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no rate increase until late 2014
Old 01-26-2012, 07:34 AM   #1
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no rate increase until late 2014

As a mostly cash, no risk investor. this news is kind of hard to swallow. I think the best bet going forward is to look at bond funds or looking into etf's. What would you look at?
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Old 01-26-2012, 08:24 AM   #2
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Old 01-26-2012, 09:34 AM   #3
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Frank - With a bond as with any investment, I try to write down the risks.

Not all risks are equal, you have to look at the risk, the cost if it comes to pass, and the chances it will happen.

Like what is the risk if you loan me money to buy a house. Risks include I may not pay back the loan (loss of principal). You would be able to look to my credit rating and make a judgement on the chances it would happen. If it did happen, your loss would be impacted by being able to forclose on the loan and sell the house. If I put down 30% of the value, you don't have much at risk as long as the value doesn't decline too much. You could sell for 80% of the value and get your money back.
Another risk is inflation risk. Say that you loan me the money at say 4% and inflation goes up in 2 years to 6%. The money I pay back would be worh less than the money you loaned me. That is the purchasing power would be less. You would loose some purchasing power but you would still get your money back so not a great loss like not getting the money back.
Still one more is interest rate risk. If you loan me at 4% and rates go to 6%. Then if you have to sell the loan, you would get less than face value. Again not a great risk, you would loose some if you had to sell but not your entire investment. You can run the numbers, if you loan me $100,000 at 4% you would get 4,000 in simple interest. If rates go to 6% and you had to sell, you would get only about $67K (4,000 interest / rate of .06).

So if you want to invest in a bond fund, check out the risks. Look at the credit rating of the bonds they buy (like my credit report). All major funds will list this or you can get it from morningstar.com for easy compare. Look at the risks of rates going up but looking for an item called duration. Shorter terms are less exposed to interest rates going up. Duration is a way to measure the amount of loss the fund would incur if rates go up or down. I would also look for the risks associated with the fund company it self, and the person running the fund. How long have they been doing this kind of thing, what is the track record. Finally, check our that the costs are. The funds list this as a percentage. Lower cost means you get to keep more of your puny returns. With rates so so, a fund that takes 1% might eat up 1/3 or more of your return.
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Old 01-26-2012, 09:42 AM   #4
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Does this mean I would be safe buying a two year CD rather than a one year CD?
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Old 01-26-2012, 09:59 AM   #5
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Does this mean I would be safe buying a two year CD rather than a one year CD?
Safe? Depends on what you mean. If you simply mean "safe" as in "not locking up money at low rates while rates went much higher," I think it's probably "safer" to go to two years now since it means rates are not likely to be much higher (if at all) before the two years have passed. The War on Savers is not ending any time soon.

The people using CD ladders are getting hammered. Even the 3-5 years CDs are paying almost nothing, so the folks who have 5-year CDs maturing this year are going to take a massive haircut in terms of the yield they are getting on that money, like 5% down to 2% if they opt for another 5-year CD to keep the ladder going.
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Old 01-26-2012, 10:08 AM   #6
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As a mostly cash, no risk investor. this news is kind of hard to swallow. I think the best bet going forward is to look at bond funds or looking into etf's. What would you look at?
I'd consider a preferred stock ETF like PFF for a portion of your funds.
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Old 01-26-2012, 10:10 AM   #7
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Safe? Depends on what you mean. If you simply mean "safe" as in "not locking up money at low rates while rates went much higher," I think it's probably "safer" to go to two years now since it means rates are not likely to be much higher (if at all) before the two years have passed. The War on Savers is not ending any time soon.

The people using CD ladders are getting hammered. Even the 3-5 years CDs are paying almost nothing, so the folks who have 5-year CDs maturing this year are going to take a massive haircut in terms of the yield they are getting on that money, like 5% down to 2% if they opt for another 5-year CD to keep the ladder going.
+1

I'm working on the last 2 year of my 5yr ladder and I'm much less enthused about parking the $ for 5 years. On the other hand, if the recovery takes another 3 years then maybe inflation won't be a great risk for 3 years. Note that in the same release, 11 of 17 members said they see the discount rate rising by end of 2014, and 8 of 18 saw it risig to 1% or higher by then. Can't see them doing one hike from .25% to 1% so that means we would see several hikes to get to 1%.
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Old 01-26-2012, 03:54 PM   #8
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The people using CD ladders are getting hammered. Even the 3-5 years CDs are paying almost nothing, so the folks who have 5-year CDs maturing this year are going to take a massive haircut in terms of the yield they are getting on that money, like 5% down to 2% if they opt for another 5-year CD to keep the ladder going.

Yep, that is a bummer. I have several CDs coming due in 2012 and 2013. Where do I re-invest the money?

I have decided to add to my holdings of Preferred Stocks and Dividend paying shares.

Example, when a CD matures; I will buy ( in 100 share lots ) a stable dividend stock, ( such as JNJ, MMM or PG ), to exhaust the proceeds. I then sell covered calls ATM for one year ( or even 2 years ) out.

The risk I take is the decline in the stock price beyond the call premium when the option expires. The dividends become the "interest" earned - which should be more than interest derived from re-laddering the CD.

Comments on this strategy welcomed and appreciated.
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Old 01-26-2012, 05:24 PM   #9
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Is anyone investing matured-CDs and other cash in tax-free bond funds? MD bond funds, for example, are paying upwards of 4%.

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Old 01-26-2012, 06:37 PM   #10
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The risk I take is the decline in the stock price beyond the call premium when the option expires. The dividends become the "interest" earned - which should be more than interest derived from re-laddering the CD.

Comments on this strategy welcomed and appreciated.
Same strategy in my ira account but much shorter timeframe. I just want to match the 5-6% I was getting. I buy PPL, DUK, MO right after xdiv date and sell covered options 2-4 months out with enough price and premium to reach my goal. About 40% get assigned. Average time for $ in the market is 7 months. Goal is to reduce the average time holding stocks which in my mind is less risk.

My credit union is 2.75% for 7yr CD. I still continue to ladder.
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Old 01-26-2012, 11:09 PM   #11
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i've been using ally banks 5 year cd's. at a lousy 2.3%, it's better than a MM account. i believe it is 60 day interest penalty for early withdrawl. i'll crunch the numbers when the time comes, but i won't take more risk with my cash.
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Old 01-27-2012, 10:29 AM   #12
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I personally would use cash equivalents for 1-3 year needs. The rest would go further up the risk curve. Short-term bonds funds are paying better than MM or CDs, with added risk. REITs, utilities, consumer staples, and energy companies are traditional dividend payers with much better yield than "cash", though, again, with more risk.
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