I'm calling this post a squib, because I want to work fast, and jargon won't be explained. MMF's have been on my mind lately, as has cash management generally. So I pulled books off my shelf and went reading. Bogle suggests that MMF's have two key characteristics: 95% of holdings have to be “of highest quality” and AWM can't exceed 90 days. Most board members know they can beat the yield of MMF's, even playing by those rules, and are doing so with their TD accounts, raising this question: Are MMF's superfluous to a well-managed portfolio?That's a can of worms, right? But let's go exploring. MMF's can access a wider range of underlying than can investors. (Read your prospectus.) The 90-day rule also means that investors are restricted, for all practical purposes, to T-bills for their underlying , due to transaction costs even if they could access the same underlying as institutions. Bogle also suggests that AWM's for MMF's typically range from 45 to 75 days. But is that what you see when you go to www.imoneynet.com and poke around?Why the observed departure from “normal” ranges? A rising interest-rate environment, right? But a couple of funds are long-dated outliers compared to their peers, and some are shorter-dated than investors can match. (They're trafficking in overnight paper & repo's.) But a plotting of yields versus AWM's suggests that departing from the norm doesn't incur yield penalties. Some managers are marching to their own drummers with respect to AWM's, but they're keeping up with the crowd with respect to yields. This suggests that an investor running what amounts to their own MMF's can make similar choices if they have a disciplined view of the market and a disciplined method of implemented that vision. In other words, as I always argue, if you know WHY you're doing WHAT you're doing, then don't listen to anyone else. Go for it. A couple of posts back, I postulated that interest rates have four stages: basing, rising, topping, and falling, and I compared the 26-week bill against the 13-week bill and asked what penalty is incurred by staying long in a rising stage. (In basing and topping stages, longer is better, obviously.) A review of the historical data I could find suggested the penalty was negligible and that an “all-weather/all-stages” strategy of sticking with the 26-bill, rather than tactically dropping to the 13-week bill, was plenty good–enough, given that one of the goals of money management is simplicity of effort. What's the AWM (Average Weighted Maturity) of a 26-week ladder? Close enough to 90 days that it falls within the rule. What's the credit quality of any Treasury ladder? The highest, right? If you build T-bill ladders, you're running your own MMF (Money Market Fund). Your AWM is an outlier 90 days if you're working with 26-week bills exclusively, but you're beating the fundies, because you're avoiding their expenses, which is always a fun thing: to do to beat the pros at their own game. Suggestions: historical data on T-Bill auctions and yields is available from the TD website in a format that can be imported into Excel. The data requires massaging to be useful, but it can be done. Likewise, the data that www.imoneynet.com makes available for the top 12 funds in the categories of “prime”, “government”, and tax-free” (for both retail and institutional versions of the funds) can also be grabbed and imported into Excel for scanning, sorting, statistical analysis, charting, etc. Why do it? To better understand your benchmark, which is the fundies, and to make better portfolio decisions about how to allocate assets, one task of which is deciding how to coordinate your bond fund (which I'm assuming you created by buying your own bonds) with your MMF. Obviously, in your own life, you don't have to play by the 90-day rule. But it's a useful disciple to do so, or else you aren't really running a MMF. You're running a very short bond fund, which serves a different purpose than a MMF, which is meant to be both safe AND liquid. Now some practical considerations. A 4-week T-Bill ladder costs $4k to set up; a 13-week, $13k; a 26k-week, $26k. If your goal is to never be more than 7 days away from a couple thousand cash –-as an emergency fund— then running two 26-week ladders ties up a lot of capital that might be better deployed elsewhere. And running three or four 26-week ladders is going to kill portfolio returns, or at least create a lot of friction. However, if you run one 4-week ladder and one 26-week ladder, you are never more than 7 days away from $2k, never more than 28 days from $8k, and have $30k you can unwind as bills mature. I don't know your individual circumstances, but $30k sounds like good-sized emergency fund to me. (Actually, $4k is where I'd argue that everyone should begin. If you're not rolling at least one 4-week ladder, you're cutting things too close.)And I'd also argue –-if the opportunities are available, which isn't always the case-- that if you've got much more than $30k tied up in cash, you're sacrificing potential return. But that's going to be a personal decision, and I'll freely confess I'm cash-heavy right now, because 6-months T-Bills look way better than messing with longer-dated or lesser-quality bonds. The 6-month T-Bill is a “sweet spot”, so the structure of my own personal MMF is getting distorted, as I buy more 4-week bills than cash-needs dictate and I as dump more money into the 26-week than I “should”. But that's is also a reality of managing money and building portfolios: what looks good on paper, and can be argued for from theory, can't always be achieved in practice. Thus, you do what you can with what you've got. But you also try to understand what you're doing as best you can, and there's 708-page book on money markets sitting on my shelf that might give me answers to some of the questions I'm asking myself. (And if I'd stop posting, I'd have time to read it. LOL. But if I don't post –-which is a chance to work out ideas— then I don't have a need to read or the pleasure that comes from doing so.) “No rest for the wicked, and the righteous don't need any.”, as my Dad used to say.CharliePS The terms "cash" and "cash-equivalents" tend to get used interchangably.Yeah, you spend "cash" at a grocery store, but you'e really spending "currency" even if you're using a credit card. "Cash", as I use the term and is commonly used in the context of a portfolio, is all of your short-term, interest-bearing vehicles that carrying no risk to nominal principal. If nominal principal can be put at risk, then you've selected an "investment", which is a vehicle that offers an upside, because it has a downside. Your profitability comes from the pockets of the opposite side of your trade (and every investment is also a trade), just as his profits will come from your pockets, and the "house" will take a cut of the action, coming and going.
Charlie,I doubt a MM can beat a T-bill ladder for savings/liquidity purposes, provided, of course, you live in $1000 increments.I keep a small amount of money in MM at brokerage to cover incidental expenses, if they come up, and during brief transition periods (although I am market timing this year's Roth and leaving it in MM until after September in the hope stocks will be lower than January). I suppose the Roth money could have been done with T-bill Auctions, but the difference would be about a 6-pack.What I do use an MM for is banking. I almost never use regular checks anymore, and the MM is where paycheck gets deposited, bills and credit card gets paid, big checks for things like taxes get written. None of this is in $1000 increments.I would certainly think anyone wanting liquidity for substantial amounts of cash, even an emergency fund (mine is in a longer term ladder) would want to do T-bills. But they can't be done in change. (I know you buy T-bills at a discount to the $1000 face value at maturity, so you aren't actually buying in $1000 increments.)
Good job, Loki. You spoke to my question ("Are MMF's superfluous to a well-managed portfolio?") and explained why they aren't, that “commercial” MMF's do have a possible role to play.In fact, now that you call my attention to it, I remember why I have an account with GMAC Bank, just to handle the "less than a thousand stuff”. They offer free checking and a good-enough interest rate on small cash. Their minimum to earn interest is a $500-dollar balance, so $501 becomes the minimum I carry, with levels above that getting routed into Treasuries in $1,000 increments. But the broader question still remains: What is a Money Market Fund? How are they constructed? How are they managed? You're old enough to remember when Donaghue ruled the Money Market world with his fund ratings, and maybe you even subscribed to Fosbeck's "Income Newsletter", or whatever it was called. But my impression these days, as that obnoxious cigarette commercial used to say, is that "We've come a long way, Baby." In the booming late '90's, investors spurned cash, and they still do. Everyone wants more yield, and rightly so. (If it's there for the taking, then why not?) But MMF's, either the prepackaged, off-the-shelf one or ones that an investor can create for her or himself, do have role to play, which has almost as much to do with their simplicity and convenience as their yields. In the “bad, old days" of $10,000 T-bills, running a Treasury ladder was beyond the means of most investors, and MMF's served a genuine purpose. But I question that nowadays.My preference, always, is “to roll my own”, to identify my competition and then try to beat them, and my “hidden agenda” is always this: if I can learn to beat them at the easier stuff, then I can learn to beat them at the harder stuff, in a logical and pedagogically-appropriate progression. That's probably my intended “message” in that post, that this stuff is doable, that any advantage so-called experts can claim for themselves in any financial area is temporary and is easily overcome by a determined competitor, which is why I like to go back to the roots of the idea on which the Motley Fool was founded: challenging conventional wisdoms and having a bit of fun and profit in the process.If Bogle's observation is correct, and I have no reason to doubt so, that the “normal” range the Average Weighted Matruity of MMF's is 45 to 745 days, what happens when an investor pushes his AWM to 90 days and then holds it there, no matter the stage of the interest-rate cycle? Obviously, the strategy can be done without violated the “game rules.” But no one seems to do it. Why? How much of the operating expenses of a MMF are due to their trading for what they hope are a few bps of yield, instead of foregoing those possible returns for the sure returns of reduced expenses? You've seen the published expenses ratios of MMF's. They're obscene. True, running a good MMF is no easy task. The money market is not simple, and the competition is fierce. But I have to wonder, as I always do, how much of those expenses is simply collusion? How much of those expenses is simply an unwillingness to break ranks and make available to investors the best product at the cheapest costs?The interest that brokers pay on free cash sucks majorly. If they did nothing but pool the cash of their customers and buy 4-week T-bills with it, they'd likely retain sufficiently liquidity for themselves, and investors would be achieving much higher returns. If they went to the default benchmark for risk-free return, the 13-week bill, then so much the better. My suspicion, however, is that investors' free cash serves the same function that deposits serve for a bank. It's an opportunity to obtain cheap money and then put it to work dearly. Thus, the goal of brokerage firms and the goal of MMF's isn't to make things better for investors, but to enrich themselves. Investors are a secondary consideration. They'll get thrown a bone or two. But they don't receive an equal share of the profits. This is why I make every effort I can to cut the financial middlemen out to my life, and why I spoke to the topic of MMF's, urging everyone to ask themselves if they, in their own lives and investing, couldn't be doing better than they are, in some easy and straight-forward ways.Thanks for the input, Charlie
A question:What kind of rate are you expecting to get from a treasury bill ladder?Emigrant Direct is showing 5% and there's no thought involved.Andy
"A question: What kind of rate are you expecting to get from a treasury bill ladder? Emigrant Direct is showing 5%, and there's no thought involved."Andy,In what sense is there "no thought involved" in selecting Emigrant Direct?You made a choice, you did some thinking, because there were --and are-- alternatives. And when ED falls behind in the interest rate game, as they did last Spring, do you "ride it out", hoping they will catch back up again, as they've done recently? Or you do figure out for yourself that you are paying very dearly for a putative ”convenience”. If you don't want “to think”, then don't. That's your choice. But it's not an admirable one, or a profitable one. It's a foolish one, not a Foolish one.As to the yield a Treasury ladder might provide, that's for you to figure out for yourself. I provided links to the relevant sources, and there's been beaucoup discussion of the CD & MMA's –-NB: ED is a MMA, not a MMF—versus T-Bills. Get yourself up to speed by doing a bit of reading. The factors involved depend on one's tax situation. But since I happen to know your state tax rate, which is 9%, I can assure you that you are making a very unthinking choice in choosing to hold money at Emigrant Direct rather than running 4-week ladders. The difference amounts to 40-45 basis points, depending on the method used to calculate an APY/APR for T-Bills, which then has to be adjusted by the impact of taxes so that apples-to-apples comparisons are being made. If you think that is a good deal, then go for it. But anyone who is running a T-Bill ladder can tell you how little work is involved: a couple of mouse clicks for another 3/8's to 5/8's of a point of yield, depending on the underlying. Lastly, to the two partisans who flagged his post with recommendations, I say this. If Andy truly doesn't understand what's going on here, then his question was sincere and deserves to be answered. But by flagging his post, you are interfering in the discussion process. Posts that are truly important are the ones that deserve recommendations. A two-sentence post deserves an answer, but not two recommendations. I dare you to identify yourselves and defend your actions. Charlie
What kind of rate are you expecting to get from a treasury bill ladder?A ladder of 6-month Treasury Bills would yield about 5.297%, a ladder of 4-week Treasury Bills about 4.936%. (See http://wwws.publicdebt.treas.gov/AI/OFBills) Someone more skilled at Bond math would have to convert this to APY.If we assume a federal marginal tax rate of 25% or 15%, state marginal tax rate of 9%, in a taxable account we have the after-tax returns of:Instrument Rate After Taxes After Taxes----------------- ------ (25% fed, 9% state) (15% fed, 9% state) ------------------- -------------------6-month T ladder: 5.297% 3.97% 4.50%4-week T ladder: 4.936% 3.70% 4.20%Emigrant Dir. mm: 5% 3.30% 3.80%Charlie could punch holes in the above math (converting to APY, for example), but you would still see that the different tax treatments can make some lower-yielding instruments be better than a little higher yielding instrument, in this case, direct debt of the federal government being exempt from state and local taxes, but interest on bank deposits generally being taxable at all levels.While there is a little work in getting a Treasury Bill ladder set up, once it is in place, on TreasuryDirect it can be self-sustaining (scheduling recurring purchases to occur when the Treasuries mature), and the difference between the purchase price (for Treasury Bills, is at a discount to face value) and maturity value (at face value) is the interest one had earned.Where this fails to be a good comparison to, say, allowing CDs to roll into new CDs, is that Treasury Bills are all in units of $1,000; one can buy a 4-week Treasury at $996.23, at maturity it is worth $1,000.00, and if at that time the rate is the same, the new purchase price is again $996.23, leaving $3.77 to deal with. So it is those odd amounts (the interest) that we then have to figure what to do with. (Well, that could go towards the price of purchasing the next rung in the ladder, but until then it isn't earning interest if left at TreasuryDirect.)Is the increased interest after taxes worth the reduced liquidity and increased work on getting this set up? Probably not for small amounts, but at some point it could be worth it. For example, in the case of 6-month Treasury Bills, each $1,000 rung would give me $7/yr more after taxes than that same $1,000 in Emigrant Direct. At some point it could add up to real money.I doubt that one would want to do this with all of one's money, e.g., one's "emergency fund" should still have a component that is quite liquid (and usually one forsakes yield for liquidity) so there will always be a place for a money market account or a money market fund; but if one has a large emergency fund it may make excellent sense to deploy a good part of the emergency fund in something a little less liquid (such as a Treasury Bill ladder or a short-term CD ladder, or, in my case, in the past I have purchased Savings Bonds) so some of the money could have a higher yield than in typical money markets.
Instrument Rate After Taxes After Taxes----------------- ------ (25% fed, 9% state) (15% fed, 9% state) ------------------- -------------------6-month T ladder: 5.297% 3.97% 4.50%4-week T ladder: 4.936% 3.70% 4.20%Emigrant Dir. mm: 5% 3.30% 3.80%
Lastly, to the two partisans who flagged his post with recommendations, I say this. If Andy truly doesn't understand what's going on here, then his question was sincere and deserves to be answered. But by flagging his post, you are interfering in the discussion process. Posts that are truly important are the ones that deserve recommendations. A two-sentence post deserves an answer, but not two recommendations. I dare you to identify yourselves and defend your actions.Good night! Charlie! Calm down!My question was a valid one. And it was a question, not a challenge.The answer I got from both you and Mark is that the difference is around a half a percent. And for, say, $25,000, we're talking a bit over $100 a year.So with that answer, I'll think about it a bit more. If the answer was $12, I would say, "don't bother".But in either case, I like to quantify ideas. Someone says, "Wow, that's worth a lot of money." I always want to know, "What's a lot of money?"And that was the reason for my question.As for the recs I got, they were probably people who wanted the same question answered.Andy
What a silly topic to fight about!One of the things we've learned about banks and credit unions is that sometimes they offer yields that are above "market rates," as represented by other banks and credit unions or by Treasuries of similar maturities (T-bills in the case of Money Markets and Savings Accounts).When it comes to things like 5-year CDs, if you can get yourself and extra 50 basis points by opening a new account at somewhere with a high rate, it is probably worth the inconvenience. You also know you are locking the rate in for 5 years.The problem with rates on savings accounts and money markets that are out of line with competitors is they tend to change back to being in line once customrs have been attracted (so do longer CD rates, but once you've got yours it doesn't matter). So, if you want to find the best money market or savings account rates, you will probably need to do a lot of switching around.The convenience versus best yield issue mostly depends on how much money you keep around in short term assets. 25 basis points on $10,000 is $250 a year.
Instrument Rate After Taxes After Taxes----------------- ------ (25% fed, 9% state) (15% fed, 9% state) ------------------- -------------------6-month T ladder: 5.297% 3.97% 4.50%4-week T ladder: 4.936% 3.70% 4.20%Emigrant Dir. mm: 5% 3.30% 3.80%I don't know about y'all, but I try to take a brief look each week at the options available to deploy my "sitting cash" (and part of my efund for that matter). In my case, with a 0% state tax, it is easier to make the comparison with just a brief look and minimal calculations. I also take convenience into account as I refuse to be in a situation where I have to make deposits and mail out checks every week for the various CDs out there.So, last week, I stopped funding my 26-week treasury ladder because *my* bank offered me a 5.5% CD. I also didn't roll over my 4-week bills at 4.936%, and instead deposited the money into my emigrant direct account at 5.05%. Next week, I may do something different - it all depends on the rates available to me at the time.
The convenience versus best yield issue mostly depends on how much money you keep around in short term assets. 25 basis points on $10,000 is $250 a year.Oops!! Make that $25, which makes a lot more sense.
Us libearl arts majors occsionaly need to have things spelled out for us. .25% or 25 beeps equals:100 = .251000 = 2.510,000 = 25and so onjack
Us libearl arts majors occsionaly need to have things spelled out for us. .25% or 25 beeps equals:100 = .251000 = 2.510,000 = 25and so onHey, what's an order of magnitude or two. To paraphrase Tom Lehrer, if the idea sound good, it doesn't matter if you get the right answer. (As you can tell, I'm preparing my run for President.)
I always will rememberit was a year ago November . . .Hurl that spheroid down the fieldand fight, fight, fight(but don't be rough though)jack
So, last week, I stopped funding my 26-week treasury ladder because *my* bank offered me a 5.5% CD. I also didn't roll over my 4-week bills at 4.936%, and instead deposited the money into my emigrant direct account at 5.05%. Next week, I may do something different - it all depends on the rates available to me at the time. Well, this week, even though the 4-week treasury bill rose to a tiny bit over 5% -28-DAY 07-27-2006 08-24-2006 4.920 5.007 99.617333 912795XS5I will still not purchase them and my 4-week cash will be placed with emigrantdirect again at 5.15%. 26-week "cash" can still be placed in bank CDs at 5.5%. Next week it might be different.
I'm new here and looking for a little clarification. After reading all the posts in this topic, my basic instinct seems to be confirmed.I'm a few years from retirement and in the process of reorganizing my IRA. From everything I read, it seems that it would be prudent to have some part of it in short term bonds for their 'safety.'What's confusing me is that bond funds, individual high quality bonds, money market funds, and short term CD's all seem to be returning just about 5% (even after fund expenses). A lot of research and a little bit of risk, in other words, might at best return only a few basis points more (and possibly less), a fairly insignificant amount on the approximately $15,000 that I'm talking about.Is there any real reason for me to forego the liquidity of the MMF I'm currently in, or the FDIC protection of a CD in favor of bonds? It appears not, but since I never really thought about bonds before, I'm wondering if there's something I may be missing.Thanks for any help you can give.
Loupi,You have a pretty good handle on the current market conditions for "safe" vehicles. The return really isn't there to go long or to go corporate, we aren't being compensated for the time involved or the risk. Many folks here have constructed CD ladders by shopping around. Others are woking various Treasury issues. The simplest to run seems to be to stay short with a Treasury direct account, something like a 26 week ladder. With 15k you could stagger every other week, the math isn't perfect put it would ladder you none the less. The advantage of Treasury issues is really the savings on local and state taxes. If you aren't in a state that has an income tax system CD's seem like the next best bet. With careful shopping and a willingness to open accounts and manage accounts all over one can also set up a reasonable CD ladder. Ladders buy you some liquidity but not nearly the same as a MMF or a MMA. It really depends on how much liquidity you think you need. If you have an e-fund already set up beyond this 15k a ladder of some sort would be a good choice.jack
Jack,Thanks for the reply.Lou
loupi3,I authored the squib, so I should comment. You correctly note the fact of current yield comaparabilities between a wide variety of debt instruments. That situation doen't always obtain. Nor is it possible to predict (or even forecast) its persitence. Thus, a person has to make the best guess they can with current information. A suggestion: dig a bit deeper in the matter and you'll find that the situation isn't quite as you describe it. Right now, the easy and safe stuff is trouncing what normally offers higher yields on both an absolute and a risk-adjusted basis. The why's are complex and maybe even unknowable. Thus, one has to accept what one sees and act appropriately. When the situation changes, and it will, then change with it. Meanwhile, do what makes the best sense to you in light of your own individual situation. Charlie
I'm a few years from retirement and in the process of reorganizing my IRA. From everything I read, it seems that it would be prudent to have some part of it in short term bonds for their 'safety.'What's confusing me is that bond funds, individual high quality bonds, money market funds, and short term CD's all seem to be returning just about 5% (even after fund expenses). A lot of research and a little bit of risk, in other words, might at best return only a few basis points more (and possibly less), a fairly insignificant amount on the approximately $15,000 that I'm talking about.Is there any real reason for me to forego the liquidity of the MMF I'm currently in, or the FDIC protection of a CD in favor of bonds? It appears not, but since I never really thought about bonds before, I'm wondering if there's something I may be missing.This discussion has been about short term T-bills, or their equivalents in liquidity and safety (FDIC insured short term CDs or Money Markets). The question is where to get the maximum yield for money you want to keep liquid (available soon, if not immediately).Short term bonds/fixed-income is for people who want to keep substantial amounts of money liquid (not just enough to pay the bills). Mostly this is for people who are active market players waiting for the right investment to come along. Others are convinced interest rates will be going up and want to wait (which doesn't hurt too much at the moment, since the yield curve is flat, unless they guess wrong and rates go down). For others, liquidity is important because the money is for a downpayment or an emergency fund.We've also been talking about taxable accounts, not IRAs (you can't do T-direct for an IRA, though you can bid at Treasury auctions if you have an IRA brokerage account).In your situation, you are probably looking for a fixed-income/bond allocation long term. The only reason for getting short term bonds/CDs/money Market is if you are convinced rates are going up, or if you want to build a 5-10 year ladder gradually and want to keep the money somewhere as you build that ladder.Bond funds are a different animal. If bond funds are returning 5% (presumably 5% yields) that doesn't mean you will get that in the long run. You can't hold bond funds to maturity and get your 5%, as with a 5% CD or Treasury. You are dependent on interest rates holding steady. If interest rates go up, the bond fund will return less than 5%. If rates go down, you do better than 5%. I don't know where rates are going in the near future, but I still wouldn't touch bond funds long term, with debt levels where they are.
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