2011 10:40 am

I used to maintain a ladder of short-term Treasury Bills, but I found that a Short-Term Treasury Fund (such as Vanguard's VFISX or Fidelity's FSBIX) is a MUCH easier solution.  The fund charges a small % for management, but it is worth it to me to not have to track all the buy/sell and interest transactions of the individual bonds.  Also, the fund is liquid if you ever need to sell with no fees (individual bonds are also liquid, but many brokers charge fees for selling the individual bonds; Treasury Direct charges $45 for selling each bond).  The Vanguard fund does go out to 5 yrs, but that's not a lot more risk than using the 1-3 yr ladder.

Another option for your cash is I-bonds, but they cannot be redeemed for 1 year after purchase, which may not be suitable for your cash.  Also there is the yearly purchase restriction of $10k per person ($5k paper, $5k online), and the fact that the Treasury Direct website states that if you want to cash in more than $1k in paper bonds, you need to mail them in to them.  I am starting to believe that I-bonds are not worth the hassle, but lots of people love them.
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Re: 1-3 yrs bond ladder

Post by foglifter » Wed Jan 12, 2011 11:14 am

Another option could be moving money to a better HSA provider. A significant part of my cash is in HSA account with Adirondack Trust earning 5% APY. I think this is way better than any other cash (or even bond) vehicle.
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Re: 1-3 yrs bond ladder

Post by Lone Wolf » Tue Feb 15, 2011 9:47 am

Just happened to stumble across this topic.  I do something very similar, except the HSA is a much tinier portion of my cash (as I've only recently qualified for an HSA by virtue of joining a high-deductible health plan.)

Like foglifter mentioned, you can get some good interest rates in HSAs.  In addition, an HSA is a great opportunity to expand your tax-deferred space.  If you wait to touch it until you are 65, it's just like an IRA.  When you mentioned switching to Treasuries, were you talking about actually taking a distribution from your HSA and putting that money into T-bills?  I assume this is not what you meant since there'd be such an unfortunate tax consequence to doing this.  I wanted to make sure, though (as this would be a bad idea.)

For me, I put as much as I can into the HSA.  The contribution limit for this year is just over $6,000 so there's a hard limit to what I can do here.  Since I fight for every scrap of tax-deferred space, I max this.  It's also worth mentioning that this is a slight deviation from the PP recipe, as these accounts (at least mine) are only protected by the FDIC.  Still, it's a pretty small portion of my cash so I don't worry about it.

I also second the recommendation to at least look at savings bonds, particularly if you are trying to build your tax-deferred space.  With the I-bond fixed rate at 0%, it's not a terribly exciting prospect but I'm hoping for something a little bit better in the 2nd half of the year.

After that, I place the bulk of my cash into a Treasury Note ladder similar to what you describe.  However, I don't restrict myself to doing this once per year.  I more or less just "eyeball" my ladder to try to keep the mean duration around 1.5-2 years, never purchasing a Note with a duration of more than 3 years or so.  When I have enough cash building up in my savings account to purchase a 2- or 3-year Treasury Note of some size, I'll just grab one at that time, typically on the secondary market (I was reminded recently that these purchases are completely free at Fidelity, so I really could be doing this even more often than I do.)  The monthly Treasury Note auctions should also work well.

Austen is absolutely correct that the expense ratios are quite low on the treasury mutual funds but personally I just can't bear to pay them if I don't have to.  It's so easy to buy the occasional T-Note that it's hard for me to justify paying someone 10 or 20 basis points just to sit on them for me when I could just as easily do it myself.  I also like the feeling that this is "my Treasury Note" and knowing that I'll hold it to maturity.  However, if you are less of a nerd than I am and instead find this kind of thing a pain in the butt then the funds will completely shield you from hassle.
Last edited by Lone Wolf on Tue Feb 15, 2011 9:58 am, edited 1 time in total.
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Re: 1-3 yrs bond ladder

Post by Reub » Tue Feb 15, 2011 11:26 am

Lone Wolf, what is your age? I am 54 and have shied away from HSA's because I wonder just how good the actual HDHP health plans are. Any thoughts on that?
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Re: 1-3 yrs bond ladder

Post by moda0306 » Tue Feb 15, 2011 12:12 pm

Reub,

As a 26 year-old healthy male, I'd say that my general impression is that HSA's are great for people like me, but probably not the best option for people with higher medical expenses that can buy into an employer plan that covers more, but is the same price for everyone, no matter how sick.

My 2 cents.
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Re: 1-3 yrs bond ladder

Post by Lone Wolf » Tue Feb 15, 2011 12:54 pm

Reub wrote: Lone Wolf, what is your age? I am 54 and have shied away from HSA's because I wonder just how good the actual HDHP health plans are. Any thoughts on that?
I'm 32 and I have to admit that I don't anticipate having to make heavy use of my health insurance.  My company's HDHP has a $2,000 deductible for individuals and $3,000 for families.  This is also the out of pocket maximum.  In addition, premiums are quite a bit lower under the HDHP.  My company also makes a free HSA contribution for anyone who participates in the HDHP.  Finally, the usual tax advantages of an HSA apply as well for either medical expenses or retirement.  Taken together, this means that if you aren't planning on hitting that deductible the HDHP provides excellent value.

I bet that it varies a lot from plan to plan, though.  My wife's HDHP has much less attractive terms, for example.  I'm surprised that more companies don't try to encourage employees to use the HDHP\HSA combo.

It might be worth glancing over the terms of your HDHP the next time benefits open enrollment comes around for you.  You might be pleasantly surprised (or completely disappointed, depending on how they have it set up!)
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Re: 1-3 yrs bond ladder

Post by Reub » Tue Feb 15, 2011 6:39 pm

How can you guys have so much wisdom at such a young age?
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Re: 1-3 yrs bond ladder

Post by moda0306 » Tue Feb 15, 2011 7:01 pm

Boards/Blogs like this inspire wisdom.  

Before this forum and the PP, I had the attitude of "go hard or go home... invest in the riskiest possible stock funds and just ride the traughs."

I tend think Medium Tex was probably muttering half sentences with bad grammer and an uninteligible southern drawl... before he stumbled onto a crawlingroad.com.

JK, MT.  But all-in-all, the internet, when used constructively, is an amazing resource that seems to me to be invaluable at this point... let's hope for another breakthrough like it to pull us out of the mess we're in... though I'm sure it will just be used by big business and big government to further ensnare the masses into servitude and consumerism.
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Re: 1-3 yrs bond ladder

Post by AdamA » Tue Feb 15, 2011 7:41 pm

moda0306 wrote: Boards/Blogs like this inspire wisdom.  
That is very true. 

It's amazing how something like a simple investment strategy can change your perspective on so many different things.
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Re: 1-3 yrs bond ladder

Post by MediumTex » Tue Feb 15, 2011 10:17 pm

Adam1226 wrote:
moda0306 wrote: Boards/Blogs like this inspire wisdom.  
That is very true. 

It's amazing how something like a simple investment strategy can change your perspective on so many different things.
I have always thought that the internet forum format provided a way of digging into ideas and enhancing understanding very efficiently.  It's almost like you are able to daisy-chain several brains and they are all working toward the same goal of deepening understanding of whatever the topic is. 

As for the permanent portfolio changing the way you look at the world, it definitely does that.  In the BH thread, I talked about how Nassim Taleb's "Black Swan" idea is much like a primitive understanding of the ideas that Harry Browne grasped so much more fully and deeply.  Similarly, Taleb always seems bewildered when he is asked about how to act on his insights, while Harry Browne provided the world with this wonderful and simple investment strategy that anyone can use.
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Re: 1-3 yrs bond ladder

Post by Lone Wolf » Wed Feb 16, 2011 8:09 am

moda0306 wrote: Boards/Blogs like this inspire wisdom.  
That is absolutely right.  You can't do things like hang out here or listen to Harry Browne's investment radio shows without having some wisdom rub off.
MediumTex wrote: As for the permanent portfolio changing the way you look at the world, it definitely does that.  In the BH thread, I talked about how Nassim Taleb's "Black Swan" idea is much like a primitive understanding of the ideas that Harry Browne grasped so much more fully and deeply.  Similarly, Taleb always seems bewildered when he is asked about how to act on his insights, while Harry Browne provided the world with this wonderful and simple investment strategy that anyone can use.
I hadn't looked at it this way, but this is exactly right.  Taleb is a very talented storyteller and has built something of an empire around his ability to communicate the idea that the world is an uncertain place.  It's a concept that is simultaneously completely obvious and deeply shocking.

Browne, however, took that idea and ran with it decades ago.  He put together simple plans for drawing order and simplicity out of a world that is so often ruled by luck and chaos.  I would argue that he achieved this in the worlds of finance and politics.  Hmm, perhaps "self-help" too, now that I think about it!  But I'd bet that substantially more people have heard of Taleb than have heard of Browne (not to say that Taleb is undeserving of his notoriety.)

Perhaps if Browne had written a book on how "How to Lose 30 Pounds in 30 Days in an Uncertain World!" he'd be more widely known.  :)
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Re: 1-3 yrs bond ladder

Post by Storm » Wed Feb 16, 2011 12:38 pm

Reub wrote: How can you guys have so much wisdom at such a young age?
I consider myself pretty young as well; only 37.  Part of the reason that I'm investing so heavily at such a young age (approximately 50% of my income) is that I saw the results of my father, who did quite well for himself in the 60s and 70s, making approximately $25,000 per month in the 70s and had a financial news show on TV in the southern California area, but didn't save for retirement.  When he was in his 70s he was living off of social security and VA benefits.  I thought to myself, how could someone who was so smart (he got a bunch of investors to buy gold in the late 70s, and made quite a bit of money for them) manage their retirement so poorly?

So, I decided to do the opposite.  I might not make as much money as he did, but at least I'll save wisely what I have.
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Re: 1-3 yrs bond ladder

Post by MediumTex » Wed Feb 16, 2011 12:46 pm

Storm wrote:
Reub wrote: How can you guys have so much wisdom at such a young age?
I consider myself pretty young as well; only 37.  Part of the reason that I'm investing so heavily at such a young age (approximately 50% of my income) is that I saw the results of my father, who did quite well for himself in the 60s and 70s, making approximately $25,000 per month in the 70s and had a financial news show on TV in the southern California area, but didn't save for retirement.  When he was in his 70s he was living off of social security and VA benefits.  I thought to myself, how could someone who was so smart (he got a bunch of investors to buy gold in the late 70s, and made quite a bit of money for them) manage their retirement so poorly?

So, I decided to do the opposite.  I might not make as much money as he did, but at least I'll save wisely what I have.
I'm 40 and I think that this way of looking at the world reflects a certain generational trend as well.

IMHO, the boomers' entire worldview was (and is) a bit delusional.  Throughout history, generations of dreamers and rainbow chasers tend to be followed by more practical generations who are less interested in unicorn safaris and more interested in picking up the pieces of their societies and trying to focus on things that actually work.

To me, interest in the PP is part of this narrative of people in their middle earning years trying to consolidate gains in a reliable way and building a brick house against future uncertainty, having seen their boomer friends, relatives and colleagues' stick and straw houses blown away as their underlying delusions were exposed to reality.
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Re: 1-3 yrs bond ladder

Post by Wonk » Wed Feb 16, 2011 7:24 pm

MediumTex wrote:
IMHO, the boomers' entire worldview was (and is) a bit delusional.  Throughout history, generations of dreamers and rainbow chasers tend to be followed by more practical generations who are less interested in unicorn safaris and more interested in picking up the pieces of their societies and trying to focus on things that actually work.
BRAAAAAAAAVO, MT.  I've shared the same feeling of the boomer generation as a whole.  As in any gross generalization, there are exceptions (perhaps the boomers who are participants on this board? :D).  But in my experience, they are the whiniest bunch of spoiled brats.  They reaped the rewards of their parents and pushed their obligations to their children.  Unfortunately they are a huge voting block so any thought of austerity is completely out the window.

Btw, since we're divulging ages, I'm 33.  And I've always wanted to go on a unicorn safari.
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