Comments on: Short-Term Fixed Income: CDs vs Bond Funds

By: TFB

TFB — Wed, 13 Jan 2010 06:32:42 +0000

ellen b – I think you got the numbers backwards. The reason for the CD ladder is stated in the concluding paragraph: comparable yield with lower risk.

By: ellen b

ellen b — Wed, 13 Jan 2010 01:46:53 +0000

I wonder why open 4 cds for an average of 2.64 vs 1 vg bond fund for 2.86? Doesn’t seem like much difference. Anyway, i thank you for one of the best writeen and clearest explanations of these investments I’ve run across. For someone who is trying to learn, it’s a pleasure.

By: geezer investor

geezer investor — Sun, 15 Nov 2009 16:30:40 +0000

Thanks for the column. Of course, I like it because it tends to confirm my recent move into credit union CDs and money market accounts was as good as I could do. I could not bring myself to ignore the financial strength of the credit unions I chose. I invested close to the insurance limit in two credit unions (a large percentage of our net worth, which may have to last as much as another 30 years of retirement). Maybe federal insurance is a slam dunk, but the federal government seems to be creating a huge, debt-related mess with unpredictable consequences. I am concerned that a strong financial institution may turn out to be better insurance than the federal government.

I actually put very long-term money in one-year CDs. My thought is that fairly short-term CDs in a CD ladder may be the best way to deal with the possibility that rates will soon begin a steep, rapid rise. I just cannot see putting money into stocks that seem to be trading at high levels because buyers (institutional and otherwise) can finance the carrying of those stocks by borrowing at extremely low rates.

By: Art Cummins

Art Cummins — Wed, 11 Nov 2009 20:29:24 +0000

Hi TFB,

Thanks much for this excellent article on what to recommend in low interest rate environments. Do you check the quality of the bank issuing the CD’s?

Also, do you have similar recommendations for taxable accounts? Muni’s,etc.
Do you ever consider closed end funds?

By: TFB

TFB — Wed, 28 Oct 2009 21:50:21 +0000

John – I agree with everything you said. The sample rates I included in the post show how much one gives up in brokered CDs compared to the best deals available. The only reason I looked at brokered CDs is that I have a solo 401k plan. I can’t open solo 401k plan accounts at credit unions. I have to pick one provider for my solo 401k and only invest in what’s available from that one provider. If others don’t have this somewhat unique restriction, building a ladder with CDs from the best deals in the country is the way to go (Alliant CU for 1 year, Hudson Savings for 2 years, Melrose CU for 5 years, etc.). You can do that with taxable and IRA accounts.

By: John

John — Wed, 28 Oct 2009 21:16:59 +0000

Just my $.02 on brokered CDs, and such.

As a general rule, when you buy a brokered CD, you will get a lower yield than if you buy a CD yourself. The reason is obvious: the middle man (or woman).

As another general rule, when you buy a brokered CD through a brokerage, you will get fewer options for purchase than if you went out hunting on your own. The reason: many issuers of CDs do not “broker” their CDs and many of the “best” CD deals these days are restricted to “local only”, whether they be by banks or credit unions.

Brokered CDs are convenient, I give you that much. If you have a consolidated statement, you can see it all in one glance.

But don’t be fooled. If you really, truly, want the best yields these days, you really, truly, have to go out shopping for the best retail CDs you can find. Try the “bankdeals” blog for starters. Credit unions always tend to offer better rates than banks (think tax laws).

I know, I know, it’s a few basis points here and there. But if you go out long enough (e.g., five years), you can find retail CDs offering 3% or more. While that sounds puny, with inflation at 0%, it’s not too shabby. Always ladder, though, so when inflation rears its ugly head, your ladder will protect you.

By: TFB

TFB — Fri, 23 Oct 2009 00:33:35 +0000

MS – If I were in the same situation, I would stay in smartypig. The first installment will come out of this pot in 3 months. The last installment in 15 months. The average holding period is only 9 months. Smartypig is safer and it earns more after taking taxes into consideration. Also realize after all is said and done, we are talking about a difference of a few dollars a month here.

By: MS

MS — Fri, 23 Oct 2009 00:26:34 +0000

Following up my question – its obvious I am after the extra yield available from the short term bond. Also, moving the money into short term bonds and then pulling it out over the next one yr and moving into the 2030 fund means I am betting that rates wont change over the next year, and even if they do, my NAV losses are very limited because the bond duration is 1-2 years.

By: MS

MS — Fri, 23 Oct 2009 00:19:44 +0000

Hey, I just ran into your blog when I was searching for some short term bonds.
I have to say excellent posts. I also have to say that I am going through the same decision process for my wife’s account. I am deciding between adding 5000$ to her vanguard account to a short term muni bond fund (e.g. VWSTX) or just letting the money be in her ‘smartypig’ account which is offering 2% FDIC insured.

What would you recommend? This money (all 5k of it) will again be dollar cost averaged out of the short term bond fund into her roth IRA throughout 2010. Her roth IRA is 100% in Vanguard 2030 Target date fund.

Thanks for your input.

By: TFB

TFB — Wed, 21 Oct 2009 00:18:43 +0000

enonymous – Applying the same thought process, I think it makes sense to move some from Treasuries in the Spartan fund to CDs. You get a higher yield with no reduction in credit quality. Do note that CDs have lower liquidity. If you have to sell before the maturity date, your CDs become secondary CDs and you have to give some enticement to the purchaser. If you commit to holding them to term, I don’t see a problem.