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CDs Still Have A Place In Your Portfolio

Sunday, December 2, 2012 - 5:48 AM
From the Wall Street Journal
"I believe that CDs are one advantage that a small investor has," says Allan Roth, a financial planner in Colorado Springs, Colo.

For example, a 0.3% yield on a one-year CD might seem like peanuts, but U.S. Treasury one-year bills are yielding around 0.17%.

Read more
 

And if you don't mind internet banking, it's easy to get yields much higher than the national averages.
6
Ken TuminKen Tumin5,472 posts since
Nov 29, 2009
Rep Points: 125,708
1. Sunday, December 2, 2012 - 9:46 AM
Thanks to Ken's efforts, finding CDs yielding 2% is not that difficult. The trick, as always, is to ladder. Think of your CDs as a bond ladder. Year one, buy a five-year CD; year two, buy another; year three ... (you get my drift).

Eventually, rates will go up. The key is to always roll your CD ladder at or above stated inflation rates (currently 1.7%).

So, while a 2% 5-year CD might seem paltry, a real rate of return of 0.3% (2.0 - 1.7) sounds pretty tasty. Beats many bond funds out there, might I add, without the NAV risk.
6
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 944
2. Sunday, December 2, 2012 - 4:38 PM
I should also have mentioned that Allan Roth is one of the few financial planners who recommends CD ladders for the conservative part of one's portfolio. It seems like most financial planners (including the other one quoted in the article) always prefer bonds or money market funds for the conservative part of one's portfolio. As you mentioned, CD ladders can still be good deals (relatively speaking) for the money that you want to keep safe.
4
Ken TuminKen Tumin5,472 posts since
Nov 29, 2009
Rep Points: 125,708
3. Monday, December 3, 2012 - 4:08 AM
I suspect most folks understand the difference between "distribution yield" and "SEC yield" in a bond fund, and also the concept of "duration", but, dang:

When interest rates begin to rise (as they will, eventually), that "tasty" bond fund distributing 2% (or more) will not only distribute less,* its value will drop. For your garden-variety intermediate-term bond fund with a duration of "5", you should be back "even" in five years. That's little solace to the person who sees his or her fund's value just "mark time march". Don't even get me started on "ERs" (expense ratios), the cost you pay the bond fund manager.

Your CD ladder, by contrast, will never lose value, and as interest rates rise, every year your maturing CDs will earn more. Oh, the ER on your ladder? I suspect it's zero. There might be a modest fee to do those transfers of maturing CDs, but that's about all.

I know it's counter-intuitive, but right now, today, this moment, folks should be swapping out of bond funds and into CD ladders. Hold only enough in bond funds to enable re-balancing of your desired asset allocation.

*Bond fund distribution yields are dropping markedly. Just check most any fund and look at the monthly yield today compared to a year ago.

PS: If one assumes interest rates will "go negative", then all bets are off. Of course, I might have said the same thing last year about the odds of Stanford and Wisconsin playing in the Rose Bowl in 2013. One thing for certain, wear red.
4
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 944
4. Tuesday, December 4, 2012 - 6:30 PM
Great post, Bozo.

Although I am not a Stanford fan, they certainly have a great football team and maybe the best defense in the country.
1
loulou552 posts since
Aug 3, 2010
Rep Points: 3,431
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