money market question

Tiny nit-pick - the S&P index does not account for dividends, currently about 1.68%. The stated past performance of any mutual fund will always include the extra returns dividends provide. Thus one would actually see a VFINX or similar fund outperform the S&P index by a 1%+ margin, but lag total performance by the expense ratio, give or take a basis point or two. JOE

Reply to
joetaxpayer
Loading thread data ...

I think that when one talks about performance relative to an index, it is fair to compare apples and apples. That is, if you are including dividends when you measure the fund's performance, you should include them when you measure the index as well, even though it's not reported that way.

I am going to guess that if you were to look at the net asset value of VFINX, it would track the S&P index almost exactly, because the expense ratio is taken out of the dividends.

Reply to
Andrew Koenig

How do you figure that? As the previous poster said, the SP500's dividend yield is around 1.70%. Vanguard's SP500 fund expense ratio is around 0.20%. So Vanguard's SP500 fund will constantly

*lead* the published SP500 index numbers by around 1.5% each and every year.
Reply to
Rich Carreiro

No, it's not. The expense ratio is a percentage of *fund assets*, not a percentage of dividends (or of income in general).

Reply to
Rich Carreiro

The *size* of the expense ratio is as applied to the fund assets. The *cash* from which the expense ratio is extracted is typically taken from dividends rather than from, say, liquiding non-cash positions in order to pay it.

Reply to
BreadWithSpam

The net asset value (i.e. price) of the fund does not include dividends.

When you buy the fund, they send you a dividend every quarter. You can choose whether to reinvest that dividend in additional shares or do something else with it. So if you reinvest the dividends, the number of shares you hold keeps increasing independently of the price of those shares.

Reply to
Andrew Koenig

This statement suggests to me that the expenses are deducted from divident payments.

Reply to
Andrew Koenig

If that were correct, then the NAV would not drop when a fund distributed its dividends; yet it does.

The only exceptions are MMFs and bond funds that declare dividends daily (e.g. Fidelity funds). These funds receive interest from their securities, and credit it daily to their shareholders (who thus accrue it daily). The funds then pay the accrual out as dividends on a (typically) monthly basis.

It is the same as with a bank deposit that accrues interest daily. You don't see the balance jump except when the interest is paid monthly.

Equity funds, and many bond funds, are analogous to stocks. As the record date nears, the price (NAV) of the stock appreciates because the stock includes rights to that dividend. After the dividend distribution, the stock (or fund) price drops by the amount of the dividend (plus daily fluctuation). Unlike the bank account, which doesn't drop in value if you have the bank send you interest checks.

You are correct that expenses are paid first out of available cash, before selling securities. In one sense the cash is fungible - whether the cash came from inflows, idle cash, realized gains, portfolio dividends, or portfolio interest, the fund has a single pool of cash from which to extract its expenses.

But a well-managed fund will for tax purposes prioritize the sources of cash for its expenses. It will take the cash representing the highest taxable income first. So, it will (or at least should) pay expenses out of recognized short term gain and nonqualified dividends. Only later should it dip into revenue that gets preferential tax treatment.

Mark Freeland snipped-for-privacy@sbcglobal.net

Reply to
Mark Freeland

I've done some checking. While putting my money into the Total Stock fund and Total Bund fund makes sense, I did see that the Wellesley fund has had a much higher yield over 10 years than either of the other two funds.

Vanguard Total Stock fund: 8.6 Vanguard Total Bond fund : 6.08

Wellesley fund: 8.84

Wouldn't this more than make up for the higher expense ratio of the Wellesley fund or am I looking at this the wrong way?

Reply to
Jane

One final question before I do this (God this makes me nervous):

The $275k is currently is a "fixed" fund that is paying 4.8%. It's been paying this rate for several years. Not very good, but certainly dependable. Given the high market, is now a good time to put a big bunch of money into anything that handles stocks or should I wait until the market corrects?

Reply to
Jane

4.8% - very reliable, dependable 4.8% - is quite good. You need to put returns in context of risks and a risk-free 4.8% is excellent.

It may not be adequate for long-term investing (ie. funding one's retirement) but in the long-term, folks often can take a bit more risk. Short-term, risk-free - it's good.

If you're nervous about prices, and think a correction may be on the horizon, don't put it all in at once.

There's absolutely nothing wrong with letting it sit in cash while you take your time and figure out what to do - or while you move it into longer-term positions incrementally.

Instead of investing all of it at once, maybe put 20% of it into the other funds at a time, putting another chunk in every couple of months on a regular basis. If the market just keeps going up, you'll have missed out a bit on the earlier gains. If it goes down for a bit before resuming its climb, though, you'll (a) not have lost as much, and (b) have bought more when cheaper.

Don't rush into something you're not comfortable with, especially while in the meantime, you're earning a reliable 4.8%.

Just don't sit on that cash for 30 years...

Reply to
BreadWithSpam

Quite the opposite -- that behavior implies that the NAV does not include dividends once they have been distributed, just like individual stocks. In other words, if you look at the NAV of a fund that tracks a particular index, it will be a close approximation to the appropriately weighted average of the prices of the stocks that constitute that index. Those prices exclude dividends, which means that the NAV does as well.

Another way to look at it is this: If you buy an S&P 500 index fund, and the S&P index goes up 10% over the next year, you should expect the NAV of the fund to go up 10% as well, not 10%+dividends. The dividends are separate.

Now, I believe (but am not completely certain) that it is the case that the NAV will actually track the index, and the expenses will cause the dividends to be slightly smaller than one would expect. But I am quite certain that the NAV will correspond to the value of the index, not the value of the index plus dividends.

Reply to
Andrew Koenig

What if you wait, and wait, and from here the market goes sideways a bit, then moves up? In effect, you are trying to 'market time' which is a losing game. As BWS stated, averaging in over time (I'd say two years) may be the way to go. You need to understand the basics in terms of average return, and standard deviation around that return. Does 10% average sound good? Of course it does, but it comes with about a 16% standard deviation, a bell curve that suggests the chance of a down year is 1/3 or so for any given year. If you are too nervous, you should have less in the market. There is data for something called 'flow of funds' the money moving into or out of mutual funds. Funny (in a pathetic, sad, kind of way) that at the market peaked in 2000, money was pouring in. Money poured out during 02 as the market bottomed. So, many people bought high and then sold low, and 'learned their lesson' that the market is dangerous. But those who averaged in through the 90's and continued to buy in through the crash (as we 401(k) investors all do) didn't see quite the swing, and certainly "didn't lose it all." Just lost some time that would need to be made up. I had a point somewhere. Consider your own 'sleep factor' to determine the percent you will invest in stocks. That was it. JOE

Reply to
joetaxpayer

As it would any sane person. It's a big part of your wealth.

See Bread with Spam's comment: it's not a bad return. In the long run of your retirement though, the value of that income (to you) will fall as inflation eats away.

Given the high market, is now a good time to put a big

Jane

Assuming you are going to put it into the 2 Vanguard funds, why not put some in now, and then the rest over the next 2 years say? In the meantime, it can sit in a Vanguard Money Market fund, earning c. 4% I believe. 80% over 24 months would be about 3% a month.

The combination of the 2 funds (50/50) right now would yield about

3.5%.

Say the minimums on Wellesley and Wellington are $10k. You could put $15k into each ($30k) every 3 months for the next 2 years: that's $240k over the next two years.

Bread with Spam has some great comments.

Reply to
darkness39

Good and sensible advice, all of the above!

Here here.

Reply to
darkness39

At the end of every bull market we find countless people who had no business investing (taking risks.)

One thing I've come to understand is that achieving financial security comes more from HOW MUCH we save, not where we save. If investing this money truly makes you nervous, I'd suggest you take a nap until the urge passes.

-HW "Skip" Weldon Columbia, SC

Reply to
HW "Skip" Weldon

I'd like to roll it over slowly but I can't. The 401k that it's in now is an all or nothing roll over. I can make withdrawals, but then I have to pay tax.

======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

Reply to
Jane

Of course you can roll over the entire sum (and should), but then invest as you choose. A rollover doesn't mean you must go 100% stocks. You'll choose the mix as you decide. Good MM funds or short CDs are at 5%, so that's where you'd put much of it until you start the shift to the mix level appropriate for the longer term. JOE

Reply to
joetaxpayer

If your plan is to roll it a little at a time into the pair of Vanguard funds we were talking about, roll it all at once right now into a Vanguard *Money Market* fund first. Then, Vanguard will let you move a little at a time from one fund to another. Vanguard's Prime Portfolio Money Market fund is one of the best in the business.

If you weren't going to be going into Vanguard funds, I'd have told you to roll it all into a brokerage account elsewhere and then buying the funds you want in the brokerage account. But if you're interested only in Vanguard fund, start with a Vanguard money market fund and then go from there. (That Prime Money Mkt Fund is currently yielding over 5% - even better than where you have the money now!)

Reply to
BreadWithSpam

Interestingly, CNBC reported this morning that individual investors "are not putting money into the market." If this means a zero flow of funds (i.e. inflows and outflows balanced), does this mean we're in an inflection point and the market is beginning to decelerate to a top?

-Will

Reply to
Will Trice

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.