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Old 01-17-2011, 11:02 AM   #21
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I'm recommending you have an AA inside your fixed income
And when CDs pay the same or higher rates with lower risk than longer-duration products I'd typically use in my AA?
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Old 01-17-2011, 11:24 AM   #22
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And when CDs pay the same or higher rates with lower risk than longer-duration products I'd typically use in my AA?
TBM has similar yield to a 5 year CD but has consistently produced returns over 5%, so for money I don't need for 5 years I'd go with TBM. Even if interest rate rises bring TBM NAV down I still like it for 5 year money over a CD, even if it is "riskier". CDs would be my short term choice right now over short term bonds
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Old 01-17-2011, 12:23 PM   #23
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Ah, if only my crystal ball worked that well...
I tend to agree with LOL that equities are the best place right now. Everybody is scratching their heads about dealing with low interest rates and that's exactly what the Fed wants right now -- investment stimulus. The money flows are not yet a stampede into equities but if that happens I personally might then rebalance. Given your response to LOL's post it sounds like you want to rebalance now.

Short term investment grade (VFSUX at Vanguard) is yielding about 2% now and the spread to short term Treasury is pretty wide. If those short rates go up 1% this year then maybe VFSUX will give a net 1% return for the year and it will then be yielding 3%. Not great but not a disaster.
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Old 01-17-2011, 12:37 PM   #24
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As of October 2009, I had almost no money in CDs and all my fixed income investments consisted of bond funds. Since then, I have loaded up significantly on CDs. My current CD portfolio will pay 4.62% interest for at least the next 7 years. But it is becoming harder to find good rates on CDs.

Currently I am adding money to equities but, on the fixed income side, I am building up my cash position so that I can take advantage of the swoon in munis and/or promotional CD offers at PenFed.
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Old 01-17-2011, 01:45 PM   #25
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As noted in my original post, we already have a big chunk of our FI in CD's. Although they should be risk-free, I don't want to have all of our FI in that one basket.

So, though they are good, CD's are out of the picture for this discussion.
My choices are currently self-limited to various choices at Vanguard, and I'm hoping for more comment on those possibilities.
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Old 01-17-2011, 02:12 PM   #26
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As of October 2009, I had almost no money in CDs and all my fixed income investments consisted of bond funds. Since then, I have loaded up significantly on CDs. My current CD portfolio will pay 4.62% interest for at least the next 7 years. But it is becoming harder to find good rates on CDs.

Currently I am adding money to equities but, on the fixed income side, I am building up my cash position so that I can take advantage of the swoon in munis and/or promotional CD offers at PenFed.
You must have got some of those good FCU rates, are they jumbo?
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Old 01-17-2011, 02:30 PM   #27
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Is the caution to have money to be spent within five years in cash, CDs, etc still valid?
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Old 01-17-2011, 02:37 PM   #28
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Is the caution to have money to be spent within five years in cash, CDs, etc still valid?
I personally do not believe that it was ever valid. That's just too long a time to be in cash.

I think it depends on what you are going to use the money for and what the consequences are if things do not go well.

If you need to pay a tax bill in April, then cash is a good place since the consequences are not pleasant. But if you need a down payment for a house in 5 years, that's a pretty flexible number and time, so a short-term bond fund or even some equities is OK. The consequences of not meeting a goal are benign: Wait to buy a house or buy a smaller house. Plus you can get less risky when the goal is closer and you have a clearer time point or value point.
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Old 01-17-2011, 04:19 PM   #29
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You must have got some of those good FCU rates, are they jumbo?
Yes I was able to catch some good rates (some were promotional) while they lasted. No jumbos.
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Old 01-17-2011, 04:48 PM   #30
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Many are asking the same question... what to do?

Don't forget the old adage... "Don't Fight the Fed"... even though the sayingis most commonly associated with the stock market.

Till the Fed is done manipulating rates on fixed securities...This is it. They want you to take more risk.

I shortened durations on bond funds we control (except those in balanced mutual funds). We are holding a stable value fund, short-term bond fund, a little in TIPs (just in case inflation kicks up)... and probably too much in MM.... we are about half MM and half (stable value fund, short-term bond fund, a little in TIPs).


When rates increase (timing being the variable)... there is no question about what happens to the pricing of bonds.

I have been thinking about investing some taxable fixed money in munis. I am watching to see if they continue to drop in price and get overdone.
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Old 01-17-2011, 05:02 PM   #31
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I shortened durations on bond funds we control (except those in balanced mutual funds). We are holding a stable value fund, short-term bond fund, a little in TIPs (just in case inflation kicks up)... and probably too much in MM.... we are about half MM and half (stable value fund, short-term bond fund, a little in TIPs).
My bonds are intermediate term (5 year duration), but I did get out of Gov debt and into more corporate debt, I'm not touching Munis with a barge pole
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Old 01-17-2011, 05:04 PM   #32
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I personally do not believe that it was ever valid. That's just too long a time to be in cash.
I can see holding 5 years of expenses in CDs/cash in retirement as a buffer against market down turns.
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Old 01-17-2011, 06:57 PM   #33
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TBM has similar yield to a 5 year CD but has consistently produced returns over 5%, so for money I don't need for 5 years I'd go with TBM.
I wouldn't count on 5% returns going forward. With a starting yield of 2.7% and a duration of 5 it may be mathematically impossible to generate 5% average annual returns over the next five years.
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Old 01-17-2011, 07:11 PM   #34
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I wouldn't count on 5% returns going forward. With a starting yield of 2.7% and a duration of 5 it may be mathematically impossible to generate 5% average annual returns over the next five years.
One should remember that real return is what counts, not nominal. Should inflation kick up you might want some protection -- short term bonds, TIPS, etc.
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Old 01-17-2011, 10:42 PM   #35
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FD (NUN):

Sounds like I did what you did. Locked in some 4% 7yr CD's last year.

Also, managed to get the "Reservation" 5 % 10 yr CD's. January 2011.

Penfed C.U. at times has great rates. Usually in Janury.

Really tough now, all CD rates seem to be extremely low.

I agree with " OP ", and am going thru the same thought process, when my other CD's mature this year.

Unless you want to take on a greater risk, (equites), you have to settle for lower interest rate returns. (CD's).
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Old 01-18-2011, 12:38 AM   #36
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i don't have a crystal ball but here's what i would like to do, we'll see how this pans out!

i have 75% of my total fixed income portfolio in the gnma fund at vanguard. i have kept about 40% of the total portfolio in my 401k mainly as i was younger than 59 1/2 when i retired and figured i could take distributions if i needed to vs the roll over ira and it's penalty prior to 59 1/2. i would like to exchange the gmna fund into intermediate term treasury fund but i don't want the nav loss in the itt if i did it now so i could put the entire 401k into the stable value fund, last year the return was 3.45%. this would have me at the present 65/35 allocation and i would not suffer any nav loss. after say 2 years i'd hope interest rate would have risen enough to make the itt fund a better buy re the nav and then i'd roll the 401k to vanguard and reallocate to 50/50 or 40/60 and put that into itt and maybe tips if the yield is better than today.

we'll see...
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Old 01-18-2011, 06:32 AM   #37
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I can see holding 5 years of expenses in CDs/cash in retirement as a buffer against market down turns.
I don't see how that helps. It may be mentally comforting, but it really doesn't help your portfolio out any differently than having 5 years of expenses in short-term bonds.

As an example, suppose your expenses require a 4% withdrawal from your portfolio. 5 years of expenses would then be 20% of your portfolio. If short-term bonds dropped by 10%, then that 20% in short-term bonds would drop your portfolio by 2%. If you had cash, you would not have that 2% extra drop in your portfolio. If your portfolio is set up such that an extra 2% drop in your portfolio is gonna make or break you, then something else is wrong.

In the meantime, did those short-term bonds create more income than cash to overcome any drop? I think the answer is yes. These can't be junk bonds though. They have to be investment-grade short-term bonds and Treasuries.

Cash is a drag on your portfolio.
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Old 01-18-2011, 07:13 AM   #38
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One should remember that real return is what counts, not nominal. Should inflation kick up you might want some protection -- short term bonds, TIPS, etc.
The nice thing about the CDs I own is that it only cost 2 months interest to get out of them. So while I'm taking treasury credit risk and enjoying significantly better than treasury (and 5-yr TIPS) returns, if interest rates go up, I can reset to higher market rates at an insignificant cost.
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Old 01-18-2011, 07:22 AM   #39
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I don't see how that helps. It may be mentally comforting, but it really doesn't help your portfolio out any differently than having 5 years of expenses in short-term bonds.

As an example, suppose your expenses require a 4% withdrawal from your portfolio. 5 years of expenses would then be 20% of your portfolio. If short-term bonds dropped by 10%, then that 20% in short-term bonds would drop your portfolio by 2%. If you had cash, you would not have that 2% extra drop in your portfolio. If your portfolio is set up such that an extra 2% drop in your portfolio is gonna make or break you, then something else is wrong.

In the meantime, did those short-term bonds create more income than cash to overcome any drop? I think the answer is yes. These can't be junk bonds though. They have to be investment-grade short-term bonds and Treasuries.

Cash is a drag on your portfolio.
I agree that 20% would be too much in cash, but I'm frugal and have rental income so 5 years of expenses is closer to 10% of my investments. The CDs would be held in taxable accounts and their main purpose would be to buffer against interest rate rises, market down turns, and provide spending money.

With this buffer I'd just have the rest of my fixed income in TBM, maybe some intermediate term corporate and TIPS all in tax deferred accounts.
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Old 01-18-2011, 07:23 AM   #40
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In the meantime, did those short-term bonds create more income than cash to overcome any drop? I think the answer is yes.
Not at the moment. Money held at Capital One Direct yields ~1.35%, versus 1.08% for the Vanguard ST Bond Index.

Times have changed. Safe pays more than risky in today's fixed income environment. I never owned a CD in my life until a year or two ago. But when banks are paying more on FDIC insured deposits than I can get in the market taking credit and duration risk, why would I ever take those risks to earn lower returns?
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