The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Dee18 on June 04, 2014, 06:37:51 AM
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I have put off asking this question because I hate to admit on MMM how conservative my investment strategy is....but here goes. I have about 35% of my stash in 3% CDs. In my mind I have substituted these for bonds in my investment allocation. Is there some reason I am not considering that I should still have bonds?
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You should consider an investment choice as that investment choice. Understand the risks and potential returns. Don't count one thing as another.
The CD's you're in will return 3% over the X time frame. That may be less or more than inflation depending on X. I'm guessing they're FDIC insured so that means there is little to no risk of loss. But there is a risk to loss due to inflation.
Bonds (we'll use 10 year US treasury as our standard here) return about 5% on average (source (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html)). Also backed by the US so little to no risk of loss. But also has a risk of loss due to inflation or interest rates.
Essentially they have similar risk characteristics but with slightly different returns. There is also the matter of the CD being an X time frame up against the 10 year treasury.
So Bonds may have slightly higher yield depending on the bond with similar risks associated. I'd educate myself on various investments to understand my options better if I were in your shoes. CD's are a great way to have your money chewed up by inflation in our current environment.
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I personally consider anything that is less riskier and not tied to the stock market as part of my bond allocation. This includes my bonds, CDs (although I don't own any), and my retirement/pension account that is guaranteed a 5% return by a big four accounting firm.
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Bonds can have capital gains which can yield much higher returns than the yield suggests. Obviously that works the other way.
Personally I think of it as stock/fixed income ratio but that doesn't roll off the tongue as well.
I have put off asking this question because I hate to admit on MMM how conservative my investment strategy is....but here goes. I have about 35% of my stash in 3% CDs. In my mind I have substituted these for bonds in my investment allocation. Is there some reason I am not considering that I should still have bonds?
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I count bonds, CDs, savings accounts, etc. as "fixed income."
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Yes. Count CDs in your bond bucket.
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Sort of, usually no.
CD's are the same as bonds if the bonds are held to maturity (i.e. you buy actual bonds at whatever price and keep them until they mature).
if you keep a bond until maturity, it doesn't matter what happens to interest rates because the price changes won't matter (because you're holding until maturity when you get $1,000). The only issue is if they default...
CD's are much safer than corporate bonds, as a default is backed by FDIC. Bonds are not protected.
In any case, I don't see a problem with your allocation. 1/3 in CD's is probably a little paranoid, but whatever helps you sleep at night is fine as long as you understand that your decision is sub-optimal.
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Thanks all!