July 13, 2020: Short Term Cash, Treasury Bills, CDs And Future Fixed Income

Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday August 3, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Short Term Cash, Treasury Bills, CDs And Future Fixed Income

What a difference a few months made: last time we looked at cash and equivalents (see February 10, 2020: Update On Short Term Cash, Treasury Bills and Brokered CDs), the interest rate was way above 1% and now, even 10 year Treasury notes’ interest is under 1%!

We look at the latest interests on cash and discuss the future of short term fixed income in this newsletter.

T-Bills and Brokered CDs

The following are the latest rates from Fidelity:

As always, investors can safely ignore any interests derived from their checking/savings accounts in major banks like Bank of America or Chase. They pretty much get pittance: for example, BofA has 0.01% to 0.04% annual interest payout. That would mean they pay you $10 a year for an account of $100,000! The good news is that for most people, they have one less item to deal with when reporting income tax!

So a 3 month T-bill pays about 0.13%, compared with 1.54% in February this year, more than 1.4% reduction. What’s more significant is that savers and investors pretty much can’t rely on any cash interests from their bank accounts or even short term bonds. In fact, the 10 year Treasuries are paying 0.61% annual interest right now!

Brokered CDs sold from a broker like Fidelity and Schwab are not of much use either: 3-month to a year rates are 0.15%!

Unfortunately, just as we tried to point out that savers can derive some meaningful interests from their savings in February this year, now all of the efforts are moot.

Brokerage money market funds

As expected, brokerage money market funds also offer depressing yields:

Money Market Fund	7-Day SEC Yield
Vanguard Federal Money Mkt	0.11%
Fidelity Government Money Mkt	0.01%
Schwab Government Money Mkt	0.01%
Etrade Sweep Rates	0.01% APY ($1m) to 0.01% (<=$250k)
Vanguard Prime Money Mkt	0.15%
Fidelity Money Mkt	0.01%
Schwab Prime Money Mkt	0.07% (or 0.22% with $1m minimum)

In a word, there isn’t substantial difference among all of the money market funds even though one can see Vanguard’s money market funds are still (consistently) offering highest rates because of their low expense charges. In the era of commission free stock and ETF trades, other than ultra active and sophisticated investors/traders (such as option traders), in our opinion, Vanguard brokerage is the go to place for most average investors because of their consistent low cost and high money market fund rates (even though right now they are still meager).

Future short term fixed income

This brings us to an important issue facing most savers, fixed income investors, retirees, and conservative investors: what to do in this sub-zero interest rate environment?

First of all, for all necessary short term use (3 month to a year), there is no much one can do other than deposit to checking/savings accounts.

However, in addition to minimal cash preserved for short term use, investors have several choices for the rest of money:

Invest in bonds or bond funds.
Invest (some) in stocks and the rest in bonds or bond funds.
Invest in real estates to derive more rental income
Invest in gold to preserve value

Gold or precious metals have a long history to help preserve cash in an ultra loose monetary and fiscal environment like the one right now. It has been touted by many great investors such as DoubleLine’s Jeffrey Gundlach and Bridgewater’s Ray Dalio. However, gold price is very volatile and in general, we would only suggest to allocate a small portion (up to 5% or so) to it if you indeed believe in its value.

Investing in real estates such as rental properties is another interesting option. It’s especially appealing right now, considering if one is able to finance the purchase by getting loans with low interest rates (30 year mortgage rate was below 3% recently). However, this is a long term investment and it’s only suitable to people who have energy and know-how. Another drawback for real estate investments is It’s not a liquid investment and it takes time to cash out.

Regarding option 2, regardless how much gains stocks have had for the past 10 years and going, investors should realize that this is actually a very bad time to invest in stocks because of their high (over) valuation. In our opinion, for money that’s not needed for over 15 years, investors can allocate some in stocks after they have undergone a good correction such as 30% or even bigger.

Investing in individual bonds does allow investors to have better control over their money as they can select individual bonds with various maturities (so called bond ladder) to accommodate their own needs. Unfortunately, at this moment, Treasury bonds are offering very low interests and thus, to get a meaningful return, one is forced to venture into corporate bonds. Not only that requires lots of work and know-how to pick good investment grade or high yield bonds, current ultra low yields require investors to be more active and tactical: corporate bonds are subject to both credit and interest rate risks. A bond market can be greatly affected by the underlying economy in both directions: when the economy falters, prices of corporate bonds can fall as investors demand higher yields to compensate for possible default risk (which is plenty in the current pandemic environment); on the other hand, when the economy is red hot growing, interest rates can rise fast (thus prices of bonds fall) if central banks are raising rates to counter inflation.

In our opinion, the best bet for average investors is to invest a tactical fixed income portfolio that invests in some excellent bond mutual funds. Our total return bond portfolios such as those fixed income mutual fund portfolios listed on Fixed Income page have consistently outperformed even the best total return bond funds such as PIMCO total return bond fund (PTTAX) or DoubleLine total return bond fund (DLTNX). Furthermore, they did that with less maximum drawdown (7.8% vs. PTTAX’s 14.4%, for example):

Portfolio Performance Comparison (as of 7/10/2020):

Ticker/Portfolio Name	YTD Return**	1Yr AR	3Yr AR	5Yr AR	10Yr AR	15Yr AR	Since 2001
Schwab Total Return Bond	6.0%	10.6%	6.5%	6.2%	7.0%	7.8%	8.6%
PTTAX (PIMCO Total Return A)	6.5%	8.8%	5.1%	4.1%	3.9%	4.9%	5.3%
DLTNX (DoubleLine Total Return Bond N)	2.6%	4.1%	3.7%	3.3%	4.9%
VBMFX (Vanguard Total Bond Market Index Inv)	6.8%	9.5%	5.5%	4.4%	3.7%	4.3%	4.7%

See detailed link >>

These tactical portfolios can switch to cash temporarily if markets are not favorable. Giving current high valuation of bonds (because of their ultra low yields), we believe a tactical portfolio with a sound strategy is perhaps the best way to invest one’s fixed income capital in the coming years.

Market overview

“Tech goes 1999”, that’s a popular saying right now. Those of us who are old enough to remember what happened in the 2000 technology bubble are familiar with the following chart: the Nasdaq composite index rose exponentially in late 1999 and reached the top in March 2000. The blast-off does resemble the one we are seeing since March this year:

By the way, it was not until November 2014 when the peak in 2000 was finally surpassed, a 13+ year journey!

Here is another chart to show we are just like 1999:

Anecdotal aside, we are still seeing big dispersion among stocks — small/mid cap and value stocks are still languishing (for more detailed current market trends, please refer to 360° Market Overview). We still don’t see a uniform up trend for stocks.

Regardless, we emphasize the following in the current situations:

For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

In terms of investments, stocks are somewhat cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles. The past development has been very supportive to our optimistic long term view so far.

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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