Where to hold taxable funds while deciding on longer term investments, FIPDX ?

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Kumsajack
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Joined: Fri Jul 28, 2017 1:05 pm

Where to hold taxable funds while deciding on longer term investments, FIPDX ?

Post by Kumsajack »

I've inherited a relatively large sum of money (>250k) and am deciding how best to manage it. Right now, the money is held at Fidelity, but I also have a Vanguard account.

While I work through a variety of concerns, etc., I'd like to have in something that is liquid, stable and inflation adjusted. Money Market accounts are just so low, right now.

I find FIPDX to be appealing (https://fundresearch.fidelity.com/mutua ... /31635T104) but it's an index fund being held in an taxable account (versus and ETF). I don't have a lot of experience w/taxable accounts (but am nearing retirement, so I'm gearing up).

Thanks !
sycamore
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Re: Where to hold taxable funds while deciding on longer term investments, FIPDX ?

Post by sycamore »

Kumsajack wrote: Fri Jul 30, 2021 2:20 pm I've inherited a relatively large sum of money (>250k) and am deciding how best to manage it. Right now, the money is held at Fidelity, but I also have a Vanguard account.

While I work through a variety of concerns, etc., I'd like to have in something that is liquid, stable and inflation adjusted. Money Market accounts are just so low, right now.

I find FIPDX to be appealing (https://fundresearch.fidelity.com/mutua ... /31635T104) but it's an index fund being held in an taxable account (versus and ETF). I don't have a lot of experience w/taxable accounts (but am nearing retirement, so I'm gearing up).

Thanks !
Some downsides (minor) of FIPDX:
- it does distribute capital gains
- it has a duration of 7+ years so if you're taking on some risk that it will fall in price over the new few weeks/months while you figure out your plan

A couple of alternatives:
- VTIP - Vanguard Short-Term Inflation-Protected Securities ETF. As a short-term fund it should fluctuate less in value so a bit less risky. As an ETF you can buy with no transaction fee at either Fidelity or Vanguard.

- a no-penalty CD. Marcus at 7-month at 0.45% https://www.marcus.com/us/en/savings/hi ... s/cd-rates. One good source for rates is https://www.depositaccounts.com/

- a high-yield Savings Account. I don't know of any good ones off the top of my head. depositaccounts.com/ might have some.
dbr
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Re: Where to hold taxable funds while deciding on longer term investments, FIPDX ?

Post by dbr »

Inflation adjustment is a long term benefit because the damage done by inflation comes from compounding over time. It should not be a significant criterion in the short run. In the same way return is a long term benefit that is effective when compounded over long times. Volatility due to longer durations is a problem when certainty is wanted in the short run.

In your case just holding cash such as savings accounts, CDs, etc. is the better matched solution. The fact that little return is available is because sometimes you get a bowl of cherries and sometimes just pits.
nix4me
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Re: Where to hold taxable funds while deciding on longer term investments, FIPDX ?

Post by nix4me »

I think i would try to come to an investment decision more rapidly and get the money in the market.
123
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Re: Where to hold taxable funds while deciding on longer term investments, FIPDX ?

Post by 123 »

If you're in a holding pattern the best options for holding cash are the no-penalty CD accounts at Marcus (7 months) or Ally (11 months). Pay attention to FDIC limits and be aware that you get the same FDIC insurance if you name a spouse as a joint-owner or as a beneficiary if you need to keep the funds separate for estate planning purposes.

If you use the no-penalty accounts for holding purposes it doesn't hurt to divide the principal up into multiple accounts in case you end up with a progressive investment strategy.

Edited to add:

If you anticipate placing a significant portion of the funds into the market I would tend to keep 50% or more in just the standard brokerage MMF. If a significant market opportunity presents itself you may want to be able to move quickly. If funds are held elsewhere it can easily take 5 - 7 days for them to become available in a brokerage account with all the account closure and transfer steps involved.
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grabiner
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Re: Where to hold taxable funds while deciding on longer term investments, FIPDX ?

Post by grabiner »

sycamore wrote: Fri Jul 30, 2021 3:58 pm Some downsides (minor) of FIPDX:
- it does distribute capital gains
- it has a duration of 7+ years so if you're taking on some risk that it will fall in price over the new few weeks/months while you figure out your plan
Capital gains on a taxable bond fund are not a disadvantage. If a bond has risen in price, this means that it is now paying more in dividends than the current market yield. Thus, if the fund sells the bond, it will have a capital gain, but replace the bond with a lower-yielding bond and thus make up the difference in lower future dividend payments. (For a municipal-bond fund, the capital gain is a total loss because the dividend would not be taxable.)

For a TIPS fund, the capital gain is subject to state tax in most states, but is taxed at a lower federal rate, so the overall tax is probably still lower than on an equal dividend.

I agree with the second recommendation; I wouldn't leave money in a fund with a 7-year duration while deciding where to invest it in the next year, because of the risk of rising rates. CDs or high-yield savings are better places to park money for the short term.
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Capricorn51
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Re: Where to hold taxable funds while deciding on longer term investments, FIPDX ?

Post by Capricorn51 »

I've put a fair amount of cash in ICSH (ultra short bond fund) at Fido:
https://www.ishares.com/us/products/258 ... income-etf
Topic Author
Kumsajack
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Joined: Fri Jul 28, 2017 1:05 pm

Re: Where to hold taxable funds while deciding on longer term investments, FIPDX ?

Post by Kumsajack »

Thanks for the guidance. I realize that I conflated two concerns into one (sort of a like a venn diagram of two circles that are nearly overlapping). I'll focus on the decision on where to put it.
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