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CD or Fund
Old 01-14-2010, 06:38 PM   #1
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CD or Fund

I think I know the answer to this question, but it is just a gut instinct and I'd like to be able to figure it out with real data. We have a 10k CD with a 2.9% coupon for 24 months. We are 6 months into it and have reinvested interest, so if we cash it in now with brokerage fees and the bid (10,014 today), we would end up with $10,150.60. If we keep it to maturity we will have $10,580.

The yield on the Wellesley fund is 3.29%. I have all the percentages for various time frames, the lowest of which is the 5 year at 4.93%. I feel it would be better to cash the CD in now and put the money in this fund, but I am basing that on a gut instinct and I really don't know how to explain it to myself or my husband (important - it's his CD).

Vanguard explains "yield" as :
A snapshot of interest and dividend income from your holding. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over a specified period and is annualized, or projected, for the coming year.

How can I compare a CD yield, which is fixed, with this yield which changes? Is it just a chance one takes? Is it because we expect the shares of the fund to go up over time and the CD to stay the same? I know 10k is a small amount, but I want to understand this for all of our other Vanguard funds.


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Old 01-16-2010, 07:14 AM   #2
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Originally Posted by smooch View Post
How can I compare a CD yield, which is fixed, with this yield which changes? Is it just a chance one takes?
You already said it. A CD is fixed and guaranteed. Guaranteed first by the issuing bank, and 2nd by the FDIC. Fixed in both interest rate and duration.

A fund return is not fixed and not guaranteed. The fact that the fund's yield has never been below X% has nothing to do with anything. It's just an interesting historical factoid.

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Old 01-18-2010, 06:17 AM   #3
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Originally Posted by rayvt View Post
The fact that the fund's yield has never been below X% has nothing to do with anything.
Yup. And remember that yield moves inversely with price (yield goes up as the price of the fund goes down). So historic yield doesn't really tell you that much. From mid-2008 to March 2009, Wellesley declined in price by about 25%. Meanwhile your CD chugged along at par earning a couple of percentage points. That is massive outperformance on the part of the CD.

Swapping the CD for Wellesley may, or may not, end up being a good move. It's impossible to say. But what is known for certain is that it is a huge move out on the risk spectrum. If you're in the mood to take on a bunch more risk and feel good about the market going forward, go for it. But my guess is that the money you put in a CD is probably "safe" money. If that's true, I'd think twice before swapping a guaranteed 2.9% for a 3.29% yield that could just as easily turn into a loss.
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Old 01-18-2010, 07:23 AM   #4
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Dumb idea if you will need this money in the next 5 yrs.
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