CD instead of bond fund

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jvini
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CD instead of bond fund

Post by jvini »

Hi. I'm 55 and can't touch my tax advantaged accounts for 4 years. I'm switching 2/3rds of my intermediate bond allocation vgit in my 60/40 portfolio to a 3 year CD yielding 3.1%.

I'll still have plenty to rebalance with at the end of the year if stocks go down. And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.

Am I missing something?
rkhusky
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Re: CD instead of bond fund

Post by rkhusky »

jvini wrote: Thu May 26, 2022 6:41 am Hi. I'm 55 and can't touch my tax advantaged accounts for 4 years. I'm switching 2/3rds of my intermediate bond allocation vgit in my 60/40 portfolio to a 3 year CD yielding 3.1%.

I'll still have plenty to rebalance with at the end of the year if stocks go down. And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.

Am I missing something?
What's the penalty for early withdrawal?
mary1492
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Re: CD instead of bond fund

Post by mary1492 »

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Last edited by mary1492 on Fri Sep 30, 2022 4:34 am, edited 1 time in total.
Dandy
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Re: CD instead of bond fund

Post by Dandy »

I think it's fine to diversify your fixed income holdings. I wouldn't get one large CD in case you need some cash. I'd have a few of different sizes e.g. for 60k I'd have a 10k,20k and 30k instead of one 60k CD
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Re: CD instead of bond fund

Post by z3r0c00l »

Presuming the CD doesn't have onerous early withdrawal penalty, or a callable option, I think it is competitive with a bond fund at 3.1%. I would max out I bonds for the year first if you have not already done so. Beyond that, taking the capital loss in the bond fund shares that you sell could help you come tax time. Note, however, that your bond fund is now paying 2.9% so it isn't a huge difference. (Total Bond Market pays about 3.1%)

One key point: You can't predict what the NAV will do for the rest of the year. It could even go up as it has the past few weeks. (Up .5% this week alone.)
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valleyrock
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Re: CD instead of bond fund

Post by valleyrock »

We've had some discussion of brokered CDs, which do have tempting rates. And there are some banks/credit unions apparently now with 3-year CDs yielding around 3%. The brokered CDs are tempting also because they can be purchased within one's brokerage account, keeping it simpler than adding another institution to one's portfolio.

One key is that it is important to plan to hold brokered CDs to maturity because pulling out early sends them to a secondary market, which is of course different than paying a 180 day penalty, for example, to a bank or credit union. Perhaps shorter term CDs would be best because interest paid on many CDs does seem to be rising rather quickly. Or ladder them? Buy one this year, one the next, etc.

A while back, when interest rates were much lower, Allan Roth said at a Boglehead event that he helped someone buy CDs at 1.3 % at a bank or a credit union somewhere. The point there, as I understood it, was to park money somewhere safe for a while until a better idea comes along and it's worthwhile to accept the penalty and move the funds. My assumption is that this approach applies especially to those who are near or in retirement, when there are fewer ways to recover if things head south. (Where does that expression comes from?....I was born in the South, but never mind.)

(On a side note and totally OT, in trying to find that bank/credit union paying 1.3%, I found a bank in Minnesota with a benefactor who'd also donated to a group connected to studying the Kensington Rune Stone, which I'd never heard of. That led to some interesting books. Quite the rabbit hole, but an example of where investment threads need not be dry.)
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nisiprius
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Re: CD instead of bond fund

Post by nisiprius »

z3r0c00l wrote: Thu May 26, 2022 7:10 am Presuming the CD doesn't have onerous early withdrawal penalty, or a callable option, I think it is competitive with a bond fund at 3.1%...
I have to chime in with my somewhat paranoid addition. Yes, this is just my schtick.

Let me add: and presuming the CD does not have language in the terms and conditions that give the bank the right to deny early withdrawal and force you to wait to maturity... or you are absolutely certain that it will not be a problem if you are forced to hold the CD until maturity.

People tend to assume that you have the absolute right to pay a small penalty and get your money out. But in many cases this is just the banks custom or policy, not the depositor's right.

A bond mutual fund, like all mutual fund, gives you the right to daily liquidity; if you sell shares, the fund is required to redeem them at NAV at close of trading on the day of the order, and actually pay you that amount within seven calendar days (usually much faster than that, of course). I don't know if my nightmare scenario for CDs is any more likely than nightmare scenarios for bond mutual funds, though.

1) The terms and conditions vary. They aren't all alike.

2) Many contain language saying early withdrawal is "at the bank's discretion," or "with the bank's permission," or even (added by Ally in 2012) "If we consent to the redemption of a CD or IRA CD prior to the maturity date..."

3) The uneasy situation, then, is: they don't need to allow early withdrawals, it's just that they always do.*

Bank policy, bank custom, not depositor's right.

If things continue as they "always" have, then despite being legally "term deposits," we can treat CDs as if they were demand deposits. I think banks want us to believe this. As it happens, I personally broke a CD just a few weeks ago and there were no problems at all. But I ask, hypothetically what is the situation in which banks might decide to deny early withdrawals? It seems to me the answer would be a combination of a sharp increase in deposit rates, leading to a flood of CD owners wanting to break their old low-interest CDs, plus a shaky bank that doesn't want to, or actually can't, afford to lose a "time deposits" if they have the right to hang onto it.


*(Not literally always, though--one of the websites, I think it was DepositReports, reported a case some years ago where a bank did deny an early withdrawal.)
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dwickenh
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Re: CD instead of bond fund

Post by dwickenh »

mary1492 wrote: Thu May 26, 2022 6:59 am
And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.
So why now? Why not 3 or 6 months ago? What you're doing is locking in your loss with VGIT down 6.8% YTD.

Does your investment plan say to sell 2/3 of your VGIT when you get scared?
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02nz
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Re: CD instead of bond fund

Post by 02nz »

Dandy wrote: Thu May 26, 2022 7:02 am I think it's fine to diversify your fixed income holdings. I wouldn't get one large CD in case you need some cash. I'd have a few of different sizes e.g. for 60k I'd have a 10k,20k and 30k instead of one 60k CD
If OP is looking at brokered CDs, 24-month ones are at around the same rate (almost 3%), so I'd also consider diversifying the duration.
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Re: CD instead of bond fund

Post by dbr »

jvini wrote: Thu May 26, 2022 6:41 am
Am I missing something?
I don't think the long term investor, meaning 60-70 years of accumulation and retirement or even looking forward 40 years from age 55 has anything to benefit from avoiding the fluctuating NAV of bond funds. The actual risk to consider is variation in returns. For CDs that is already a range of a few percent over time as interest rates vary.

That does not mean CDs are not a valid fixed income holding. Some people just prefer them, but there is no special advantage compared to bonds of some selected credit quality and duration. A bond fund may be a more convenient ongoing holding.

A different game is using CDs to try to time interest rate changes, specifically to avoid a downturn in bond NAV such as recently. For that game you are probably already too late, that being the hazard of attempts at timing.
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Re: CD instead of bond fund

Post by Call_Me_Op »

My guess is that the Op is referring to a brokered CD.
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rkhusky
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Re: CD instead of bond fund

Post by rkhusky »

mary1492 wrote: Thu May 26, 2022 6:59 am
And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.
So why now? Why not 3 or 6 months ago? What you're doing is locking in your loss with VGIT down 6.8% YTD.

Does your investment plan say to sell 2/3 of your VGIT when you get scared?
The correct question to ask is - if you had the money today in cash would you buy VGIT or the CD? If the CD, sell VGIT and buy the CD (taking into account taxes and early withdrawal penalties).
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burritoLover
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Re: CD instead of bond fund

Post by burritoLover »

rkhusky wrote: Thu May 26, 2022 8:43 am
mary1492 wrote: Thu May 26, 2022 6:59 am
And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.
So why now? Why not 3 or 6 months ago? What you're doing is locking in your loss with VGIT down 6.8% YTD.

Does your investment plan say to sell 2/3 of your VGIT when you get scared?
The correct question to ask is - if you had the money today in cash would you buy VGIT or the CD? If the CD, sell VGIT and buy the CD (taking into account taxes and early withdrawal penalties).
Well, duh, they wouldn't buy VGIT because it just dropped. :P
rkhusky
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Re: CD instead of bond fund

Post by rkhusky »

burritoLover wrote: Thu May 26, 2022 8:46 am
rkhusky wrote: Thu May 26, 2022 8:43 am
mary1492 wrote: Thu May 26, 2022 6:59 am
And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.
So why now? Why not 3 or 6 months ago? What you're doing is locking in your loss with VGIT down 6.8% YTD.

Does your investment plan say to sell 2/3 of your VGIT when you get scared?
The correct question to ask is - if you had the money today in cash would you buy VGIT or the CD? If the CD, sell VGIT and buy the CD (taking into account taxes and early withdrawal penalties).
Well, duh, they wouldn't buy VGIT because it just dropped. :P
Why not? Perhaps it would be viewed as on sale.
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Re: CD instead of bond fund

Post by gips »

op, before cd interest rates went to near zero, many of us were allocating a portion of our fixed income portfolio to cds. There are some long threads authored by kevinM where this choice is documented if you'd like to search the forum. also, https://www.depositaccounts.com/ is a good resource to research current rates.

best,
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Re: CD instead of bond fund

Post by dbr »

gips wrote: Thu May 26, 2022 9:50 am op, before cd interest rates went to near zero, many of us were allocating a portion of our fixed income portfolio to cds. There are some long threads authored by kevinM where this choice is documented if you'd like to search the forum.

best,
That is very true. CDs are risky because the return can vary. This gets one nothing over bond funds. Bond funds also don't get you anything over CDs. Both are plausible fixed income instruments.
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burritoLover
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Re: CD instead of bond fund

Post by burritoLover »

rkhusky wrote: Thu May 26, 2022 9:43 am
burritoLover wrote: Thu May 26, 2022 8:46 am
rkhusky wrote: Thu May 26, 2022 8:43 am
mary1492 wrote: Thu May 26, 2022 6:59 am
And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.
So why now? Why not 3 or 6 months ago? What you're doing is locking in your loss with VGIT down 6.8% YTD.

Does your investment plan say to sell 2/3 of your VGIT when you get scared?
The correct question to ask is - if you had the money today in cash would you buy VGIT or the CD? If the CD, sell VGIT and buy the CD (taking into account taxes and early withdrawal penalties).
Well, duh, they wouldn't buy VGIT because it just dropped. :P
Why not? Perhaps it would be viewed as on sale.
This is the same broken record over and over again. Their assets are flying high and they couldn't have a care in the world. Starts dropping, they look to start selling the underperforming asset and moving into something that is performing better (or will stop the bleeding), thinking they are fixing the problem. Rinse and repeat - kill your returns.
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Re: CD instead of bond fund

Post by hudson »

jvini wrote: Thu May 26, 2022 6:41 am Hi. I'm 55 and can't touch my tax advantaged accounts for 4 years. I'm switching 2/3rds of my intermediate bond allocation vgit in my 60/40 portfolio to a 3 year CD yielding 3.1%.

I'll still have plenty to rebalance with at the end of the year if stocks go down. And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.

Am I missing something?
You probably already know...
CDs are good...safer than many intermediate bond funds.
You don't want to go over the FDIC limit.

Will rates really go up?

I would personally go longer; many would go shorter. Name your poison. :)

I can really warm up to 3% plus interest rates!

Since you are likely still working, you don't need to worry about inflation as much as retirees.
mary1492
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Re: CD instead of bond fund

Post by mary1492 »

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Last edited by mary1492 on Fri Sep 30, 2022 4:33 am, edited 1 time in total.
sureshoe
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Re: CD instead of bond fund

Post by sureshoe »

Just to state the obvious: a CD is more than likely going to underperform a bond fund because you're accepting risk with the bond fund.

Last 10 years, BND is what, around 1.5%? This downswing obviously hurt that numbers... but yeah, that's about the 1% more than what most people were getting out of CDs the last 10 years. Spitballing this, so sure someone will correct me.

So if CDs are paying 3% now, I think we can expect BND and the like to be more in the 4-5% range. Of course, they could also bleed money :)
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Re: CD instead of bond fund

Post by aristotelian »

jvini wrote: Thu May 26, 2022 6:41 am I'll still have plenty to rebalance with at the end of the year if stocks go down. And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.

Am I missing something?
If you are making this move, you haven't avoided the fluctuating NAV, you would be locking in a loss.

The Fed is raising the Federal Funds Rate but we don't know how much the market has already priced in or what might change in the future. Should inflation top out and/or the economy go into recession, you might see rates fall. Actually, the 10Y Treasury yield has fallen from a high in early may of 3.15% down to 2.78%. Who says "rates are increasing"?
gips
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Re: CD instead of bond fund

Post by gips »

sureshoe wrote: Thu May 26, 2022 11:11 am Just to state the obvious: a CD is more than likely going to underperform a bond fund because you're accepting risk with the bond fund.

Last 10 years, BND is what, around 1.5%? This downswing obviously hurt that numbers... but yeah, that's about the 1% more than what most people were getting out of CDs the last 10 years. Spitballing this, so sure someone will correct me.

So if CDs are paying 3% now, I think we can expect BND and the like to be more in the 4-5% range. Of course, they could also bleed money :)
>>Last 10 years, BND is what, around 1.5%? This downswing obviously hurt that numbers... but yeah, that's about the 1% more than what most people were getting out of CDs the last 10 years. Spitballing this, so sure someone will correct me.

we own bnd and four 5-year cds that were established in 2018 and 2019. They pay 4.2%, 4%. 3%, 3%
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jvini
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Re: CD instead of bond fund

Post by jvini »

rkhusky wrote: Thu May 26, 2022 8:43 am
mary1492 wrote: Thu May 26, 2022 6:59 am
And I'm avoiding the fluctuating bond fund nav, especially as the Fed raises rates.
So why now? Why not 3 or 6 months ago? What you're doing is locking in your loss with VGIT down 6.8% YTD.

Does your investment plan say to sell 2/3 of your VGIT when you get scared?
The correct question to ask is - if you had the money today in cash would you buy VGIT or the CD? If the CD, sell VGIT and buy the CD (taking into account taxes and early withdrawal penalties).
You asked why now (in a snarky way)🙂. Here's your answer. The Fed told us they were raising rates and I listened and moved almost everything on the fixed income side to a stable value fund from my bond etf. I failed to mention I put my vgit allocation into a stable value fund, sorry. This saved me over 100k as rates rose and bond ETFs had their worst returns in recent history. It also made me a bit with the stable value fund. Now that 3yr CDs are over 3%, I'm moving money from stable value to CDs. If the Fed keeps raising rates I might miss a better CD rate, but that's ok. The 3% I'll get is quite a bit of money. Was this market timing? Yes. Was I fortunate? Yes. But it was a very calculated risk with no real down side. Going to stable value would preserve my money so I moved money there. Worst that could happen was the very transparent Fed wouldn't raise or would lower and I'd miss out on some gains. The 40% fixed portion is for safety so I was ok with that. The last line of my plan is be smart. I think I was smart. I think 3% is smart.
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Re: CD instead of bond fund

Post by hudson »

mary1492 wrote: Thu May 26, 2022 10:10 am
hudson wrote: Thu May 26, 2022 10:02 am I can really warm up to 3% plus interest rates!
Maybe when inflation was running below 2% for years. Now at 8%? You're not going to be very warm.
Good point mary1492!
3% is better than half a percent.
My personal inflation isn't 8%, but it's nothing to brag about.

In the future, I plan to move to 70% TIPS and 30% nominal treasuries.
Why? Sometimes TIPS just don't pay. I'd like to lock in 3% or more nominal
I speculate that I can get by on 3%.
BigJohn
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Re: CD instead of bond fund

Post by BigJohn »

OP, if inflation stays where it is you’re losing 5 - 6% per year in purchasing power. Have you considering moving at least some of those dollars into a short term TIPS fund? Won’t give you much if any positive real return but at least it will minimize your losses.
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1moreyr
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Re: CD instead of bond fund

Post by 1moreyr »

OP,
I am retired and trying to build a CD/bond bridge for my annual expenses from 59 (next year) to 62. that gets me to Social Security which is then an emergency parachute if I need it. (not planning on pulling that trigger until at least 65 , but hey). I can also close my eyes to equities for 5 years if things get ugly. if they stay ugly i have SS.

I too have looked at the 3% rates and am struggling with the Feds continuing raising of rates. Will this push this down or up? who knows?
I have built the 2023 and 2024 bridge of Tbills/CD.

I am kind of at the point where I will DCA half now into 2025 and 2026 .. I will wait a couple months and decide when to do the rest. Market timing? sure but with about 1-2% of my total portfolio.

Am I locking in some inflation? sure but I can tighten the belt if I must. Going back to work is not something i want to do.

maybe easing in is better, maybe pulling the band aid off. .. depends on your personality I guess
hudson
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Re: CD instead of bond fund

Post by hudson »

1moreyr wrote: Fri May 27, 2022 9:56 am OP,
I am retired and trying to build a CD/bond bridge for my annual expenses from 59 (next year) to 62. that gets me to Social Security which is then an emergency parachute if I need it. (not planning on pulling that trigger until at least 65 , but hey). I can also close my eyes to equities for 5 years if things get ugly. if they stay ugly i have SS.

I too have looked at the 3% rates and am struggling with the Feds continuing raising of rates. Will this push this down or up? who knows?
I have built the 2023 and 2024 bridge of Tbills/CD.

I am kind of at the point where I will DCA half now into 2025 and 2026 .. I will wait a couple months and decide when to do the rest. Market timing? sure but with about 1-2% of my total portfolio.

Am I locking in some inflation? sure but I can tighten the belt if I must. Going back to work is not something i want to do.

maybe easing in is better, maybe pulling the band aid off. .. depends on your personality I guess
3% rates? 3% looks attractive to me
Will rates go up? It looks like it; I'm not sure that I would bet on it.
You are talking about 1-2% of your portfolio...what to do? That's not enough to worry too much about.
Maybe throw in some TIPS?
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jeffyscott
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Re: CD instead of bond fund

Post by jeffyscott »

hudson wrote: Fri May 27, 2022 10:22 am Will rates go up? It looks like it; I'm not sure that I would bet on it.
It probably also looked like rates would be going up earlier this month and yet, 3-5 year nominal treasury yields (which react faster than brokered CDs) have fallen from around 3% to about 2.7% in the past couple weeks or so.
hudson
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Re: CD instead of bond fund

Post by hudson »

jeffyscott wrote: Fri May 27, 2022 10:55 am
hudson wrote: Fri May 27, 2022 10:22 am Will rates go up? It looks like it; I'm not sure that I would bet on it.
It probably also looked like rates would be going up earlier this month and yet, 3-5 year nominal treasury yields (which react faster than brokered CDs) have fallen from around 3% to about 2.7% in the past couple weeks or so.
Thanks jeffyscott!
I used to think that I could predict interest rates.
I forget which year. I moved from intermediate funds to short funds because it looked like rates just had to go up.
My predictions fell flat.
I decided that I wouldn't go short again. Since then, I've only gone 5-7 years. In the future, I'm going to do some form of duration matching with TIPS and nominals.
My plan doesn't hold up with nominal rates much below 2%.
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