Join Early Retirement Today
Thread Tools Search this Thread Display Modes
CD or Fund
Old 01-14-2010, 07:38 PM   #1
Recycles dryer sheets
Join Date: Nov 2004
Posts: 140
CD or Fund

I think I know the answer to this question, but it is just a gut instinct and I'd like to be able to figure it out with real data. We have a 10k CD with a 2.9% coupon for 24 months. We are 6 months into it and have reinvested interest, so if we cash it in now with brokerage fees and the bid (10,014 today), we would end up with $10,150.60. If we keep it to maturity we will have $10,580.

The yield on the Wellesley fund is 3.29%. I have all the percentages for various time frames, the lowest of which is the 5 year at 4.93%. I feel it would be better to cash the CD in now and put the money in this fund, but I am basing that on a gut instinct and I really don't know how to explain it to myself or my husband (important - it's his CD).

Vanguard explains "yield" as :
A snapshot of interest and dividend income from your holding. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over a specified period and is annualized, or projected, for the coming year.

How can I compare a CD yield, which is fixed, with this yield which changes? Is it just a chance one takes? Is it because we expect the shares of the fund to go up over time and the CD to stay the same? I know 10k is a small amount, but I want to understand this for all of our other Vanguard funds.


smooch is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-16-2010, 08:14 AM   #2
Full time employment: Posting here.
Join Date: Sep 2007
Posts: 849
Originally Posted by smooch View Post
How can I compare a CD yield, which is fixed, with this yield which changes? Is it just a chance one takes?
You already said it. A CD is fixed and guaranteed. Guaranteed first by the issuing bank, and 2nd by the FDIC. Fixed in both interest rate and duration.

A fund return is not fixed and not guaranteed. The fact that the fund's yield has never been below X% has nothing to do with anything. It's just an interesting historical factoid.

rayvt is offline   Reply With Quote
Old 01-18-2010, 07:17 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
Join Date: Sep 2005
Posts: 5,381
Originally Posted by rayvt View Post
The fact that the fund's yield has never been below X% has nothing to do with anything.
Yup. And remember that yield moves inversely with price (yield goes up as the price of the fund goes down). So historic yield doesn't really tell you that much. From mid-2008 to March 2009, Wellesley declined in price by about 25%. Meanwhile your CD chugged along at par earning a couple of percentage points. That is massive outperformance on the part of the CD.

Swapping the CD for Wellesley may, or may not, end up being a good move. It's impossible to say. But what is known for certain is that it is a huge move out on the risk spectrum. If you're in the mood to take on a bunch more risk and feel good about the market going forward, go for it. But my guess is that the money you put in a CD is probably "safe" money. If that's true, I'd think twice before swapping a guaranteed 2.9% for a 3.29% yield that could just as easily turn into a loss.
Gone4Good is offline   Reply With Quote
Old 01-18-2010, 08:23 AM   #4
Thinks s/he gets paid by the post
Bikerdude's Avatar
Join Date: Jul 2006
Posts: 1,901
Dumb idea if you will need this money in the next 5 yrs.
“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan
Bikerdude is offline   Reply With Quote

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
Does anyone own a Long/Short Fund like GGHEX - GMO Alpha Only Fund III fatman22 FIRE and Money 3 01-15-2009 08:02 AM
Vanguard opens their Health Care Fund and Explorer fund to new $$$ thefed FIRE and Money 2 08-10-2008 08:30 PM
It's best to fund an IRA or emergency fund account? Nanita8140 FIRE and Money 9 08-08-2008 09:43 AM
Prime Money Market Fund vs. Total Bond Fund two4theroad FIRE and Money 2 04-10-2008 01:46 PM
Bond Fund and Money Market Fund Tax Treatment Question terminator FIRE and Money 4 03-01-2007 07:56 AM

» Quick Links

All times are GMT -6. The time now is 03:32 AM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.