I sold a house recently and got a good amount of cash. I want to find a good place to park it, then DCA it into S&P over 5 years.
The best strategy has probably been discussed here a million times already, but I still did my own little research passionately.
I'm a Vanguard user, so the easiest choice is Vanguard's default settlement fund VMFXX. It consistently beats CDs, I love it. Now my goal is to find a simple fund that's better than VMFXX.
I first considered tax exemptions. After googling "what securities are federal tax exempt, and what are state tax exempt?" I got the basic understanding that (A) federal government / treasury stuff is state tax exempt (B) state municipal stuff is federal tax exempt (C) state municipal stuff is also state tax exempt if it's my own state.
Apparently (C) is the best tax-wise, but my state doesn't offer good options, so I aimed for (B), and I found two:
- VMSXX
- VTEAX(VTEB)
They're federal tax exempt, but the yield is low. My marginal federal tax rate is 24%, which means if a CD yields 4%, they need to yield ~3% to compete. Numbers show they don't.
So (B) didn't work, and I turned to (A) which is federal government / treasury stuff that are state tax exempt. My marginal state tax rate is 8.5%, which means if a CD yields 4%, a treasury fund needs to yield 4 * (1-8.5%) = 3.66% to be equal.
In reality, funds rarely contain all or none government stuff, they usually contain a portion. Vanguard publishes this pdf every year on what % each fund contains. From there, I found these funds contain a significant % government stuff:
- VMFXX 49%
- VMRXX 52%
- VUSXX 80%
- VEDTX (EDV) 100%
- VIPSX 100%
- VSIGX (VGIT) 93%
- VUSTX 93%
- VLGSX (VGLT) 93%
- VBIRX (BSV) 61.57%
- VTAPX (VTIP) 100%
- VFISX 88%
- VSBSX (VGSH) 88%
Performance can easily be compared by clicking on each one. I mainly looked for yields and volatility. Some yield too low, some yield ok on average but often have negative years which don't suit my goal.
After removing the bad performers, I finally narrowed down to 4 candidates:
1. VMFXX 49%
2. VMRXX 52%
3. VUSXX 80%
4. VTAPX (VTIP) 100%
Surprisingly and unsurprisingly, every money market fund (ending with "XX") survived. They're actually the best of 3 worlds: (1) actively managed (2) low fee (3) NAV stays at $1 meaning return can't drop below 0%.
Here I learned the lesson: money market funds have the same goal as mine (preserve principle meanwhile try to grow), so the fund managers already utilize all investment vehicles and all tricks to achieve this goal, so I don't really need to try and seek something better myself.
In theory, fund managers of #1 and #2 have the option to buy what's in #3 and #4, so when #3 and #4 are doing great, #1 and #2 should always be able to keep up.
Anyway, their performances have been very close historically. For me, each of the 4 has its strength:
VMFXX strengths:
- it's the default settlement fund so DCA can be set and forget.
- if there's an opportunity to buy a dip in S&P, I can do it immediately.
VMRXX strengths:
- historic performance is a hair better than VMFXX
VUSXX strengths:
- similar historic performance as VMFXX, but more % state tax exemption
- in years when treasury yield is less good, the % treasury in the above 2 should decrease (presumably), widening the difference in % state tax exemption, therefore offset the treasury yield being less good
VTIP:
strengths:
- historic performance arguably better than the 3 above
- 100% state tax exempt
- NAV fluctuates, so a portion of return can be taxed as long term capital gain (or loss)
- if there's an opportunity to buy a dip in S&P, I can do it immediately by trading the ETF
- no need to be a vanguard user
- rising interest rate (causing TIPS to fall) seems unlikely in the near future
- falling inflation rate (causing TIPS to fall) seems unlikely in the near future because inflation is already down
weakness:
- NAV fluctuates, so return can be negative in some years
My conclusion: for the purpose of parking large amount of cash for a few years, VMFXX, VMRXX, VUSXX, and VTIP are the best options. I kinda like VTIP but wouldn't mind using the other 3. Just need to remember to claim state tax exemption no matter which I choose.
Feedback please, thanks!
The best strategy has probably been discussed here a million times already, but I still did my own little research passionately.
I'm a Vanguard user, so the easiest choice is Vanguard's default settlement fund VMFXX. It consistently beats CDs, I love it. Now my goal is to find a simple fund that's better than VMFXX.
I first considered tax exemptions. After googling "what securities are federal tax exempt, and what are state tax exempt?" I got the basic understanding that (A) federal government / treasury stuff is state tax exempt (B) state municipal stuff is federal tax exempt (C) state municipal stuff is also state tax exempt if it's my own state.
Apparently (C) is the best tax-wise, but my state doesn't offer good options, so I aimed for (B), and I found two:
- VMSXX
- VTEAX(VTEB)
They're federal tax exempt, but the yield is low. My marginal federal tax rate is 24%, which means if a CD yields 4%, they need to yield ~3% to compete. Numbers show they don't.
So (B) didn't work, and I turned to (A) which is federal government / treasury stuff that are state tax exempt. My marginal state tax rate is 8.5%, which means if a CD yields 4%, a treasury fund needs to yield 4 * (1-8.5%) = 3.66% to be equal.
In reality, funds rarely contain all or none government stuff, they usually contain a portion. Vanguard publishes this pdf every year on what % each fund contains. From there, I found these funds contain a significant % government stuff:
- VMFXX 49%
- VMRXX 52%
- VUSXX 80%
- VEDTX (EDV) 100%
- VIPSX 100%
- VSIGX (VGIT) 93%
- VUSTX 93%
- VLGSX (VGLT) 93%
- VBIRX (BSV) 61.57%
- VTAPX (VTIP) 100%
- VFISX 88%
- VSBSX (VGSH) 88%
Performance can easily be compared by clicking on each one. I mainly looked for yields and volatility. Some yield too low, some yield ok on average but often have negative years which don't suit my goal.
After removing the bad performers, I finally narrowed down to 4 candidates:
1. VMFXX 49%
2. VMRXX 52%
3. VUSXX 80%
4. VTAPX (VTIP) 100%
Surprisingly and unsurprisingly, every money market fund (ending with "XX") survived. They're actually the best of 3 worlds: (1) actively managed (2) low fee (3) NAV stays at $1 meaning return can't drop below 0%.
Here I learned the lesson: money market funds have the same goal as mine (preserve principle meanwhile try to grow), so the fund managers already utilize all investment vehicles and all tricks to achieve this goal, so I don't really need to try and seek something better myself.
In theory, fund managers of #1 and #2 have the option to buy what's in #3 and #4, so when #3 and #4 are doing great, #1 and #2 should always be able to keep up.
Anyway, their performances have been very close historically. For me, each of the 4 has its strength:
VMFXX strengths:
- it's the default settlement fund so DCA can be set and forget.
- if there's an opportunity to buy a dip in S&P, I can do it immediately.
VMRXX strengths:
- historic performance is a hair better than VMFXX
VUSXX strengths:
- similar historic performance as VMFXX, but more % state tax exemption
- in years when treasury yield is less good, the % treasury in the above 2 should decrease (presumably), widening the difference in % state tax exemption, therefore offset the treasury yield being less good
VTIP:
strengths:
- historic performance arguably better than the 3 above
- 100% state tax exempt
- NAV fluctuates, so a portion of return can be taxed as long term capital gain (or loss)
- if there's an opportunity to buy a dip in S&P, I can do it immediately by trading the ETF
- no need to be a vanguard user
- rising interest rate (causing TIPS to fall) seems unlikely in the near future
- falling inflation rate (causing TIPS to fall) seems unlikely in the near future because inflation is already down
weakness:
- NAV fluctuates, so return can be negative in some years
My conclusion: for the purpose of parking large amount of cash for a few years, VMFXX, VMRXX, VUSXX, and VTIP are the best options. I kinda like VTIP but wouldn't mind using the other 3. Just need to remember to claim state tax exemption no matter which I choose.
Feedback please, thanks!
Statistics: Posted by quuzuu — Thu Dec 05, 2024 9:06 am — Replies 1 — Views 130