Ladder vs Short Term Bond Fund

[WilliamG]

I am in the retirement withdrawal phase and trying to adhere to Frank Armstrong's two bucket approach; ie., keep enuf in short term bonds to cover 5 years expenses in case the markets are down and you don't want to sell stocks or longer term bonds to fund a particular year's expenses. I have funded the Vanguard Short Term Investment Grade bond fund within my IRA for this purpose. Today's yield for this fund is 3.68%. I see several CD rates for 5 years over 4%. Would it be reasonable replace this fund with a 5 year ladder of CDs or other safe DIs? Would be used solely for this annual refunding process so likeliehood that would want to sell before a particular security's due date is low. Can anyone point to data where could compare returns or perhaps someone has already done some analysis? The NAV on this fund is relatively stable, but even if return is a wash I am attracted to knowing exactly what will be available each year and the preservation of principle.... thanks! bill

 

[RockMiner]

Last time I looked 2 year CD's were yielding similar to your VSTIG fund. If short term rates continue to rise (as seems likely) a short CD ladder looks like a better solution to me.

Disclaimer: fixed income knuckle head

 

[Jarhead*]

I am in the retirement withdrawal phase and trying to adhere to Frank Armstrong's two bucket approach; ie., keep enuf in short term bonds to cover 5 years expenses in case the markets are down and you don't want to sell stocks or longer term bonds to fund a particular year's expenses. I have funded the Vanguard Short Term Investment Grade bond fund within my IRA for this purpose. Today's yield for this fund is 3.68%. I see several CD rates for 5 years over 4%. Would it be reasonable replace this fund with a 5 year ladder of CDs or other safe DIs? Would be used solely for this annual refunding process so likeliehood that would want to sell before a particular security's due date is low. Can anyone point to data where could compare returns or perhaps someone has already done some analysis? The NAV on this fund is relatively stable, but even if return is a wash I am attracted to knowing exactly what will be available each year and the preservation of principle.... thanks! bill

 

 


 

Bill: My approach is similar to yours, with the exception of time involved with non-equities position. I am going to go a lot further out. (Age related, etc.).

Just a thought. Instead of either short-term or CD's, why not hedge a little, and buy both?

I have Vanguard Short-term, and the "total return" was 2% in 04. It has been slightly negative so far in 05.

Being mainly interested in "total return", the short-term corp. has been a bit of a disappointment so far, but beings where we are in "interest rate cycle" it is to be expected.

Both CD's and short-term Corp. have usually (even in the hyper-inflation of the late 60's until the early 80's),
given you a fighting chance to come close to matching inflation, and not lose principal.

 

[parnass]

... I see several CD rates for 5 years over 4%. Would it be reasonable replace this fund with a 5 year ladder of CDs or other safe DIs?

I am reluctant to purchase long term CDs now, while rates on shorter term CDs (e.g., 1-year) are still climbing.

I checked CD rates at http://bankrate.com . I prefer to bank locally so I called several local banks to learn their CD rates. I have a CD maturing at a local bank today and they offered to match the higher 1-year CD rate at a local competing bank.

This was a pleasant surprise. I didn't think banks would bargain.

 

[WilliamG]

Thanks for the discussion. Perhaps ex-Jarhead, you are right, some combination. Noticed in yesterday's WSJ that William Bernstein recently sold some Short Term Inv Grade and purchased 2 year tnote(s) (in Jonathan Clements' column). Perhaps a shorter ladder along with V Short Term would be an alternative.

 

[brewer12345]

I am reluctant to purchase long term CDs now, while rates on shorter term CDs (e.g., 1-year) are still climbing.

I checked CD rates at http://bankrate.com . I prefer to bank locally so I called several local banks to learn their CD rates. I have a CD maturing at a local bank today and they offered to match the higher 1-year CD rate at a local competing bank.

This was a pleasant surprise. I didn't think banks would bargain.

As long as the penalties for early withdrawal are low enough (6 months interest), I don't see why it wouldn't be worth going out farther if you get paid enough. You always have the option of wallking away (i.e. surrender) if rates rise too far, too fast.

 

[Jarhead*]

As long as we are talking about our "chicken investments", I had a CD come due about a week ago, and sent proceeds to Fidelity for my MM acct. I carry there, until I tried to figure out what in the hell to do with it.
The money mkt. is now paying 2.3%.

Starting to bring back memories of late seventies and early 80's when Money Markets were a pretty solid place to be.

??

Jarhead

 

[MooreBonds]

Take a look at www.fisn.com
(it's a CD broker)

I know someone that opened an account with them and was pleased with their rates. They update their rates every day, and some are fairly good (disclaimer: penfed.com beats their 'fixed, non-callable' cd rates....but if you're willing to take on a little more interest rate risk, I would suggest a callable step CD...even if it is called, the rates are fairly good, and if it's not called, then the rates increase as time goes on).

 

[searcher]

These rates look pretty good.

http://www.penfed.org/prodserv/certificates/index.asp

 

[Mr._johngalt]

I agree those are pretty good rates. I recently posted
about my efforts to find a home for liquid funds.
I (finally) ended up with a savings account at a local bank at 3.25% locked until 2006. I was required to open a no minimum/free checks checking account with it,
and the penalty for closing within the first 6 months is only $15.00. Looked like a no-brainer to me. Anyway,
I now have liquid funds and long term bonds. Still a
bunch of rungs on my "ladder" to be filled in.

JG

 

[parnass]

I (finally) ended up with a savings account at a local bank at 3.25% locked until 2006. I was required to open a no minimum/free checks checking account with it,
and the penalty for closing within the first 6 months is only $15.00. Looked like a no-brainer to me.
JG

JG, both of us like to comparison shop when it comes to banks.

I phoned several local banks yesterday and found a similar deal, called an "Investors Savings" account, but with a 3.5% interest rate and no penalty after 90 days. I was surprised to find the 3.5% rate was higher than most banks are offering on 1-year CDs.

A couple of the local banks are beating Penfed's 3% rate on a 1-year CD, too, e.g., 3.25%, 3.5%, etc.