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Old 12-02-2014, 02:59 PM   #41
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I get the feeling a lot of folks consider CDs to be like cash.
Personally, I consider them in the bond category.

Regardless, when I look at my AA, I add up the equity portion and get a percent, then figure the rest will take care of itself, whether it's in a bond fund, actual bonds, CDs, or something else. I keep my equity portion around 60% (5%) and don't worry about slicing and dicing the rest of it.
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Old 12-02-2014, 03:16 PM   #42
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Think I am going to go with Otar's recommendation, which is using the bucket approach. Forget the exact allocations, but for non-equities it's something like 2 years spending in cash, 3 years in short term bonds, and the rest in long term bonds. When rebalancing, any buckets out of balance are topped off.

Will enact this probably next month when I rebalance.
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Old 12-02-2014, 04:31 PM   #43
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Originally Posted by braumeister View Post
I get the feeling a lot of folks consider CDs to be like cash.
Personally, I consider them in the bond category.

Regardless, when I look at my AA, I add up the equity portion and get a percent, then figure the rest will take care of itself, whether it's in a bond fund, actual bonds, CDs, or something else. I keep my equity portion around 60% (5%) and don't worry about slicing and dicing the rest of it.
I completely consider them cash, for the simple reason that they bear no interest rate risk. They don't appreciate when interest rates drop either. You don't see capital gains or losses. So they act like the cash asset class, not like the bond asset class.

Most CDs can be withdrawn early without cutting into the original principal - you just forfeit some of the earned interest. It's important to consider penalties when buying a CD.
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Old 12-02-2014, 04:40 PM   #44
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I completely consider them cash, for the simple reason that they bear no interest rate risk. They don't appreciate when interest rates drop either. You don't see capital gains or losses. So they act like the cash asset class, not like the bond asset class.

Most CDs can be withdrawn early without cutting into the original principal - you just forfeit some of the earned interest. It's important to consider penalties when buying a CD.
What you say is true, of course. But I'm not alone in thinking of them more as bonds.
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While CDs are often thought of as different assets than bonds, in reality they are simply bonds with special characteristics.
CDs vs bonds - Bogleheads
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Old 12-02-2014, 04:59 PM   #45
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What you say is true, of course. But I'm not alone in thinking of them more as bonds.

CDs vs bonds - Bogleheads
Yeah - the special characteristics being that they act like cash? I just don't see the benefit of trying to model CDs like bonds. It's all about interest rates and capital gains/losses with bonds.
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Old 12-02-2014, 05:50 PM   #46
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Think I am going to go with Otar's recommendation, which is using the bucket approach. Forget the exact allocations, but for non-equities it's something like 2 years spending in cash, 3 years in short term bonds, and the rest in long term bonds. When rebalancing, any buckets out of balance are topped off.

Will enact this probably next month when I rebalance.
Prior to retiring I targeted a 60/40 AA with no real cash balance. After I retired, I changed to 60/34/6 with about two years worth of withdrawals in cash (or really close to 3-4 years after considering expected dividends).

When I do my AA analysis, I also look at my portfolio on a bucket basis (as defined in a M* video by Christine Benz) which has liquidity, stable value and inflation protection buckets which end up being 6%, 22% and 72%, respectively. IIRC, my 60/34/6 allocation reasonably aligned with M*'s recommended ranges for those buckets so it is all much ado about nothing.

I'm not sure how that AA would align with Otar's buckets.
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Old 12-02-2014, 05:55 PM   #47
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Yeah - the special characteristics being that they act like cash? I just don't see the benefit of trying to model CDs like bonds. It's all about interest rates and capital gains/losses with bonds.
I think of CDs as very similar to bonds in that you make a deposit, receive periodic interest and a return of principal at maturity. They also have interest rate risk which is directly measurable for brokered CDs and more difficult to measure for bank CDs. They don't have credit risk unless you exceed FDIC limits (but UST bonds lack credit risk as well).

They share liquidity characteristics with cash except for those pesky early withdrawal penalties but bonds can also be easily converted to cash (albeit at a cost).

In short, CDs are much more similar to bonds than they are to cash.
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