VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

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Mister Imperceptible
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VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by Mister Imperceptible » Mon Apr 08, 2019 6:40 pm

My mother was laid off. I am assuming the reins on her 401(k). It cannot be rolled over into an IRA until a few clerical hurdles which may take a few weeks. She has 100% of the account invested into the Vanguard Target Retire 2040 Trust, which has to me a crazy 82+% allocation to equities (crazy because she is in her fifties and crazy because what anyone familiar with my posts knows of my market outlook).

My short-term objective, until I can help her get this rolled over, is capital preservation. The most viable alternatives, are:

Vanguard Total Bond Market Index (VBTIX): Less than 44% are in Treasuries as of 28Feb2019. Over 24% are mortgage-backed. Over 17% are Baa rated.

Held its own during the 2008 episode but this time could be different. Suffered 8% decline from 22Jan2008 to 31Oct2008.

Vanguard Target Retirement Income Trust:

As of 31Dec2018:
Vanguard Total Bond Market II Idx I 37.30%
Vanguard Total Stock Mkt Idx Instl Plus 18.05%
Vanguard Shrt-Term Infl-Prot Sec Idx Ins 16.70%
Vanguard Total Intl Bd Idx Institutional 15.91%
Vanguard Total Intl Stock Idx InstlPls 12.04%

Overall about 30/70 stocks/bonds. I am normally averse to TIPS as a Harry Browne disciple but any Treasuries are good considering the alternatives. I’m also eating a decent amount of foreign debt, especially European debt, with VTIFX (yuck).

Fund Inception Date 29Feb2008 so full potential drawdown unknown but did suffer a 20% decline from 19May2008 to 20Nov2008. More potential protection from an inflation shock than VBTIX.

Mass Mutual “Guaranteed Interest Account”:

“The GIA, backed by MassMutual’s General assets, is designed to provide a stable, guaranteed rate of return and guarantee of principle.”

Bonds 56.7%
Mortgage Loans 13.8%
Policy Loans 8.1%
Partnerships & LLCs 5.0%
Common & Preferred Stocks. 7.9%
Real Estate 0.3%
Short-Term & Cash 2.5%
Derivatives & Other Assets 5.7%

Interest is supposed to be 3% but there is all sorts of disclosures and an invitation to call the custodian for more information. Sounds like a potential rip-off waiting to happen.

Seeing as there is no way to avoid eating a slug of mortgage-backed securities somewhere, I am leaning toward VBTIX until I can get her IRA set up and into Treasuries and mining stocks. Any input appreciated.

bigato
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by bigato » Mon Apr 08, 2019 6:51 pm

Have you considered analyzing your portfolio ideas using the tools at Tyler’s site?

The Old Man
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by The Old Man » Mon Apr 08, 2019 6:55 pm

Since we are only talking a few weeks and if you don't want to take any risk of any kind, then I would suggest putting it into Vanguard Prime Money Market Fund. The 7-day SEC yield is 2.45%.

Mister Imperceptible
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by Mister Imperceptible » Mon Apr 08, 2019 7:01 pm

I’ve spent loads of time on Tyler’s site. The problem with her account is lack of options. No individual stocks. No Treasury funds. No gold mining equities. Not even sector funds (The energy sector is heavily indebted but I would at least throw some money that way as an inflation hedge without mining equities available). Just one fund each for large cap growth, large cap value, large cap core, mid cap growth, mid cap value, etc.

This is short-term. Once I get her into an IRA, I’m going to load it up with short-term Treasuries (SHY, likely 50%) with a dash of long-term treasuries (EDV, 12.5%) and a good slug of mining equities (SGDM, SGDJ, GDXJ, 37.5%). My father has a larger company-managed retirement account that is very tied to the market, and my parents also own a McMansion (with a mortgage). She wasn’t laid off after 14 years for poor performance.....I’m going to provide them with a hedge.

KevinW
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by KevinW » Tue Apr 09, 2019 1:07 am

The Old Man wrote:
Mon Apr 08, 2019 6:55 pm
Since we are only talking a few weeks and if you don't want to take any risk of any kind, then I would suggest putting it into Vanguard Prime Money Market Fund. The 7-day SEC yield is 2.45%.
+1

If you are just parking the assets for a couple weeks, I'd use a money market fund or short term treasury fund.

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Gilberto de Piento
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by Gilberto de Piento » Tue Apr 09, 2019 11:01 am

+1 for money market.

If I remember correctly this is where Vanguard puts your money between when you transfer it to them and when it goes into a fund.

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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by jacob » Tue Apr 09, 2019 11:07 am

Target date funds are essentially just balanced funds (fund of funds) where the balance is something like ~3x(Target year - Today)% in equities or something to that effect. Keep in mind that it's not mandatory to match target date retirement funds in terms of the actual date :idea: For example, due to lack of options, we use a 2015 target date retirement fund for our HSA account.

Mister Imperceptible
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by Mister Imperceptible » Tue Apr 09, 2019 1:47 pm

There were no Vanguard Money Market or Treasury options. I decided to put her into VBTIX until I can roll it into an IRA within a few weeks. If interest rates rise significantly in the next few weeks despite the dovish pivot I would suspect equities are doing as bad or worse than bonds. I would have put it into the Income Trust/Fund of Funds if she were still employed and I had to leave it in there for awhile with limited options.

Edit:

@Dr. Fisker

To your lightbulb, she was in the 2040 fund of funds, and also available was 2035, 2030, 2025, 2020, 2015, and Income. Income had the lowest equity allocation and would have been my choice for that reason.

Apparently, it is just too irresistible to package up those toxic securities in the only available bond funds in a lot of these plans..... “but I’m getting a 50% employer match!...”

Mister Imperceptible
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by Mister Imperceptible » Wed Apr 10, 2019 12:32 am

http://www.myrmikan.com/pub/Myrmikan_Re ... _05_15.pdf

From the piece:

By convention, market money funds are valued a $1 per unit and pay interest daily. The tiny duration, senior position, and credit-worthiness of the borrowers make the loans have no possibility of loss, at least theoretically. But theory and practice rarely match fully, and in the panic of 2008 one of the major money market funds “broke the buck,” meaning its NAV per share went below $1. The Fed was terrified this would lead to a run on the money market funds, which would freeze the cash large corporations use to make payroll, pay suppliers, etc., so they bailed them out.

The SEC, wishing to prevent a repeat of such an occurrence, imposed rules as of 2016 that force money market funds to allow their NAVs to float and require them to gate investors in the event of a liquidity panic. The whole point of the funds is to house ready cash, so the prospect of a gate completely undermined their function. When the rule change came into effect, about $1 trillion of money market funds moved into government bond money market funds, which (of course) are exempt from the rules, and around $350 billion moved into lightly-regulated, so-called “cash funds.” Whereas government money market funds were shooting for a 0.6% return in early 2017, cash funds were promising 2% returns. This is a low figure from an asset perspective but was a fabulous return on “risk-free” cash. But how could these cash funds achieve this risk-free return at time when short-term Treasury bonds had barely any return at all? Easy: through the CMBS market.

Whereas MBS contain residential mortgages, CMBS contain commercial mortgage- backed securities: malls and office buildings. Let us consider a typical transaction from early 2017. JP Morgan and Deutsche Bank made (or acquired) $1 billion of commercial loans yielding 4.5% with maturities of around 10 years. The owners of the real estate took the loans out against their existing assets, perhaps, to finance construction of new office towers (in this specific case, the largest single loan was to Jared Kushner against his ownership of a portion of the old New York Times building). The banks securitized the loans such that 79% of the loan pool was put into slices of short maturities (meaning they get principal payments first) that got a AAA rating, 16% was put into tranches that were rated between AA and B+, and the remaining 5% was put into a “B-piece,” which has the longest maturity and is first to absorb defaults.

The 5% non-rated B-piece was what is now called the “horizontal risk-retention piece” because post-crisis rules prevent banks from hedging it or using it as collateral. These rules as designed would make this 5% piece behave as a kind of reserve requirement, meaning the banks would be allowed to magnify deposits “only” 20 times through the fractional reserve mechanism. Changes in the rules, however, allow the banks to sell this unfinanceable, dead-weight piece to someone else.

That someone else in this case was the insurance behemoth MassMutual, which has $675 billion under management. MassMutual issued concurrent with this transaction a $475 million 60-year bond paying 4.95% fixed rate and used the capital to buy the B-piece, priced to yield 13.9%. The insurance company is not permitted to pledge the B-piece directly to the bond holders (and, thereby, get it off its balance sheet), but its balance sheet is so huge that investors don’t care. The result is that the 5% quasi-reserve requirement, instead of consisting of hard dollars, as intended by the regulations, is now represented by 60-year paper, which a bank can accept as collateral to create more credit! The banks are freed to do CMBS transactions an infinite number of times. Note hat this sample transaction consumed only 10% of the capital MassMutual raised: the company already held more than $50 billion in commercial real estate and was embarking on a headlong dive into the structured market.

The cash funds took the AAA tranches, initially priced to generate yields ranging between 2.1% and 3.5% (though they closed at higher prices / lower yields). Everyone was a winner: the banks made a fortune selling $1 billion of assets yielding 4.5% at a price that resulted in the average yield falling to around 3.5%; MassMutual locked in a 9% spread for ten years, and the cash funds could offer three times the yield of government money market funds.

Generation-X
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by Generation-X » Wed Apr 10, 2019 1:15 am

I would also consider the ramifications of moving assets out of an ERISA "qualified retirement plan" which are protected from civil lawsuits. (non-bankruptcy protection)
https://www.investopedia.com/articles/p ... ditors.asp

IRA protection (non-bankruptcy protection) varies from state to state.
https://www.thetaxadviser.com/content/d ... achart.pdf (2014)

BAPCPA protects IRAs in an event of bankruptcy (Traditional and Roth upto $1,283,025 - 2018).
https://www.retirementwatch.com/how-to- ... -creditors

I'm not an investment advisor and this is not an advice - this is for information purposes only, use at your own risk.

classical_Liberal
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by classical_Liberal » Wed Apr 10, 2019 3:41 am

@Generation-X
I have always been under the impression ERISA's which were rolled into other tax deferred accounts (IRA), remain under the same protections as if they were still ERISA, if no other funds were added to the IRA post roll-over. Meaning that only accounts originally opened as IRA or Roth fell under state legislation (or roll overs with additional contributions once designation changed).

Can you speak to this point?

@MI
Reading the mortgage example on pg1-2 of your linked publication gave me a flashback to 2005. I worked in banking, Fannie and Freddie were buying loans even the subprime market wouldn't touch. Zero down without income verification was A-OK as long as you had good credit and a few bucks in your 401K for reserves.

Generation-X
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Re: VBTIX vs Vanguard Target Retirement Income Trust vs “Stable Value Guaranteed Interest Account”

Post by Generation-X » Thu Apr 11, 2019 2:27 am

@classical_Liberal
This appears true in California, at the appellate court level, per McMULLEN v. HAYCOCK**
(https://caselaw.findlaw.com/ca-court-of ... 83253.html). If you had money in a 401(k), then put it in an IRA, it will have complete protection (from creditors) if you can trace it back to the 401(k). The case *does not* address the protection status of future IRA contributions which commingle with the roll-over IRA. https://www.sfgate.com/business/networt ... 647177.php

** Under California law, assets held in private retirement plans are fully exempt from execution, ***both before and after distribution*** to the judgment debtor.  (Code Civ. Proc., § 704.115, subds. (b), (d).

For other states, without a specific case law like California, the existing state-by-state IRA exempt status *may* govern the protection status of roll-over IRA by default, but this is just a guess. If this is not the case, then BAPCPA would provide protection but under bankruptcy.

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