Bonds, Savings Accounts, Money Market FUNDS, etc...

[IdealFugacity]

Hey all. It's been a while since I had to return The Four Pillars of Investing to the library, and I haven't gotten around to ordering it from Amazon yet.

As I skim over my notes from my first read-through, and also simply from stepping back and looking at my current plans for my new post-college income, I realize that I either ignored the book on the topic of bonds, or the book told me things such that I have not recognized an appreciable relative value for them.

I am sold on equities in my portfolio, largely in the form of large-cap domestic, small-cap domestic, and international, in the forms of both blend and value index funds (Vanguard, blends via my employer-sponsored Roth 401k which offers Institutional shares, and value funds via my Roth IRA, also with Vanguard)

For the non-equities portion, to which I have assigned an asset allocation of 30-40% - 40% until I have 6 months expenses built up, 35% until I have a permanent job location when done with 2 years of rotations within my company, and then 30% after that until I begin saving for a home/family/whatever - I am, in the short term, mostly focusing on Vanguard Prime Money Market Fund (Emergency savings account), E*Trade Savings (5.05% APY), and of course my ING Direct checking account (4% APY, only keeping around $4000 in this account at any given time, fluidly moving cash between this and E*Trade to keep the balance in checking from getting too high or low).

Now, with the amount of money I have now and will have for a while (probably at least a year, if not 2-3 or longer!), my emergency fund account will probably make up the vast majority of the 30-40% non-equities portion of my portfolio, and my checking account will also be a non-negligible contributor in this portion as well. But, would it be a serious oversight to not consider bond funds as additional places to stick some money once I have reached this allocation with a fully stocked 6 months emergency expense VMMX account and interest-bearing checking account, and then my net worth begins to expand beyond that point?

If I reached that point this morning, I would have directed further money required to keep the 30-40% non-equities number steady into more shares of VMMXX (with a mental distinction between these shares and the shares devoted to 6 months of emergency expenses) or a high-yield savings account, maybe CDs. Bonds have not crossed my mind very much, and I don't know if that is a bad thing.

[Fishhead24]

It amazes me how many people are confident in stock market.

Personally, would not have more than 10% of my net worth in stocks at this time........and don't.

Having said that, if your definetly going to not touch the money in your stock portfolio other than moving it around in that sector for the next 10-15 years or longer, than you should be ok longterm.

[IdealFugacity]

Fishhead,

If I too had the opportunity to invest in IOWA FARMLAND, I wouldn't be considering putting that much money into stocks either.


[Sorry, this joke is too old.]

[kyleb]

[ QUOTE ]
It amazes me how many people are confident in stock market.

Personally, would not have more than 10% of my net worth in stocks at this time........and don't.

[/ QUOTE ]

KING OF THE STOCK MARKET

[Fishhead24]

[ QUOTE ]
Fishhead,

If I too had the opportunity to invest in IOWA FARMLAND, I wouldn't be considering putting that much money into stocks either.



[/ QUOTE ]

One acre of quality land can be had right now for less than $5,000........I'm sure you have more than that to invest if your looking into stock investing.

However, it is hard to find parcels of 10 acres or less for purchase, except for timberland, which by the way has increased at almost the same rate as farmland in the states of Iowa and Minnesota. In fact, this would be the way to go if you plan on investing with small capital in this area, as the timberland can and will be highly sought out for in respect to hunting, building, ehtanol production, and conversion to farmland.

-FH-

[jively]

Your plan sounds good.

Generally, I would have two "groups" of money on my net worth statement: cash equivalents, and investment assets. Your emergency fund and checking acct are in your cash equivalents. For the investment assets, that is your Roth 401k and Roth IRA.

You are including your cash equivalents in your 60/40, 65/35, or 70/30 portfolio. If you want to do that, fine. Generally, I would think that the investment assets would be 60/40, 65/35, or 70/30, and not include the cash equivalents in that allocation.

The bond portion of your investments should be short-term and intermediate-term and high quality. Since your accounts are at Vanguard, I would suggest 50% Short-Term Invest-Gr Inv and 50% Inter-Term Invest-Gr Inv (if available).

Good luck,

-Tom

[IdealFugacity]

jively,

Bernstein believes that Emergency funds should be swept into the overall portfolio section of "cash, bonds", as indicated on page 272 of Four Pillars (I bought it on Amazon, and ponied up a couple extra bucks to get the digital version right away).

I got the impression on my first read through, and again, I just found this in his Chapter 12 summary:

"Manage all of your assets-personal savings , retirement accounts , emergency money , college accounts , and house savings-as one portfolio."
COPYRIGHTED MATERIAL
William J. Bernstein. The Four Pillars of Investing: Lessons for Building a Winning Portfolio. (McGraw-Hill, 2002). Page 241.


Clearly there are multiple ways of looking at this.

[jively]

Ok, I believe you. I haven't read this book for a few years, and I think it's a great book and I recommend it.

Adding cash equiv. to your portfolio has a couple of strange results. If you're saving for a 1st house, and have lots of cash equiv., then as you buy the house, you'd have to rebalance to get your allocation back.

Also, there are a lot of people here that are young with high risk tolerances that use 100% stock, 0% fixed. But those people should still have emergency funds...

-Tom