Non-emergency cash alternative

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Topic Author
greenyoda
Posts: 10
Joined: Wed Apr 21, 2021 11:01 pm

Non-emergency cash alternative

Post by greenyoda »

A little over 10 years ago we had emergency fund squared away, but were saving a bunch of cash for a potential down payment on a house in a very high cost of real estate/living area. (My retirement/long-term funds were/are all good and in a Bogle-y 5 fund portfolio.) It was approaching the mid-six figures and I wanted more return. Trying to sustain value so we could use it if the right house came along, but do better than money market/CD/I-bond levels - likely available somewhere between 3-10 years but optional so could be postponed.

I did a bunch of research/thinking and ended up putting it in the following (80/20):
*. 20% VCSH - Vanguard Short-Term Corp Bond ETF
*. 20% VCIT - Vanguard Interm-Term Corp Bond ETF
*. 20% VCAIX - Vanguard CA Interm-Term Tax Exempt (CA resident)
*. 20% VWITX - Vanguard Interm-Term Tax Exempt
*. 20% VIG - Vanguard Dividend Appreciation ETF

Frankly I don't remember all the twists and turns of logic that got me there. But it did really well for what I intended - obviously VIG did great in bull market. Backtesting now without my exact in/out dates it was roughly 6% CAGR. Worst year was about even (-0.18%).

Curious about your thoughts. There's probably a simpler version of the same thing, but this wasn't hard either. You could argue we should've just gone all equities, but there would be a downside possibility where we'd just have to postpone the house to hold. Or just pick one of the shorter-term bond funds and be done with it, but the returns would've been lower. Maybe can do better next time, could see us having a similar thing with non-529 college savings for example.
lazyinvestor30
Posts: 63
Joined: Mon Apr 12, 2021 7:58 am

Re: Non-emergency cash alternative

Post by lazyinvestor30 »

If all you are looking for is a better return - why not consider the LifeStrategy Income Fund? That will give you what you want? Also 3-10 is a pretty long time range. I myself am in a similar situation, where I know I would need the money in 5-7 years and I accomplished this a 3 fund portfolio with 55% stocks, and 45% bonds.

If you want more tax efficiency - BHs will need to know your tax brackets to make an informed decision. I think you can accomplish your goals with 2-3 funds max instead of 5. Good luck
Topic Author
greenyoda
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Joined: Wed Apr 21, 2021 11:01 pm

Re: Non-emergency cash alternative

Post by greenyoda »

Thanks. Agreed, VASIX would be a good one-fund equivalent, or VSCGX to be more aggressive.
Highest tax bracket, I'd need to do some digging to see how much the munis helped here.
Was your three fund just regular VTI/VXUS/BND?
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climber2020
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Joined: Sun Mar 25, 2012 8:06 pm

Re: Non-emergency cash alternative

Post by climber2020 »

greenyoda wrote: Thu Apr 22, 2021 9:31 am Agreed, VASIX would be a good one-fund equivalent, or VSCGX to be more aggressive.
An alternative to this is to invest in your usual mix of stocks and bonds (this is assuming you have a decent sized taxable account).

If stocks are doing well when an emergency arises, sell whatever stocks you need from taxable and pay the capital gains taxes. After taxes, you're still ahead of where you would have been with cash.

If stocks have tanked when an emergency arises, sell stocks from taxable and simultaneously exchange the equivalent amount of bonds to stocks within your tax deferred accounts. You've indirectly sold some bonds and your stocks are still invested so you haven't sold at the bottom of a crash.
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mrpotatoheadsays
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Joined: Fri Mar 16, 2012 2:36 pm

Re: Non-emergency cash alternative

Post by mrpotatoheadsays »

I recommend Paul Merriman's take on your bond partition: 50% Vanguard Intermediate-Term Treasury Index, 30% Vanguard Short-Term Treasury Index and 20% Vanguard Short-Term Inflation-Prot Sec Index. These are the safest of the safe. In CA, you do not pay State taxes on these fund's dividends; they obviously hold just Treasuries.

Corporate bonds will fall with "the market". Tax-exempt funds only make sense to the ultra rich now because the yield spread is near nil.

I do not like VIG. If I was forced to choose one pure stock fund, it might be Vanguard Value Index Admiral Shares (VVIAX) / Vanguard Value ETF (VTV).
chassis
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Joined: Tue Mar 24, 2020 4:28 pm

Re: Non-emergency cash alternative

Post by chassis »

Agree with @climber2020

Also agree with the earlier comment on dividend stocks.

Bonds have a dim outlook that is getting dimmer.
lazyinvestor30
Posts: 63
Joined: Mon Apr 12, 2021 7:58 am

Re: Non-emergency cash alternative

Post by lazyinvestor30 »

greenyoda wrote: Thu Apr 22, 2021 9:31 am Thanks. Agreed, VASIX would be a good one-fund equivalent, or VSCGX to be more aggressive.
Highest tax bracket, I'd need to do some digging to see how much the munis helped here.
Was your three fund just regular VTI/VXUS/BND?
Was your three fund just regular VTI/VXUS/BND? - Correct

One other thing to look at is the Vanguard Tax Managed fund. This roughly 50% US stock and 50% US bonds.. This could be a good balanced fund as well.
aristotelian
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Re: Non-emergency cash alternative

Post by aristotelian »

You realize this is just mental accounting and exactly the same financially as having no emergency fund and slightly larger stock and bond allocations?
Topic Author
greenyoda
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Joined: Wed Apr 21, 2021 11:01 pm

Re: Non-emergency cash alternative

Post by greenyoda »

aristotelian wrote: Thu Apr 22, 2021 12:46 pm You realize this is just mental accounting and exactly the same financially as having no emergency fund and slightly larger stock and bond allocations?
Not sure if it was unclear in my original post, but these funds were separate from emergency fund.
Our emergency funds are in cash. At a minimum both these "cash alternative" funds and my other taxable accounts are to some degree less liquid than cash, so I wouldn't say they are the same financially.

Of course having additional stocks and bonds does mean larger stock and bond allocations.
However, vs. my other taxable accounts the point of doing this was to have funds that would be less likely to lose significant value even in a down market, such that I'd be comfortable liquidating when I needed them. The other taxable accounts are much more heavily weighted to equities but that's fine because I don't anticipate needing the money anytime soon.

Re: VIG - point there was the conventional wisdom that companies paying regular dividends weather downturns better than those that don't, so trading off some growth potential for quality (in theory). Whether that trade-off was worth it or whether other equity options out there would do it better are valid questions. With the history that actually happened, I just left growth on the table but c'est la vie.

Thanks to all for the comments and suggestions!
NabSh
Posts: 377
Joined: Fri Dec 25, 2020 11:09 am
Location: USA

Re: Non-emergency cash alternative

Post by NabSh »

I agree with others. Tax exempt are useful to provide Tax free income for high tax bracket. However they do tend to go down with the market. They do not provide same level of protection like treasuries do.

Question: What is your risk tolerance for these fund? Are you ok to lose 10% of these in case you need to sell this investment in 5 year? What about 15% or 20%? Based on that you can either have 20% or 30 % in VTI and rest in combination of VCIT and VCSH .


greenyoda wrote: Wed Apr 21, 2021 11:43 pm A little over 10 years ago we had emergency fund squared away, but were saving a bunch of cash for a potential down payment on a house in a very high cost of real estate/living area. (My retirement/long-term funds were/are all good and in a Bogle-y 5 fund portfolio.) It was approaching the mid-six figures and I wanted more return. Trying to sustain value so we could use it if the right house came along, but do better than money market/CD/I-bond levels - likely available somewhere between 3-10 years but optional so could be postponed.

I did a bunch of research/thinking and ended up putting it in the following (80/20):
*. 20% VCSH - Vanguard Short-Term Corp Bond ETF
*. 20% VCIT - Vanguard Interm-Term Corp Bond ETF
*. 20% VCAIX - Vanguard CA Interm-Term Tax Exempt (CA resident)
*. 20% VWITX - Vanguard Interm-Term Tax Exempt
*. 20% VIG - Vanguard Dividend Appreciation ETF

Frankly I don't remember all the twists and turns of logic that got me there. But it did really well for what I intended - obviously VIG did great in bull market. Backtesting now without my exact in/out dates it was roughly 6% CAGR. Worst year was about even (-0.18%).

Curious about your thoughts. There's probably a simpler version of the same thing, but this wasn't hard either. You could argue we should've just gone all equities, but there would be a downside possibility where we'd just have to postpone the house to hold. Or just pick one of the shorter-term bond funds and be done with it, but the returns would've been lower. Maybe can do better next time, could see us having a similar thing with non-529 college savings for example.
thenextguy
Posts: 717
Joined: Wed Mar 25, 2009 12:58 am

Re: Non-emergency cash alternative

Post by thenextguy »

I use VTINX for these types of purposes.
tomsense76
Posts: 1428
Joined: Wed Oct 14, 2020 1:52 am

Re: Non-emergency cash alternative

Post by tomsense76 »

Have you looked at using your stable value fund in your 401k (assuming you have one)? Some info in the wiki about how this works
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Topic Author
greenyoda
Posts: 10
Joined: Wed Apr 21, 2021 11:01 pm

Re: Non-emergency cash alternative

Post by greenyoda »

NabSh wrote: Thu Apr 22, 2021 11:42 pm Question: What is your risk tolerance for these fund? Are you ok to lose 10% of these in case you need to sell this investment in 5 year? What about 15% or 20%? Based on that you can either have 20% or 30 % in VTI and rest in combination of VCIT and VCSH .
My risk tolerance was lower, probably -10% max. Past tense because this already played out - I cashed out at a nice gain and bought the house (home equity has done great). But your comment is useful because for the other example I cited as a possible future scenario - college savings - the risk tolerance might be greater. For that we wouldn't need the entire bundle all at once like a down payment so could sell less or just muddle through on income until a rebound (hopefully).

Had a lot of great suggestions in this thread that I wanted to summarize (thanks again!) - useful exercise for me and hopefully helpful to others.
Roughly ordered by increasing risk.

mrpotatoheadsays (Merriman+) (20/80):
- 20% VVIAX - Vanguard Value Index Admiral Shares
- 40% VSIGX - Vanguard Intermediate-Term Treasury Index
- 25% VSBSX - Vanguard Short-Term Treasury Index
- 15% VTAPX - Vanguard Short-Term Inflation-Prot Sec Index

My original (20/80):
- 20% VCSH - Vanguard Short-Term Corp Bond ETF
- 20% VCIT - Vanguard Interm-Term Corp Bond ETF
- 20% VCAIX - Vanguard CA Interm-Term Tax Exempt (CA resident)
- 20% VWITX - Vanguard Interm-Term Tax Exempt
- 20% VIG - Vanguard Dividend Appreciation ETF

NabSh (20/80):
- 20% VTI - Vanguard Total Stock Market ETF
- 40% VCIT - Vanguard Intermediate-Term Corporate Bond ETF
- 40% VCSH - Vanguard Short-Term Corporate Bond ETF

lazyinvestor30:
- 100% VASIX - Vanguard LifeStrategy Income Fund (20/80)

thenextguy:
- 100% VTINX - Vanguard Target Retirement Income Fund (30/70)

A more aggressive VASIX:
- 100% VSCGX - Vanguard LifeStrategy Conservative Growth Fund Investor Shares (40/60)

lazyinvestor30:
- 100% VTMFX - Vanguard Tax-Managed Balanced Fund Admiral Shares (50/50)

lazyinvestor30:
- [~30%/25%/45%] VTI/VXUS/BND (55/45)
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