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CD Vs Bond Fund: A Case Study

Monday, April 22, 2013 - 7:36 PM
From The Finance Buff:

     [...] my bond fund returned 6%+ a year in the last few years.
     If I had bought CDs instead, I would’ve missed all the good
     returns. [...]

     What if you bought a CD instead of a bond fund say four
     years ago in 2009?

Read more:
3
cumuluscumulus364 posts since
Jan 16, 2010
Rep Points: 1,706
1. Monday, April 22, 2013 - 7:48 PM
Excellent comparison. Thanks for the post cumulus.
1
ShorebreakShorebreak2,699 posts since
Apr 6, 2010
Rep Points: 14,632
2. Monday, April 22, 2013 - 8:28 PM
Kind words Shorebreak; subtext to this is that
Ken is doing a superb steering job for us in
this environment.
2
cumuluscumulus364 posts since
Jan 16, 2010
Rep Points: 1,706
3. Monday, April 22, 2013 - 9:55 PM
Dear cumulus,

I guess the article misses out on an important matter.  That of fluctuations of the NAV/Price of the Mutual Fund.  The article, I guess, assumes that one buys the security and keeps holding it just like a CD.  Surely this is a rather hypothetical assumption and quite far off from the reality.  The potential of profit from a Mutual Fund does not solely reside with the "dividends" it returned.  The potential also lies in the fluctuations of its NAV/Price.  These fluctuations can be used to get higher returns than the dividends. 

Such flucuations are routinely used by traders to get more than the dividends.  For example see the TFI and HYMB trades at link below.  Both of these trades (if I were to redeem tomorrow - which I intend to) will result into some dividends, and some capital gains.

http://www.depositaccounts.com/forum/thread/12981-municipal-bonds.html

In short the Principal of the CD stays the same, but principal amount put into the Mutual Fund (and ETF) does not.  So comparing merely interest of a CD with dividends of a Mutual Fund is a partial comparison, rather than complete comparison.  (i.e. What about comparing the Capitals Gains/Losses?)

Such partial comparisons perhaps can give comfort to the people who shun trading Bond Funds, but such people I guess need be bear in mind that doing selective/partial comparison is a rather dumb thing to do. ;-)

Yours Truly,
- Anon
6
ytytytytytytytyt158 posts since
Jan 28, 2013
Rep Points: 623
4. Tuesday, April 23, 2013 - 12:01 PM
ytytytyt you make valid points, quite
well said; thanks for posting.
2
cumuluscumulus364 posts since
Jan 16, 2010
Rep Points: 1,706
5. Tuesday, April 23, 2013 - 1:44 PM
.

Dear cumulus,

I'll give a link below that shows the historical prices for the Mutual Fund the (so called) study has referenced.

http://finance.yahoo.com/q/hp?s=VBMFX&a=05&b=4&c=1990&d=03&e=23&f=2013&g=m

As you'll see, the "Adjusted Close" for the VBMFX was 8.67 on Jan 2, 2009, and it was 10.93 as of Jan 2, 2013.  That's a Capital Gain of about 26%.  Therefore this (so called) study has missed out quite a lot.   ;-)

I'd hesiitate to call an article you've cited as anything other than fantacy. Surely "study" will not be the word I'd use to describe it!

Yours Truly,
- Anon
3
ytytytyt64 posts since
Feb 28, 2013
Rep Points: 197
6. Wednesday, April 24, 2013 - 7:36 PM
   [ The following post to this thread was attempted
     at 804pm Tuesday, April 23, 2013.  Due to an
     unknown bug, the post never appeared; I have
     reported the error to Ken.  From the first
     sentence, I assume the submission is from
     Harry Sit, the original author of this item. ]


Tuesday, April 23, 2013 8:04 PM

I wrote the article. Yahoo's adjusted close substracts all dividends from
the current NAV. In other words if you count the adjusted close for the
capital gains, you would not get any interest/dividends. It's not like you
would get 26% plus the dividends. The average annual return of 6.1% so far
already included the effect of capital gains. Sure you can sell and profit
but what do you do with the money? Buy a CD that pays 1.x% versus the old
CD paying 4.5%?
1
cumuluscumulus364 posts since
Jan 16, 2010
Rep Points: 1,706
7. Wednesday, April 24, 2013 - 10:06 PM
.

Dear cumulus,

See the definition given by Investopedia:  http://www.investopedia.com/terms/a/adjusted_closing_price.asp

Now, for some reason, if we are prefer (though I don't know why) the simple "close", then what we have is:

Jan 2, 2009 close = 10.07
Jan 2, 2013 close = 10.99

So that's a capital gain of about 10%. 

Do it whichever way, what's missing is accounting for the Capital Gains.  Without any mention of Capital Gain/Loss, the (so called) study remains a partial comparison, of rather questionable value.  ;-)


========

Oh, and coming to the message that was not posted on this site, if it indeed was from the author, then instead of recanting his questionable "study" the author seems to inquire "Sure you can sell and profit but what do you do with the money? Buy a CD that pays 1.x% versus the old CD paying 4.5%?".

... I shall pose my answer as a series of questions:  "(1) Well Sir, if a trader can sell at a profit then can you safely assume that this trader will be familiar with existance of trading vehicles in addition to CDs you've cited that pay 1.x% and 4.5%?  ... (2) ... Will you Sir, not refuse to believe that this trader will be aware of Bond Funds and ETFs, and Precious Metals and Currencieis and Commodities and whole host of other trading vehicles?  ... (3) ... And will you Sir, also not refuse to believe that this trader will be able to wait for another suitable opportunity, and will try his/her utmost to keep doing a seres of profitable trades again and again and again with the money that he/she would gain after perfoming the aforementioned "sell" transaction, rather than using the money to buy a lower paying CD? ... (4) ... And Sir, when you write that "Sure you can sell at profit" are you tacitly admiting that this "profit" must arise from "capital gain", which was not mentioned in your "study"?

... Sir, I see that even the folks who do not consider themselves traders perform good amount of research and money management to select the best possible CD their acumen affords them. They seek out better interest and favorable term.  They perform calculations about what's the penalty if the CD is redeemed early.  They go out of the way to gain small advantages of .05%, .10%, .25%, etc.

... So Sir if your answers to any my above questions is anything other than affirmative, then I must admit that you lack the necessary grasp of this topic to understand this matter fully or even partially!  ;-)

Yours Truly,
- Anon
3
ytytytytytytytyt158 posts since
Jan 28, 2013
Rep Points: 623
8. Tuesday, April 30, 2013 - 3:53 AM
A successful trader will trade successfully. I will give you that because it's a tautology. If you can successfully forecast when interest rates will fall (buy bond funds/ETFs) or when interest rates will rise (sell bond funds/ETFs), you will profit handsomely. No argument. Use EDV for the maximum effect. Forget about dull CDs. The 6.1% average annual return in 4 years from the bond fund already included capital gains. It's already mentioned in the article.
3
harrysitharrysit3 posts since
Apr 30, 2013
Rep Points: 18
9. Tuesday, April 30, 2013 - 7:18 AM
Dear harrysit,

Alas ... you are not able to grasp the nuance of the fact that Capital Gain/Loss that remains unrealized unless the security is sold, and the fact that to earn dividends one merely needs to be retian the security till the ex-dividend date ... I'm afraid I'll have to give-up questioning/explaining this aspect to you!  ;-)

Err ... forgetting about the CD is not an option really for the CDs can be bought (at discount) and sold (at preminum) as well ... so I would not surely rush into forgetting about them.  I'm referring to bank CDs that are of the brokered type of CDs here.  If we were to go into discussion about "Structured CDs" that have FDIC insurance for the principal, then that will open-up different set of considerations altogether.

BTW ... Dear harrysit, EDV does not produce maximum effect.  There are others that superseed the effect of EDV hadily (almost) every day.  Allow me to cite UBT on upside (and TBT on the downside).  I'm afraid you're in need to correct your information about what would produce maximum effect.  No?  :-)

Finally ... I'll like to bust the common mis-conception that to profit from Bonds one needs to "forecast" when the interest rates will rise (or fall).  Such forecasting is not an "essential" factor to make profit.  Check the link below where I posted about  my trade of HYMB in real enough time.  This trade resulted in profit, and I made no forecast for interest rates whatsoever to make this profit.  I merely took advantage of the changes in price/NAV for HYMB.  The broad interest rates in the meantime held very steady for the duration between buy and sell. :-)

http://www.depositaccounts.com/forum/thread/12981-municipal-bonds.html


Yours Tryly,
- Anon
3
ytytytytytytytyt158 posts since
Jan 28, 2013
Rep Points: 623
10. Tuesday, April 30, 2013 - 9:33 AM
Yes sir. You win. Buy and sell whatever gives you the maximum effect to your heart's desire. All the power to you. I thought DA is mostly about dull bank CDs and savings accounts. We don't have your skills in taking advantage of the changes in prices/NAV. I wonder why a successful trader would hang out here. One day of successful trading will earn you all the interest we will ever earn from a bank CD in a whole year. Keep showing us your profitable trades and let us all be jealous.
3
harrysitharrysit3 posts since
Apr 30, 2013
Rep Points: 18
11. Tuesday, April 30, 2013 - 10:08 AM
Dear harrysit,

Hmm ...
  • I see that you have no respose if you need to correct your information about EDV vis-a-vis UBT (and TBT).
  • I also see that you have no respose about forgetting about the CDs as they can be rather handy. The traditional, the brokered and the structured types.
  • I am glad to that you are truthful to acknowlege that the fact that you lack the skill to take advantage of the price/NAV difference to make profit, yet troubled to note that you are not truthful enough to admit that "forecasting" interest rate is not essential to make profit from bonds and bond funds.
  • Jealous? ... Nope ... I'm afraid you are missing a few points here.  The purpose would be carefully consider the  (so called) study. A well infromed/experienced professor, may award a failing grade to the (so called) study posted on "thefinancebuff.com" site, and educate the author of such a study by debunking several of his mis-conceptions!  :-)
Yours Tryly,
- Anon
3
ytytytytytytytyt158 posts since
Jan 28, 2013
Rep Points: 623
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