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Brokered CD Advice / Making a mistake
Old 03-02-2014, 06:25 AM   #1
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Brokered CD Advice / Making a mistake

Morning, I have been CD laddering for over 30 years. This month I have over 300K coming due and need some direction on who to invest with for a Brokered CD. I will not cash it in early and don't mind going long term, no matter what rates may do in the future. I am happy with a 2.8 - 3 percent return. I had a financial adviser come to my house the other night, he was over 60 years old, telling me I am making a huge mistake keeping my money in CD's. Any thoughts on that?

Have 36 months to ER at 52 . God willing
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Old 03-02-2014, 06:34 AM   #2
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Nothing wrong with CDs if they fit your ability, need, and willingness to take risk. Of course, your returns on this investment will be rather low, so that you will need to have a lot more money saved up in order to generate money for future expenses. But maybe that's the way you roll.

Another poster here, obgyn65, does not like anything risky, too.

Other possiblilies for you are I-bonds purchased directly from Treasury Direct, but there is a rather low annual limit.

You also did not write that CDs were your only investment, so maybe you have a stash of equities in the form of passively-managed low-expense-ratio index funds, too.
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Old 03-02-2014, 06:42 AM   #3
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Hello - I also like brokered CDs. I don't think you are making a mistake by sticking to them.
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Old 03-02-2014, 06:59 AM   #4
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And I'll bet the FA wanted you to buy a SPIA.
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Old 03-02-2014, 07:12 AM   #5
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Which, in some cases only, make sense.
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Originally Posted by frayne View Post
And I'll bet the FA wanted you to buy a SPIA.
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Old 03-02-2014, 07:49 AM   #6
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I have used "Brokered CD's" ( On E-Trade, you find them in the "Bonds" section) . The only way I have found acceptable rates going out 3 or more years.

Remember a FA needs to make money in commisions to survive. And he can't ,unless he sells you something. A financial product / insurrance sales person does not wish you bad things , it's just that he put's himself as a priority , not you, and this can cost you big time.

If CD's are where your comfort zone is , your gut feeling is likely correct.
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Old 03-02-2014, 08:42 AM   #7
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Vanguard has a lot of them. IMO I personally would stick to FDIC and non-callable ones and be reasonably sure I could hold to maturity - redeeming early on the open market in a rate rising environment could be ugly. BTW if you can get in Navy FCU is currently paying 3.1% APY on standard 7 year NCUA insured CD's of $100K+. I just bought there and at Pentagon FCU (Pentagon no longer has any 3% ones currently). We have been retired for a LONG time and CD's is all we have (besides Army Retirement and SS) seems to work just fine for us and IMO was not a mistake.
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Old 03-02-2014, 08:59 AM   #8
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I think it would be a serious mistake to buy a brokered CD. I really don't like them. In my mind, they carry all of the interest rate risk of bond funds without any of the premium yield over traditional bank CDs.

I do have a significant amount of my fixed income in CDs, but all directly with banks, where my penalty for early withdrawal is capped at no more than one year of lost interest.

If interest rates go up 2% over the next few years, you are not going to want to be in a low yield brokered CD, but you are going to see a significant hit in value if you want to sell and reinvest at higher rates. I think it's a complete scam for brokered CDs to be selling at the same rates as bank CDs given the interest rate sensitivity they carry. IMHO, don't do it, don't even think about it. Go for the best rate you can get with a bank CD knowing you can get out and reinvest if rates go up.
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Old 03-02-2014, 09:07 AM   #9
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@Ready, so you trade CDs just like you do bonds? I find that unusual. Folks who buy CDs are supposed to hold them to maturity no matter what. If you do, then brokered CDs are the same as non-brokered CDs.

I suppose if one has to cash in a CD early, even non-brokered CDs have early redemption penalties. It is true that some penalties are rather light.

Maybe we should have a poll to see how many folks have cashed in a CD before the term was up?

Full disclosure: I have used brokered CDs in the past and held them to maturity without any issues whatsoever.
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Old 03-02-2014, 09:12 AM   #10
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Look at the brokered cd that Obgyn65 bought - 10 years at 3.3%. Compare that to the PenFed CDs we all recently bought at 3% for 5 years.

Now look at the impact of these two investments if rates rise to 5% in two years. For the PenFed CD, I cash out after two years, pay 3% and reinvest in a new 5 year CD at 5%.

The brokered CD immediately takes a drop in value of 20%, so clearly you are not going to sell. Instead, you continue holding a CD for 8 more years at 3% when I'm making 5% on my CDs.

This is interest rate risk. Any time I take on risk, I want to earn more yield than a risk free investment. If a bank CD is risk free, a brokered CD has to pay more to make it worth the risk of interest rates rising.

Look at the yields on brokered CDs right now. They are awful. They are lower than the 3% PenFed or NavyFCU rates. Yes, I know the PenFed deal is over, but those deals tend to come around at least once or twice a year. Put your money into a high yield Ally savings account and wait for a deal to come back.
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Old 03-02-2014, 09:15 AM   #11
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LOL! to me the issue with brokered CDs is if interest rates rise and you want access to your CD you will get hammered and likely experience a loss. However with a bank CD you would pay a modest early withdrawal penalty and be able to access your funds (or reinvest at the higher rates).

For the OP, I think the target maturity bond funds from Guggenheim and iShares are a sensible alternative to CDs, particularly if you have the ability and intent to hold to maturity. You get better yields, albeit with some credit risk. While those instruments have interest rate risk, if you have the ability and intent to hold to maturity it is moot. I own both.
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Old 03-02-2014, 09:25 AM   #12
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Looking at CDs available through Vanguard, the highest yield for a 5 year CD is 2.067%. So exactly the rate of PenFed's 5 year CD now that the promotion is over, or a full point less than NavyFCU if you are eligible to join.

To get the rate up to 3%, I have to go up to 8.5 years. Why would anyone want to lock up their money for 8.5 years at 3%, knowing that if rates rise they will take a significant hit if they want to sell early?

To account for interest rate risk, a brokered CD MUST pay at least a full percentage point above a bank CD to justify the extra risk. Until they do, they are just plain bad investments.

When I hear brokered CD, I have the same reaction as when a new member tells us they are thinking about going to Ameriprise for their investments. Sorry, but it's just plain bad. Don't do it.
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Old 03-02-2014, 09:46 AM   #13
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Quote:
Originally Posted by pletal View Post
Morning, I have been CD laddering for over 30 years. This month I have over 300K coming due and need some direction on who to invest with for a Brokered CD. I will not cash it in early and don't mind going long term:
Schwab has 7 yr for 2.7%, 10yr/3.3. You could get two, one for annual expense (I.e 60k) and 240k for the 2nd. Or get one for whatever amount gets you to the next maturity rung.

Did you ask the FA what he did with HIS last 300k that needed a home?
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Old 03-02-2014, 09:50 AM   #14
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I see nothing wrong with investing in brokered CD's, as long as you stick to FDIC insured, non-callable. Obviously you want to stay under the $250K FDIC limit per bank.

Most of my CD's are thru banks, but I've recently invested in a long-term brokered CD with a good rate.

As for the warnings from the other folks on this thread, I don't think they fully understand how CD ladders work. If you have to cash in your CD before maturity, then your CD ladder is not setup correctly IMHO.
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Brokered CD Advice / Making a mistake
Old 03-02-2014, 09:54 AM   #15
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Brokered CD Advice / Making a mistake

Just a couple of comments. Sorry for any typo as I am traveling.

I found that buying 10-year CDs is what works best for me. I like the predictability, stability, and zero risk over the long term. I already have $70k in CDs maturing every year on average, including in 5 years time - therefore why on earth would I need to buy more CDs expiring in 5 years then if I spend less than the CD maturing value + interest that year ?

I have never had a CD going down 20 percent. Right now all my CDs up to 5 years are 101-105% of their initial values. The CDs up to 10 years are between 97-99%.

I am not trying to sell the concept of 5 year vs 10 year CDs. What works for me will not work for everyone.


Quote:
Originally Posted by Ready View Post
Look at the brokered cd that Obgyn65 bought - 10 years at 3.3%. Compare that to the PenFed CDs we all recently bought at 3% for 5 years.

Now look at the impact of these two investments if rates rise to 5% in two years. For the PenFed CD, I cash out after two years, pay 3% and reinvest in a new 5 year CD at 5%.

The brokered CD immediately takes a drop in value of 20%, so clearly you are not going to sell. Instead, you continue holding a CD for 8 more years at 3% when I'm making 5% on my CDs.

This is interest rate risk. Any time I take on risk, I want to earn more yield than a risk free investment. If a bank CD is risk free, a brokered CD has to pay more to make it worth the risk of interest rates rising.

Look at the yields on brokered CDs right now. They are awful. They are lower than the 3% PenFed or NavyFCU rates. Yes, I know the PenFed deal is over, but those deals tend to come around at least once or twice a year. Put your money into a high yield Ally savings account and wait for a deal to come back.
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Old 03-02-2014, 10:29 AM   #16
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Risks come in many forms. We often focus on the risk of investing in stocks and having them go down in value, thus we "lose money".

CDs, whether direct or brokered, will not "lose money" assuming they are FDIC insured. However, that does not mean they don't have risk.

If rates rise tomorrow from 3% to 5%, your stuck earning 3% for the next 10 years with a brokered CD. I will be cashing in all of my bank CDs, paying a small penalty, and reinvesting all of them at 5%.

I'm not sure how to state it any simpler than that. It's an opportunity loss risk, not a loss of principal value risk. And it has nothing to do with understanding how laddered CDs work.

The funny thing is, when investing my money in fixed income, I consider myself to be more conservative than Obgyn65. That is why I'm not wiling to take on the risk of buying brokered CDs. I'm afraid that Obgyn65's conservative desire to invest has actually placed him in the position of taking on more risk that necessary, simply because he does not understand the importance of factoring in interest rate risk into investment planning.
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Old 03-02-2014, 10:55 AM   #17
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Risks come in many forms. We often focus on the risk of investing in stocks and having them go down in value, thus we "lose money".



CDs, whether direct or brokered, will not "lose money" assuming they are FDIC insured. However, that does not mean they don't have risk.



If rates rise tomorrow from 3% to 5%, your stuck earning 3% for the next 10 years with a brokered CD. I will be cashing in all of my bank CDs, paying a small penalty, and reinvesting all of them at 5%.



I'm not sure how to state it any simpler than that. It's an opportunity loss risk, not a loss of principal value risk. And it has nothing to do with understanding how laddered CDs work.



The funny thing is, when investing my money in fixed income, I consider myself to be more conservative than Obgyn65. That is why I'm not wiling to take on the risk of buying brokered CDs. I'm afraid that Obgyn65's conservative desire to invest has actually placed him in the position of taking on more risk that necessary, simply because he does not understand the importance of factoring in interest rate risk into investment planning.

I understand what you are saying Ready, but I cannot get the 3%, 5 year CD. I have to confess, I was looking at transferring a chunk of my Roth in vanguard the other day to a 10 year 3.4% brokered CD. The only thing that stopped me was I discovered I would have to open another brokerage account in the Roth and couldn't just buy by selling my funds. I will probably just wait out the year and see if they do rise, and if that happens my fingers will be more interested in setting up another account.


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Old 03-02-2014, 11:17 AM   #18
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I use www.deposit accounts.com. I read Ken's blogs every day and also read the latest posts on the forums. Like this site you can start or reply to a posting. It has the highest rate CD's, IRA's, Reward checking accounts etc. You can used the light blue box to put in banks and credit unions, and if you would do on-line and put in the state you live in and then click find. This site will sort through the IRA's, or CD's or savings accounts or checking or money markets that has the highest interest rate for people in your state. By clicking the + sign by each bank or credit union you can find the health of the bank, what is required for that product, their phone number, link to their website, comments from people having worked with that institution etc. Amazing site. Pentagon Federal Credit Union just stopped their 3% CD's. They were available in Dec through Feb. I think there are still 2-3 places that have national CD's available for that rate or more and maybe a few that are just for certain states. I still have 5 and 6% CD's and IRA's with Pentagon Federal Credit Union. My 6.5% IRA's just matured in DEC. They also have a great credit card that pays 5% on your gas paid at the pump and takes the credit off your bill each month. I also use Lake Michigan Credit Union (allows accounts from any state) for my reward checking account. It pays 3% up to $15,000 with a direct deposit and using a debit card (with a pin or signature) 10 times a month. You can use it for $1 yogurt, at the $1 store, at Aldi's etc. Even use it 2-3 times at the grocery store when going through the line or several times while getting gas. They have a credit card that pays 3% on gas, 2% on groceries and 1% on everything else. When you get $50 just call them and they will put the money in your account or on your credit card bill. They will if you fill out the form debit your checking the first week of the month or the middle of the month for a payment, or payment in full. I don't work for these places but just received my information from Bank Account Rates | Bank Reviews, Deals & Promotions | Deposit Accounts. Also when we built our home I used AARP's credit card from Chase that 5% off everything for 6 months. Was able to use my builders discount, and found several sales and rebates and paid for my kitchen cupboards, and bathroom vanities, granite counter tops, carpet, hardwood floors, tiles for the bathrooms, electric fixtures, toilets, all new furniture and appliances. This site is amazing.
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Old 03-02-2014, 11:59 AM   #19
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Ready states: If rates rise tomorrow from 3% to 5%, your stuck earning 3% for the next 10 years with a brokered CD. I will be cashing in all of my bank CDs, paying a small penalty, and reinvesting all of them at 5%.
Bingo - that's the difference between someone who invests in CD's and someone who has setup a CD ladder to generate a steady source of interest that is spent during retirement. I've spent years setting up multiple CD ladders that come up for renewal every 3 months. I can choose to let the CD rollover, move it to a another bank or spend the interest.
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Old 03-02-2014, 12:23 PM   #20
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I had a financial adviser come to my house the other night, he was over 60 years old, telling me I am making a huge mistake keeping my money in CD's. Any thoughts on that?
The huge mistake was letting a financial adviser come to your house, no matter how old he or she is. Actually the older the worse. Why is he or she still working at that age?

Unless you are getting a much higher rate, direct CD is better. Also check the Treasury yields and make sure you are getting a meaningfully higher rate on the brokered CD versus Treasuries. Treasuries are more liquid and state income tax free.
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