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Old 01-21-2014, 10:04 PM   #21
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Originally Posted by daylatedollarshort View Post
Years ago I used to read all of the total freak out posts on the Boglehead forum every time the market would drop and decided I don't want to spend every day of my retirement worried about what the stock market is going to do that day and whether or not I could stay retired.

While I can't predict Black Swans like the government defaulting on TIPS, the risk of that is relatively low compared to a major stock market drop, especially in the beginning of our retirement years. A 50% drop in our retirement savings would mean we'd have to make 100% back just to recover what we started out with initially, plus the inflation rate in the intervening years.

A large drop early on in retirement just seems so devastating. To each his own on the investing front, but for me I'd rather settle for comfortable as we are now and have an investment portfolio likely to keep us that way. I think of it as using our money to buy peace of mind.
Thanks for your reply.

IMO... there is considerable real value to peace of mind.
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Old 01-22-2014, 12:56 AM   #22
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+1.

Some posters around here who keep telling other more conservative posters like me to take more risks with their money should read the quote below from time to time. :-)

I bought a 3.3%, 10-year CD last week, very happy with that investment.

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I think it is a mistake to tell people what to do with their money. People must "own" their plans about important things like this, or they will not believe in them and they might easily abandon the plans under heavy stress, which will certainly come from time to time. There is validity to many of these ideas, but they are not one size fits all.

I would not like to convince someone that s/he needs more stocks, right before stocks drop 40%. If we are honest and aware, we will realize that the future is unknowable, and be properly modest about what we say-particularly in the area of advice.

Ha
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Old 01-22-2014, 10:52 AM   #23
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Originally Posted by obgyn65 View Post
+1.

Some posters around here who keep telling other more conservative posters like me to take more risks with their money should read the quote below from time to time. :-)

I bought a 3.3%, 10-year CD last week, very happy with that investment.
If it works for you and your financial plan, who can argue? And even if it doesn't, who am I to judge? (I just love quoting "il Papa".)

Still, there is risk involved. Mainly the risk that interest rates will return to normal and in two or three years one can get 5% or 6%. Full disclosure: took a similar risk when I signed up for 2.25% CD's several years ago. It paid off compared to other insured investments. I again took that risk when I recently bought several 3% 5 Year CD's from PenFed. Time will tell....
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Old 01-22-2014, 11:11 AM   #24
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If it works for you and your financial plan, who can argue? And even if it doesn't, who am I to judge? (I just love quoting "il Papa".)

Still, there is risk involved. Mainly the risk that interest rates will return to normal and in two or three years one can get 5% or 6%. Full disclosure: took a similar risk when I signed up for 2.25% CD's several years ago. It paid off compared to other insured investments. I again took that risk when I recently bought several 3% 5 Year CD's from PenFed. Time will tell....
I think that is the strategy behind rolling ladders of bonds or CDs - to get an rolling average of interest rates that stays ahead of inflation. Or with CDs that are not broker CDs, that can be cashed in with a minimal penalty.

I suspect there are many inflation beating strategies (I bonds, TIPS, CD ladders with credit union CDs) that do not get much press because they do not make recurring income, or sometimes any income at all, for the large investment companies. Even a .17% fee over 50 years on a $1M average portfolio balance adds up to $85K.
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Old 01-22-2014, 11:41 AM   #25
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I bought a 3.3%, 10-year CD last week, very happy with that investment.
Was this a brokered CD or a direct purchase from a bank or credit union?
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Old 01-22-2014, 05:57 PM   #26
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Obviously you have missed some interesting threads :-)
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If it works for you and your financial plan, who can argue? ...
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Old 01-22-2014, 05:57 PM   #27
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Brokered CD.
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Was this a brokered CD or a direct purchase from a bank or credit union?
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Old 01-22-2014, 06:40 PM   #28
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Brokered CD.
Interesting. I am curious why you chose a brokered CD over a PenFed CD. The way I look at it, I can lock in a 3% rate for either 5 or 7 years with PenFed. If rates stay the same or go down (unlikely), I just leave the CD in place until maturity. However, if interest rates increase to 5% in the next two years, I can cash out at any time and just pay a flat penalty of one year of interest.

With a brokered CD, if rates rise to 5%, the value of the CD drops pretty substantially, similar to selling a bond prior to maturity in a market with rising interest rates. This interest rate sensitivity associated with brokered CDs in my mind makes them just as "risky" as buying bonds, because the value can drop substantially if interest rates rise. And while you can hold the CD for ten years to get your principal back, you would be stuck holding a 3% CD for 8 years when you could have reinvested into a 5% CD and made substantially higher returns over those 8 years.

So following this logic, if a bank CD with a guaranteed "cap" on the penalty for early withdrawal is a very modest one year of interest, the risk associated with a brokered CD would require that it pay a premium to reward the holder for the risk.

Which brings me to my ultimate question: is an extra .3% interest enough to justify that much risk?
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Old 01-22-2014, 07:07 PM   #29
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I get all my CDs from Edward Jones. Much simpler. One statement for tax purposes.

If interest rates go up, I will buy new CDs at new rates and I will pay the penalty - it's a risk I am willing to take.

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Originally Posted by Ready View Post

Interesting. I am curious why you chose a brokered CD over a PenFed CD. The way I look at it, I can lock in a 3% rate for either 5 or 7 years with PenFed. If rates stay the same or go down (unlikely), I just leave the CD in place until maturity. However, if interest rates increase to 5% in the next two years, I can cash out at any time and just pay a flat penalty of one year of interest.

With a brokered CD, if rates rise to 5%, the value of the CD drops pretty substantially, similar to selling a bond prior to maturity in a market with rising interest rates. This interest rate sensitivity associated with brokered CDs in my mind makes them just as "risky" as buying bonds, because the value can drop substantially if interest rates rise. And while you can hold the CD for ten years to get your principal back, you would be stuck holding a 3% CD for 8 years when you could have reinvested into a 5% CD and made substantially higher returns over those 8 years.

So following this logic, if a bank CD with a guaranteed "cap" on the penalty for early withdrawal is a very modest one year of interest, the risk associated with a brokered CD would require that it pay a premium to reward the holder for the risk.

Which brings me to my ultimate question: is an extra .3% interest enough to justify that much risk?
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