It’s really not worth worrying about too much for investment via a reputable broker. Everything is ACT/365 these days and at current interest rates, the difference between SABB (semi annual bond basis) and APY is only 0.05%, i.e. SABB 4.50% = APY 4.55%.
For T-Bills that are quoted at a discount, the broker will show you the implied interest rate (SABB) for their bid and ask, and I can tell you the Fidelity calculation is always exactly correct.
Thanks for the other link, I’ll look at it.
I think Treasury bills are /360 when reported or did they change that?
If your friend is < 30, he should focus on value growth. Between 30 and 45, he should balance growth and income, and 46+ he should focus on making sure that his income is stable and growing faster than inflation.
Assuming that he’s 46+, I would go with a bond ETF:
In essence, you want the price rate of change per year + dividend per year to be as high as possible. If, together, they’re under 2% then you’re going to be getting poorer every year as inflation grows. But, note that you could have something that’s decreasing in value every year but has such a high dividend that you still get richer off of it so you do need to add those together.
A quick and easy way to check this is to use the DRIP returns calculator here:
And try to find something that has 5+ years of data so you can have some confidence on the numbers.
One will be better than all of the others. From there, he’ll have to decide if he wants to put everything down on that one (best) option or try to limit exposure.
If you want to limit exposure to any one failure then you’d want to intermix things like:
IANA investment professional.
But IMO I’d add at least 10, and probably 25 years to the ages you mention. Your money needs to last until you’re 80 or 90. No bond-heavy portfolio will keep up with inflation from age 45 for another 40 or 45 years. Unless it’s loaded with junk bonds. Which are all but assured to crash at least once during a timespan that long.
Bond funds that perform better than 2% (over the last 5 years):
PFXF
RINF
ANGL
FALN
FPE
HYDB
BSJP
etc. a few dozen more
(Not an endorsement of any of these particular funds. I’ve done no research beyond looking up their performance rate.)
Granted, inflation could grow faster than 2% but the Fed does work hard to guarantee that.
But it is true that going in 100% on bonds is unreasonable at pretty much any point in your life. I was talking about focus, not spread.
At 45, you should be trying to pay down a house, supporting several other life forms, and etc. Your ability to ensure that all of that survives through a job loss and an extended number of months - up to a couple of years - while job hunting is pretty vital.
You should be able to calculate how much you require per month for basic survival and then be able to calculate how much income you need to have coming in, without needing to lift a finger.
Once you’ve covered what you need reliably, what you do with the rest of everything is basically open to whatever. You might be focused on income stability and still have 90% of your money in growth stocks. You’ve just sat down and done the math to determine what lump some of income-generating dollars needs to be set aside for financial security. If you haven’t done that math, and just assumed that you’re cool at 10% or 90% or 84.3%, then you’re liable to be putting too much or too little in. It should be pretty precise - whatever that specific number needs to be.
Much of the outsized performance of bond funds over the last 2-years was short-term price appreciation in the underlying bonds. A nice outcome, but not one that should be part of you bond portfolio planning.
Overall I agree w your high-level approach. For those who have enough assets to meet their expense needs through investment income and still have assets left over it’s THE smart play. It’s what I’m doing, and you probably are too.
The problem is the vast number of 40- or 60-yos for whom 100% investing in conservative income still leaves them short. They almost have to play “double or nothing” by investing more aggressively.
Your research in bond funds was insightful. There was someone else who wrote about CDs. Maybe OP’s friend might check with various companies. I feel like someone’s circumstances and experiences can influence the vehicles they choose. Maybe the OP needs some liquidity too? Or maybe OP’s friend might see fit to, I don’t know, make like a staggered ladder out of vehicles that mature shortly so the friend could take some advantage of changing interest rates in the future. And I hope this seems within bounds, that it doesn’t seem pushy. I’ve got no financial background at all.
Imo, this is not a worthwhile analysis. If your objective is to beat 2%, Treasuries now yield around 4%.
The absolute performance of any bond fund over the past few years is not going to be useful as a guide to future performance, because of the dramatic impact of the shift to and from near-zero interest rates.
The thought process for fixed income funds should be:
(1) tax considerations;
(2) what risk profile do I want in terms of duration and credit risk;
(3) screen funds with that profile for adequate size and liquidity and reasonable fees;
(4) look at which does best against its benchmark.
Savings accounts now beat 4%. Agree, 2% is trivial.
Thanks to everyone who made suggestions. My friend is consulting with a financial advisor. She wonders much she’d roughly pay in California income tax on CDs interest as opposed to Treasury Bills. Any penalties if taking her money out at any point. How to purchase the longest term they have. She’s read something claiming they go 5 years, but can only see one year on what she now sees.