CDs or... (don't try this at home)

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Topic Author
namajones
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CDs or... (don't try this at home)

Post by namajones »

Today, 5-year CDs are yielding...0.4 percent. Gulp.

So I went looking for a way to keep up with inflation (est = 3 percent annually) with my emergency fund (EF) and settled on this: with no more than one-third of EF, "buy the dip" in the markets using highly liquid vehicles such as VOO, VTI, or VT. Hold until the percentage gain equals 3 percent of the entire value of EF. Sell.

I've done this for 2 years straight and generated 3+ percent, after cap gains taxes, for my entire EF while being in the market for approximately 3 months each year.

Downside is not horrible, in my view, if the market were to tank and force me to be in the market for years because of the security provided by the rest of the EF.

I don't like doing this, but it has worked, and it has kept me out of these horrible CDs that lock up your money for 5 years while paying nothing in the process.

Yes, this is market timing. Yes, it is a bit risky. But so are CDs yielding 0.4 percent when inflation is running at 2+ percent per year.
sport
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Re: CDs or... (don't try this at home)

Post by sport »

It's easy to make money in an "up market". It is not so easy under other conditions. The problem is that you cannot identify an up market until after it has happened.
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ApeAttack
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Re: CDs or... (don't try this at home)

Post by ApeAttack »

namajones wrote: Fri May 14, 2021 11:08 am Today, 5-year CDs are yielding...0.4 percent. Gulp.

So I went looking for a way to keep up with inflation (est = 3 percent annually) with my emergency fund (EF) and settled on this: with no more than one-third of EF, "buy the dip" in the markets using highly liquid vehicles such as VOO, VTI, or VT. Hold until the percentage gain equals 3 percent of the entire value of EF. Sell.

I've done this for 2 years straight and generated 3+ percent, after cap gains taxes, for my entire EF while being in the market for approximately 3 months each year.

Downside is not horrible, in my view, if the market were to tank and force me to be in the market for years because of the security provided by the rest of the EF.

I don't like doing this, but it has worked, and it has kept me out of these horrible CDs that lock up your money for 5 years while paying nothing in the process.

Yes, this is market timing. Yes, it is a bit risky. But so are CDs yielding 0.4 percent when inflation is running at 2+ percent per year.
Imagine how much money you would have made if you kept your CD money in the market every month for the past two years.

I-Bonds are yielding 3.54% for the next 6 months risk-free and you only lock up your money for one year instead of 5.
May all your index funds gain +0.5% today.
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Stinky
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Re: CDs or... (don't try this at home)

Post by Stinky »

namajones wrote: Fri May 14, 2021 11:08 am Yes, this is market timing. Yes, it is a bit risky.
Yes and yes.

Please keep us posted on how you do.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
namajones
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Re: CDs or... (don't try this at home)

Post by namajones »

sport wrote: Fri May 14, 2021 11:29 am It's easy to make money in an "up market". It is not so easy under other conditions. The problem is that you cannot identify an up market until after it has happened.
Totally agree. That's why I risk only 1/3 of EF--and wouldn't be tragic if it went underwater for a few years or more. Just a method--clearly not for everyone and every circumstance.
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namajones
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Re: CDs or... (don't try this at home)

Post by namajones »

Stinky wrote: Fri May 14, 2021 11:35 am
namajones wrote: Fri May 14, 2021 11:08 am Yes, this is market timing. Yes, it is a bit risky.
Yes and yes.

Please keep us posted on how you do.
I'm done for this year. Will be a while, likely.
Topic Author
namajones
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Re: CDs or... (don't try this at home)

Post by namajones »

ApeAttack wrote: Fri May 14, 2021 11:31 am Imagine how much money you would have made if you kept your CD money in the market every month for the past two years.
"Imagining" is not the point of this strategy to beat CD rates. Beating CD rates (and hopefully inflation) is.

Totally separate pots are invested permanently in the market, so there's no "gee, if I had only" involved.
Nohbdy
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Re: CDs or... (don't try this at home)

Post by Nohbdy »

namajones wrote: Fri May 14, 2021 11:08 am Today, 5-year CDs are yielding...0.4 percent. Gulp.

So I went looking for a way to keep up with inflation (est = 3 percent annually) with my emergency fund (EF) and settled on this: with no more than one-third of EF, "buy the dip" in the markets using highly liquid vehicles such as VOO, VTI, or VT. Hold until the percentage gain equals 3 percent of the entire value of EF. Sell.

I've done this for 2 years straight and generated 3+ percent, after cap gains taxes, for my entire EF while being in the market for approximately 3 months each year.

Downside is not horrible, in my view, if the market were to tank and force me to be in the market for years because of the security provided by the rest of the EF.

I don't like doing this, but it has worked, and it has kept me out of these horrible CDs that lock up your money for 5 years while paying nothing in the process.

Yes, this is market timing. Yes, it is a bit risky. But so are CDs yielding 0.4 percent when inflation is running at 2+ percent per year.
Interesting. Faced with a similar quandary (albeit more recently) I bought CA muni bonds. Getting around 2% tax free so our real returns are comparable. I-bonds also. Market timing scares me but CD trash returns are also bad. I am glad you are coming out ahead to date.
investuntilimrich
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Re: CDs or... (don't try this at home)

Post by investuntilimrich »

CDs are horrible right now, something like Ibonds would be better if you're not going to touch the money for a year plus. Some people say it's zero risk but that's not actually true, because you're not made whole if someone does manage to take your funds by gaining access to your username and password so treat those carefully.
annu
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Re: CDs or... (don't try this at home)

Post by annu »

There are still 3% CDs around, upto 100k HM bradley for example. There are few from credit unions as well. There is also Ibond, married and with trust you can do 30k annually.
Topic Author
namajones
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Re: CDs or... (don't try this at home)

Post by namajones »

annu wrote: Fri May 14, 2021 12:16 pm There are still 3% CDs around, upto 100k HM bradley for example. There are few from credit unions as well. There is also Ibond, married and with trust you can do 30k annually.
Really? I looked on TD Amertrade's CD screener and found nothing.
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ApeAttack
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Re: CDs or... (don't try this at home)

Post by ApeAttack »

namajones wrote: Fri May 14, 2021 11:48 am
ApeAttack wrote: Fri May 14, 2021 11:31 am Imagine how much money you would have made if you kept your CD money in the market every month for the past two years.
"Imagining" is not the point of this strategy to beat CD rates. Beating CD rates (and hopefully inflation) is.

Totally separate pots are invested permanently in the market, so there's no "gee, if I had only" involved.
If the market goes down 40% and doesn't recover for five years, are you going to treat the invested funds as locked up until you get your 3% per year back? If yes, then it isn't an EF which is supposed to be very liquid when needed. If no, then why not just keep that 1/3 of your EF permanently in stocks so you can gain more than 3% per year over the long run?

Most BHs think of an EF as funds that are very protected from the wild oscillations of the market. I certainly do. Your strategy is working really well in this long bull market, and would do well throughout most of the 1990s. It would not do well throughout much of the 2000s.
May all your index funds gain +0.5% today.
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