Munis/taxable account and inflation

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Curiouslearner
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Munis/taxable account and inflation

Post by Curiouslearner »

I admit it: I know sooo little about bonds... help me with your thoughts, please: my taxable account holds only two funds, 60 VTSAX/40 VWITX. I keep funding this account each month with $2,000, maintaining the 60/40 AA. Purpose of the account is for a mid-term goal (educational help for my kids). I will keep investing this way for another 5 years, progressively reducing to a 50:50, then stop funding it but won’t need to access these funds for at least another 5 years (10 yrs from now).

My question: With the current feeling of impending inflation hikes, does it make sense to keep purchasing VWTIX or would you consider buying something different to help act as a ballast? (Just for clarity, I am not considering selling any of the existing funds at this time.
Just thinking on how to go about new contributions.)
Thanks for your thoughts,
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typical.investor
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Re: Munis/taxable account and inflation

Post by typical.investor »

Curiouslearner wrote: Mon May 17, 2021 11:01 pm I admit it: I know sooo little about bonds... help me with your thoughts, please: my taxable account holds only two funds, 60 VTSAX/40 VWITX. I keep funding this account each month with $2,000, maintaining the 60/40 AA. Purpose of the account is for a mid-term goal (educational help for my kids). I will keep investing this way for another 5 years, progressively reducing to a 50:50, then stop funding it but won’t need to access these funds for at least another 5 years (10 yrs from now).

My question: With the current feeling of impending inflation hikes, does it make sense to keep purchasing VWTIX or would you consider buying something different to help act as a ballast? (Just for clarity, I am not considering selling any of the existing funds at this time.
Just thinking on how to go about new contributions.)
Thanks for your thoughts,
VWITX has a duration of about 5 years I believe (4.6 actually). So that means it should recover from NAV loss from rising rates hikes in that time. So if there is a rate hike 5 years from now, it should recover in time for spending. At some point, you might want to move money to a stable value fund or shorter duration for amounts that need to be spent before the time the fund would recover.

For ballast, treasuries might be better as they hold up better in equity crashes to rebalance from.
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Re: Munis/taxable account and inflation

Post by abuss368 »

Curiouslearner wrote: Mon May 17, 2021 11:01 pm I admit it: I know sooo little about bonds... help me with your thoughts, please: my taxable account holds only two funds, 60 VTSAX/40 VWITX. I keep funding this account each month with $2,000, maintaining the 60/40 AA. Purpose of the account is for a mid-term goal (educational help for my kids). I will keep investing this way for another 5 years, progressively reducing to a 50:50, then stop funding it but won’t need to access these funds for at least another 5 years (10 yrs from now).

My question: With the current feeling of impending inflation hikes, does it make sense to keep purchasing VWTIX or would you consider buying something different to help act as a ballast? (Just for clarity, I am not considering selling any of the existing funds at this time.
Just thinking on how to go about new contributions.)
Thanks for your thoughts,
That is an excellent fund and I have invested in that for years. Tune out the noise and stay the course.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Curiouslearner
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Re: Munis/taxable account and inflation

Post by Curiouslearner »

Thank you both for the advice. Much appreciated. So, I am 100% sold on the benefits of sticking to “stay the course” when there is a market crash and stocks lose all the value, etc. but I have to admit that I had not thought of how I would feel about significant inflation increases and the effect on my bond allocation. Is the advice of “stay the course” equally sound if inflation starts climbing? One reads things such as “avoid bonds, go for gold and commodities, reallocate to inflation friendly assets”...etc. All but staying the course! So, could you help me appease my mind by sharing some economical arguments that would support staying the course during an inflation accelerating period? Thanks again.
Last edited by Curiouslearner on Mon Oct 04, 2021 10:27 pm, edited 1 time in total.
rockAction
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Re: Munis/taxable account and inflation

Post by rockAction »

Have you considered adding I-Bonds? They will keep up with inflation (minus taxes), and currently paying 3.54%. You can add 10K per year per family member, and they are tax free if used for education.
40% VT | 20% Global SCV | 20% LTPZ | 10% I-Bonds | 10% Cash
grok87
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Re: Munis/taxable account and inflation

Post by grok87 »

Curiouslearner wrote: Mon May 17, 2021 11:01 pm I admit it: I know sooo little about bonds... help me with your thoughts, please: my taxable account holds only two funds, 60 VTSAX/40 VWITX. I keep funding this account each month with $2,000, maintaining the 60/40 AA. Purpose of the account is for a mid-term goal (educational help for my kids). I will keep investing this way for another 5 years, progressively reducing to a 50:50, then stop funding it but won’t need to access these funds for at least another 5 years (10 yrs from now).

My question: With the current feeling of impending inflation hikes, does it make sense to keep purchasing VWTIX or would you consider buying something different to help act as a ballast? (Just for clarity, I am not considering selling any of the existing funds at this time.
Just thinking on how to go about new contributions.)
Thanks for your thoughts,
I guess a couple of thoughts:
1) it sounds like you want to mentally segregate these funds from your retirement accounts. hence the need for a tax efficient bond allocation. hence munis
2) but what about ibonds? they are tax deferred and may even have some education tax benefits depending on your income.

what about a 529 account?
cheers,
grok
RIP Mr. Bogle.
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Curiouslearner
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Re: Munis/taxable account and inflation

Post by Curiouslearner »

Thanks for that info: I was not aware of the I-bonds so will look into it - yes, I’m mentally separating that pot from my retirement account. Did consider 529’s initially but current plan is for our kids to study abroad (EU) which unfortunately brings significant restrictions/drawbacks to using the 529’s...
grok87
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Re: Munis/taxable account and inflation

Post by grok87 »

Curiouslearner wrote: Thu May 20, 2021 9:35 pm Thanks for that info: I was not aware of the I-bonds so will look into it - yes, I’m mentally separating that pot from my retirement account. Did consider 529’s initially but current plan is for our kids to study abroad (EU) which unfortunately brings significant restrictions/drawbacks to using the 529’s...
i'm a big fan of ibonds. but it does mean setting up a separate account(s). you can buy 10k per year per person,
RIP Mr. Bogle.
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typical.investor
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Re: Munis/taxable account and inflation

Post by typical.investor »

Curiouslearner wrote: Thu May 20, 2021 7:30 pm Is the advice of “stay the course” equally sound if inflation starts climbing? One reads things such as “avoid bonds, go for gold and commodities, reallocate to inflation friendly assets”...etc.
Gold and commodities would have an insurance cost if inflation doesn't materialize or if they don't react quick enough to inflationary changes. Gold may or may not.
Curiouslearner wrote: Thu May 20, 2021 7:30 pm All but staying the course! So, could you help me appease my mind by sharing some economical arguments that would support staying the course during an inflation accelerating period? Thanks again.
If inflation is a concern, why wouldn't you choose TIPs? Personally I prefer longer nominals for rebalancing in crashes, but if you are looking at funding college spending then you don't want to be spending out of a bond fund with too much duration because it leaves you vulnerable to NAV loss from rising rates that you don't have time to recover from.

Personally, if bonds are in a crisis due to rising rates and need time to recover, I am not going to sell bonds at a NAV loss to fund college. Nor am I going to shorten duration and take sharply negative real returns. I maturing CDs which should cover some of the spending. I think I would just sell more equities and if it comes out of my personal savings (ie not specifically earmarked for college), then so be it. Same with equities. I would sell bonds from my personal savings if equities were in severe crisis. I have a difficult time moving all college savings to fixed income.

Anyway, "stay the course" with bonds typically means intermediate term over the course of investing and retirement. As your spending horizon will likely be long, it makes perfect sense since you can benefit from the higher yields on longer bonds but also hold shorter durations which are safer for immediate spending. You may want to shorten duration as spending approaches. You may want to reduce equity risk as spending approaches. 4 years is a pretty short horizon.

And since we are on the topic of inflation, neither TIPs nor nominals are likely to keep pace with college costs. So equities it is. But yeah they can crash. That's why I am allowing myself to spend from personal savings (ie retirement) if some asset class in in the dumps in that horizon, although a stable value fund in a 529 could be helpful too.
grok87
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Re: Munis/taxable account and inflation

Post by grok87 »

typical.investor wrote: Fri May 21, 2021 8:48 am
Curiouslearner wrote: Thu May 20, 2021 7:30 pm Is the advice of “stay the course” equally sound if inflation starts climbing? One reads things such as “avoid bonds, go for gold and commodities, reallocate to inflation friendly assets”...etc.
Gold and commodities would have an insurance cost if inflation doesn't materialize or if they don't react quick enough to inflationary changes. Gold may or may not.
Curiouslearner wrote: Thu May 20, 2021 7:30 pm All but staying the course! So, could you help me appease my mind by sharing some economical arguments that would support staying the course during an inflation accelerating period? Thanks again.
If inflation is a concern, why wouldn't you choose TIPs? Personally I prefer longer nominals for rebalancing in crashes, but if you are looking at funding college spending then you don't want to be spending out of a bond fund with too much duration because it leaves you vulnerable to NAV loss from rising rates that you don't have time to recover from.

Personally, if bonds are in a crisis due to rising rates and need time to recover, I am not going to sell bonds at a NAV loss to fund college. Nor am I going to shorten duration and take sharply negative real returns. I maturing CDs which should cover some of the spending. I think I would just sell more equities and if it comes out of my personal savings (ie not specifically earmarked for college), then so be it. Same with equities. I would sell bonds from my personal savings if equities were in severe crisis. I have a difficult time moving all college savings to fixed income.

Anyway, "stay the course" with bonds typically means intermediate term over the course of investing and retirement. As your spending horizon will likely be long, it makes perfect sense since you can benefit from the higher yields on longer bonds but also hold shorter durations which are safer for immediate spending. You may want to shorten duration as spending approaches. You may want to reduce equity risk as spending approaches. 4 years is a pretty short horizon.

And since we are on the topic of inflation, neither TIPs nor nominals are likely to keep pace with college costs. So equities it is. But yeah they can crash. That's why I am allowing myself to spend from personal savings (ie retirement) if some asset class in in the dumps in that horizon, although a stable value fund in a 529 could be helpful too.
I think ibonds are even better than tips for OPs purpose. And i’m not just saying that because the yield is a sky high 4.53% rn pretax. I think a reasonable expected return for ibonds is 2.25% pretax. I bet that’s competive with munis right now.

Re reducing stocks and bonds as he gets closer to year 10.
David Swensen (rip) provides a framework for that.

For assets needed in 1-2 years keep in cash.
For assets needed in 10+ years keep in a long term equity oriented portfolio such as OP is doing.
For assets needed at interim times, say 6 years, you would interpolate. 6 years is halfway between 2 years and 10 years. So you would be 50% cash and 50% long term portfolio.

Cheers
Grok
RIP Mr. Bogle.
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typical.investor
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Re: Munis/taxable account and inflation

Post by typical.investor »

grok87 wrote: Fri May 21, 2021 1:37 pm
I think ibonds are even better than tips for OPs purpose. And i’m not just saying that because the yield is a sky high 4.53% rn pretax. I think a reasonable expected return for ibonds is 2.25% pretax. I bet that’s competive with munis right now.
That's a good suggestion. Interest is tax free for educational purposes if the criteria are met:
Who Can Take the Exclusion

You can take the exclusion if all five of the following apply:

You cashed qualified U.S. savings bonds in the same tax year for which you are claiming the exclusion.
You paid qualified higher education expenses in that same tax year for yourself, your spouse, or your dependents.
Your filing status is any status except married filing separately.
Your modified adjusted gross income was less than the cut-off amount set by the Internal Revenue Service. This amount typically changes every year. See IRS Form 8815 for the current amount.
You were 24 or older before your savings bonds were issued.

Savings Bonds That Qualify for the Exclusion

To qualify for the exclusion, the bonds must be Series EE or Series I savings bonds issued after 1989 in your name, or, if you are married, they may be issued in your name and your spouse's name. Note: A bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or the child.


https://www.treasurydirect.gov/indiv/pl ... cation.htm
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