Money mkt or short term bonds for cash reserves

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tominsc
Posts: 108
Joined: Wed Dec 30, 2020 11:25 am

Money mkt or short term bonds for cash reserves

Post by tominsc »

I struggle a lot with this. Should I split my bond allocation into some in VBIRX and the rest in bond funds like VBTLX. Or is this just the same as putting some of my bond allocation into a money market fund like VMRXX.

My basic asset allocation right now is about 55/40/5 stocks/bonds/cash.

We don’t need the 5%+- we have now in VMRXX for ongoing living expenses. It truly is a cash reserve. And right now it’s pretty close to ”enough” if that’s defined as several months to a year or so in reserve. I.e., I don’t need MORE in reserve.

For now, what I’m struggling with is whether or not I’m, in effect, double dipping into cash (keeping more in reserve than I need) by putting about 5% of my total into VMRXX and then also putting any significant fraction of my bond allocation into VBIRX, leaving the rest of it in VBTLX, at the moment.

I.E., are VMRXX and VBIRX essentially the same asset class? VMRXX, of course, never varies by a penny and VBIRX never moves more than a penny or two a day most of the time. I’m aware of the theoretical reasons for why I want anything in bonds at all, and I fully subscribe to those reasons. At the moment, I’m totally comfortable with the interest rate risk and duration risk I’m exposed to for my VBTLX portion of my total bond allocation. So what am I getting by putting some of my bonds in VBIRX. I wonder if, like I said, I’m just putting both my VMRXX and my VBIRX into cash-type accounts even if it doesn’t all have the same name.

Would I be better off putting my whole bond percentage into something like VBTLX, which happens to be where the non-VBIRX part is now anyway, and not putting any of my bond allocation in short term bonds at all?
Makefile
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Joined: Fri Apr 22, 2016 11:03 pm

Re: Money mkt or short term bonds for cash reserves

Post by Makefile »

The SEC yield on that Short-Term Bond Index Fund (VBIRX) is 0.41%, so I consider this a pretty lousy risk-reward tradeoff when an Ally Bank savings account pays 0.50% with no principal risk and free FDIC insurance to boot.

Note that is usually an ultra short-term bond fund that a money market fund is compared to when considering whether to take on some more risk in hopes for some return.
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iceport
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Re: Money mkt or short term bonds for cash reserves

Post by iceport »

tominsc wrote: Sat Jun 12, 2021 7:26 pm Would I be better off putting my whole bond percentage into something like VBTLX, which happens to be where the non-VBIRX part is now anyway, and not putting any of my bond allocation in short term bonds at all?
Interesting choice of wording at this interesting time.

VBIRX is up +0.92% for the year ending 5/31/21
VBTLX is down -0.49% for the same period

For the past year, anyway, looks like you've actually been better off holding VBIRX.

Yes, I know your question is forward-looking, and probably assumes a long term horizon. But the point is that the short term bond does have lower interest rate sensitivity, and so may outperform the intermediate term bond fund when interest rates rise. That short term downside protection does come at the cost of long term expected returns, so there's a trade-off.

In the big picture, considering the primary purpose of your bond allocation, whether or not you carve out a portion of the allocation for short term bonds or not won't make much of a difference. And there are options in between — slightly more risk than VBIRX with slightly higher yields. It's not a real high stakes decision, IMHO.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
dbr
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Joined: Sun Mar 04, 2007 8:50 am

Re: Money mkt or short term bonds for cash reserves

Post by dbr »

You are agonizing over non issues both with respect to picking this or that fund and also with respect to keeping a cash reserve.

There is inevitably going to be cash around just to manage cash flow, so use common sense about that, and the rest takes care of itself pretty much either way.
UpperNwGuy
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Joined: Sun Oct 08, 2017 7:16 pm

Re: Money mkt or short term bonds for cash reserves

Post by UpperNwGuy »

I would pull your cash reserves out of Vanguard and put them into a mix of high yield savings accounts and certificates of deposit at banks or credit unions.
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