Halls of Shrewd'm / US Policy❤
No. of Recommendations: 1
I have nearly 95% of money in 3 month US Treasury Bills now. With the current situation is there a lot of risk?
No. of Recommendations: 2
I too have moved much of my funds into 1-month and 3-month T-bills. If you are a US person I think the risk is about as low as one can get. Jim has discussed some of the ways that non-US persons can be mis-treated and I won't repeat them. The current sell-off in the bond market is causing long-term rates to go up, which is bad for the USG and those attempting to re-finance debt, but as the 3-month bills are renewed their price will respond to changes to the yield curve. If you could get by putting funds into FDIC-insured bank account(s) that might be a skosh more safe, but you are limited to $250k per SSN per account, which may not be enough to protect all your assets. If we get into a hyper-inflation situation then maybe converting dollars to (mumble) makes sense, but which other currency? It is a scary new world.
Rgds,
HH/Sean
No. of Recommendations: 1
You might want to keep some of your funds in relatively "safe" dividend paying consumer goods stocks like Pepsi, Colgate, P&G, Hersheys. You may get an yield close to market and won't miss out entirely on an equity rally.Even in a recession people brush their teeth and wash their clothes.
And tax rates on qualified dividends would also be lower for US investors.
No. of Recommendations: 0
I have significant funds in the money market funds SNVXX and SGUXX.
Until recently I had no reason to consider their safety or their advantages/disadvantages compared to owning 3 month t-bills, it's just not an issue I've thought much about. I use them to back some put writing.
Any thoughts? Schwab has an automatic rollover feature for T-bills, so wouldn't need to do that manually.
No. of Recommendations: 3
I am at the "dire warning" end of the spectrum, but I think that there is no particular risk to T-bills or bonds for US persons.
For non-US persons the story may be a bit different. Google recent articles mentioning "treasuries user fee".
US-person or not, money market funds are very much higher risk than T-bills, for a host of reasons.
Jim
No. of Recommendations: 0
US-person or not, money market funds are very much higher risk than T-bills, for a host of reasons.
Can you expand on this please? Is it in terms of T-Bills are simply safer, or are there warning signs of money market funds at risk to break the buck?
Appreciated,
IP
No. of Recommendations: 4
US-person or not, money market funds are very much higher risk than T-bills, for a host of reasons.
...
Can you expand on this please? Is it in terms of T-Bills are simply safer, or are there warning signs of money market funds at risk to break the buck?
Structural issues.
First, there is counterparty risk. A lot of money-market funds invest in short term paper of companies, not the same as the Fed. They have to reach for yield (= a bad thing) to cover their costs. Particularly true for anything but the very largest MM funds, as running costs are not proportional to size.
Second, there is structural risk. A lot of money-market funds (and "short term government bond" funds) don't invest only in what their name seems to imply. Some pretty dodgy stuff and complicated derivatives in some of them.
And lastly, systemic risk. If the fund has a problem, or the fund's sponsor, or your broker, whatever---if the poop really hits the fan, T-bills in your own name would be by far the safest (other than devaluation risk). T-bills at your broker slightly less so, but still better than money market.
To make matters worse, often the money market funds offer lower yields. So, more downside and less upside.
Jim
No. of Recommendations: 1
Appreciated Jim. For years now, the market has been very complicated for this very vanilla investor at what is a risk off time in our lives.
IP
No. of Recommendations: 5
For years now, the market has been very complicated for this very vanilla investor at what is a risk off time in our lives.
Well, the risk of money market funds is admittedly low, but T-bills is lower, so why not?. We are living in interesting times, and I'm not speaking of tariffs.
Fun kinda-humorous-but-kinda-true article at the Financial Times, from which I selected a few sentences
"Advice to shell-shocked Americans from Brexit Britain
Britons are skilled at navigating the humiliation unleashed by political and market chaos — allow us to give you some tips
...
The foreign policy, the deportations, the assaults on free speech and the rule of law are horrifying. But the economic self-harm is, to us, fair game for taking the mickey. Horrified Americans, I am here to tell you: I feel your pain. Britons know what you are going through, and we are skilled at navigating this humiliation. Allow me to give you some tips.
...[a few examples of the humiliation rational Brits have faced resulting from Brexit]...
Third, without wishing to stereotype too much, Americans are generally natural optimists, plus history has conditioned them into thinking the mighty US of A will always spring back, stronger than ever. You need to understand this is not necessarily the case. You’ve had a good run at operating the world’s most important currency, most vibrant stock market, most crucial bonds. This is now in genuine peril. We’re not just joking with you. Be humble. Britons had to learn the hard way that we just don’t matter that much and now, maybe you do too."
Jim
No. of Recommendations: 1
There are money market funds which only invest in US govt debt, e.g VMFXC which yields 4.23%.
https://investor.vanguard.com/investment-products/...Or an ETF VBIL which invests in 0-3 month T-Bills, which yields 4.21%.
https://investor.vanguard.com/investment-products/...There is virtually zero credit risk assuming US government doesn’t default.
Even if bond yields soar, these won’t take much principal loss, due to very short term maturities.
The main risk is from inflation and taxes, if you plan on holding for a multi year period. It is almost certain to give you a negative real after tax total return.
For longer term investments you’ll inevitably need to hold equities, to get a positive real after tax total return.
No. of Recommendations: 7
There are money market funds which only invest in US govt debt, e.g VMFXC which yields 4.23%.
https://investor.vanguard.com/investment-products/... ...
https://investor.vanguard.com/investment-products/... But read your links.
The first one isn't a pile of T-bills.
About a third of the fund is repo agreements. Another third is not in T-bills but in "US government obligations", which generally allows inclusion of agency securities which do not have the stated guarantee of the US government, but merely assumed to behave as if they do. Plus of course there are certain layers of risk introduced merely by the fact that it's a fund.
The second fund is allowed to have up to 20% in stuff other than T-bills, provided management thinks they have "economic characteristics that are substantially identical", and "may also invest in debt securities that are not included in the Index, cash and cash equivalents, or money market instruments, such as repurchase agreements and money market funds (including money market funds advised by the advisor)."
These are better than some, but money market funds are generally sausages trying to look like meat.
If you want the safety of T-bills, buy T-bills. Or if you're taking on various additional risks, be aware that you are doing so.
Jim
No. of Recommendations: 0
would it make sense to now switch to 2 year Treasury bonds from the 3 month Treasury Bills?
No. of Recommendations: 2
would it make sense to now switch to 2 year Treasury bonds from the 3 month Treasury Bills?
For you or me to answer that presupposes we know more about the future economic trajectory than anybody (everybody) else, which at least for me certainly isn't true. It's a coin toss.
The best advice is to think personally. If the 2 year yield is currently high enough to meet your investment goals, but wouldn't be if the yield were somewhat lower, then locking in might make sense.
Bear in mind that the 2 year mark is the term that is most extremely affected by changes in short term rates. Higher because inflation is about to spike? Lower because the economy is about to fall off a cliff? Beats me. I do not envy Mr Powell his job. But I would wager that his replacement will be 100% in favour of extremely low rates and high inflation, since that is what is desired by the guy who picks the person for the job.
Just to mess with your thinking, consider TIPS, any duration. No inflation risk, and the yields have popped more than treasuries.
Jim
No. of Recommendations: 0
more information now
have most of my money in 3 month Treasury Bills now with 2 months to go
If I feel interest rates will be going down, should I sell on open market and buy 2 year bonds?
No. of Recommendations: 0
Sorry, did not see Jim's reply before.
No. of Recommendations: 0
Just to mess with your thinking, consider TIPS, any duration. No inflation risk, and the yields have popped more than treasuries.
Jim
--------------------------------------------------------------------------------------------------------
Wife and I are 84 years old.
Pension and soc sec cover expenses
What type of Tips would you buy
one Year or couple years, or ladder or ETF?
No. of Recommendations: 0
Well, the risk of money market funds is admittedly low, but T-bills is lower, so why not?
Mostly because we are not one of the optimistic Americans referenced in the article, and are keeping our options open while maximizing our portability and doing our research. Buying US debt under the leadership of someone who has a history of and seeming fondness for defaulting on his debt and not paying his bills, has risks of it's own. Worse yet, we are living in a country dependent on those who got us here in the first place, to get us out again. Don't need all of them, at least.
IP
No. of Recommendations: 1
What type of Tips would you buy
I'm not Jim, so take it for what it's worth, but for me Tbills are for preservation of capital rather than return on capital. I am hoping to redeploy the "cash" into Berkshire and/or the rest of the market when it has retrenched sufficiently. Brk.b at $405? Sure would be nice to not be locked into a 2-year Tbill or Tips when that blessed day happens. So for me 1-month Tbills make sense. They respond quickly to whichever direction the Fed takes interest rates. If you aren't worried about getting back into the market and are preserving this wealth for your descendents then perhaps tips make more sense as they also have some inflation protection and you can stop worrying about the market. Really depends on what your investing goals are.
Rgds,
HH/Sean
No. of Recommendations: 6
Well, the risk of money market funds is admittedly low, but T-bills is lower, so why not?
...
Mostly because we are not one of the optimistic Americans referenced in the article, and are keeping our options open while maximizing our portability and doing our research. Buying US debt under the leadership of someone who has a history of and seeming fondness for defaulting on his debt and not paying his bills, has risks of it's own. Worse yet, we are living in a country dependent on those who got us here in the first place, to get us out again. ..Fair enough.
My comment was purely about the two specific alternatives of a T-bill versus a money market fund: there seems to be a relative advantage to the T-bill and no disadvantage to the T-bill, no matter where you live, so that's the one (among those two specific choices) I'd always recommend.
Whether you want EITHER of them, or any US- or US-dollar based asset, is another question. Personally I ditched all of my T-bills and USD deposits and over 90% of my US stocks during a couple of days in mid March, but I don't live in the US, so the risk profile is different. I had more or less assumed that most "US persons" were pretty safe with T-bills and, closer to your point, hostages to the governmental environment and therefore might as well play along. But of course a large country contains a multitude of views on world events. Being wiped out is wiped out no matter where you live, nor how remote the risk.
Interesting column by Chris Murphy, US senator for Connecticut, in today's Financial Times. The gist of it: the tariffs have precisely nothing to do with re-industrialization or the trade deficit or raising tax revenue. Rather, they are entirely about bringing the corporate sector to heel by creating an environment where they must become supplicants to survive, as part of the broader blocking of any group capable of affecting or voicing dissent against him. (universities, students, court rulings, legal firms, civil servants, journalists and media outlets, election officials...). Kind of a strong stance, the sort of thing that might once have sounded like a conspiracy theory, but it's from a senator. If an economic undertaking does not further its purported purpose, it exists for another purpose.
Not sure whether this link is paywalled
https://www.ft.com/content/6d0c25e1-f8e5-43d6-88eb...Jim
No. of Recommendations: 3
Wife and I are 84 years old.
Pension and soc sec cover expenses
What type of Tips would you buy
one Year or couple years, or ladder or ETF?
If your nest egg is big enough that having a good positive real return is not they key determinant, there is much to be said for a ladder. No work. Other than currency devaluation, essentially no risk. Just spend any coupons plus the money from whatever bonds are maturing this year. Buy the TIPS, not a TIPS fund.
However a side note:
I am a big fan of funding one's retirement in two parts to deal with longevity risk: the risk of outliving your money. Too many people handle that risk by spending far less than they probably could, to their detriment.
The two part goes like this:
(a) Pick a ripe old age, say 90, perhaps somewhere around or just after your actuarial life expectancy. Buy some deferred annuities that kick in then. These will be pretty cheap for a given amount of income, since the starting age is so high. Depending on your ages and so forth this might use up, say, 10-20% of one's portfolio.
(b) Spend the rest of your money in a roughly straight line between now and then. Just as your main block of money runs out, that big fat annuity kicks in. You don't have to worry about outliving your money, so you don't have the problem of never getting to enjoy it. This part could be in TIPS. For younger people equities also make sense, since there is enough time that the real rate of return matters.
It's not all that hard to estimate the ratio of money to put into each part in order to get roughly level permanent real income for life, since you can see the annuity pricing in advance. The hard part is that inflation-adjusted annuities at a fair price are pretty much non-existent, so you kind of have to a different amount of non-inflation-adjusted ones. (the ones with a little bit of inflation protection tend to be the worst of both worlds: you're not fully protected, and they charge more than the finite extra benefit they provide). Either just buy more than you need so the inflation merely brings you back down to the target, or buy mostly ones that kick in at (say) 90 and a smaller annuity that kicks in at (say) 94 just as inflation is starting to hit the real income from the first set.
It's not a bad idea to buy annuities from multiple credit worthy sources, not backed by private equity firms.
Jim
No. of Recommendations: 0
Would it make more sense to not buy the future annuity till one of us passes away because the living spouse could get so much more for a one person annuity?
No. of Recommendations: 2
Would it make more sense to not buy the future annuity till one of us passes away because the living spouse could get so much more for a one person annuity?
Sounds good on paper, but what do you do until then? And what do you do if you both live to 100? (healthy and happy we hope!)
Annuities are not a great deal in terms of prices/returns, and inflation protection in annuities is an even worse deal. But looking at the single versus joint pricing, it seems a relatively fair price difference to me. It's also simple and meets the need well, so I don't see a problem going joint.
What can make some sense is this:
Instead of buying a deferred annuity which starts payments five (or however many) years from now, buy 5 year TIPS and then buy an immediate annuity with the final amount. The income is higher because you're older, you get a few years of return in the mean time, your capital is completely inflation protected in the mean time, and of course the money is in your estate instead of the hands of the insurance firm if you die before the five years is up. The only disadvantage is that it's something to sit on your financial "to do" list for a long time when you might want to be doing something else. And the smallish risk that interest rates and annuity rates will be lower at that time than they are now, but I think annuity returns for the very old are based more on mortality tables than interest rates on purchase date.
Jim
No. of Recommendations: 1
That opened my eyes to the sausage making, thank you.
I'll switch to actual T-bills. Schwab apparently has an auto roll feature.
For me, T-bills are a place to park money while I'm now mainly out of the U.S. market (1/3 is still in).
Given that the only certainty these days is uncertainty, I'm writing puts using a portion of those T-bills to back them (vol and hence premiums are high and imo likely to remain that way).
Not going all out on the put writing, but would like to goose the return of the T-bill portion some while still being comfortable with the risk.
No. of Recommendations: 0
Instead of buying a deferred annuity which starts payments five (or however many) years from now, buy 5 year TIPS and then buy an immediate annuity with the final amount.
-----------------------------------------------------------------------------------------------------
just 2030 Tips or ladder 25-2030?
No. of Recommendations: 4
Instead of buying a deferred annuity which starts payments five (or however many) years from now, buy 5 year TIPS and then buy an immediate annuity with the final amount.
-----------------------------------------------------------------------------------------------------
just 2030 Tips or ladder 25-2030?
I was thinking of a single TIPS bond of the duration between now and when you think you want to switch to annuity income.
You need a lump sum to buy the annuity, so on maturity that single bond gives you the lump you need.
This is purely related to the "income after age X" problem, which deals with longevity risk. Only a pooled strategy like an annuity or tontine makes sense for that.
The rest of your money is of course used differently...spend it between now and then.
In many ways the TIPs-then-annuity idea makes great sense for the longevity risk portion. The only modest disadvantage is that it makes it just a pinch harder to estimate how much money to put into that deferred bucket. The prices for annuities for today are known, but they might be a little different a few years from now. I don't think that removes the merits of the idea, just something to bear in mind. Allow a little "slop" in the estimate : )
(translation: maybe buy a pinch more TIPS than you think you need, and a pinch less spend-in-a-straight-line-till-then. The advantages outweigh that)
If this is a little scary, don't sweat it. It's not an all-or-nothing idea. Say you wanted to set it up so that you spend capital for 8 years then live on an annuity. You could buy an 8-year-deferred annuity now, or you could buy an 8-year TIPS bond and buy an immediate annuity 8 years from now. But you could also split the difference and buy 4-year TIPS and then buy a 4-year-deferred annuity when it matures.
Also, having multiples smaller annuities (with different firms) has some advantages. You could do more than one of those alternatives. You don't have to lose sleep worrying that you made a choice which was good, but not optimal. No strategy is perfect, so pick any two!
Stepping back for a moment, the bigger observation about retirement planning, rarely discussed, is this:
- if your nest egg is not big enough, no amount of fancy strategy is going to fix that. A bummer, but it happens.
- if you have more than enough socked away, there are lots of strategies that are entirely feasible, you can't go too far wrong. A billionaire's widow could put it all in a wildly overpriced S&P 500 and still live nicely on the dividends.
- picking an optimal strategy is time well spent only for those on the borderline between those two categories
I have a friend with whom I traded a bunch of emails of how he should arrange his affairs for his wife on his demise. He is not young. His first thoughts were extremely fancy, the sort of optimization that is a joy for me, and a joy for him, but perhaps not for his future widow. I pointed out "um, hey, you're pretty rich. Just keep it simple, have her buy a fund". (particularly startlingly because I am NOT a fan of standard cap-weight index funds)
Jim
No. of Recommendations: 1
I have a friend with whom I traded a bunch of emails of how he should arrange his affairs for his wife on his demise. He is not young. His first thoughts were extremely fancy, the sort of optimization that is a joy for me, and a joy for him, but perhaps not for his future widow. I pointed out "um, hey, you're pretty rich. Just keep it simple, have her buy a fund". (particularly startlingly because I am NOT a fan of standard cap-weight index funds)
Been thinking about something similar myself - what investment recommendations do I give to my trustee? (likely my eldest kid). If she wants to get into investing at some point all well and good. Given her choice of career (MD), it's likely she won't though, and I don't want her employing a "helper" taking 1% or more of her and her sibs money.
No. of Recommendations: 0
If this is a little scary, don't sweat it. It's not an all-or-nothing idea. Say you wanted to set it up so that you spend capital for 8 years then live on an annuity. You could buy an 8-year-deferred annuity now, or you could buy an 8-year TIPS bond and buy an immediate annuity 8 years from now. But you could also split the difference and buy 4-year TIPS and then buy a 4-year-deferred annuity when it matures.
--------------------------------------------------------------------------------------------------------Also, it is not in stone. If I am not mistaken the Tips are liquid, I could buy more or sell more as time goes bye, getting a profit or taking a loss.
Am I correct about this?
No. of Recommendations: 6
Also, it is not in stone. If I am not mistaken the Tips are liquid, I could buy more or sell more as time goes bye, getting a profit or taking a loss.
Am I correct about this?Sure. The prices of TIPS don't gyrate nearly as much as many other things, but they can certainly be traded.
The main "timing" thing is it is good to buy them at a good initial yield if you can : )
This is a chart of the last decade of ten-year TIPS yields.
https://fred.stlouisfed.org/series/DFII10You can see that they are currently near the highest in that length of time. That's perhaps a bad omen for the US economy and currency--people are shunning US bonds and even an inflation guarantee isn't tempting them much--but good for a TIPS buyer.
Avoid TIPS funds. Yields are low, so paying a management fee is a significant hit, and you don't get to pick your maturity.
Jim
No. of Recommendations: 8
There is another (slight?) risk with TIPs. They depend on the government's definition of what the CPI is. The current administration has demonstrated a willingness to create their own reality and might choose a CPI that is less than actual inflation. That would be another reason to stick with 1-3 month Tbills where the price (and thus inflation) is crowd-sourced, as it were.
Rgds,
HH/Sean
No. of Recommendations: 6
There is another (slight?) risk with TIPs. They depend on the government's definition of what the CPI is. The current administration has demonstrated a willingness to create their own reality and might choose a CPI that is less than actual inflation. That would be another reason to stick with 1-3 month Tbills where the price (and thus inflation) is crowd-sourced, as it were.
Yes, they could mess with CPI. But probably only at the margin. Presumably a period of generally higher inflation would have even a broken CPI going up somewhat faster. So that would be a small risk compared to the bigger risk of leaving yourself completely exposed to inflation as rolling T-bills would do. You would have no idea in advance what your real return would be over time, and (based on history) it would likely be negative.
For portfolio planning TIPS are a very different asset class, in some ways as different from bonds as bonds are from stocks.
The real risk in TIPS is possible fall in the US dollar--lower purchasing power of tradeable goods and services, which is most things. There are good reasons to think it might fall quite a bit, and other good reasons to think it might rise. If you're concerned about bounding that risk, one could buy a small portion of WIP, an ETF which holds a wide variety of non-US government-issued inflation protected bonds. It has gone nowhere for years, but it does go up (measured in US dollars) when the US dollar shrinks, almost perfectly (and almost by definition). YTM most recently reported as 6.8%. A chunk of UK, then 4% allocations to a lot of other countries. I'm not fond of fixed income funds, especially with .5% fees, but it would be a huge amount of work to replicate this yourself.
Jim
