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Bond Fund vs CD In the Next Five Years
Old 12-22-2013, 05:17 PM   #1
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Bond Fund vs CD In the Next Five Years

I found this article surprising. I have no idea who the author is, I found the link at The Finance Buff . Here's the link to the article Bond Fund vs CD In the Next Five Years

This was of interest to me because I hold the Vanguard Short-Term Investment-Grade Fund Admiral Shares and the Vanguard Intermediate Term Investment Grade Fund Admiral Shares in my rollover IRA. In addition to that, I have all of my 401k in the Stable Value fund whose yield is about 3.15% this year and this fund I'd compare to the CD except the nav can appreciate a bit but it does not lose nav like a bond fund.

So from reading this I think I'm making a mistake holding the ITIG fund whose average duration is 5.3 years yield of 2.96% as it strikes me as being almost the same as the Vanguard Total Bond Market Index Fund Admiral Shares 5.4 duration and yield of 2.2%. I want to get my AA up from 50/50 to 60/40 but with equities so high and the powerful year end effect I'm wondering when. I was going to use money in the Stable Value to do this but now I think it should come from the ITIG fund.

I'm not asking what to do just pointing out what this article says and how it effects me and perhaps you.


ETA: After reading the article neither bond fund is very good compared to the CD! I focused on the IT fund but we all know the interest rates won't go up 2.7% immediately for the ST fund! Retirees live in interesting times re their fixed income investments! My Stable Value really looks to be a better choice than either bond fund I hold.
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Old 12-22-2013, 05:37 PM   #2
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I had my annual financial plan review with my Vanguard advisor this week, and I had this exact conversation with him. He agreed that the PenFed CD makes more sense than investing in short term bond funds at this point in time and encouraged me to keep my money there. I split my 40% FI allocation 24% bonds and 16% CDs, all earning 3% or better. There is little up side to short term bond funds when CDs are paying 3% right now. I suppose one could question why I have any money in VG Total Bond Fund given the 2.2% yield, but I suppose diversification has some value, even if it doesn't look so great right now.

On the other hand, VG CA Intermediate Term Tax Free is paying almost 3% right now, and it is state and federal tax free, so that is where I'm keeping most of my bond holdings. At my tax bracket, that's likely close to a 5% return, so not too shabby.
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Old 12-22-2013, 09:47 PM   #3
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We keep it simple. We have two choices for "intermediate bonds": a 5yrCD or PTTAX.lw. We will pick whichever has the highest SEC Yield at that moment.
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Old 12-22-2013, 11:14 PM   #4
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I mulled this over in the Why buy a bond fund thread. I sold my Vanguard GNMA and I'm investing in Pen Fed CDs. Like other articles I could find no realistic scenario where the CDs were substantially worse than a bond fund, and many very plausible situations were they were much better.
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Old 12-23-2013, 05:38 AM   #5
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I wish I had access to a stable value fund. I jumped on the PenFed CDs too. Bond funds would be my last choice. I do hold some target maturity bond funds as a substitute for a CD/individual bonds.
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Old 12-23-2013, 07:19 AM   #6
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I've been thinking about PenFed myself but I'm thinking about the security part of these "CD's". How solid is the credit union? Since the certificates aren't backed by the federal government, how do they differ from buying stock in some company or a bond from city? I think they are self insured.
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Old 12-23-2013, 07:39 AM   #7
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I've been thinking about PenFed myself but I'm thinking about the security part of these "CD's". How solid is the credit union? Since the certificates aren't backed by the federal government, how do they differ from buying stock in some company or a bond from city? I think they are self insured.
Credit union are insured, Home | NCUA.gov

http://www.ncua.gov/Legal/GuidesEtc/...cctInsured.pdf
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Old 12-23-2013, 07:43 AM   #8
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I've been thinking about PenFed myself but I'm thinking about the security part of these "CD's". How solid is the credit union? Since the certificates aren't backed by the federal government, how do they differ from buying stock in some company or a bond from city? I think they are self insured.
As others have pointed out, PenFed (Pentagon Federal) CU deposits are backed by govt insurance. Your money is as safe there as in an FDIC insured bank.

Note: It is an excellent idea to check as not all credit unions are federally insured through the NCUA (CU version of the FDIC). " If a credit union does not have the word "federal" as a part of its name and is not headquartered in Arkansas, Delaware, South Dakota, Wyoming or the District of Columbia, then it is probably a state-chartered credit union...", and probably has private, not federal insurance.
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Old 12-23-2013, 12:19 PM   #9
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The way things look to me, CDs are guaranteed to lose money against inflation over the next few years. But to each his/her own.
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Old 12-23-2013, 01:12 PM   #10
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Until interest rates rise and bond prices drop, any high quality, short to intermediate term fixed income vehicle is guaranteed to lose or stay even against inflation over the long term.

Steak is expensive and costs what it costs. If you want to eat spam that's fine. Just understand the risks involved.

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The way things look to me, CDs are guaranteed to lose money against inflation over the next few years. But to each his/her own.
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Old 12-23-2013, 01:23 PM   #11
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... is guaranteed to ...
No. Not guaranteed in the same way I used the word.
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Old 12-23-2013, 04:06 PM   #12
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The way things look to me, CDs are guaranteed to lose money against inflation over the next few years. But to each his/her own.
You already know what inflation will be over the next few years. You think it will exceed 3%? Or 2.5%?
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Old 12-24-2013, 05:09 AM   #13
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Penfed's current cd rate for three years is 2%. Not 3% or 2.5%.
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Old 12-24-2013, 07:42 AM   #14
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The way things look to me, CDs are guaranteed to lose money against inflation over the next few years. But to each his/her own.
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Penfed's current cd rate for three years is 2%. Not 3% or 2.5%.
While you were gone, many here bought the PenFed 5-yr 3.04% CD, there's even a lengthy thread about it. And CPI has been less than 3% in 4 of the last 5 years with the Fed pledging to hold interest rates close to zero into 2014-15. You might be right, but not "guaranteed."
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Old 12-24-2013, 07:54 AM   #15
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Read what you quoted... I wasn't talking about the five year CD. Who knows what will be in five years? Two or three years - that's another story.

If you want to lock up your retirement savings for 5 years at 3.04%, with half the world saying interest rates are soon to rise markedly, that's your choice, but don't think that perspectives that deem such choices as ill-advised as you consider such choices advised are any less valid.
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Old 12-24-2013, 08:03 AM   #16
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Read what you quoted... I wasn't talking about the five year CD. Who knows what will be in five years? Two or three years - that's another story.

If you want to lock up your retirement savings for 5 years at 3.04%, with half the world saying interest rates are soon to rise markedly, that's your choice, but don't think that perspectives that deem such choices as ill-advised as you consider such choices advised are any less valid.
1. They aren't "locked up" for 5 years. Penalties for early withdrawal simply revert to rates for a shorter term CD and can be used to buy something else - but won't lose principal in the mean time. That's a heck of a lot better than most cash options and without the credit OR interest rate risk of a bond fund.

2. It just doesn't mean anything that "half the world saying interest rates are soon to rise markedly". Half the world has been saying that for the past 5 years. They don't know any better than anyone else. Anyone who feels absolutely certain about the near future is fooling themselves.

3. This thread is talking about the next 5 years. And CDs versus bond funds, not some other investment.
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Old 12-24-2013, 08:08 AM   #17
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You already know what inflation will be over the next few years. You think it will exceed 3%? Or 2.5%?
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Penfed's current cd rate for three years is 2%. Not 3% or 2.5%.
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Read what you quoted... I wasn't talking about the five year CD. Who knows what will be in five years? Two or three years - that's another story.

If you want to lock up your retirement savings for 5 years at 3.04%, with half the world saying interest rates are soon to rise markedly, that's your choice, but don't think that perspectives that deem such choices as ill-advised as you consider such choices advised are any less valid.
And audreyh1 didn't specify "three years" - you did, despite the thread title "Next Five Years." The thread is about the current outlook for bond funds vs CDs - arguably a choice between the lesser of two evils (negative real returns). If you have a better non-equity alternative for fixed income allocation than bond funds or CDs, I am sure the audience would be interested.
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Old 12-24-2013, 09:03 AM   #18
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The way things look to me, CDs are guaranteed to lose money against inflation over the next few years. ....
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....Anyone who feels absolutely certain about the near future is fooling themselves....
+1 with audreyh1
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Old 12-24-2013, 09:29 AM   #19
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I agree with Audreyh1's comments as well. I see absolutely no down side to a 3% CD in today's bond environment. The principal is guaranteed and the 3% is guaranteed. No bond fund can offer that. I think we can safely assume that interest rates will not go down meaningfully below their current rates. So that means that over the next five years they can either stay the same or go up.

If they stay the same, they are still below 3% (short term bond funds specifically), so the CD does better. If they go up, bond fund prices go down while their yields go up. If this happens, your money is safely tucked away in your CD with no loss of principal. You can now take the money out of the CD, foregoing only one year of interest, and buy into the bond fund at lower prices and with higher yields. In my mind, it's a win win regardless of what happens with rates.
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Old 12-24-2013, 11:08 AM   #20
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My view in a nutshell: At my age (77), vs younger retirees everything I have invested must last me the rest of my life and my wife's life. There is no going back to work. So, I have to be VERY conservative. I'm currently sitting OK as the house is paid for, I have a decent pension, we both get Social Security and are holding a mortgage on our last house which the buyer will pay off in another six years. I have a sizeable IRA CD that matures in March 2014. Also, $80K sitting in Ally Bank money market at 1% (another CD that matured this year). My problem is that we don't need the income off the IRA or the Money Market. I'd like for those funds to grow a little but can't afford to invest in anything risky.

I like the PenFed offers but am leery of anything not backed by the Fed. I've got to move that IRA in March and I'm concerned about that. Think I'll take a trip to the local Fidelity office early next year and start talking to them.
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