Asset Allocation with CD’s

[RetireAge50]

I’ve never had a CD before and was thinking about getting some of the Navy Fed 18 month at 3%.

My new portfolio mix would be 70% stocks, 18% Bonds, 8% CD’s and 4% Money Market. So would you think of this as 70/18/12 or 70/26/4?

 

[RunningBum]

On my spreadsheet I'd see it as 70/30. Though I do have a place where I track cash so maybe 70/18/12. I see CDs more like MMs than Bonds but somebody will probably come up with a good justification for 70/26/4. Or how about 70/18/8/4?

 

[VanWinkle]

70/26/4

 

[COcheesehead]

70/26/4

This ^^

 

[RunningBum]

Waiting for the justification on 70/26/4.

My justifications are:

70/30 Equities vs non-equities
70/18/12 CDs are cash, like MMs
70/18/8/4 CDs are cash, but not immediately accessible so different than MMs
I guess 70/26/4 is that CDs have a duration and set interest rate like bonds? Assuming they are FDIC I think that guarantee puts them in a different class.

 

[COcheesehead]

The 4% is liquid cash. The bonds and CD's are fixed income, guarantee does not matter. I don't break out prefunded muni's which are 100% guaranteed. Why would I do it for FDIC?

70/26/4

 

[pb4uski]

I’ve never had a CD before and was thinking about getting some of the Navy Fed 18 month at 3%.

My new portfolio mix would be 70% stocks, 18% Bonds, 8% CD’s and 4% Money Market. So would you think of this as 70/18/12 or 70/26/4?

70/26/4.... I view CDs as a akin to a US Treasury Bond... both are "risk-free" and fixed income.

It's not cash because of the EWP.... IOW it can't be converted to cash without the cost of the EWP.

 

[OldShooter]

I’ve never had a CD before and was thinking about getting some of the Navy Fed 18 month at 3%.

My new portfolio mix would be 70% stocks, 18% Bonds, 8% CD’s and 4% Money Market. So would you think of this as 70/18/12 or 70/26/4?

What problem are you trying to solve?

 

[Dtail]

70/26/4

+2
CD's can be a valid substitute for bonds, especially longer dated ones not counting as cash.

 

[RetireAge50]

What problem are you trying to solve?

None. Just a random thought for idle chit chat.

I like to have about 75% stocks, 20% Bonds and 5% cash. We got a windfall and are throwing the money into CD’s for now and thus the question.

 

[GenXguy]

I always express my AA as equities to everything else. Everything else is fairly stable, but volatility comes from equities.

 

[CardsFan]

I always express my AA as equities to everything else. Everything else is fairly stable, but volatility comes from equities.

I am pretty much this way, now. I used to have the same issues, and came to the realization that it just does not matter whether you consider a CD to be a "bond" or "cash". Even our MM accounts are paying 2%, similar to some CD's and some bonds (though on the LOW end). So the only "cash" we have, that is money earning next to nothing at the B&M bank, is less than 1%. Not worth segregating.

 

[Dtail]

Some retirement calculators also effectively use this further differentiation between CD's and cash.

 

[RetireBy90]

I have basic AA 65/35, but break down equities to large cap, mid and small, and international. Then I break down bonds to cash, us bonds and intl bonds. CDs fit into the cash allocation. With pen fed and navy you can break them out any time and forfeit I think 3 months of earnings so I think of them as cash.

 

[ncbill]

Little difference in rates between bonds & CDs at this time...I'd count them the same.

 

[RunningBum]

I guess my distinction is that I own bond funds, which are less like CDs.

 

[RetireBy90]

Little difference in rates between bonds & CDs at this time...I'd count them the same.

One difference is that a Traditional CD won’t loose value like a bond can. Also no fees like a bond fund or cost to buy and sell. I consider more like cash or MM.

 

[friar1610]

I solved that dilemma years ago by relabeling the "bond" category to "fixed income". Into that category go my bond MFs, CDs and I-Bonds. Problem solved. MMFs and savings accounts in a separate "cash" category (although, strictly speaking, they are also FI.)

 

[pb4uski]

One difference is that a Traditional CD won’t loose value like a bond can. Also no fees like a bond fund or cost to buy and sell. I consider more like cash or MM.

Brokered CDs have interest rate risk just like a bond.... bank CDs do not.

There is no penalty to cash out a MM... most long bank CDs have 180 day EWPs.... that makes then different.

 

[mrfeh]

I consider anything that isn't in equities as fixed income (that includes bonds, CDs and cash).

No reason to complicate things.

 

[foxfirev5]

I consider anything that isn't in equities as fixed income (that includes bonds, CDs and cash).

No reason to complicate things.

Exactly. KISS

 

[Montecfo]

I’ve never had a CD before and was thinking about getting some of the Navy Fed 18 month at 3%.

My new portfolio mix would be 70% stocks, 18% Bonds, 8% CD’s and 4% Money Market. So would you think of this as 70/18/12 or 70/26/4?

I think of my cash and CDs as part of my bond allocation. Cash is just the most conservative part.

 

[jazz4cash]

+2

CD's can be a valid substitute for bonds, especially longer dated ones not counting as cash.

+1
I count CDs with 2 or more years to maturity as bonds and anything shorter I count as cash. It’s all fixed income. One problem with using CDs in lieu of bonds is that it makes rebalancing tricky.