Put some spending cash in CDs or in I bonds?

P.S.  How are CD rates set in the first place?  I
       would imagine it is some weenie pouring
       over the same data that is used to measure
       current CPI and projecting in the future.  Do
       you mistrust TIPS as well?  Those rates are
       priced by auction with an implicit assumption
       about future CPI made by the aggregate.  
Click to expand...

Hahahahah! Not even lose, my friend. CD rates are set by each individual bank offering them, based on how badly the bank needs funds at each maturity bucket, what the market requires, and (to put it bluntly) exactly how lazy and inattentive their customers are.

Banks as a whole may well follow CPI, but more likely the CD rate is related to the rate on the assets the banks are buying with the funds spits out. Asset rates in turn are related to treasury rates and risk premia. Treasury rates are strongly influenced by inflation expectations. So in a rather circumspect way, CD rates are likely related to CPI, but its probably a reationship with a fair amount of noise.
 
Although I have a couple thousand shares of Nortel & Sun in a separate account, the equities in our retirement portfolio are hardly risky (not even that volatile).  35% is in Tweedy, Browne Global Value (TBGVX), 30% is in Berkshire Hathaway (BRK.B), 20% is in the S&P600/Barra Small-cap Value ETF (IJS), 10% is in the Dow Select Dividends ETF (DVY), and the rest is cash.  For the last year Tweedy has been rising faster than we've been selling.  And if value investing doesn't work for the next four decades then we might as well be buying bullion & shotgun shells.

...

As the years roll on and our income picture clears up, perhaps we'll become more conservative and keep a larger cash stash.  We might move further into dividend-paying stocks or even bonds.  Or, if our withdrawal rate gets down to 2-3% and our portfolio outperforms the mortgage, maybe we'll keep the equities until we're in our 90s.  But we'd rather deal with volatility risk now to beat inflation.
Click to expand...

Wow, a leveraged portfolio in payout mode with a 30% allocation to a single stock! You definately have gazungas, my friend.

Given the pensions, I actually think that the whole shebang makes some sense. I guess I can think of a couple of questions which you can feel free to ignore if you like:

- Any particular reason for a 30% allocation to Berkshire? I know a lot of people like the company, but...

- How much does Tweedy charge? I think that one of the things well worth noting in a payout portfolio is that small changes in expense ratios can materially increase potential WR and/or survivability (another reason to find good rates for your cash stash).

- I can't figure out DVY. I know a lot of retail investors like the dividend stream, but it seems like you are prone to end up with some unintentional sector bets and some of the wacky things that the people that run that ETF do.
 
I have been an optimist my whole life and have
avoided the clutches of cynicism thus far. Call
me gullible but, like unclemick, I give the gov the
benefit of the doubt until they prove otherwise.

As for hedonic adjustments of the CPI, I see that
as an attempt to improve the overall accuracy ....
and according to the links, they are mostly a wash.

I just can't buy into the conspiracy theory of an
evil government manipulating the CPI ..... sorry.

Back to the original discussion of CDs vs. I-Bonds,
it seems to me that the banks are going to set CD
rates to be profitable over the time period of the CD.
That means taking a guess at inflation. CDs have to
compete with treasuries, I-bonds, etc for the investor
dollar. CD rates will be set to achieve the bank's
profitability and market share goals, but not one
basis point higher than necessary. My point is that
the banks use the same CPI data along with current
financial rates to set their CD rates.

I don't understand your logic that CDs will beat
I-bonds because of a manipulated CPI. Both are
driven by the same basic data..... faulty or not.

The simple fact is that I-bonds beat CDs if inflation
is higher than the consensus forecast over the
duration of the CD and lose if inflation is lower.

Step up and place your bets, gentlemen. :)

Cheers,

Charlie
 
I think the fundamental problem is that this should be a simple calculation.

You have a bunch of stuff, how much more does it cost from one year to the next to buy the same functional abilities?

That so much crappola has been introduced into the formulae that we cant even agree on whether they're accurate or not is the telling sign.

When someone makes something harder to understand, either they've got nothing else to do with their spare time, or they've got an agenda.

As far as giving the government the benefit of the doubt until they do something to make you doubt their credibility...err...give me a break? Do you want the 10,000 item list or the 100,000 item list of less-than-truths?

How about this one...the one that made me stop listening to greenspan...where last year he advised that everyone considering buying a home get themselves an adjustable mortgage instead of fixed...KNOWING he's got every intention to raise rates to the point where that adjustable mortgage will cost more than a fixed.

Lets look at this a different way...forget that a lot of credible people think the cpi is underestimating inflation by a percent and greenspans already given the message that he thinks it overestimates by a percent (and therefore we can expect that to be 'fixed'). Social security recipients have been living off of CPI adjustments for a while now. I know plenty of people in their 70's that count on that check. They tell me their money doesnt buy as much as it did a decade ago. There is small comfort that the goods and services are "better" because some 20-something in DC wrote a white paper on hedonic adjustments that says so.

The car still just gets you from here to there. The computer still just gets your email and your web pages.

Throw one last thing into the mix: the big bugaboos for inflation are usually energy and wage costs. Given outsourcing and RFID tags replacing a lot of your retail employees, older workers working longer and the fact that we're stomping over middle eastern countries at a rate of one per year...I dont see the higher wages or uncontrollable energy costs creating any excuse for inflation.

Cutting to the chase...if we see 5%+ returns from ibonds in the next 5 years, I'll eat my hat. And its not a tasty looking hat either.
 
Wow, a leveraged portfolio in payout mode with a 30% allocation to a single stock! You definately have gazungas, my friend.
Click to expand...

He used to climb into a little skinny tin can with a nuclear pile at one end and explosives at the other, and if that wasnt enough, it was then plunged hundreds of feet below the surface of the ocean. The idea being that people who dont like us would then look for it and try to drop explosive charges on it.

The gazunga level is therefore well established. ;)
 
TH, you keep circling around the issue. Why do
you think CDs will outperform I-bonds? Just
having a hard on against the CPI does not cut it
as far as I am concerned since, IMHO, both rates
are driven by essentially the same data. Whether
you like the data or not is irrelevant as far as I
can tell. :D

Cheers,

Charlie
 
He used to climb into a little skinny tin can with a nuclear pile at one end and explosives at the other, and if that wasnt enough, it was then plunged hundreds of feet below the surface of the ocean.  The idea being that people who dont like us would then look for it and try to drop explosive charges on it.

The gazunga level is therefore well established. ;)
Click to expand...

With all due respect to Nords' years of tin can diving, there is a big difference between high financial risk tolerance and being nucking futs.
 
I'll take both thank you.

I do see a big difference. CDs are issued by thousands of banks and credit unions at different rates and terms. Rates vary widely, for example Penfeds 5 year CD pays 5%. Citibank pays 3.78%. They are both using the same external 'data' projections (aside from their own internal finances.)
Savings bonds have one issuer. Some CDs are competitive with Savings Bonds (in my view, a better value), some are not.

I don't trust the government. Government's lie. So do the politicians/managers who are trying to justify their own value. I'm not expecting Snow to say 'that 2nd tax cut was a mistake, we're digging ourselves deeper and deeper into debt'. Or Cheney to admit that most of our expectations and plans regarding Iraq have gone awry. 'They' even covered up the cost of the medicare drug bill. Why should I trust them with the CPI data?
 
Hey JohnBlake...........in God we trust; everyone else is suspect :)

TH, you hurt me to the quick. You only listen to Gross,
Bogle and Buffett? What about me? Is this going to hurt my chances to be Pope?

JG
 
Setting aside the issue of trust in the CPI, I would
have a very hard time choosing between a 5 year
CD ladder at Penfed vs. I-bonds. Why? Because
after playing the game for 5 years you get a 5 year
rate at an average maturity of 2.5 years. OTOH, you get insurance against higher than expected inflation and the ability to cash in the I-bonds after 1 year with only a 3 month penalty.

You young puppies were making love to your hands
the last time real inflation reared its head. You have
no idea of the havoc it can play. The idea that the
gov can artificially hold the CPI to 3.5% is absurd,
IMHO, of course. :D

Cheers,

Charlie
 
 OTOH, you get insurance against higher than expected inflation and the ability to cash in the I-bonds after 1 year with only a 3 month penalty.  

You young puppies were making love to your hands
the last time real inflation reared its head.  You have
no idea of the havoc it can play.  The idea that the
gov can artificially hold the CPI to 3.5% is absurd,
IMHO, of course.   :D

Cheers,

Charlie
Click to expand...
Tell 'em Charlie. Let's return to the golden inflationary days of 1978-1980. That ought to make believers of 'em and mebbe grow hair in their hands.

Allen Greenspan believes that inflation is a curse and he acts accordingly. But Ole Allen can't stay around forever.
 
Berkshire & Tweedy.

Wow, a leveraged portfolio in payout mode with a 30% allocation to a single stock! You definately have gazungas, my friend.

Given the pensions, I actually think that the whole shebang makes some sense. I guess I can think of a couple of questions which you can feel free to ignore if you like:
- Any particular reason for a 30% allocation to Berkshire? I know a lot of people like the company, but...
- How much does Tweedy charge? I think that one of the things well worth noting in a payout portfolio is that small changes in expense ratios can materially increase potential WR and/or survivability (another reason to find good rates for your cash stash).
- I can't figure out DVY. I know a lot of retail investors like the dividend stream, but it seems like you are prone to end up with some unintentional sector bets and some of the wacky things that the people that run that ETF do.
Click to expand...
Gazungas-- perhaps, but the pension cashflow helps a lot. We definitely have a healthy respect for inflation and a long time to live with it. (I wish I'd saved my "WIN" button!)

Berkshire's a single stock about as much as America is a single political & demographic entity. Our Berkshire allocation started out at 20% and I can't for the life of me come up with a logical reason to rebalance. (We bought our shares between 2001-03 and we feel like real newbies next to those who bought in the 90s, 80s, or even 70s...) What's a better investment? Who's a better manager? Who has a bigger mutual fund (or ETF) with cheaper expenses, lower turnover, more tax efficiency, and a better record of beating the S&P500? Aside from Carly Fiorina, who else's company will have a higher breakup value after the CEO steps down? Er, lemme dismount my soapbox and point you to Robert P. Miles' latest "Warren Buffett Wealth: Principles and Practical Methods Used by the World's Greatest Investor". (http://www.amazon.com/exec/obidos/t...f=sr_1_3/104-2517571-5071145?v=glance&s=books) About the only Miles recommendation I can't bring myself to follow is to margin the rest of our investments to buy more BRK. (The annual report will be posted 5 Mar at http://www.berkshirehathaway.com/annual.html.)

TBGVX is 1.39%-- higher than most funds but about par for global funds. (Much of the expense is dollar hedging.) The ER had actually dropped over the last five years to 1.37% but popped up this year. Turnover has been single digits for over three years yet has also popped up to about 12%. But, hey, maybe they're ready to move out of the Netherlands & Switzerland and into new pockets of value. http://www.tweedy.com/global/gvfundfacts.pdf Over 30% of our holdings are unrealized gains (we bought between 1996-2001).

The kid's college fund is over half BRK and another 30% TBGVX. Over a quarter of that portfolio is cap gains and they'll all be taxed at the five-year rate.

I'm also intrigued by DVY-- and gratified by its runup-- but the recent expansion to 100 stocks may drag it down. We have a moderately tight sell stop and we're waiting to see what it does.

... there is a big difference between high financial risk tolerance and being nucking futs.
Click to expand...
Actually we're fondly referred to by our naval brethren as "nucking fukes"...
 
Nords, I am well aware that the cult of WB is alive and well, but I don't swing that way. Different strokes...

On DVY, the stories I could tell you... Suffice it to say that the management of some of the companies that DVY holds find the ETF very perplexing.
 
You young puppies were making love to your hands
the last time real inflation reared its head. You have
no idea of the havoc it can play.The idea that the gov can artificially hold the CPI to 3.5% is absurd,
IMHO, of course. :D
Click to expand...
You sure got that one right on!

I don't think the government can artifically hold the CPI down by large amounts. What they can do, is to shave a few basis points off thereby saving the government billions. They give with one hand, and take with the other.
 
Charlie -

Dont get rubbed wrong by me on this...and by the way I do remember 18% mortgage rates and my groceries making me cut an awful lot of coupons out of the paper to make them affordable...and still eating a lot of oodles of noodles.

I think we're stuck on "evil government" and "CPI manipulation".

Lets do away with that.

Long term CD's right now pay 4.6-5%. ibonds pay ~3.6%. Apparently they arent glued together all that well. In my mind, a treasury issue that is supposed to protect me from inflation and provide me with a "real rate of return" will probably ALWAYS give me a little less than a CD that is paying a fixed rate with no inflation protection. Otherwise...who the hell would buy a CD? Theres a risk element that simply has to create a premium, just like with value stocks. No?

Will 4.5%+ inflation come about, at least as measured by the CPI?

Why dont you tell me what you think will cause this to happen? Then perhaps I can understand your perspective.

My understandings of the last huge wave of inflation was the middle east folks jerking us around on oil, coming off the gold standard, a labor crunch, and a bunch of economic policies resulting from wading into some new waters.

The perceptions of many people today are that many of those issues are behind us. I dont necessarily agree with that. But I dont see any interactive factors coming about in the next 5 years that will create a runaway inflation scenario.

Labor is plentiful. I strongly doubt any of the oil bearing countries would think that now is a good idea to yank our chain with a few hundred thousand of our troops in their backyard. Supposedly we have a grip on monetary and economic policy. An unpinned currency has been defacto for decades.

So whats going to do it?

And before we recycle this one more time, I'm not saying that ibonds suck and that one should buy CD's in exclusion. I think both suck and both will barely tread water vs real inflationary pressures...if that. I think that people wanting these sorts of instruments should divvy their money up both ways...just to be sure.

I'm not completely out there...look at vanguards "target retirement income". It only holds 25% in "inflation proof" securities. Apparently asset allocation among fixed income instruments is also alive and well...
 
NFCU-PFCU update

Here's a comparison of their five-year CDs.

NFCU: 4.75% APY at $20K minimum. Six-month penalty for early redemption.
http://eics.navyfcu.org/general/rates.nsf/SavingsRates?OpenFrameset

PFCU: 5.00% APY, $1K minimum. Same six-month penalty. (Also offers 7 year CDs at 5.15%.) https://www.penfed.org/rates/certrates.asp?app=CDA

First, I'm perplexed by PenFed's membership rules. This is more a snivel than a rant, but I'd blissfully assumed that Navy veterans were automatically qualified for PFCU membership. I was rudely recalibrated that just about every American veteran EXCEPT Navy/USMC is eligible. Maybe they have a non-compete agreement with NFCU?

Second, their National Military Family Association donation scheme is a hassle. Paying the $20 membership fee online can only be done via credit-card cash advance and not by EFT. (MBNA, "my" credit-card company, charges $5 for a $20 cash advance plus 19% interest.) Application to NMFA can be done by mail with a check but application by mail to PFCU must be done separately.

At this point I was thinking "OK, Nords, quit sniveling and start licking stamps." Then I decided to call NFCU.

Things began to change over the phone (after reviewing our account). NFCU stuck to their $20K minimum but raised their offer to 5% upon "discovering" that I've been a member for 25 years (yikes). I pointed out that PFCU is trying to eat NFCU's CD lunch with higher rates & longer terms, and NFCU claims that they'll be discussing that very issue at next week's rate meeting. NFCU also pointed out that their CD's accrued dividends can be withdrawn anytime penalty-free as long as the $20K isn't invaded. (PFCU's customer service rep will get back to me on that one.)

PFCU's big advantage is 7-year terms and a $1K minimum. NFCU has a small advantage for inertia with no hassle factor.

It sounds like NFCU is getting ready to go up against PFCU in the next couple weeks. It'll be interesting to see where rates stand next month.
 
I have not looked into this much, only read what has been posted here. Seems to me there must be some easier ways to get 5% for 5 years. But, like Dennis
Miller says, "That's only my opinion. I could be wrong."

JG
 
I joined Penfed last month. The initial deposit and NMFA membership were charged on my credit card (not a cash advance). I also went ahead and charged 20K in CDs on the card which I also earned miles on.

When I purchased the CDs I was given two options a) reinvest the dividends or b) dividends are deposited to another account.

The only hassles I ran into is the limit on credit card purchases and electronic bank purchases is 10K each. I had to wire some funds in order to get the promotional interest rate. This cost me $15.

Penfed's website is relatively easy to use, and I've found their customer support to be excellent. No complaints here.
 
TH,

I agree that IF inflation behaves as predicted, then
some 5 yr CDs might have a little edge over I-Bonds.

But you are missing my central point which is that
I-bonds give protection against inflation being
higher than predicted. When you buy a 5 yr
CD you are taking a 5 year risk that inflation will
not take off .... it is a simple as that.

Now if you are talking about 1 yr CDs, which Nords
has been buying and rolling over, then it is a no-
brainer to buy I-bonds, IMHO. The best CDs are
a little over 3% right now. I-bonds pay 3.67% now
but are likely to go up at the next reset. After all
the current YOY CPI is at 3.26% and the real interest
is 1% making it likely that current I-bonds will be
paying over 4% this spring.

I posted on another thread that a 5 year ladder
at Penfed vs. I-bonds would be a hard choice.
That is because a 5 yr ladder pays 5 yr rates
(after 5 years) with only a 2.5 yr average maturity.

BTW, I never take offense at your comments even
when you are blowing smoke. :D You always
have a good sense of humor which I enjoy a lot.

I am glad that you can type and hold a baby at the
same time. What happened to the 25 lb. attack cat?
Is it jealous? I guess the baby is evidence that the
cat did no permanent damage while on your lap.

Cheers,

Charlie
 
But you are missing my central point which is that
I-bonds give protection against inflation being
higher than predicted. When you buy a 5 yr
CD you are taking a 5 year risk that inflation will
not take off .... it is a simple as that.
Click to expand...

Not really. Because you can redeem the CD with only a 6 month interest penalty. So holding it for a couple years will beat the I-Bond, even if you have to redeem it early and take the penalty.

So don't look at it like a 5 year commitment.
 
Once again I agree with Cut-Throat. I don't know many liberals with that much common sense (unclemick?). :)

JG
 
Glad you arent taking offense, we're just chewing the fat here. [homer]Mmmm...fat...[/homer]

The 25 lb attack cat is exasperating. I get up with the baby to get something and when I come back he's enjoying the warm spot I left behind and is not pleased to be moved. But he likes to lick the baby, so I guess he's ok with it. The other day Gabe started his mad waving (I think he's giving a presentation on why we should increase his feedings) and bopped the cat on the head a couple of times. Not well received.

As C-T says, you can bail on a cd at any time with a small penalty, should the interest rates start to look displeasing. Unexpected inflation should (within a very short time) be matched with higher interest rates. At that point you revisit the decision now that you know what the new parameters are.

But if you're worried about unexpected high inflation, perhaps a chunk of a commodities index fund is more in line than simply holding ibonds. Pretty liquid, uses TIPS as collateral against commodities, and commodities fly when unexpected inflation comes around. Usually. In that case you get the TIPS return, the inflation protection from that, and an extra dollop of juice if inflation really runs due to the commodity run-up.

You never did say what you thought might create short term inflationary pressures that would make ibonds attractive...
 
If the real interest rate on I-bonds were to creep
back to the 2% range then I would like them a
lot better, but I don't know what moves real
rates other than supply and demand. I-bond rates
will spike if/when the CPI spikes. As it is, I-bonds
at 3.67% (going to 4.26% this spring, IMHO) are
just about a wash with 5 year CD's held for 2 years.

I wish Gummy had a calculator to allow comparison
of returns under different assumptions of changing
CPI and penalties for early redemption. My head
hurts trying to do back of the envelope swags. :D

Short rates are likely to go up more as Greenspan
turns the screw, but I don't know how 5 yr and
longer will react.

My feeling is that we are in an unstable equilibrium
situation on long rates and they will jump when
some trigger occurs ..... like another oil shock or
foreign crisis or just whenever our debt holders
spook a run on the bank because they like the euro
or other currency better. The herd mentality among
bond investors is just as scary as stock investors.
When the pendulum starts to swing it always seems
to overshoot.

Cheers,

Charlie
 
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