As many regular readers if this blog know, I sold my GNMA fund awhile ago and bought TIPS and iBonds. I also sold all my bond funds not indexed to inflation. I put the remainder of my "fixed income money" in short term savings accounts that earn 1% or more. I have no reason to take bond fund risk until the Federal Reserve "normalizes" interest rates.
Some people need the income but I tell my subscribers there is a better alternative. I recommend selling SOME of your appreciated stocks or funds when you do your annual rebalance then use some of the profit taking cash for spending over the next year. Put the money into a savings account to use during the year to replace the income from bond interest and dividends. My explore portfolio is up 17.9% YTD so I've already taken significant profits.
I currently have the bulk of my fixed income cash at HSBC Bank and StarOne Credit Union. They both just dropped rates so I am leaning towards moving some of the money to American Express for 1.30%. For details, click "Learn More" here. If you hear of a large bank paying a better rate for short term savings, send me an email with the details.
Fixed Income Advice
This is what I sent my newsletter subscribers earlier today:
I moved my explore portfolio cash reserves from Schwab, where I was earning 0.25%, to American Express Bank where they are paying 1.30% APY.
If you have significant funds in a retirement account at Vanguard's prime money fund and don't want to move to another institution, then I suggest making a ladder of CDs with Vanguard's CD Ladder tool. Divide the funds into 5 buckets. Keep 1 bucket (20%) in Prime money fund ready for any buying opportunities or potential rebalancing, then put the remaining 80% into CDs for 3, 6, 9 and 12 months. As the 3,6 and 9 month CDs mature, buy a new 1-YR CD. After 9 months, you will have four one year CDs with one maturing every quarter. When interest rates normalize, you can put the CD funds into the total bond fund again.
You can get an idea what different banks are paying for CDs and savings accounts for various amounts by using the rate tool here. I use American Express because it is available to everyone and it is "too big to fail." You can often find better deals with more restrictions such as the 1.3% at Capital One plus 10% bonus and up to $60 credit detailed here, but you have to be a member of Costco.
For reporting simplicity, I have enough to calculate already, I will keep my core portfolios fixed income in Vanguard's prime money fund knowing it is a slight drag on my reported performance compared to the above CD ladder strategy.
(My explore portfolio has 70% in equities and 30% in fixed income so the stocks are doing very, very well)
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