Is there any downside risk to moving my stagnant cash savings into this ASAP?
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lol do you really need an iPhone just for this to work? An Apple account isn’t enough?
Indeed, for the vast majority of that time period, you’d be lucky to get much more than 1% interest. Banks aren’t in the habit of giving away interest rates higher than inflation.
Pretty sure the core money market fund with Fidelity (spaxx) has a current yield of like 4.3%. My free cash is just parked there.
I just checked and it’s 4.47%. But if you have Schwab the default is 0.45%, they do offer higher yield options but you have to remember to move the money in and out of the funds every single time you buy/sell.
I’ve heard this explanation a million times and I can repeat it, but I just don’t grok it.
What Riverman said feels right even though I know that what you wrote is actually right.
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Let’s say you are just buying bonds at a single point. You either buy a 10 year treasury bond or a ten year bond fund consisting of only that same type of bond. You never sell either during the ten years after you buy. Your total return will be the same, no matter what interest rates do. If you do choose to liquidate either the bond or the bond fund at any point, your total return will still be the same. How could it not be?
This is harder for me to intuitively understand because in that fund there will be older bonds that will mature early in the 10 year period and some that are purchased well after I bought the fund that won’t have hit maturity until after I liquidate. So my return will be the aggregate of all of those individual bond returns and it’s not clear to me why that will be identical to the return of a single bond held to maturity.
Because the older bonds’ value fluctuates so that their net present value is exactly the same as the new bonds being bought.
Yeah, that’s where I get stuck. If I were taking a test, I’d know that’s the right answer. Just feels weird to me. I’ll think on it some more. I feel like I’m getting closer.
I guess I could just run the experiment myself (with a term less than 10 yrs). If I just followed it along during the term that would probably help it feel more right to me.
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Another way to think of it. Instead of just buying bonds once, you’re buying all the ten year bonds. Every time ten year bonds gets issued you buy some and hold it to maturity. Is this different from buying a ten year bond fund every time a ten year bond is issued and never selling?
That’s helpful too. It make sense that those should be the same. But when you go from this bulk buying to buying individual bonds, the leap is not intuitive, although I know what the answer is.
If I buy a bond paying 4% and hold it, I earn 4%.
If I buy a bond fund comprised of lots of bonds paying 4%, that continues just buying bonds at the market price over time, I can earn more or less than 4%. If they’re long term bonds, I can earn way more or way less than 4%, in fact I can earn like negative 50%, which I’d prefer to avoid. Ask Silicon Valley Bank how “safe” 10+ year bonds are.
But in reality, the bond fund is going to continually buy new bonds over the 10 year period. There’s no fund that is just going to buy ten years bonds at a certain date and then hold them until they mature and then go out of business.
So I think your point is theoretically correct but not practically correct in terms of what people are asking about in this thread or the choices they would have with their money today.
The 4% treasury bond you could buy today doesn’t have downside nominal risk unless you have to sell it before maturity or the US government defaults on their bonds, the bond fund does.
Think the difference with the 10yr bond fund is that they are continuously reinvesting the proceeds from interest and principal payments. So you are continuously fully exposed to interest rate risk.
If you bought a 10yr treasury bond, then after 9.9 years you would have trivial interest rate risk. If you were in the bond fund, after 9.9 years you would still be fully exposed to interest rate risk.
Think the two are fully equivalent only if you were fully committed to reinvesting your 10yr treasury bond proceeds into more 10 year treasury bonds. But people like Suzzer are not fully committed. They are saying I like 3.55% for now, but if five years from now it’s back down below 1% then I’d probably want to invest in something different.
Many bond funds pay out the accrued interest to holders (although most investors choose to automatically reinvest it).
You are right in that owning an individual bond subjects you to reduced interest rate risk over time - this is just because the duration of that bond is decreasing, whereas bond funds generally maintain the same duration of their bond portfolio.
Over time the return on holding individual bonds vs. a bond portfolio should be about the same. The risk are a bit differently concentrated though as with the individual bonds - assuming you’re planning to roll the money back into bonds - your risk is all concentrated at maturity. So if when your bond matures interest rates are low, you’re now stuck with cash at the worst time. Bond funds spread out this interest rate risk over time. Individual bonds can be great if you know you need money in x years (say you’re saving to buy a house in 5 years, then 5 year bonds can be ideal based on your risk tolerance).
This article does a good job explaining individual bonds vs. bond funds:
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yeah I’ve got a little left in my local bank in case I need to run and get it but everything else is at least 3.5% online now. luckily for regional banks it’s mostly old people money so they don’t even know but long run… yeah the kids are gonna notice. If they have any money at all anyway.
I just jumped on to the Principal Website because I have some funds sitting in an old 401k from a few jobs back and I got a letter saying I needed to vote on some such. Anyway, I’ve been thinking of moving those funds to my Roth IRA. I noticed that my Roth IRA is up 4.58% since January 1, while the 401k is up 6.53%. That’s almost two whole percent more! Should I even mess with it? I know I’ll have to pay taxes on the funds next year if I move them now vs not paying until retirement if I let them lie, but I don’t like being at the mercy of whatever idiot they’ve hired as accountant now to decide which fund they invest in next year so I’m not sure which option is most favorable?
Past performance are not indicative of future results.
A long as you like the funds you’re in, I wouldn’t sweat a 2 point difference based on 4 months of stonks.
I was joking about all that. I mainly would just like to have the funds in my control. Or maybe if I ever work somewhere again that has a 401k I could just switch it over to that. I guess it is not hurting anything to just leave it alone, it isn’t like the company owns it.