CD vs VTIP

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User12345
Posts: 50
Joined: Thu Jan 08, 2015 7:58 pm
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CD vs VTIP

Post by User12345 »

Hi,

I'm saving for a down payment for a house in a few years (> 1.5 year). Currently I have around $200,000 in cache for this purpose (+ $50,000 in not mature CD + more in uncached investments). I'm thinking about either going back to CDs or trying VTIP as I'm more worried about inflation than missed opportunities.

Pros of CD:
  • FDIC insured (which is stronger than 'full faith and credit of US government'?)
  • Safe principal in case of deflation
Pros of VTIP:
  • Higher returns (though I may be reading Yield incorrectly?)
  • Principal is safe in real money instead of nominal money
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: CD vs VTIP

Post by sycamore »

User12345 wrote: Sat Oct 16, 2021 3:32 pm Hi,

I'm saving for a down payment for a house in a few years (> 1.5 year). Currently I have around $200,000 in cache for this purpose (+ $50,000 in not mature CD + more in uncached investments). I'm thinking about either going back to CDs or trying VTIP as I'm more worried about inflation than missed opportunities.

Pros of CD:
  • FDIC insured (which is stronger than 'full faith and credit of US government'?)
  • Safe principal in case of deflation
Pros of VTIP:
  • Higher returns (though I may be reading Yield incorrectly?)
  • Principal is safe in real money instead of nominal money
The main downside of VTIP (or any bond fund) is the potential mismatch between the fund's duration and when you really need to cash in the fund for spending. What is VTIP's duration, 2 or 3 years? If you invest in VTIP and a couple of years go by, and then then rates go up, the VTIP price will drop, potentially by more than you need for a down payment. That's the risk of bond funds.

CDs by contrast can give you certainty regarding the safety of your principal. But of course they don't get the inflation adjustment of TIPS. It's a tradeoff for sure.

Another factor to consider: the inflation protection in TIPS may be nowhere near enough to cover rising real estate costs. Of course CD yields won't be enough either, but the point is switching to VTIP may not be protecting you all that much.
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