Understanding Cash Will Make You a Happier Investor (Tyler)

Discussion of the Cash portion of the Permanent Portfolio

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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by Tyler » Sat May 13, 2017 1:22 pm

barrett wrote:What do most folks on here do with cash if they only have, say, a few thousand bucks in cash in any given account. Put it in SHY? I don't like its .15% expense ratio but maybe I'm just being penny wise and pound foolish. Any other good options?
I personally like SCHO. Same 1-3 year maturity as SHY, but with an ER of only 0.06.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Sat May 13, 2017 2:54 pm

That (SCHO) is lower than the Vanguard Admiral treasury money market I mentioned, which has an ER of 0.09%.

I finally got off my duff and calculated my WAM, Weighted Average Maturity. My notes & bills come out to 1.2 years. Pretty much what I want. I never did carefully construct a ladder. It was more randomly throwing boxes of different sizes, eyeballed not measured, until they amounted to a ladder.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by barrett » Sat May 13, 2017 5:54 pm

OK, so help me out here. SCHO has a WAM of exactly two years. The two-year note now has a yield of 1.28%, yet the one-year annualized return I'm seeing for SCHO online is only .16%.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Sat May 13, 2017 10:27 pm

Yield aside, I have 2- and 3-yr notes that are down. Theyre paying, but they're currently down. Maybe that has something to do with it.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by sophie » Sun May 14, 2017 6:58 am

Barrett's right. Even at the lower interest rates of a year ago, the SCHO yield plus the ER should be close to 1%, which was the interest rate on the 2 year note one year ago. Something's fishy.

I share that dislike of funds with an ER greater than their yield, which is why I went with autorolling Treasuries. I haven't tried to go farther out than 6 months though. Even with 3 month treasuries I'm beating the interest rates of funds like SCHO, and there's practically no risk of having to sell at a loss.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by barrett » Sun May 14, 2017 7:56 am

sophie wrote:Barrett's right. Even at the lower interest rates of a year ago, the SCHO yield plus the ER should be close to 1%, which was the interest rate on the 2 year note one year ago. Something's fishy.
I'd actually love to be wrong! Holding SCHO could simplify all our little IRA accounts. I do realize that there is some interest rate risk with a fund holding 1-3 year notes. I would just be surprised if the interest rate risk is knocking the fund's performance down so much.

There's a very strong possibility that I am just misreading the numbers for SCHO. Depending on what online source I use, I see different numbers for weighted average maturity and also for performance over recent one, three and five-year periods.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Sun May 14, 2017 8:26 am

Could you guys explain how you're calculating it? I don't know how it's done.

I just know that I have bills and notes (up to 3-year notes), so I can see individually how they're doing.
For example, the $10,000 block ending in ~LF4 2017-Jun-29 (bought as a 26-week t-bill) is up $27.
The $10,000 block ending in ~R44, due 2019-MAY-15 (bought as a 3-year note) is down $84.
Yes, I'm going to get my money back, but when I add up everything (cost vs holding value, but not interest paid), it's down. Even though I artificially added a $100 gain from my i-Bonds.

So how do you calculate SCHO's return? Not the yield alone, but the return.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by Tyler » Sun May 14, 2017 10:52 am

Looking at ETFreplay, the total return of SCHO is within a few basis points of SHY as one would expect (about 0.8% in 2016). Both lost a bit of money in the last half of 2016 as rates went up a tad.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by buddtholomew » Sun May 14, 2017 11:57 am

MangoMan wrote:It seems like there is an awful lot of principal fluctuation, no? Maybe a FDIC insured online savings account paying 1% is better?
Image
Agree with FDIC insured savings account or CD's with EWP paying 2.25% (5-year).
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Sun May 14, 2017 11:59 am

I still don't understand how to calculate the return or what you think it should be for SCHO, but the bills and notes work out for me.
We talk about having iBonds for "deep cash", and I suppose the brand new 3-year-notes fall into the same category. Soon enough, they have just one year left until maturity, whereupon they calm down.

I keep some cash in the bank for bills, and some "shallow cash" composed of 26-wk T-Bills, but I've never had to sell them prematurely, if I recall correctly. If I do, I'll surely go for the T-Bills and leave the deeper cash alone.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by sophie » Mon May 15, 2017 7:42 am

I went into ETFreplay to look into SCHO's total return. Here's a few numbers:

Last 12 months: total return 0.2%
Last 6 months: total return 0.1%
For calendar year 2016: 0.8%
Calendar year 2015: 0.4%

The 2016 figure is about right given the 1-2 year Treasury rates at the time. I guess the interest rate increase was enough to knock down returns, but I'm still surprised the it was that much, given the relatively modest increase in 1-3 year rates.

Savings account (Ally's rate is now 1.05%, whoo hoo) and CDs are great for taxable cash, but Barrett was asking about a retirement account. I'm still sticking with short range Treasuries. It's a great combo of minimal interest rate risk and returns comparable to the 1-3 year funds, for practically no work other than firing off the initial T bill order. If you then start buying longer duration bonds with accumulated cash, you'll end up with a self-sustaining ladder.

I wonder if anyone thought that autorolling Treasuries might spell the death of Treasury money market funds, with their high (0.4%+) ERs.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by grapesofwrath » Mon May 15, 2017 8:11 pm

sophie wrote:I wonder if anyone thought that autorolling Treasuries might spell the death of Treasury money market funds, with their high (0.4%+) ERs.
One day I was horrified to discover that 70-80% of my treasury cash yield at a Schwab fund was being sucked up by their "expenses". So I decided to just use Tbills instead. Also I don't really have a need for cash and I don't have the stomach for 20yr bonds so I decided to combine short and long and set up a ~5yr (intermediate) treasury ladder. I intend to hold to maturity so Treasury Direct seemed OK. I also liked the instituitional diversification of not having all at brokerage. I started setting ladder up by buying 1,2,3 and 5 year notes in the first year, second year fill in the gaps with 3 and 5 year purchases and then just let it roll from there. I may add 7yr notes.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by barrett » Tue May 16, 2017 8:04 am

sophie wrote:...CDs are great for taxable cash, but Barrett was asking about a retirement account...
Sophie, why would it make a difference if the CDs were held in an IRA? I am just trying to generate a bit of yield on the cash in my IRA. Thanks.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by Jeffreyalan » Tue May 16, 2017 3:30 pm

Do most of you keep your cash in Treasury Direct? Or in a brokerage?
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by Jack Jones » Wed May 17, 2017 12:56 pm

Brokerage for me.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Wed May 17, 2017 5:03 pm

Jack Jones wrote:Brokerage for me.
Me too.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Wed May 17, 2017 9:52 pm

dualstow wrote:Could you guys explain how you're calculating it? I don't know how it's done.

I just know that I have bills and notes (up to 3-year notes), so I can see individually how they're doing.
For example, the $10,000 block ending in ~LF4 2017-Jun-29 (bought as a 26-week t-bill) is up $27.
The $10,000 block ending in ~R44, due 2019-MAY-15 (bought as a 3-year note) is down $84.
Yes, I'm going to get my money back, but when I add up everything (cost vs holding value, but not interest paid), it's down...


Well it's up now ;-)
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by grapesofwrath » Thu May 18, 2017 6:21 am

dualstow wrote:
dualstow wrote:Could you guys explain how you're calculating it? I don't know how it's done.

I just know that I have bills and notes (up to 3-year notes), so I can see individually how they're doing.
For example, the $10,000 block ending in ~LF4 2017-Jun-29 (bought as a 26-week t-bill) is up $27.
The $10,000 block ending in ~R44, due 2019-MAY-15 (bought as a 3-year note) is down $84.
Yes, I'm going to get my money back, but when I add up everything (cost vs holding value, but not interest paid), it's down...


Well it's up now ;-)
This is another reason I prefer holding my bills/notes at treasury direct rather than a brokerage. A brokerage tends to prominently display the daily current market value of each of your bill/note/bond. As far as I'm aware TD doesn't show this (or I haven't seen it and not looked for it). As interest rates rise/fall above what you bought your bill/note/bond for its value on the market (if you tried to sell it) will fall/rise. This daily loss/gain displayed in reds and greens is a distraction to me and fear it may tempt me to do something stupid like figure out which way interest rates are headed... I'm trying to get into a mode of been oblivious and trying not to care.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by dualstow » Thu May 18, 2017 6:32 am

Or you could always ... not look. ;-)
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by sophie » Thu May 18, 2017 6:53 am

Jeffreyalan wrote:Do most of you keep your cash in Treasury Direct? Or in a brokerage?
Deep cash at Treasury direct. "Shallow" cash in bank savings account. All other cash in brokerage as autorolled T bills. But that's not a hard and fast plan. I figure I'll be moving more cash into Treasury Direct, especially given that autorolled T bills will give approximately the same return as the bank savings account & CDs, after taxes.

Banks should be ashamed of themselves...interest rates have barely budged despite the jump in Treasuries.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by eufo » Thu May 18, 2017 8:20 am

sophie wrote:Banks should be ashamed of themselves...interest rates have barely budged despite the jump in Treasuries.
Agree. Chase keeps sending me a deal for $200 to deposit $15,000 into one of their savings accounts and leave it for 90 days. It's actually a good deal except that I will have to pretty much instantly close the account because of the 0.03% APY. Is it worth $200 to have to move money around, open the account, wait 90 days, monitor until the money goes in, close the account and shuffle money back where I want it? No.

Hey, Chase... up the interest rate on your savings and I'll just have a savings account with you instead of somewhere else. It's that simple.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by grapesofwrath » Fri May 26, 2017 8:21 pm

Tyler, Didn't you once include TIPs in your Portfolio Charts and then they disappeared, or am I mistaken ? I would think TIPs would be an insightful asset class to include given their performance/correlation is (supposedly) relatively unique. Even though TIPs are relatively recent invention I understand "synthetic" data exists for how they likely would have performed earlier. (But a question would be what duration..) Thanks.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by Tyler » Fri May 26, 2017 10:43 pm

grapesofwrath wrote:Tyler, Didn't you once include TIPs in your Portfolio Charts and then they disappeared, or am I mistaken ?
Yep -- I used to have TIPS on the site. Late last year a group of smart guys on the Bogleheads forum (including the guy I really trust who manages the Simba spreadsheet) sought to reproduce the study that reconstructed all of the synthetic data and basically determined that the data was junk. And it wasn't just the methodology of a single study but the nature of TIPS themselves.

The thing about TIPS is that because of the additional value of the guaranteed inflation adjustment their yields are lower than normal treasuries of the same maturity. That makes sense, otherwise nobody would purchase normal bonds. However, the difference is not tied to a measurable inflation number but is instead equal to whatever the market believes is the expected inflation over the life of the bond. Believe it or not, TIPS were invented at least in part to try to predict inflation. You can probably guess how well that has worked out.

Basically, to accurately model the behavior of TIPS you have to quantify the emotional belief of the market at a given point in time regarding expected future inflation. Studies have tried to do that but none I'm aware of have come close in any repeatable way. So while I haven't totally given up on the idea, for now I don't trust it enough to use synthetic data and there's not enough real data to make backtesting worthwhile.

BTW, several of the people who looked into modeling TIPS left the exercise swearing them off with their own money.
Last edited by Tyler on Sat May 27, 2017 11:24 am, edited 1 time in total.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by grapesofwrath » Sat May 27, 2017 5:47 am

Thanks for the reply Tyler. I had been wondering if a short term TIPS fund (eg VTAPX) or a ladder of 5yr discrete TIPS bonds held to maturity would be a suitable/sensible substitute for a cash component in a portfolio (if one didn't want immediate liquidity). My naive understanding is the yield might be slightly lower/comparable than that of regular bonds of same duration, but they would offer better protection if there were a substantial rate rise - hence decent alternative to cash. I've seen some portfolios (Swedroe ?) where the (heavy) treasury bond/note allocation is split equally between regular bonds/notes and TIPS of comparable duration. Seems like doing this is hedging one's bets on rates ? My other understanding is holding TIPS only really makes sense in tax deferred accounts, correct ? Further comments from others much appreciated.
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Re: Understanding Cash Will Make You a Happier Investor (Tyler)

Post by sophie » Sat May 27, 2017 9:06 am

Tyler, that's the best summary of TIPS I've heard anywhere. We'd had previous threads about keeping TIPS funds as an extra inflation hedge, but it always looked to me like you had to give up too much in order to get it.

Anyway, it's not really needed. The PP provides consistent enough returns over inflation that you don't really have to worry about it.
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