Revealed: Mid-Term Investment Choice from 2011
I’m going to reveal something today that I never have before on EPF – or to anyone (other than Kyle), actually. This is more intimidating to me than sharing my net worth, even! In 2011, we had enough money to pay off my subsidized and deferred student loans, but instead of doing so we invested the money with a 2-3 year time horizon. Today I’m going to tell you exactly what we bought with that short/mid-term investment money.
I have held back on sharing this information until now for two reasons:
1) To those of you who know less about investing than we do: I did not want it to seem like we were giving investment advice or holding up our own choices as anything to emulate. Now that we’re divested from these funds, I feel more comfortable sharing what we did because it is in no way a recommendation for an investment going forward.
2) To those of you who know more about investing than we do: I didn’t want to expose our choices to criticism. We wanted to stay the course with these investments for the duration of our time horizon, so I didn’t want to see any commentary on what we should have bought instead that would make us reconsider. Not that I think what we chose was perfect by any means – in fact, I’m sure it deserves a lot of criticism. I just didn’t want to hear it! Maybe that is dumb, but that’s how I felt.
We chose what we thought was a very conservative asset allocation. While we were pretty confident that the market would continue to rise, we knew that with our short time horizon there wouldn’t be time to ride out any significant loss. We acknowledged that it was possible that our overall experiment could lose money, yet we still wanted to undertake it.
We had approximately $16,000 to invest at the start of the period. We split that money between $6,000 in cash, $6,000 in ‘balanced’ mutual funds (a mix of stocks and bonds), and $4,000 in stock mutual funds and ETFs. How did we come to this allocation? Feelings, I suppose! We wanted some significant cash in case the bottom fell out of everything. The balanced funds were to give us a lot of safety and likely a little return; I couldn’t choose one so I chose two. The stocks were just for fun and to test us.
Below is a table of the funds we bought, the starting and ending balances, and the annual rate of return for each over the period we owned it (8/1/2011 to 3/3/2015).
The Parnassus fund, in particular, was a consolation prize. In 2011 we explored a certain investing strategy that wasn’t cost-effective for us at the time. The Parnassus Workplace fund was the closest mutual fund to our desired strategy, so we put a bit of money into it even though it was outside of Vanguard and had higher fees. And yeah, the fund has done quite well! We have even more confidence about pursuing our idea now that we know how to make it cost-effective.
Taken all together, our annual rate of return on this money was 7.22%, which I think is pretty darn good considering the level of risk we perceived we were taking. Of course, the markets have gone bananas over this time period so our return was higher than it “should” have been. We have a bit over $4,500 to show for this experiment in addition to the lessons we learned!
We had expected to sell these funds and pay off my student loans in December 2014, but instead we decided to keep the money invested according to a new strategy and pay off the loans slowly using cash flow (until the interest rate rises). I’ll give you more details about the new plan in my next post in this series.
How do you choose funds to invest in? Would you invest money you wanted to use within 2-3 years or keep it in cash? If you have short/mid-term investments, how do you have them invested?
Filed under: investing · Tags: cash, ETFs, mutual funds, returns
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I just follow the Boglehead lazy 3 fund portfolio.
For short term use….it’s hard to say. A couple months ago, I would have said CDs, savings accounts, maybe some short term bond funds, and I Bonds.
But, I recently decided to just get rid of my emergency fund, because my portfolio is large enough now that I will always have enough money in my portfolio to cover any emergency, even with a large market drop. So from that standpoint, logically, because an emergency fund could be required at any time, I should just invest the short term savings with the rest of my portfolio, so long as my portfolio is sufficiently large compared to the short term savings. I’m not sure if I would actually do this though – I’m guaranteed to need the short term savings at some point, while I’m never guaranteed to need my emergency fund.
I should mention – there are “specialty accounts” such as Mango and Netspend that give you 6% and 5% APY on the first $5k (but the Mango account has a $3/month fee).
I think I would have to consider myself quite wealthy before I stop keeping cash on hand for emergencies or unknown short-term needs. I don’t think we would have made these mid-term investments if we weren’t also quite cash-healthy (we could easily pay the loans with cash, too).
I haven’t heard of those accounts before, interesting. Have you calculated how much the fee knocks down the return?
You (well you + Kyle) are wealthier than I am. Deciding to not have an emergency fund isn’t so much about being wealthy as it is about weighing the probabilities.
Suppose you knew that there was a 90% chance that you would not need an emergency fund for the next five years. Then more often than not, you would come out ahead by getting rid of your emergency fund and investing it instead.
Of course, there’s still that 10% chance you still need the emergency fund. And more importantly, we don’t actually know the real probability. But we all invest based on unknown probabilities, not uncertainties anyway.
Could I possibly need some money that I can’t cash flow while the stock market is down? Yes. But will that happen during a time when I would have been better off having some money sitting as cash in a bank account as opposed to invested in the market? Probably not. The more years out you project, the higher the probability that my investment gains will outpace a savings account.
And another thing. If you go look up the top uses for an emergency fund, it’s actually kind of funny. A good number of them aren’t emergencies at all, but completely predictable expenses that only occur once or twice a year that people just don’t plan ahead for.
Out of curiosity, have you ever actually needed an emergency fund? That was another reason I got rid of it. I mean, I only started supporting myself financially two summers ago, but I have literally never had a large unexpected expense. And I don’t mean I’ve had emergencies but I was able to cash flow them as opposed to dip into savings – I mean I literally have not had a financial emergency.
As for the Mango and Netspend accounts, yes I have. For Mango, many people will say the yield is .06*$5000 = $300, less $36/yr in fees = $264, $264/5000 = 5.28% APY. This is wrong. You get taxed on the $300, not the $264. So for somebody with a 28% marginal rate (federal + state + local, if applicable), the post tax yield is $300*0.72 = $216, less $36/yr in fees = $180 => 3.6% APY post tax. Which would be equivalent to a 3.6%/0.72 = 5% pre tax yield on a no fee savings account.
Now I cherry picked that 28% marginal rate because it appears that the Netspend account has no fees if set up properly, and the 28% rate is the one where the equivalent pre-tax yields for the accounts are equal. I need to read all the fine print for the Netspend account though. There’s a lot more posts on the internet about the Mango account as opposed to the Netspend account. I’m not sure why that is, as I’m pretty sure Mango doesn’t have a referral program or anything like that.
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Oh and another reason I decided to get rid of my emergency fund – I started churning bank accounts for signup bonuses. Typically I go for ones that have a $200 bonus for fulfilling some direct deposit requirements. To keep them fee free they typically require $1500-$2000 minimum or average daily balance. If I did have an emergency, I could drain those accounts (keeping enough in the account to pay the account maintenance fee) without having to sell my investments. I currently have $4300 tied up in such bank accounts.
I’ve earned $910 by churning bank accounts since I started in November. I’ve got another $730 pending.
All bank bonuses are taxable and reported as bank interest.
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It sounds like you’ve given your new system a lot of thought and research. I’m not trying to criticize your choice. 🙂
We have never had to tap our very small, currently defunct emergency fund. As you said, we have always been able to anticipate our irregular expenses to some degree or used cash flow. The anticipation we have now is having a too-low income once my fellowship ends, so for us keeping a lot of cash around is sensible until we’re through this transition period.
In general, I am not a big emergency fund proponent for those who have other accessible money or high cash flow. I like the idea of a laddered emergency fund. I think the concept of an emergency fund is best for people who are prone to using up all available cash, are not able to anticipate irregular expenses well, or who have a lot of stuff that is likely to break e.g.., a house. In our case, the stuff that is likely to break is our income.
For retirement I invest in index funds as you do. For short-term / emergency savings, well, I’m sad to say we don’t have too much of that right now due to paying for school and trying to maximize retirement savings. Whatever money we have is sitting in checking accounts earning literally nothing or saving accounts earning basically nothing. I think one of my savings accounts got a penny in interest rate in December.
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You are in the “barbell” of having only short-term and long-term savings – for good reason, I think!
I actually forgot that our checking account is interest-bearing because we don’t receive interest on it monthly like we do for our savings accounts – Kyle had to correct me!
Did I lose my earlier comment? Strange.
Anyhow, short-term savings – what paltry amount I have is in checking accounts earning literary nothing or savings accounts earning a penny a month. I try not to think about it too much. Because of other financial commitments, I can’t start saving for short-term again until end of this year.
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I probably would have put the funds in a CD ladder myself since the investments could have very well lost money as well and it wasn’t a large enough sum that you would still have enough money leftover to work with. Or I would have used some of the money to help max out your Roth IRAs in the years where you couldn’t do that with cash flow.
That said, at the point my investing was at in 2011, I probably would have also picked quite a few funds to invest in and I in fact had with my 401(k), as well as a crazy bond fund in my taxable account that I later sold to buy Vanguard 500 Index Fund Investor Shares.
All of my short/mid-term investments are in cash since that’s the most flexible and doesn’t require any complicated taxation or withdrawal strategies. I tend to be indecisive about what to do in the short-term, so cash is key 😀
I’m curious what about the Parnassus Workplace fund made it the closest mutual fund to your desired strategy.
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We used a no-penalty CD last time around so laddering didn’t really seem necessary (although I’m not sure we considered it – maybe it would have made sense).
Yeah, we didn’t really know what we were doing but we were trying our best!
It’s been interesting to learn a bit about the capital gain taxation stuff – that actually has been a plus for making these investments.
I’ll explain more about this strategy we picked when I post next in this series, which will show why the Parnassus Workplace fund was where we parked the money last time.
I have some mutual fund Emily. I hope this would produce enough or more than for my retirement. I also invested in stock market. And, I recently bought a lot, which I am planning to build an apartment. Congrats by the way Emily! 7.22% is really great!
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Wow, that is a major undertaking! What is your timeline on the apartment building?
I would say 7%+ is a pretty good return. Nice job!
I invest my retirement accounts fairly similarly to yours. I focus on large cap funds like an S&P 500 fund. In my non-retirement investments, I have individual stocks, some of which are more speculative.
For the long-term, I am very conservative. My individual stocks have also done very well, but I consider that to be more like “play money” where I can easily live without it if the stocks tank.
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It sounds like you have a similar approach to us with different categories for your money. I know this approach is criticized by some as money is fungible, but I like it!
Thanks for sharing, this is really interesting! Finally inspired me to try putting a fraction of my savings into an index fund with Vanguard (just the minimum balance for starters, this is my first toe dipped into non-retirement investing so I’m starting irrationally small). I’ve never heard of the Parnassus Workplace Fund but I like the idea of it from looking it up, I’d love to read a post on why you picked it.
It is difficult to decide where to keep mid-term money because it’s much more personality/risk tolerance-dependent than short- or long-term money. I’m glad you’re experimenting!
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