Author Topic: Future CD rates  (Read 5251 times)

FIPurpose

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Future CD rates
« on: December 04, 2013, 11:45:31 AM »
As a young investor, I have never invested during the times of good CD rates. So when looking at historical rates on CDs, they look like a deal at certain points in time. For example:

In the mid eighties you could get a 5 year CD at 12% in 2000 it topped out at somewhere around 8%

Obviously, you can't time the market just like you can't time CDs, but if CDs went up to 9 or 10% would it be unwise to just throw a large chunk of investments into a long-term CD? Rates rarely stay that high, and something that promises 9 or 10% for 5-7 years is a nice promise.

If the aim is to average about 8%, would doing this if it became viable in 10 years ruin stock market averaging?

I hope that question makes sense.

Mr.Macinstache

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Re: Future CD rates
« Reply #1 on: December 04, 2013, 12:13:13 PM »
CD = certificate of depreciation. Don't look for rates to climb anytime soon, at all.

matchewed

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Re: Future CD rates
« Reply #2 on: December 04, 2013, 12:53:36 PM »
The criticism would be that CD rates closely track inflation. If you want to be performing at inflation then it's a great strategy, but generally you want to beat inflation.

brewer12345

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Re: Future CD rates
« Reply #3 on: December 04, 2013, 05:15:10 PM »
To give you perspective, before the crash the absolute best, way above market rates I saw on a a CD were 5 year credit union CDs at a notorious rate leader for 6.25%.  8 or 10% rates are not terribly likely in the next 5 years.

Another Reader

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Re: Future CD rates
« Reply #4 on: December 04, 2013, 07:27:26 PM »
CD's are not generally investments.  They are one way to get better interest rates on low risk cash reserves.  Generally, they reflect inflation expectations.  They can be helpful to retirees that want to hold a year or two of expenses in cash to avoid selling other paper assets in a bad market.  I keep a small percentage in laddered CD's, and just bought a PenFed 3 percent 5 year CD today.  I'm not impressed with I-bond rates right now, and I needed to do something with a maturing CD from the 5 percent plus days. Sniff, sniff, I sure do miss the days when Countrywide and Wachovia were on the ropes.

FIPurpose

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Re: Future CD rates
« Reply #5 on: December 04, 2013, 08:14:23 PM »
I realize rates won't be at those levels for awhile, but I was curious as to the ability to out perform the market. If those levels ever rise again, I was wondering when the move would make sense.

Obviously not right away, but in holding a fixed rate CD at specific times could be advantageous when held 5-7 years.

Here is a chart comparing CD rates and inflation:
http://www.freeby50.com/2011/08/historical-cd-savings-rates-vs.html

Obviously right now it is in the negative, but around 1981-1982 there was a time when you could have bought a 7 year 16% CD and by the time 1983-1987 comes, you have a consistent real gain of 12-14% for 3-4 years.

I guess would this be like any other market move where you can't always time the market?

The difference being that there is little to no risk of loss, and the money is FDIC insured(correct me on that if i'm wrong.).

Maybe that is the one time in its history where it made sense to buy as much as you could, but what's to say that the opportunity may not present itself again?

matchewed

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Re: Future CD rates
« Reply #6 on: December 04, 2013, 08:30:55 PM »
I realize rates won't be at those levels for awhile, but I was curious as to the ability to out perform the market. If those levels ever rise again, I was wondering when the move would make sense.

Obviously not right away, but in holding a fixed rate CD at specific times could be advantageous when held 5-7 years.

Here is a chart comparing CD rates and inflation:
http://www.freeby50.com/2011/08/historical-cd-savings-rates-vs.html

Obviously right now it is in the negative, but around 1981-1982 there was a time when you could have bought a 7 year 16% CD and by the time 1983-1987 comes, you have a consistent real gain of 12-14% for 3-4 years.

I guess would this be like any other market move where you can't always time the market?

The difference being that there is little to no risk of loss, and the money is FDIC insured(correct me on that if i'm wrong.).

Maybe that is the one time in its history where it made sense to buy as much as you could, but what's to say that the opportunity may not present itself again?

Yeah what you're proposing is definitely market timing, the site you posted even shows CD rates adjusted for inflation and they only beat inflation by any decent margin a handful of years.  When your strategy consists of hitting an event which occurs for 3-4 years within a 50 year time frame it probably isn't a viable option as that may not even be repeated in the next 50 years.

It's just not that rates won't be at those levels for a while but that when you're looking at a 3-4 year out-performance of a market when you're investing time line is 60+ years you've got a no win scenario.

Here's an exercise, the S&P 500 over the last 50 years has returned 6.61% on average after inflation (1962-2012). How much would you get if you did CD laddering for 50 years over the same time frame? Probably not much.

clutchy

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Re: Future CD rates
« Reply #7 on: December 04, 2013, 08:33:19 PM »
buying CD's is not investing.  It's saving and they have significantly different purposes. 

The goals you mentioned are for investing not saving.  You will not realize your goals with your current plan of action.  Please reconsider and make decisions accordingly.

start here: http://jlcollinsnh.com/stock-series/

Cyrano

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Re: Future CD rates
« Reply #8 on: December 05, 2013, 03:47:23 AM »
In the unlikely event real CD rates spike in the next 5 years, you can do the math and if it makes sense pay the early withdrawal penalty to get your liquidity back.

KingCoin

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Re: Future CD rates
« Reply #9 on: December 05, 2013, 09:27:34 AM »
The key realization is that when CD rates are that high, other investments will also likely have a very high yield. So if the CD rate is 10%, we'd expect real estate to yield ~20%, corporate bonds ~15%, and the discount factor on stocks to be ~25%. So the CD rate won't be a free lunch, you'll face tradeoffs vs much higher yielding investments. It's the exact same situation now; we're just in a much lower rate regime.

Silverado

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Re: Future CD rates
« Reply #10 on: March 08, 2014, 07:11:11 AM »

Rates rarely stay that high, and something that promises 9 or 10% for 5-7 years is a nice promise.



I think the question you have to answer is: and then what? After seven years you a bunch of cash. No telling what the rate is now going to be, no telling what the markets will be doing. The only thing you will know is that whatever rate you were getting, you are not getting anymore. There is a lot risk. We have been using CDs as part of our IRA long term plan, and are blindly rolling into new 7 year CDs, but I hate seeing a 5 percent turn into 1 now. Make sure you lay out a long term plan and understand what you are doing.

Vjklander

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Re: Future CD rates
« Reply #11 on: March 10, 2014, 08:46:14 AM »
Look at CDs as "Super Passbook" savings accounts, higher interest rates, and more requirements. In 2007, I feared for the market and started to convert my stocks to mostly CDs of 6 mos or 1 year. Some I rolled over on expiration, some I cashed out. Since the rates plummeted during the crash, most of them expired and I just kept the cash so when I jumped back in, I was about 90% cash and 10% stocks I had chosen to hold. I just consider CDs as a useful place to park cash for a limited amount of time. Of course, right now, due to the immoral, unethical, and corrupt activities of The Fed and the DoT, it doesn't make any sense to even consider CDs.