Opinion on CDs

[melmar]

I am unique on this forum in that I do use a fee based financial planner and have done well by him. However, this morning I had a meeting with him that left me rather upset. My wife and I have an IRA, an annuity and SS. We can live off the annuity and SS. The IRA is for future use - hopefully around 5 to 8 years down the road. We are conservative investors and have an asset allocation of 40% equities and 60% bonds. The bonds are going down - about 3% in the last month. Our conversation with the FA this morning revolved around strategies for the bond allocation. His rec is to increase equities allocation and decrease bonds in the IRA. He further stated that he doesn't see a bond fund making more than 1% in the foreseeable future - that meaning 4 to 5 years. I asked him why we couldn't put some of the bond money into a laddered CD approach (at a local bank) and at least make something off the money. He said that was foolish as inflation will eat up those returns. I am not saying to put it in CDs forever, just until the bond thing plays out a little. I think his real reason for discouraging this move is that he will lose part of the portfolio that he makes money on. It makes no sense to me to pay him a fee that will be more than anything he generates from the bond funds and in fact it could be a negative return at that. We ran out of time with him today, but are having another meeting next week. Just wanted to get some opinions before the next meeting.

 

[Dawg52]

How much more in equities did he recommend? People here will have different opinions on how much to allocate to equities to fight inflation. Whatever you decide on the equity side, I see nothing wrong with a ladder of CD's for a portion of your fixed income.

 

[obgyn65]

I would not increase my equity allocation. My opinion only. A CD ladder may be a good idea.

 

[Midpack]

There is no right answer, no place to hide with conservative assets. My comments below:

His rec is to increase equities allocation and decrease bonds in the IRA. Make no mistake, it is adding more risk, but some people are choosing that route - usually with dividend paying stock funds (good yield, but principal risk).

He further stated that he doesn't see a bond fund making more than 1% in the foreseeable future - that meaning 4 to 5 years. May well be true, and 4 to 5 years is not out of the question. When yields/rates increase, NAVs will adjust downward accordingly, no way around it.

I asked him why we couldn't put some of the bond money into a laddered CD approach (at a local bank) and at least make something off the money. He said that was foolish as inflation will eat up those returns. Inflation will eat up most if not more than the returns, but safer than bonds (no NAV risk) - and longer CDs may net out better than some bond funds. And some folks have moved from bond (funds) to CDs or CD ladders - depends on what kind of returns one needs.

I am not saying to put it in CDs forever, just until the bond thing plays out a little.Again, some folks are moving fixed income assets to CDs, but the bond situation could change next year or 10 years from now.

I think his real reason for discouraging this move is that he will lose part of the portfolio that he makes money on. That would be my guess too, but you know him better than we do.

Best of luck, very few of us are thrilled with our options WRT bond funds-cash assets...

 

[Midpack]

I would not increase my equity allocation. My opinion only. A CD ladder may be a good idea.

FWIW obgyn65 doesn't buy equities under any circumstances in case you didn't read his signature info (below his post)...other than a tiny recent position. So far he'd recommend no equities under any and all circumstances.

 

[Meadbh]

I am unique on this forum in that I do use a fee based financial planner and have done well by him. However, this morning I had a meeting with him that left me rather upset. My wife and I have an IRA, an annuity and SS. We can live off the annuity and SS. The IRA is for future use - hopefully around 5 to 8 years down the road. We are conservative investors and have an asset allocation of 40% equities and 60% bonds. The bonds are going down - about 3% in the last month. Our conversation with the FA this morning revolved around strategies for the bond allocation. His rec is to increase equities allocation and decrease bonds in the IRA. He further stated that he doesn't see a bond fund making more than 1% in the foreseeable future - that meaning 4 to 5 years. I asked him why we couldn't put some of the bond money into a laddered CD approach (at a local bank) and at least make something off the money. He said that was foolish as inflation will eat up those returns. I am not saying to put it in CDs forever, just until the bond thing plays out a little. I think his real reason for discouraging this move is that he will lose part of the portfolio that he makes money on. It makes no sense to me to pay him a fee that will be more than anything he generates from the bond funds and in fact it could be a negative return at that. We ran out of time with him today, but are having another meeting next week. Just wanted to get some opinions before the next meeting.

I think your assessment is correct.

 

[FIREd]

I am unique on this forum in that I do use a fee based financial planner and have done well by him. However, this morning I had a meeting with him that left me rather upset. My wife and I have an IRA, an annuity and SS. We can live off the annuity and SS. The IRA is for future use - hopefully around 5 to 8 years down the road. We are conservative investors and have an asset allocation of 40% equities and 60% bonds. The bonds are going down - about 3% in the last month. Our conversation with the FA this morning revolved around strategies for the bond allocation. His rec is to increase equities allocation and decrease bonds in the IRA. He further stated that he doesn't see a bond fund making more than 1% in the foreseeable future - that meaning 4 to 5 years. I asked him why we couldn't put some of the bond money into a laddered CD approach (at a local bank) and at least make something off the money. He said that was foolish as inflation will eat up those returns. I am not saying to put it in CDs forever, just until the bond thing plays out a little. I think his real reason for discouraging this move is that he will lose part of the portfolio that he makes money on. It makes no sense to me to pay him a fee that will be more than anything he generates from the bond funds and in fact it could be a negative return at that. We ran out of time with him today, but are having another meeting next week. Just wanted to get some opinions before the next meeting.

So losing to inflation with bonds is OK, but losing to inflation with CDs is not? Yep, he's worried about his commission. As for increasing your equity allocation at this time, you are upset when you lose 3% in one month with bonds, how will you feel the next time you lose 3% in one day with equities? I think it's not a wise move. Maybe it's not the time to re-evaluate your asset allocation, but it may be time to re-evaluate your business relationship with this guy.

 

[photoguy]

Personally, if I had an annuity and SS that covers my expenses, I would have been much more aggressive with equity. Maybe down to as little as 10-15% fixed income (cash/bonds).

 

[David1961]

Welcome, melmar:

Not sure what your age is, but if you are old enough to collect SS and are a conservative investor, 40% in equities is probably enough. Maybe you could consider moving half of your current allocation that is in bonds to laddered CDs. But it's really important to do what you feel comfortable with.

 

[pb4uski]

First, I think many would agree that there is concern about bond funds returns given the low interest rate environment, interest rate risk associated with a likely rise in interest rates, etc. CDs are a good answer but currently pay paltry yields (high 1% to 2.5% depending on how long you go) and the have inflation risk as well.

I think given that SS/annuity cover your living costs and your current low equities exposure that increasing equities isn't a horrible idea if you are comfortable with the added risk. Over the 5-8 year time horizon that you have for this money equities are not inappropriate IMO.

Another in-between solution that has been talked about on this board are the target-date bond funds. I bought some recently. They are admittedly a bit new but the hold bonds that mature in a target year and then they distribute the funds assets and close the fund. So they are similar to holding a diversified bond portfolio and yield a bit more than CDs.

I would consider increasing the allocation to equities over some period of time and the interest rate risk of your fixed income allocation.

YMMV.

 

[zakenjanei]

How about staying in bonds but moving to bonds with short/ultra short duration?
Wouldn't that minimize the risk of falling prices due to increasing interest rates
while giving the opportunity to buy newer bonds with the higher rates upon
maturity?

 

[youbet]

I am unique on this forum in that I do use a fee based financial planner ............... I think his real reason for discouraging this move is that he will lose part of the portfolio that he makes money on.

I don't think you are using a "fee based planner" if he makes his money based on the size of your portfolio.

 

[urn2bfree]

I don't think you are using a "fee based planner" if he makes his money based on the size of your portfolio.

This exposes the inherent conflict of interest in these so called fee based advisors who charge by a percent of assets under management (AUM)
I have posted and criticized AUM on numerous threads so I won't go into it in detail here, but it is not the only option available.
If you have at least $500,000 in your portfolio, feel free to PM me for a couple of very successful portfolio managers who charge by a reasonable flat rate whether you have $500,000 or $5,000,000. It all breaks down to allocation percentages. Their time commitment is the same, so they charge the same.
In their own words:
"We view our services as those of expert consultants who are compensated for the approximate number of hours we spend on your accounts per year, not as money managers with esoteric skills who deserve a percentage of your assets whether you make or lose money." is a quote from one of them

and from the other one they point out that using AUM to generate fees translates into paying advisors at a “$700 to $1,000 hourly rate or more. Passive and index investment managers perform important services, but billing $700 to $1,000 per hour is nonetheless excessive for helping investors formulate a plan, stay on track toward financial goals, and avoid foolish financial decisions. These fees are over and above what most other professionals earn in other high paying occupations like medicine, engineering and the law. It defies common sense that an investor should be penalized by higher fees because they have more assets, or because markets are doing well. Furthermore, unless advisory percentage charges decline over time (highly unlikely), investors will pay much more to their advisors as their assets grow.”

 

[enjoyinglife102]

I agree that this planner who you "have done well with" (compared to what?) appears to be yet another who looks out for himself before his clients. As someone who has worked in the industry, the AUM evaluation in this thread is spot on - one of the biggest rip offs ever created.

I personally don't agree with changing one's AA strategy based on performance. Rebalance, absolutely, but if equties weren't the strategy before, why are they now? If bond prices do rise - which has been forecast incorrectly for years now, you'll be buying into them and their higher yeild through rebalancing.

Not sticking to one's strategy creates high levels of anxiety around "what to do" and worst yet often creates lower returns. Investing isn't difficult, being disciplined is difficult.

 

[OAG]

OP I did not see anything to indicate your age in your posting. If you take on more risk and it does not work out to your satisfaction do you have enough time to recover? Personally I use CD ladders. I have virtually no experience with bonds as I fee CD's are be less restrictive. Unfortunately safe insured CD's are not offering much better rates than bonds and IMO the prospect for higher rates in either do not appear better than your FA's estimate. I also have no experience with a FA as I have never needed to use one (my "investments" have always consisted of about 99% CD's). I do admit a bias towards DIY. However, if I was faced with your decision which looks to me like: more stocks, CD Ladder, or doing nothing I would go the CD Ladder route or do nothing, especially since you can meet your current financial needs from other resources. JMO.

 

[melmar]

Thanks to everyone for their thoughts. I am 62 years old and my wife is 59. We are 2 years in to our retirement. We've got some decisions to make and all of your input was very valuable.

 

[frayne]

So losing to inflation with bonds is OK, but losing to inflation with CDs is not? Yep, he's worried about his commission. As for increasing your equity allocation at this time, you are upset when you lose 3% in one month with bonds, how will you feel the next time you lose 3% in one day with equities? I think it's not a wise move. Maybe it's not the time to re-evaluate your asset allocation, but it may be time to re-evaluate your business relationship with this guy.

My thoughts exactly.

 

[ERD50]

I think you have received some good advice and information to consider regarding CD ladder and other alternatives, though I would suggest you ignore any opinions that are provided without any backup information or reasoning given. Without reasons and background, it's really just distracting noise and you really have no idea if that opinion is applicable to your situation.

I am unique on this forum in that I do use a fee based financial planner and have done well by him. ....

My standard question to anyone who makes this claim is "How did you determine you have done well with your FA?". There seems to be a fair amount of agreement on this forum that once you have learned enough to be able to evaluate your FA, you have also learned enough to DIY and avoid the fees. And now you are questioning his judgement, so what exactly are you paying him for? There may be exceptions for unique situations, but I'd say it holds generally.

-ERD50

 

[Bikerdude]

I guess it depends on what you expect from the bond funds. If you are holding them for portfolio stability and income I see no reason to sell. If stocks go down bonds tend to increase, although not always. If interest rates go up your bond nav will fall but your yield should increase and given enough time should recover the nav decrease. However, if your primary reason to hold bonds is capital appreciation then maybe more equities is appropriate.

CD's would be a good choice if you plan to spend the bond allocation in the near term (1 to five years).

 

[haha]

I am unique on this forum in that I do use a fee based financial planner and have done well by him. However, this morning I had a meeting with him that left me rather upset. My wife and I have an IRA, an annuity and SS. We can live off the annuity and SS. The IRA is for future use - hopefully around 5 to 8 years down the road. We are conservative investors and have an asset allocation of 40% equities and 60% bonds. The bonds are going down - about 3% in the last month. Our conversation with the FA this morning revolved around strategies for the bond allocation. His rec is to increase equities allocation and decrease bonds in the IRA. He further stated that he doesn't see a bond fund making more than 1% in the foreseeable future - that meaning 4 to 5 years.

You stated that you are happy overall with this guy, though it beats me how or why. What he is recommending is reverse re-balancing- i.e. trend following. He wants you to close the barn after the horses have escaped, and he is predicting what will happen in the future. If you are a trader, this may make sense. But if you were a trader, you likely would not have an FA.

So my advice is to figure out whether you are fish or fowl, then act accordingly and consistent with this.

Ha

 

[warren]

I can only relate what I decided a few years ago. I purchased an Instant Equity Insurance Policy from New York Life that pays me 4% a year and if I die, leaves a sizable bonus to my wife. I like the fact that it's hands off and simple to set up with no ties to the markets.

 

[timo2]

How much in cash do you already have? The CD ladder would count as cash, which is an important part of your portfolio. If you have enough cash, I would not move more funds to there. but if you do not have an appropriate amount of FDIC protected cash, IMHO, that would be more important than bonds.