How do you invest the Cash portion?

[dualstow]

I don't have a problem with it, even though I don't buy them. I guess I would have to try it to really know.
I would ask jhogue, though.

[jhogue]

drumminj,

I do not buy 5 year CDs. I buy Treasury-backed securities because safety and liquidity is more important for my HBPP Cash quadrant than yield.

More important than what I think, however, is what you think:

Why do you want to buy a 5 year FDIC-backed CD, which is illiquid (as you yourself described it) and not as safe as a T-bill?

[sophie]

One of each, please.
Seriously, it depends on which way you think rates are going. I do in fact buy both.

Good for you dualstow! Stick to your guns!

I never got the 3 year rolling ladder thing going. The I bonds I have are soaking up my "deep cash" permissible level, so I'm sticking to short maturities or treasury money market funds for the rest. If I had the deep cash space, I'd be super tempted to use CDs. You can wait to break them until a higher interest rate outweighs the 3 month interest penalty, and the face value isn't at risk. With a short term treasury though, you pretty much are stuck with holding to maturity because their value and bid-ask spread will erase any such interest rate arbitration.

[drumminj]

Why do you want to buy a 5 year FDIC-backed CD, which is illiquid (as you yourself described it) and not as safe as a T-bill?

I buy both, to be honest. For "deep cash", as folks tend to call it, I have some 5-yr CDs fetching > 3%. Yes, I'm chasing yield, but I can withdraw the money immediately (for a small penalty). It's a bit less accessible than cash in an FDIC-insured account, but for some of my cash, the difference in yield is worth it.

I also have a bunch of 13-week treasuries, cash in a bank account, and cash on hand. There's some risk with FDIC, but there's also risk with SIPC (possibly more?) if you're holding STTs with Fidelity, and there's risk with TreasuryDirect (as discussed on this forum).

Pick your poison!

[jhogue]

11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:

From CraigR’s FAQ:

"Q: Why a Treasury Money Market Fund and not something else with better yield?

A: Because you are not looking to take risk with your cash. Treasury Money Market Funds that are properly run are one of the most liquid investments you can own. There are no FDIC limits to worry about, no bank credit worthiness to worry about, and you will always be paid barring some extremely catastrophic event in the country. Chasing yield with your cash means you are taking on more risk and those risks can show up when you least expect (or want) them to."

The FDIC ran short of cash during the 2008-2009 financial crisis and had to be bailed out by Congress to the tune of $100 billion. That is a fact, not an opinion or a theory.

During that same time period, there was no interruption in the secondary market in T-bills.

Happy Thanksgiving to one and all.

[drumminj]

11/27/19
drumminj,

I am not picking your poison because I agree with Harry Browne and craigr that all financial risks are not created equal:

That's fair, and to be clear I'm not trying to convince anyone.

I disagree though that there are no "FDIC limits to worry about". Your MM funds are held by a financial institution (in "street name", possibly even?) which may become insolvent, halt withdrawls, etc. You have insurance issues there, no? Asking sincerely, is this less risky than FDIC?

Treasuries held directly? Sure. Treasuries held on your behalf? Less so. Treasury MM? Also has risks.

Again, not trying to convince anyone to do what I do -- just trying to be clear about the risks here in the margins.

[Pet Hog]

A general question, not addressed to anyone in particular: Isn't a treasury money market fund just a treasury ladder held by someone else on your behalf? If so, there's not magic to it. You can set up your own and cut out the middleman. And set the duration/maturity however you like. Personally, I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.

[dualstow]

I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.

I’m accumulating, too. But, imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

It’s not the same as a treasury mm, from which you can withdraw what you need and a share = $1. If you’re really going to go five years out, maybe you had better go with those CDs with low penalties.

[sophie]

I have no problem with cash being defined as up to five-year treasuries/CDs, but I am in the accumulation phase. I can understand someone in the withdrawal phase having a different opinion.

I’m accumulating, too. But, imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

It’s not the same as a treasury mm, from which you can withdraw what you need and a share = $1. If you’re really going to go five years out, maybe you had better go with those CDs with low penalties.

Yep. And that, in a nutshell, is why I think savings bonds (any series) are also a bad choice.

Really? They're easy to liquidate and won't lose value. Even with the one year lockup and 3 month interest penalty if you sell before 5 years, I'd prefer them to > 1 year STTs for emergency cash withdrawals, which is why I've never found a place for treasury ladders.

[Pet Hog]

... imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

Can you give an example of such a situation? Because as a PP investor in the accumulation phase, my first response would be to pay for this sudden emergency with money from my emergency fund (not five-year treasuries), or with earnings from my job, or put it on a credit card. Ideally, I wouldn't touch my PP cash. Furthermore, as a PP investor I have several options, like selling appreciated stocks and potentially paying little (nothing?) in capital gains taxes. But let's say I have to suddenly liquidate all of my 25% cash component (and that includes five-year treasuries that I bought at 1.5% and now the interest rate is 10%**) -- well, I'd just suck it up and be grateful that I didn't have to go to a loan shark.## I'm not being facetious; I think as PP investors we have lots of options and can weather most storms.

**In such a high-rate environment, we'd also have high inflation, which would presumably boost stock and gold prices. Perhaps I'd be better off selling those assets. They are just as easy to liquidate as treasuries. So my response would depend on taxes and fees. That's why I asked for an example.

##Or maybe going to a loan shark would be smarter than selling my five-year treasuries! Again, many options for the PP investor.

[Pet Hog]

##Or maybe going to a loan shark would be smarter than selling my five-year treasuries! Again, many options for the PP investor.

Ah yes, PP investors' personality profiles certainly would be the type to use loan sharks.

I'll admit, there I was being facetious!

[dualstow]

... imagine you suddenly need to use cash at the same time that five-year treasuries sharply decrease in value. How mature is that ladder? How many of those treasuries can you really sell in a pinch without much of a loss?

Can you give an example of such a situation? Because as a PP investor in the accumulation phase, my first response would be to pay for this sudden emergency with money from my emergency fund (not five-year treasuries), or with earnings from my job, or put it on a credit card. Ideally, I wouldn't touch my PP cash.

A situation more specific than a sharp rise in interest rates plus some kind of catastrophe that would require cash? Use your imagination.

It does change things if you have an emergency fund that is separate from pp cash. I didn't really use to hold cash pre-pp, and now I've grown used to it. Like a lot of people who run this portfolio, though, I don't have a separate emergency fund of cash in addition to pp cash.

I was responding to

I have no problem with cash being defined as up to five-year treasuries/CDs

[sophie]

Yes, really. They won't lose value? Maybe not in the sense of the return of principal, but certainly in the sense of opportunity. And you are talking about I bonds. EEs are even worse.

What kind of opportunity do you mean?

I bonds are much better than CDs for me, because of the state/local tax exemption and tax deferral for the life of the bond. I'm not aware of any opportunities that would qualify as cash.

I think five year treasuries, CDs etc all have a place (if you're not a PP purist I guess, when it comes to the CDs). You still need a source of cash in its most liquid form. Like dualstow, I hold money markets and 4 week T bills as part of my cash allocation, not separately from the PP.

[Pet Hog]

I was responding to

I have no problem with cash being defined as up to five-year treasuries/CDs

And the rest of that sentence is, "but I'm in the accumulation phase." I think someone in the accumulation phase has greater risk-tolerance toward any changes in interest rates and/or emergencies and, therefore, can be a bit more aggressive with all aspects of the PP, but particularly with the cash component. Ergo, my tolerance toward five-year treasuries and CDs.

I'm still curious if anyone can provide an example of an emergency situation that would be problematic to the PP investor in the accumulation phase and holding five-year treasuries. I'll suggest my own. Consider a PP valued at $400,000, so $100,000 in cash with $20,000 in each of five rungs of a five-year treasury ladder, currently all yielding about 1.6%. The investor is in the accumulation phase and adds $500 every month. If interest rates suddenly spike to about 5% (gains of 3.4%-ish) -- after a terrorist attack, a state government default, or surprise presidential election result** -- and we approximate the dollar effect to be "duration multiplied by percentage change," then the one-year treasuries would decline by about 3.4% (maybe $700 of $20,000) and the five-years by about 17% (maybe $3400 of $20,000). An emergency strikes and this investor needs $20,000. Cashing out the one-year treasuries would come with a loss of $700, but that would be made up in a month or two with earnings from employment. If the emergency is for $100,000, then I suggest taking the money wisely from the portfolio as a whole## and not necessarily from the four- and five-year treasuries. With that spike in interest rates, 30-year treasuries would surely suffer badly, but maybe stocks and gold would be doing OK. Paying 10% capital gains tax (or maybe 0%) on the sale of $20,000 of stocks (maybe only $10,000 of which is capital gains, so $1000 in tax -- covered by two months of work) would be better than locking in a loss of $3400 when selling those five-year treasuries. The accumulation-phase PP investor should have options to weather a storm without having to resort to selling depreciated five-year treasuries.

**I suspect some of these surprises might cause investors to buy treasuries and lower their yields; feel free to consider a more appropriate disaster.

##Taking $100,000 from cash alone would necessitate rebalancing the whole PP, resulting in a similar tax effect as withdrawing equally from each of the assets.

[jhogue]

Pet Hog,
I disagree with your assumption that “someone in the accumulation phase has greater risk-tolerance” and therefore can be (ought to be?) more aggressive with their investments.

Consider a couple of real-world examples:

Example #1. 52 year old female (divorced, with 3 kids) came down with brain cancer. Got fired from her long-time nursing job because she could not work any more. Had to liquidate IRAs and 403b to meet monthly mortgage payments and medical bills before she died at age 56. I would not have suggested that she invest in 5 year CDs- or 5 year T-bills. Would you?

Example #2. 40 year old male working in the red-hot real estate market in Las Vegas before the financial crisis of 2008-2009. Lost his job when the local construction industry abruptly collapsed. Could not find another job in the area, and with his own house now under water, he stopped making mortgage payments. He subsequently lost the house, but not before his wife divorced him and took 50% of his retirement funds as well as alimony payments. I would not have suggested that he invest in 5 year CDs- or 5 year T-bills. Would you?

To be sure, not all emergencies are strictly financial in nature. Nevertheless, these examples illuminate why safety and liquidity must come before yield, particularly in Cash.

[jhogue]

EE bonds can be redeemed for more than their nominal value after one year. 5 year CDs cannot.

Which would be better in a really bad situation?

Snowing like hell in Minnesota. How is the weather in Chicago, Pugchief?

[Pet Hog]

Pet Hog,
I disagree with your assumption that “someone in the accumulation phase has greater risk-tolerance” and therefore can be (ought to be?) more aggressive with their investments.

Consider a couple of real-world examples:

Example #1. 52 year old female (divorced, with 3 kids) came down with brain cancer. Got fired from her long-time nursing job because she could not work any more. Had to liquidate IRAs and 403b to meet monthly mortgage payments and medical bills before she died at age 56. I would not have suggested that she invest in 5 year CDs- or 5 year T-bills. Would you?

Example #2. 40 year old male working in the red-hot real estate market in Las Vegas before the financial crisis of 2008-2009. Lost his job when the local construction industry abruptly collapsed. Could not find another job in the area, and with his own house now under water, he stopped making mortgage payments. He subsequently lost the house, but not before his wife divorced him and took 50% of his retirement funds as well as alimony payments. I would not have suggested that he invest in 5 year CDs- or 5 year T-bills. Would you?

To be sure, not all emergencies are strictly financial in nature. Nevertheless, these examples illuminate why safety and liquidity must come before yield, particularly in Cash.

I wouldn't consider either of these unfortunate people to be in the accumulation phase any more. Without jobs and without insurance and without a home I think it's more likely they are in the drawdown phase. Perhaps they shouldn't be in the PP at all. Go to 100% savings accounts. But if you had asked me to give them advice before their misfortunes occurred, I wouldn't have had a problem suggesting five-year treasuries because they haven't done poorly recently. That is, there hasn't been a big spike in yields, as far as I can recall, in recent years. Also, please note than I am not saying invest 100% of your cash in five-year treasuries. If you do hold five-year treasuries (and, personally, I don't), I would suggest holding them only as part of a ladder while also keeping an emergency fund (in or out of the PP) of something more liquid.

A couple of other points. First, I didn't say anyone "ought" to be more aggressive, just that having a job and accumulating means that you can be a bit more risk-taking if you want to. And if that risk involves extending a treasury ladder out from three years to five -- well, that's not really that much extra risk, is it?

Second, we are all PP investors on this forum. We don't like risk. I lost a lot of money, too, in 2000-2002 and in 2008-2009 and I wish I had been in the PP then -- with any type of 25% cash strategy!

[drumminj]

EE bonds can be redeemed for more than their nominal value after one year. 5 year CDs cannot.

I'll challenge this. If the CDs have a 6month interest penalty (which the CDs I mentioned that started this thread do), then you can break them after a year for more than their nominal value. You'd get your money back, plus 6 months interest. Which, if the interest rate is twice what you can get with shorter-term instruments, you come out even.

I think you can make a safety argument against CDs (relies on a party not as credit-worthy as the US government, though arguably FDIC has the treasury/fed reserve behind it), but I don't see that your liquidity argument holds up here.

[mathjak107]

today pretty much a good prime money market from any of the major brokerages is fine .with the restrictions on them today the issues of the past are gone .

i put this about on par with buying gld , iau , etc for the gold portion . in the end they will likely be just fine ....

i already owned a money market that broke the buck and was closed back in 2008 .. but the stuff they were allowed to buy back then is no longer the case .

the same money printers that guarantee treasuries will be the same printers that guarantee other gov't bonds and also fdic payments to banks .

[dualstow]

i already owned a money market that broke the buck and was closed back in 2008 ..

You're in good company.

[sophie]

Yes, that's the problem - when you say you're in the accumulation phase, you're in it Right Now, but maybe not a month from now. All it takes is getting laid off or disabled for you to be shot straight into the withdrawal phase. In addition to all the poor souls in 2008-2009 who defaulted on their house payments after getting laid off, check out the threads on the Money Mustache forum with titles like "I lost my job now what?" - this stuff happens all the time. So I don't really subscribe to the idea of different investment structures for the accumulation vs withdrawal phases.

MangoMan - I don't get the concern with I bonds, but I hear you on the EE bonds. I personally haven't bought any of those. Note though that if I lost my job tomorrow and my living expenses didn't change, it would be over a year before I'd get around to the savings bonds. And some of mine are over 5 years old, so no penalty at all for selling. I'd almost certainly have to rebalance into cash before I got down to the ones less than 5 years old.

[boglerdude]

> At today's rates on I bonds, there are just more desirable ways to invest cash

Which are? ibonds are risk free 2.22%

[jhogue]

I would like to oblige Pugchief with better fixed rates on I-bonds, but neither our super-low yield curve nor the current crop of Trump Treasury officials support that. In fact, I am pessimistic about the future of the US savings bonds program, given the Goldman Sachs background and outlook of Treasury Secretary Steve Mnuchin. Encouraging the Great American public to save more just isn’t on his radar.

With regard to EE bonds, I still think they are a great buy for specific liability matching needs, such as saving for college or funding early retirement. Of course, before buying EE bonds, investors should max out all other tax-deferred accounts first (401k, 457b, Roth IRAs, and I-bonds). Buying EE bonds also takes a long-term view and patience—qualities that do not characterize either baby boomers or millenials.

[jhogue]

So, for that miniscule difference, why bother taking the credit risk of the CD-issuing bank PLUS the credit risk of the FDIC?

If all you really care about is a higher interest rate, I am sure there must be some really red-hot CD rates from Venezuelan banks right now. Adios, amigos!

[sophie]

> At today's rates on I bonds, there are just more desirable ways to invest cash

Which are? ibonds are risk free 2.22%

There are 5 year CDs available now paying more than that.

Can you share? The highest 5 year CD that I can find is paying 2.15%. This is effectively much worse than I bonds for me, as they are subject to state and local taxes. I bonds are not PLUS they're tax deferred. This is another substantial benefit for me...potentially another 10% or greater tax savings on top of the 11% with state/local.

Also, you pay the same 3 month interest penalty (and possibly more) with a 5 year CD if you break it early. So I'm not quite following your logic here? Also, all CD agreements have a little gotcha buried in them to the effect that the bank can deny or delay your request to cash in a CD before maturity. Treasury direct has no such limitations on selling an I bond.

The one advantage of a CD is that if inflation rates drop, I bond interest will drop accordingly but the CD will remain constant. Of course it works the other way too, if interest rates rise. And of course you can break the CD in year 1 if you choose to. But if you're buying a 5 year CD (or an I bond) you hopefully have at least a year's worth of expenses socked away in a more liquid form, such as a savings account or money market fund.