Author Topic: ***CDs vs Bonds***  (Read 4485 times)

Radagast

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Re: ***CDs vs Bonds***
« Reply #50 on: June 11, 2018, 08:57:10 AM »
Show me where I can get 4 percent real returns, guaranteed and insured.  I don't believe it.  I think you may get 4 percent or lose 40 percent. 

BTW, I have 9 percent of my nest egg in CDs currently.  I'll probably ramp it up quite a bit. 

What if your stash could last you 30 years without investing it at all?  Would you still gamble it in stocks and bonds?
Show me where it says CDs will give 30 years of living expenses, guaranteed, insured. I think you might get 33, or you might get 22 depending on negative interest rate policy and inflation. Show me where it says I will only last 30 years. Can you show me some reason to think global stocks will return -40% after 30 years? So far the worst case has been a withdrawal rate of more than 3% real, meaning return in isolation was greater than that.

daschtick

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Re: ***CDs vs Bonds***
« Reply #51 on: June 11, 2018, 09:23:48 AM »
I am very interested in this topic myself, as I see CDs as good alternative to bonds.   Now I wouldn't load up on CDs as a primary investment, as I feel that equities is where you need to be for long term growth, however I also feel that 2 years of living expenses might be reasonable amount to provide an alternate source of income in the event of a down market.

Getting back to the title of this thread, are there any good reasons why I should consider bonds over CDs as a secondary investment to weather a downmarket in equities?

simonsez

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Re: ***CDs vs Bonds***
« Reply #52 on: June 11, 2018, 09:55:11 AM »
What if your stash could last you 30 years without investing it at all?  Would you still gamble it in stocks and bonds?
Interesting usage of the verb 'gamble' considering 30 years periods of not investing vs. stocks/bonds.  Maybe maybe not, depends on one's goals for retirement but that seems like an absurd scenario.

Assuming a 2% inflation rate, you would need ~41x your annual expenses if you never invested any of it (and this is if you live exactly 30 years and would run down to $0 on the day you die).  I'd be furious with myself for having worked that hard and far longer than I needed to get to a traditional* SWR that small.

*-without investing, the SWR is still 4% technically but a traditional SWR with more typical investing espoused here would be less than 2.5%.  And keep in mind that the non-investing number is going down to zero while the investing number is supposed to stay near the initial level!

As many others have mentioned, it is fine to implement some measures that reduce volatility (especially during those first several years of retirement) but if you take yourself completely out of the stock market for a long period of time, you're only making it harder on yourself. 

It just strikes me as a lot more reasonable work a lot less, invest to around 25x spending, keep a solid level of exposure in the stock market while retiring, monitor how things go a bit closely during the first several years of retirement adjusting as needed, and then being able to live for ANY amount of time with a small risk (that you can see coming!) that you'd ever run out of money.  Then when you die, have the pile of money (that is likely BIGGER than when you retired) and give it to your family or your favorite charity or scholarships, etc.

However, we're all different.  If this is where you find yourself (worked longer than you realized you had to or came into a windfall) or you had a career that you continued after FI simply because you loved it or where you choose to go after not being ignorant of personal finance, that's your choice.  In the end, it's all about being happy.  Money is just a tool and a rather ineffective one at times at that.

One

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Re: ***CDs vs Bonds***
« Reply #53 on: June 11, 2018, 09:56:26 AM »
A bond cannot go down in value if you hold it. A bond can go up in value if interest rates go down and you sell it.  A cd will never be worth more than what you start with. As long as you plan on holding the bond I think it would be a better investment. There's always a chance something can happen to cause rates go down from here and you could sell your bond for profit.

VoteCthulu

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Re: ***CDs vs Bonds***
« Reply #54 on: June 11, 2018, 12:13:07 PM »
The nominal value of a bond can never go down (as long as the issuer remains solvent and honors it), but the real value certainly can. If you buy a 30 year bond today for at 3.1% interest and inflation goes up to 5% for the next 20 years, then you've lost a lot of money even if you end up cashing it in for the full face value
« Last Edit: June 12, 2018, 07:15:36 AM by VoteCthulu »

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Re: ***CDs vs Bonds***
« Reply #55 on: June 11, 2018, 12:19:37 PM »
The nominal value of a bond can never go down (as long as the issuer remains solvent and honors it), but the real value certainly can. If you buy a 30 year bond today for at 3.1% interest and inflation goes up to 5% for the next 20 years, then you've lost a lot if money even if you end up cashing it in for the full face value

True, but if you could buy a 30 year CD the same would be true.  I'm talking about short term us treasuries purchased on the open market, 5 year treasury vs 5 year CD.

DreamFIRE

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Re: ***CDs vs Bonds***
« Reply #56 on: June 11, 2018, 06:03:16 PM »
Getting back to the title of this thread, are there any good reasons why I should consider bonds over CDs as a secondary investment to weather a downmarket in equities?

With a bond fund,  you could rebalance immediately and without penalty.  With a CD, you are locked in for an extended period of time, so you won't be able to rebalance without penalty.  Rebalancing helps a portfolio and the SWR success rate.

DreamFIRE

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Re: ***CDs vs Bonds***
« Reply #57 on: June 11, 2018, 06:04:49 PM »

Usually, when people are talking about investing in bonds as part of their AA, they are referring to bond funds, not individual bonds.

VoteCthulu

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Re: ***CDs vs Bonds***
« Reply #58 on: June 12, 2018, 07:22:45 AM »
The nominal value of a bond can never go down (as long as the issuer remains solvent and honors it), but the real value certainly can. If you buy a 30 year bond today for at 3.1% interest and inflation goes up to 5% for the next 20 years, then you've lost a lot if money even if you end up cashing it in for the full face value

True, but if you could buy a 30 year CD the same would be true.  I'm talking about short term us treasuries purchased on the open market, 5 year treasury vs 5 year CD.
In that case, if interest rates rise you can break the 5 yr CD after the first year for a small fee and buy a higher interest one, while the bond must either be sold at a loss or kept the full 5 years at an interest rate below market value.

There's some risk no matter what you do, it's just a matter of taking the right amounts and types of risk for your own situation.

One

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Re: ***CDs vs Bonds***
« Reply #59 on: June 12, 2018, 10:51:04 AM »
Probably depends on what the rates are, now maybe not much difference between bond or cd. If rates were at historical levels, 5 to 6 percent and there was a black swan 2008, rates drop to 2 percent your bonds is now worth much more than your cd?

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Re: ***CDs vs Bonds***
« Reply #60 on: June 12, 2018, 11:02:41 AM »
Imagine if you'd bought 30 year bonds here, best investment in US history?

https://www.nytimes.com/1982/02/05/business/record-set-on-30-year-us-bonds.html

detroital

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Re: ***CDs vs Bonds***
« Reply #61 on: June 12, 2018, 12:50:03 PM »
Probably depends on what the rates are, now maybe not much difference between bond or cd. If rates were at historical levels, 5 to 6 percent and there was a black swan 2008, rates drop to 2 percent your bonds is now worth much more than your cd?

What are you talking about??  The CD is worth the exact same rate as you bought it when it's time to cash it in, except that it generated a nice payout either monthly or semi-annually.  It doesn't go down if you let it run it's full term and sends you money, plus it's FDIC insured. 

detroital

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Re: ***CDs vs Bonds***
« Reply #62 on: June 12, 2018, 12:52:30 PM »
Imagine if you'd bought 30 year bonds here, best investment in US history?

https://www.nytimes.com/1982/02/05/business/record-set-on-30-year-us-bonds.html

If my aunt had a mustache would she be my uncle?

FIRE@50

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Re: ***CDs vs Bonds***
« Reply #63 on: June 12, 2018, 12:53:14 PM »
Probably depends on what the rates are, now maybe not much difference between bond or cd. If rates were at historical levels, 5 to 6 percent and there was a black swan 2008, rates drop to 2 percent your bonds is now worth much more than your cd?

What are you talking about??  The CD is worth the exact same rate as you bought it when it's time to cash it in, except that it generated a nice payout either monthly or semi-annually.  It doesn't go down if you let it run it's full term and sends you money, plus it's FDIC insured.

The CD would have the same value, but the value of the bond would have risen.

One

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Re: ***CDs vs Bonds***
« Reply #64 on: June 12, 2018, 01:18:40 PM »
Imagine if you'd bought 30 year bonds here, best investment in US history?

https://www.nytimes.com/1982/02/05/business/record-set-on-30-year-us-bonds.html

If my aunt had a mustache would she be my uncle?

History repeats, look for opportunity

daschtick

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Re: ***CDs vs Bonds***
« Reply #65 on: June 12, 2018, 06:23:10 PM »
Getting back to the title of this thread, are there any good reasons why I should consider bonds over CDs as a secondary investment to weather a downmarket in equities?

With a bond fund,  you could rebalance immediately and without penalty.  With a CD, you are locked in for an extended period of time, so you won't be able to rebalance without penalty.  Rebalancing helps a portfolio and the SWR success rate.

I understand that, however, isn't it also possible that cashing out of a bond fund could return you less than your original investment?  Sure, a CD cashed out can do that also after penalties, but the penalty at my local credit union is only 90 days worth of interest. 

Probably depends on what the rates are, now maybe not much difference between bond or cd. If rates were at historical levels, 5 to 6 percent and there was a black swan 2008, rates drop to 2 percent your bonds is now worth much more than your cd?

What are you talking about??  The CD is worth the exact same rate as you bought it when it's time to cash it in, except that it generated a nice payout either monthly or semi-annually.  It doesn't go down if you let it run it's full term and sends you money, plus it's FDIC insured.

The CD would have the same value, but the value of the bond would have risen.

That is not always true, is it?

I am still not clearly seeing how a bond fund could be a better choice than a CD in this rising rate environment.  If I invest into a 5 year CD, and after the first year, I want out to secure a higher rate, I simply cash out, minus a 90 day interest penalty (so I still have 3/4ths of the interest), then buy a higher rate CD.  Sure, a bond fund could return more, but it could also return less.

Please show me the light if there is any, as I don't see it.

*** Note: This investment is only a small portion of my portfolio, may 10-15%, while the significant portion of my balance remains in equities.

detroital

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Re: ***CDs vs Bonds***
« Reply #66 on: June 12, 2018, 08:42:41 PM »
Put $250K in a 3 percent CD for 3 years that pays monthly and you'll get $625 a month.  That's like having rental property income that is guaranteed for 3 years.  Why would anyone cash that in early?  It's a nice income stream.