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Author: 7Xjust1Y One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: CDs? Bonds? Notes? - Where should my money go? Date: 2/24/2005 12:52 PM
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OK, I'm pretty much a newbie when it comes to saving money. This is my first post to this board after just finding it last night.

We recently sold our home and paid off most of our debt. Our auto loan is at 0% with 53 months left, so we'd like to use this FREE money to earn some interest while the loan is still open.

We've tucked away the next 18mos or so of payments in an EmigrantDirect MMA earning 3.04% APY. Our loan payments will come directly out of this account. For the rest of the money we're setting aside, we figure our best bet would be to invest the money in three fixed-income securities with 1-yr, 2-yr, and 3-yr maturities. As each matures, we'll roll the funds into the MMA to keep the auto payments going. Sort of a short-term ladder, if you will.

So, any suggestions on where we should park the money? I don't know anything about bonds, although I'm under the impression that they're not a good vehicle for short-term funds. I'm familiar with how CDs work and from the little research I've done it looks like the best rates I can find are 3.46%, 3.56%, and 4.01% APY for 1-, 2-, and 3-yr CDs, respectively. While confirming a loan payment had posted, I found this info on Fixed-Rate Notes that Ford Credit issues: http://tinyurl.com/66ofg. The rates are somewhat better than CDs, with 3.40%, 4.18%, and 4.70% for 1-, 2-, and 3-yr notes, respectively. Other than the fact that these aren't FDIC insured, why would I chose one of the other vehicles?

Your Foolish thoughts are always welcome.
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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11921 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/24/2005 4:03 PM
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Well I'm sure others will be along shortly with much more sage advice; however, I'll take a stab.

We recently sold our home and paid off most of our debt. Our auto loan is at 0% with 53 months left, so we'd like to use this FREE money to earn some interest while the loan is still open.

Is the auto loan the only debt you have? If so, great! Otherwise, you may be better off paying down any deby you have, particularly credit card debt.

We've tucked away the next 18mos or so of payments in an EmigrantDirect MMA earning 3.04% APY.

Just opened an account with Emmigrant as well. Certainly no argument there.

You may also want to consider I-bonds. They're currently paying 3.62% and are exempt from state and local taxes. You must hold them for at least a year, and you forfeit 3 months interest if you cash them within 5 years. The rate of return on i-bonds adjusts twice a year. There are two components to the interest rate: a fixed rate (currently 1% I think) and the variable rate that is adjusted for inflation (I believe this is closely tied to the CPI).


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11922 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/24/2005 4:44 PM
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" I'm familiar with how CDs work and from the little research I've done it looks like the best rates I can find are 3.46%, 3.56%, and 4.01% APY for 1-, 2-, and 3-yr CDs, respectively. While confirming a loan payment had posted, I found this info on Fixed-Rate Notes that Ford Credit issues: http://tinyurl.com/66ofg. The rates are somewhat better than CDs, with 3.40%, 4.18%, and 4.70% for 1-, 2-, and 3-yr notes, respectively. Other than the fact that these aren't FDIC insured, why would I chose one of the other vehicles?"

Basically, the reason Ford is paying more than you can get with a CD is not only that the notes aren't FDIC insured, but that Ford is not a great credit risk. (I don't have time right now to seek Ford's rating, but it certainly isn't AAA or AA.) Personally, I don't expect Ford to default in the next 3 years (I wouldn't count on that for the next 20 years), but you still have to decide if the extra yield is worth the extra risk.

Try calculating how much of a difference it makes in actual $$$. If you can make up the difference by eliminating waste in your spending habits, do that instead. In the long run, learning to cut back on the waste will save you a lot more money.


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Author: mejayroberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11923 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/24/2005 7:39 PM
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Our auto loan is at 0% with 53 months left, so we'd like to use this FREE money

Not to come across as a SA, but 0% auto loan money is never free.

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11924 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/24/2005 7:45 PM
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... but 0% auto loan money is never free.

That's usually true and it is good to remember for next time. E.g., if given a choice between a cash discount or 0% financing, in some cases it is cheaper to get financing from a credit union or another lender so the car dealer will give you a cash discount--one has to "run the numbers". Or one could save up to pay cash for the next car

But once the deed is done, paying extra on the 0% loan won't save any money unless one would be reducing the level of auto insurance once the car is paid off.

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Author: 7Xjust1Y One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11925 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/24/2005 8:58 PM
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Is the auto loan the only debt you have? If so, great! Otherwise, you may be better off paying down any deby you have, particularly credit card debt.

That's it - almost. Aside from a store credit card - which is also at 0% - this is the only debt that remains. The store card will be paid off in September (with funds in savings).

You may also want to consider I-bonds
I was under the impression that the 3-month interest penalty that these would incur would tend to favor CDs or other vehicle. Given that they're paying a slightly higher rate and earnings are exempt from state taxes, the difference may not be so great. If anyone can point me to an online calculator or Excel form that can help compute the tax-adjusted yield, that would be great. As I said, I'm pretty new to investing, esp. the tax consequences.

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Author: 7Xjust1Y One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11926 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/24/2005 9:04 PM
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Try calculating how much of a difference it makes in actual $$$.
I gave this a shot but I'm afraid I didn't include everything. Assuming $7200 in the 1-yr CD vs Note, another $7200 in the 2-yr, and the $9600 in the 3-yr, I figured the Notes would yield ~$350 more (after 3 yrs). Certainly I could save $0.25/day to make up for that, so the insured CDs seem like a better choice.

Compounding interest has always worked against me in the past. I'm having trouble adjusting my thinking to see how it will work for me.

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Author: 7Xjust1Y One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11927 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/24/2005 9:13 PM
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Not to come across as a SA, but 0% auto loan money is never free.

Point taken. But this was a pretty good deal, IMO. I don't mean to drive this thread OT, but we got 0% for 5 yrs + $3,000 cash back. Combine that with the $5,000 we saved by using Ford's X-Plan price, and we started out $8,000 under dealer invoice. If we can earn $1,500 or so by hanging on to their money for a few years, I'll take the extra icing.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11928 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/24/2005 11:27 PM
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A lot of us find the Ford and GMAC financial bonds tempting, and I believe some participants on this board have taken the plunge. We think of these as blue chip companies, and they are among the very few companies that don't qualify as obvious "junk" or near junk that are offerring yields that pay better than CDs for the same maturities.

But it sounds like you really need the money to pay off the loan, which basically means any added risk is too much risk.

(Of course, FDIC is only as good as the US government, and at least Ford seems to want to stay solvent.)

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Author: torobravo2003 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11930 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/25/2005 3:53 AM
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It is difficult to balance risks, rates, and maturities. And all of this has to be balanced against the interest rate environment and that environment is one of rising interest rates. But I attempt to do it every months, especially at the end of the month when I rearrange my liquid holdings based on that balance. Okay, so here is what I did yesterday and how my thinking evolved (note, my thinking would be different if we were in a declining interet rate environment):

1. The Vanguard Short-term Bond Fund is currently yielding 3.48% and has a duration of 2.0 years. As interest rates rise, bond prices fall. Just go to Yahoo!, type in the ticker symbol VFSTX and look at the chart; the bond fund is going down and that is not a good thing in the short-run and it will eat into my yield via a capital loss. Now, I can go to NetBank today a get a 2 year CD at 3.8%, FDIC insured, and no loss of principal if I don't cash in early. CD seems to be the obvious answer here.

2. At the present time, I only go out 2 years. It is getting tempting to extend beyond 2 years but I am not there yet and don't think I will be there anytime soon. If interest rates looked like they have peaked and were beginning to fall, I would surely go out three years or probably more.

3. The Ford Motor Credit is tempting but for my cash I prefer safety; the money that I want to risk I put in the stock market. Why put risks in Ford Motor Credit when the risk/reward is better in stocks? GE notes I would buy but the yield is better in CDs.

So, based on this balancing act, I always come back to two places: CDs or the Emigrant money market. Boring, right?

So I would make sure first you have 3 months living expenses in Emigrant Bank and put the rest in the best CD yields you can find out to two years.

This is just my opinion but I do practice what I am recommending here.

ToroBravo2003



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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11934 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/26/2005 2:02 PM
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<Compounding interest has always worked against me in the past. I'm having trouble adjusting my thinking to see how it will work for me. >

The formula for compound interest is FV = P * (1 + i)^n

Where FV is the future value, P is the principal you start with, i is the interest rate, and n is the number of periods.

Excel has very good financial formulas. You can set up spreadsheets to analyze the future values, payments on a loan, etc.

Since you are used to compound interest "in the past," it's clear that you are paying off debt. This is a negative. Once you are debt-free, and are earning compound interest on your money, it's a positive. So, your "opportunity benefit" of paying off debt and saving is the SUM of the interest you aren't paying, PLUS the interest you are earning. Given the exponent in the formula for for compound interest, this sum will grow exponentially, every year. That's why it's great to get out of debt, and start saving!

I suggest that you set up spreadsheets that express your finances, in the same way that a business would.

1. Balance sheet for business = net assets for yourself. List your assets and liabilities. The difference is your net worth.

2. Income statement for business = budget for yourself. This will help you live below your means (LBYM). There is an active LBYM Board on Motley Fools, full of hints on how to do this.

3. Cash flow statement for business = cash flow for yourself. You have to cover your bills every month, or you will get penalties.

In addition, you can set up a spreadsheet that will show the growth in your fixed-income investments, using the exponential formula. This will help you relate to compound interest working for you. Use the graphing tool for an easy-to-understand visual representation.

Wendy


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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11948 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 2/28/2005 7:46 PM
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Not directed at ToroBravo2003...

So, based on this balancing act, I always come back to two places: CDs or the Emigrant money market. Boring, right?

So I would make sure first you have 3 months living expenses in Emigrant Bank and put the rest in the best CD yields you can find out to two years.

This is just my opinion but I do practice what I am recommending here.


A meta level observation is that there is little to be gained from closely watching the short term rates being offered. A person could do better by taking a part time job or attending a course on other investments vs. trying to make a meaningful difference in short term liquid returns.

It is really difficult to make significant marginal returns while the damage if you lose money would be difficult to repair.

I am all for having liquid assets. Just saying the time invested in optimizing such returns is badly invested compared to other things that could expand your horizons (personal, financial, what ever).

John

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Author: torobravo2003 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11950 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/1/2005 2:33 PM
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I agree that if are not talking about a lot of money, the differential rate is not significant. However, if you are talking $400,000, then the differentials in rates do make a difference. Maybe not as much as a second job but it may mean you can retire one or two years earlier via compounded interest. It's all relative.

ToroBravo2003

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11951 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/1/2005 4:41 PM
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I agree that when you start talking about 6, 7 or even 8 figures the slight difference in interest can buy something real or significant.

My larger point is people should consider how they value their time. If their time has marginal value there are two suggestions. Do something that really matters in their life. Or find investments that they do not already understand that they could master if they invested time.

If someone has $400,000 invested in what is essentially CD rates I have a hard time understanding the logic.

1. They could not spend it in the short term so not all of it is needed for living expenses. They might not want to take risks but holding it at CD rates is a bit of an extreme solution.

2. There must be something that will spread out the maturity, provide similar short term cash access and help shift up the returns on the cash not needed now.

I can suggest a few things I like that pay much better. That becomes a red herring and people argue if returns that I earn are realistic (my earning them makes them realistic in some fashion so the question is really something else like can another person earn such returns).

I completely agree that retired people should take less risk then someone who is 30. At the same time someone who is 65 and only earning CD rates will have inflation kill them financially before they actually die based on today's average lifespan.

Having a debate about this or that CD rate and how to get 0.5% better on an annual basis is really the tail wagging the dog.

Bottom line. I am arguing that people need to really continue their retirement horizon and think about how they invest their time educationally. Chasing marginal differences in liquid investments vs. learning how to produce a range of returns that are risk adjusted for their situation and education is a better use of time IMHO. Sorry if I appear not to be so humble.

John


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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11957 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/2/2005 2:09 PM
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If someone has $400,000 invested in what is essentially CD rates I have a hard time understanding the logic.

You probably do understand but just disagree with the logic: the risk premium on stocks and bonds today make their return unsatisfactory compared to CD, E/I bonds. In other words, today there is too much money sloshing around which has forced the returns in stocks and bonds down to historic lows. Historically as these returns improve one can expect a drop in dollar value of those investments. This along with the fact that it is very difficult to recover from a loss, a 50% loss requires a 100% gain to break even, makes the return on CD and EE/I bonds preferable. If one thinks the most important rule of investing is don't lose money, then at this time, it is hard to find anything better then CD's and EE/I bonds.


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Author: 7Xjust1Y One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11965 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/2/2005 7:39 PM
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Wow, a lot of activity in this thread since I last checked it. I appreciate everyone's responses - this is a great learning experience.

Since this is our first real experience investing money for a period greater than the in which we'll receive the next paycheck, we decided to spend some time researching and studying rates, fees, terms, etc. We realize that in the end we could have spent our time more wisely - as the difference between one option to the next is minimal - but the learning experiece will hopefully pay off in the long run.

Our bottom-line goal for this money is to pay off the vehicle loan in 53 months. We'd like to earn as much interest as possible but as others have suggested, we don't want to risk losing any of the principal.

We like the idea of a CD ladder and although the benefit of using one over such a short timeframe may not be significant, we decided to give it a shot, if only to see the plan in action for future savings.

We're both of the opinion that interest rates are headed north over the time period we'll have this money invested. Therefore we want to avoid locking it into today's rates for long periods of time. We decided to go with a 4-rung ladder:
CD    Term    APY
1 6 mos 3.15%
2 12 3.55
3 24 3.85
4 36 3.75
The first three are all standard CDs from Capital One. The fourth CD listed is a Compass 36-Month Option CD. This CD provides options to 1) bump the rate twice during the term and 2) make two add'l deposits to the CD. This will allow us to take advantage of the higer rates we expect over the term.

When CD's 2, 3, and 4 mature, 1/2 the balance will go into a MMA from which we'll make the vehicle loan payments. The other half will be used to purchase a 6 month CD at the highest yield available at that time. This will ensure provide liquidity (?) every 6 months.

At those six-month intervals that we're moving funds around, we'll also revisit the rates on the Option CD from Compass to see if it's a good time to take a rate bump or make another deposit.

I hope this makes sense. In total, we're talking about $24,000 initial investment. We'd like to see somewhere around $1,500 in earnings by the time the loan is paid off, which seems pretty reasonable from what we've been able to calculate (this would be 6.25% yield over 3 years).

We haven't made any moves yet, so do let me know your comments and/or suggestions!

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11967 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/2/2005 8:48 PM
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You probably do understand but just disagree with the logic: the risk premium on stocks and bonds today make their return unsatisfactory compared to CD, E/I bonds. In other words, today there is too much money sloshing around which has forced the returns in stocks and bonds down to historic lows.

I agree that there is a lot of cash chasing limited returns.

What I find a bit hard to understand is the need to focus on three options (liquid things like CD's, stocks and bonds). Many asset models show something like 14 asset classes. Even people who have recently retired will need to plan for long horizons so being in very low volatility and low return investments is a risk in itself.

Rather then create a major debate about asset classes...

If I felt the options are limited I would take a slight amount of the money and invest it in further education to better understand what is possible in such economic times.

$400K seems to be a lot for someone's short term cash needs. Even a ladder of CDs implies that not all the funds in the ladder are needed in the immediate future so funds are pushed out and a higher rate of return is locked in.

Maybe all I am showing is my lack of understanding of how some view their investment options and investment horizons. That would be my problem so I am more then willing to take responsibility if that is the case.

Still amazed.
John B. Corey Jr.




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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11972 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/3/2005 3:01 AM
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If I felt the options are limited I would take a slight amount of the money and invest it in further education to better understand what is possible in such economic times.

On 2/25/05, the S&P 500 had a P/E of 19.2 which is a 5.21% yeild. On 01/20/05 a 5yr CD yeilded 5.25%. Would you be kind enough to tell us where one can get a higher real rate of return with similar or less risk then that 5yr CD? Than you.


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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11973 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/3/2005 7:52 AM
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On 2/25/05, the S&P 500 had a P/E of 19.2 which is a 5.21% yield. On 01/20/05 a 5yr CD yielded 5.25%. Would you be kind enough to tell us where one can get a higher real rate of return with similar or less risk then that 5yr CD? Than you.

You are making my point.

You are looking at a 5 year horizon so not something that is liquid in the short term (medium term maybe?).

You then cite one asset class (equity stock market) as the alternative. The one that is the most popular and at some level the well understood.
CD rates are as you note.

I completely agree that given the two choices the obvious answer is the CD route. I am trying to say that there are a few more asset classes and some have done a better.

Not all options are for everyone based on the preferences. When the preferences are driven from a lack of knowledge then a good 'investment' is education rather then trying to find the marginal improvement.

In a different discussion someone else indicated that a good place for such a discussion is a Portfolio forum. He went on to say that he remembers a report that says the bulk of the difference in returns comes from picking the right asset classes to invest in vs. try to maximize the returns within a class. I know that stock investors believe the same thing. This is presented by saying that if you wanted to be in a sector, picking the right sector is more important then picking the individual company within the sector (partially because a single company can have unique performance results while the sector will tend to reflect the larger economic picture for the sector).

As to specific investments.

I have tried that before and people get worked up about the specific suggestions and then miss the point that alternatives exist. Normally we get into a debate between those who do and those who don't for each specific suggestion. This time I am trying to be more neutral and encourage education and thinking as opposed to chasing crumbs when the other table might have a richer offering.

Side note. I will look at the other forum to see if there is the possibility of an educational discussion there on the broader alternatives. If there is then I will drop a note here.

John B. Corey Jr.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11976 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/3/2005 10:41 AM
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Since I'm a strong advocate for CDs, let me make my position clear (again).

What I'm talking about is putting new money that would be earmarked for the "fixed income" portion of one's asset allocation into 5-year CDs. (In some cases, with a need to break up a large sum of money, it may be neceessary to start with a ladder of 1 to 5 year CDs, rolling over to 5-years, but this has to do with liquidity issues for the long haul, not a presumption of getting a better overall return as rates go up.) Currently, you can get 5-year CDs that have better yields than 10 year T-bills or even 10 year high investment grade corporates. If you want to go out 20 years, you can probably find a fairly low risk option that will beat a 5-year CD, but I'm not prepared to lock money up that long at current rates. For those who won't need money for 20-30 yers, the tax advantages of EE bonds may be a better option than 5-year CDs. I think it is very unlikely any non-junk bond fund will provide a better total return than a 5-year CD over the next 5-years (in which case, you can buy more shares then with the money from the CD), if interest rates go up even a smidgen. In retirement accounts, where CDs are not available, there may be no other option for "fixed income" allocation than bond funds.

The other issue is asset allocation. As I've said before, I don't buy into the prevailing advice from finance professionals of using historical returns to predict the future and planning to maximize returns. I believe in a more conservative strategy of figuring out how much money you will need, using conservative expectations for inflation (i.e., high inflation) and realistic understanding of expenses (including home improvements, taxes, etc.), and then looking at what kind of nest egg you can build that will allow for putting as little as possible into volatile, higher risk assets. If you can save enough, you can accumulate enough, without relying on the stock market to give historical returns, to have a margin of safety. Not everyone can save that much, but if you have an upper middle class income for most of your career and live well below your means, you can put away half of what you get paid (including retirement match and taxes).

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11978 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/3/2005 12:35 PM
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Quick addendum:

If you save, on the average, as much as you spend for 25 years and only earn the rate of inflation on your savings, you have 25 years of living expenses accumulated, which can get you from 65 to 90, not including social security or equity in a house.

The presumption that you need big returns for a viable retirement is based on the expectation that people with higher incomes will spend money just because they have it. Some of us don't.

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11981 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/3/2005 8:43 PM
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Lokicious,

I completely agree that someone who is putting away half of their income can build a retirement fund using low return investments as they are effectively meeting the amount needed of the back of the saving. Investment returns are not even a factor in such a plan other then making sure you maintain your position relative to inflation.

As a few folks here either do care about investment returns that are not as conservative or they are not in the pool of people saving 50% of their income they might care about doing better then 5 year CD rates. Your advocacy is noted. BTW - your case for CDs is weaken by the unclear tie to being upper middle clase in income and saving half of what you make. Are you somewhat saying that CDs are of much lower interest if a person does not fit that profile?

John B. Corey Jr.


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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11982 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/3/2005 8:46 PM
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You are making my point.

You are looking at a 5 year horizon so not something that is liquid in the short term (medium term maybe?).


Nope.. this 5 yr CD is very liquid.

You then cite one asset class (equity stock market) as the alternative. The one that is the most popular and at some level the well understood.

Hey..I was just giving you a real world example hoping you could do the same. Sorry you don't have any.

I completely agree that given the two choices the obvious answer is the CD route. I am trying to say that there are a few more asset classes and some have done a better.

Easy to know what asset class has done best in the past. People do use that data to predict the future but that is not investing, that's gambling to me. Lots of folk like pie in the sky. Best of luck.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11983 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/3/2005 10:53 PM
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"I completely agree that someone who is putting away half of their income can build a retirement fund using low return investments as they are effectively meeting the amount needed of the back of the saving. Investment returns are not even a factor in such a plan other then making sure you maintain your position relative to inflation.

As a few folks here either do care about investment returns that are not as conservative or they are not in the pool of people saving 50% of their income they might care about doing better then 5 year CD rates. Your advocacy is noted. BTW - your case for CDs is weaken by the unclear tie to being upper middle clase in income and saving half of what you make. Are you somewhat saying that CDs are of much lower interest if a person does not fit that profile?"

John,

I think, at this point, 5-year CDs are likely going to be the best choice, if available, for anyone for the portion of their asset allocation intended for low-risk fixed income (i.,e., with a 5 year time frame, will get a better return than 5-year (or 10 year) T-bills, TIPS, high investment grade corporates, money markets, or non-junk bond fund). With tax advantages, EE-bonds are a good alternative in a taxale account, but not for those of us looking to need the money before the tax advantages make up for lower returns. When you compare yield on 5-year CDs with most of the aforementioned alternatives, interest rates would actually have to go down for others to win (by selling for a capital gain)—some longer bond funds do have higher yields, but with only a small increase in relevant interest rates, the total return will be less over 5 years.

Whether or not to stick with CDs when it is time to roll over will depend on how things look in 5 years. I don't claim CDs are always the best choice; just now (and for the last few years).

How much of one's asset allocation should go into conservative fixed-income options is a completely different question. I just wanted to point out that it is possible to put enough away through saving a lot not to need returns much beyond staying even with inflation. I think you have to have upper middle class (or higher) incomes and choose to live frugally to do it—not possible for someone earning $50 grand with 3 children. But the default assumption of financial advisors that everyone will choose to spend most of their income is not necessarily so, nor is the presumption by the finance industry that everyone wants to maximize their returns, at least with the risk level predicted by historical returns of asset classes.

My own asset allocation is certainly not just CDs/fixed income. However, my calculations suggest we can reach or nest-egg goals without adding further to our stock (index funds plus lottery money on a few high risk microcaps) allocation (except Roths, via Target Fund for age 90). I'm not big on real estate, because we already have about 30% of net worth in our home and vacation property.

I generally think some variant of "your age in bonds" for asset allocation is a good starting point. I personally think we can make it with less in stocks than this formula, but everyone needs to analyze their own case.


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Author: EdParrot One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11984 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/5/2005 1:27 PM
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I think, at this point, 5-year CDs are likely going to be the best choice, if available, for anyone for the portion of their asset allocation intended for low-risk fixed income (i.,e., with a 5 year time frame, will get a better return than 5-year (or 10 year) T-bills, TIPS, high investment grade corporates, money markets, or non-junk bond fund). With tax advantages, EE-bonds are a good alternative in a taxale account, but not for those of us looking to need the money before the tax advantages make up for lower returns. When you compare yield on 5-year CDs with most of the aforementioned alternatives, interest rates would actually have to go down for others to win (by selling for a capital gain)—some longer bond funds do have higher yields, but with only a small increase in relevant interest rates, the total return will be less over 5 years.

5-year CD's will get a better return than all of what you list except TIPS - no one knows what the rate of return on TIPS will be, since it is tied to inflation. Also, depending on tax bracket, muni bonds may be superior in returns to CD's, with risk similar to or less than the high inv grade corporates or non-junk bond funds listed in your options (note: muni risk of default is generally less, but investment/price risk is porbably a little greater).

And...there's no chance of capital gains with CD's. Sure, interest rates are likely going up and bond prices will probably fall. But one of the reasons to diversify - even within the low-risk fixed income category - is because we really don't know what will happen.

Last June, bonds had just taken a big hit. Interest rates were clearly headed up. A bit like now, although the hit taken by bonds in the past two weeks is not as big as the one last spring. Surely back then it would have been stupid to buy bonds, right? Well, bonds proceeded to rally again through this february.

A portion of the low-risk fixed income portfolio should be in CD's. And a portion should be in various kinds of bonds. Diversification - as always. If this portion is small enough - say five to ten grand or less - then OK, perhaps simply going with CD's is best rather than spreading a small amount out. Otherwise, we ignore diversification at our peril.

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11985 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/5/2005 2:11 PM
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5 years CD that is liquid. Well done.

Hey..I was just giving you a real world example hoping you could do the same. Sorry you don't have any.


You jump to many conclusions to justify you views. You are correct that I did not offer an alternative. To assume that I do not have one is rather small of you.


Easy to know what asset class has done best in the past. People do use that data to predict the future but that is not investing, that's gambling to me. Lots of folk like pie in the sky. Best of luck.


If you believe that the past is not an indication of the future then only assets that would be of interest are ones that have a contractual to pay out in the future. Most asset classes are can no such obligation. Equities and other assets are about holding an assets so you can benefit from the future without knowing what the future might hold.

In conclusion...

I see nothing that says you would favor a open and honest discussion without trying to show your superior understanding. How about we agree that from where you sit you are superior and I continue to earn more then you think possible. We both win.

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11986 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/5/2005 2:42 PM
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Lokicious,

You started with...

I think, at this point, 5-year CDs are likely going to be the best choice, if available, for anyone for the portion of their asset allocation intended for low-risk fixed income

I have rec'ed the post as I think it provides a good perspective.

Two point ring the bell for me.

One is the idea that returns vary a lot and what your goals is does frame what investments will work best. Hence returns are relative to other factors and people can vary their returns by looking at alternatives that still fit their overall profile.

Second relates to your comments on savings. Many people will be more successful when they retire if they can learn to live on less now and save the differences. In many ways the principle balance has more to do with what you can draw on later then the returns earned on the principle. Granted this varies the most based on how long the returns can compound. If more people can save an extra $2,000 early in their career they will see a large difference in the future.

I do take a different position than you with respect to real estate.

I do not think of my home (or second home) as much of an investment. You need to sell to do much with the equity and what I want to spend my life in is not always the best RE investment.

I do have a larger percentage of my assets in RE. This is loosely based on the logic that you can hold more RE assets with others contributing to the running costs. Between having a bank who will let you leverage up the assets (2x or 3x if you want to be conservative) and tenants who will pay the carrying costs allows you control a much greater asset pool then in almost any other class. You need to invest some time (education mostly) hence this is not completely passive. I claim the time invested is similar to what a stock investor would invest if they looked beyond simple index funds.

Sticking with vanilla situations real estate is pretty well understood and have long term returns that are just below equities before apply any leverage what so ever.

RE being something between 9% - 11% over the long term with stocks being normally 10% to 14%. Some variance in both.

Once you factor in leverage you can have consistent cash on cash returns that exceed equities unless you look at options or other exotics.

Leverage in the RE sector is pretty low risk with bank interest rates confirming this. From the banks point of view lending on residential property is one of the least risky options they have. Lending to an investor to buy residential real estate is marginally riskier so the rates are adjusted. The point is the asset class does not show high risk when the LTV is conservative (70%-75% being the point for investment RE).

Sorry if I am a bit on my soapbox on the RE subtopic.

John B. Corey Jr.



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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11987 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/5/2005 2:47 PM
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If you save, on the average, as much as you spend for 25 years and only earn the rate of inflation on your savings, you have 25 years of living expenses accumulated, which can get you from 65 to 90, not including social security or equity in a house.

The presumption that you need big returns for a viable retirement is based on the expectation that people with higher incomes will spend money just because they have it. Some of us don't.


Preservation of capital is an implied goal when you are good at saving and not really producing much more then inflation for returns.

One other note is many people who have done really well tend to pick investments that protect principle as they know their prior home run will not be repeated so their pot of gold is to be protected. You see this with many wealth management companies dealing with the super rich.

John B. Corey Jr.


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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11990 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 2:18 AM
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I see nothing that says you would favor a open and honest discussion without trying to show your superior understanding. How about we agree that from where you sit you are superior and I continue to earn more then you think possible. We both win.

I don't have any superior knowledge. You win. Asset classes and asset allocation have been brought up in this thread. In regards to that, the following is from: http://www.jvbruni.com/berkshire.htm

"Buffett and Munger noted that at Berkshire, there is no checklist of prioritized asset classes or ideas. All investments are simply alternatives to each other. Buffett added that the “typical stuff [of asset allocation] is pure nonsense.” He criticized the practice of brokers and financial advisers recommending that investors hold a given mixture of stocks and bonds, saying “typical asset allocation is just merchandising — you don't need this.” Instead, he suggested, “The best way to reduce risk is to think.” The default position for investors should be short-term instruments, he said, and investors should move into longer term investments only when it's justified."


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11992 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 9:29 AM
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"5-year CD's will get a better return than all of what you list except TIPS - no one knows what the rate of return on TIPS will be, since it is tied to inflation. Also, depending on tax bracket, muni bonds may be superior in returns to CD's, with risk similar to or less than the high inv grade corporates or non-junk bond funds listed in your options (note: muni risk of default is generally less, but investment/price risk is porbably a little greater)."

I agree about muni bonds, but usually we're talking very high tax bracket or bond in a high tax state (your state). Historically, munis have been safer than investment grade corporates: the current fiscal situation for states and local governments gives me pause.

With TIPS, no we don't know for sure that they will yield than 5-year CDs over the next five years. However, the fixed (coupon) rates on 5-year and 10-year TIPS are trading with certain inflation expectations for those time frames to make their combined coupon+inflation components equal to the coupon on 5-year and 10-year T-bills. Unless you have reason to believe you know better than the traders what inflation will actually be, CDs with a higher yield than T-bills is the default guess.


"And...there's no chance of capital gains with CD's. Sure, interest rates are likely going up and bond prices will probably fall. But one of the reasons to diversify - even within the low-risk fixed income category - is because we really don't know what will happen.

Last June, bonds had just taken a big hit. Interest rates were clearly headed up. A bit like now, although the hit taken by bonds in the past two weeks is not as big as the one last spring. Surely back then it would have been stupid to buy bonds, right? Well, bonds proceeded to rally again through this february.

A portion of the low-risk fixed income portfolio should be in CD's. And a portion should be in various kinds of bonds. Diversification - as always. If this portion is small enough - say five to ten grand or less - then OK, perhaps simply going with CD's is best rather than spreading a small amount out. Otherwise, we ignore diversification at our peril."

There's no chance of a capital gain with CDs. There is also no chance of a capital loss. The notion that tradable bonds or bond funds provide better diversification than CDs is based on the assumption that when stocks go down bond prices go up (i.e., you get a capital gain on the bonds in addition to yield). But stocks and bonds don't necessarily go counter to each other. During the 90's, when stocks were booming, interest rates were dropping compared to bonds from the 70's, 80's, and early 90's, so both were going up at the same time. We are now in a situation where the opposite could happen. Just because the bond market started up fast last year, then came back down, doesn't mean it will happen again. Putting money into a bond fund at current historically low interest rates on the presumption of a capital gain seems to me very dangerous.

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11993 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 9:47 AM
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"Buffett and Munger noted that at Berkshire, there is no checklist of prioritized asset classes or ideas. All investments are simply alternatives to each other. Buffett added that the “typical stuff [of asset allocation] is pure nonsense.” He criticized the practice of brokers and financial advisers recommending that investors hold a given mixture of stocks and bonds, saying “typical asset allocation is just merchandising — you don't need this.” Instead, he suggested, “The best way to reduce risk is to think.” The default position for investors should be short-term instruments, he said, and investors should move into longer term investments only when it's justified."</B.


Perfect start.

So, taking the B&H view, there are opportunities that are not available every day that provide superior returns. Having large positions in specific investments, holding them long term and recognizing that the market does not correctly price an investment all the time will offer the thinking investor a way to obtain superior returns.

B&H is well covered when it comes to listed securities. Less well covered but certainly no secret is B&H investments in re-insurance and long tail investments (statistically rare occurrences on a bell curve - the tail or the curve to the left and right).

If all asset classes are largely alternatives with only moderate differences for one class might be favored over the other then superior returns for similar risks must be the criteria. Knowledge of the investments is required if you are going to accurately assess the risks and the returns.

I am long real estate. When using moderate or conservative leverage you can easily achieve superior returns assuming 5% appreciation over long periods of time. Liquidity is not the same as a CD or other more 'liquid' investments.

You can lend money secured by real estate (acting as the banker if we need a label) where you would earn 10% paid monthly with a lower risk profile then a bank will normally take - 65% LTV. As individuals normally do not hold portfolios of such loans you have the risks associated with a specific event impacting a large part of the income stream. You also have possible increased returns from the foreclosure if there was a default as you would have an asset at a fire sale price.

Higher returns tends to found from lack of liquidity. B&H will many times buy into a preference share that was originated for their specific deal. It is not a commonly traded security and will not be something that they can dive out of with a phone call. If for no other reason then the position is large and well known so any movement out of the position will move the value being placed on the company.

I am more of a subscriber to the B&H view of asset allocation then the more common view. That said I do see the value to an investor in using asset allocation when the investor is mostly concerned about down side risks and prefers a passive investment of time and knowledge. Asset allocation can flatten out the returns so that you do not have any large holes while removing the peaks in a similar fashion.

A different Wall Street investor of years gone by said put all your eggs in one basket and then watch the basket. Be a specialist in something so you can see value when the less educated masses would not recognize the opportunities. Similar to Peter Lynch's point in his original book about focusing on a small number of stocks and to really study the company. Peter says to stay in equities and sell 5% a year if you are interested in income.

My liquid assets earn north of 10%. My illiquid assets can do much great (but they are illiquid). My best to date was just over !,000% after 22 months. The secret to the investment was luck in the market combined with leverage. This means that I was not expecting a market rise when I decided on the investment. It just happened. Was I was counting on was a 10 to 1 use of leverage with no carry costs and a reasonable sense of value so I could pick the right investment.

I will stop here as I have said enough to start a conversation about alternatives. BTW - Just because someone can does not mean they should. Hence part of the value in the discussion to help show the range that is possible so when someone chooses they are aware of what they ruling out rather then thinking the list of available options is narrow.

John B. Corey Jr.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11994 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 10:04 AM
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John,

First of all, I respect your advocacy for thoughtful, knowledgeable, Real Estate investing (not to confused with what looks to me like real estate day trading). I wish I had been in a mindset, a dozen years ago, to think about buying land for investing, not just looking for somewhere we wanted to build a vacation home. I don't know if I would have had the courage to take the plunge, but in retrospect there are places we looked at and rejected as too likely for development to suite our tastes, that would have been great investments. There was the last new stretch of beach front on Lake Michigan that was selling for about $100,000 a plot c. 1992, and is now selling for over a million (pretty good return on $20,000 down). And we could have chosen the new development where Kevin Costner bought near Hemmingway's old hang-out of Grand Marais on Lake Superior, which has gone up 6-fold since '95 when we bought elsewhere (ours has gone up about 4-fold, which is great, but we aren't selling). Lots of other opportunities we've missed. But nothing I would touch, now, with the boom in prices (well, maybe in the Western UP, where I'm amazed how cheap you can still get Lake Front.

Whether to consider personal real estate (home, vacation home/property for building vacation home) in asset allocation is like whether to consider Social Security as bonds. As usual, it depends on your situation. I'm looking to be able to get into our mid-'80s, when we are statistically dead, with cash (or equivalent from TIAA), even without Social Security, which is because I think we can do that based on my calculations. If we do live past that, we probably will be ready to unload the vacation house and likely need to get out of our house, as well. So, this leads me to treat these as real estate assets in asset allocation planning. But this fits my circumstances and is not intended as a paradigm for others to follow, unless it fits their circumstances.

This said, although I'm not personally interested in the added effort of real estate investing, I would certainly like to increase the % in my portfolio (now limited to some in TIAA Real Estate Fund) in REITs (or TIAA RE), but I have felt Vanguard's REIT Index has gotten trader popped and won't touch it until I feel comfortable, and even with TIAA RE, which is not subject to momentum trading, I'm too convinced Real Estate in general is overvalued to add to my holdings.

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Author: mjcalab Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11995 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 12:40 PM
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My liquid assets earn north of 10%.

That's fantastic, could you share with us how you obtain this return?



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Author: missash Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11996 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 12:44 PM
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"""I'm too convinced Real Estate in general is overvalued to add to my holdings."""..........Lokicious, maybe yes, maybe no. Green Street Advisors, a highly respected buy side investment advisory firm, recently reported that the Reits in their coverage universe were trading at a 7% premium to NAV; this figure is below the historical average of 12%. Most Reit investors feel that a small premium to NAV is more than justified by the value creating ability of a good management team. My personal view is that most Reits are fairly valued; not cheap by any stretch of the imagination, but not wildly overvalued either. If you have a long term investment horizon( e.g. 5 years or more), dollar cost averaging into Reits may not be a bad idea. The main concern most Reit investors have is a substantial increase in interest rates from current levels, which could make competing income investments more attractive. On the other hand (there is almost always another hand), such a rise in rates will make the apartment Reit sector more attractive, as home ownership becomes less affordable.


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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11997 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 12:47 PM
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Lokicious,

I agree with you that a home is not an investment. TO go further anything that holds the label of 'home' for an individual is best consider a liability and not an investment. You have to pay to live there so you need to produce income (even if it is free and clear as there are taxes and maintenance).

Investing in houses that someone else might call a home is an investment.

I'm too convinced Real Estate in general is overvalued to add to my holdings.

I would agree with your observation but I draw a different conclusion. I just look in other markets or in the same market for other types of RE that are not as overvalued. For some reason (ones I will not go into right now), banks in some areas are unloading houses at less then the fair market value. You can buy a REO for less then the current appraised value. If you want to hold it you can then rent it out. If you wanted to flip it you can find buyers who will buy it from you producing a profit that is taxed using ordinary income rates.

There is a book called Weekend Millionaire (title is actually much longer but that is close enough) where he talks about buying for cash flow and just holding. The idea is that in 10-20 years you can create a retirement income that is completely stable, exceeds what you can do with a normal day job and is asset rich. The program is designed to be followed by someone with a day job so it is mostly about how to make progress investing a bit of your weekend and not much more. Though I do not follow the outline completely (I invest beyond the location where I live) the model is very simple and very, very conservative.

It can be argued that you can not invest as the book advocates in a market that is appreciating quickly as rents rarely track appreciation. Rents tend to rise as a function of value more when values are falling or flat as people feel less need to buy or feel at risk if they buy.

John B. Corey Jr.



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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11998 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 12:50 PM
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That's fantastic, could you share with us how you obtain this return?

When I have done so in the past people critise or claim that they can not do as well as they are not versed in the asset class. Hence I learned it was better to remain quiet about the specifics and just discuss what people are comfortable with.

John B. Corey Jr.


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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11999 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/6/2005 12:54 PM
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Forgot to use the spell checker.

critise => criticized

Sorry.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12004 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/7/2005 9:20 AM
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""I'm too convinced Real Estate in general is overvalued to add to my holdings."""..........Lokicious, maybe yes, maybe no. Green Street Advisors, a highly respected buy side investment advisory firm, recently reported that the Reits in their coverage universe were trading at a 7% premium to NAV; this figure is below the historical average of 12%. Most Reit investors feel that a small premium to NAV is more than justified by the value creating ability of a good management team. My personal view is that most Reits are fairly valued; not cheap by any stretch of the imagination, but not wildly overvalued either. If you have a long term investment horizon( e.g. 5 years or more), dollar cost averaging into Reits may not be a bad idea. The main concern most Reit investors have is a substantial increase in interest rates from current levels, which could make competing income investments more attractive. On the other hand (there is almost always another hand), such a rise in rates will make the apartment Reit sector more attractive, as home ownership becomes less affordable."

On the principal principle of preserving principal, I'm wary of REITs for a few reasons.

First, I started dismissing REITs when the hedge fund pump and dump scammers started pumping them—sure, they were right, for the time being, but they won't tell you in advance when they are going to cut and run.

Second, over the last 5 years, the REIT index has returned about 20% annualized. Compare this with around an 8% return on the TIAA Real Estate fund. The 5 years previous to that, the TIAA and REIT Index returns were similar (TIAA was a little better). TIAA's NAV is based on income from rents plus increases in assessments of properties owned, but does not involve any kind of trading increase (or decrease) to share values. TIAA's holdings are broad, more or less covering the same range as the REIT Index. Most REITs do, however, make more extensive use of leverage, which does help their asset values, unless things go wrong, of course. But, still, there's been a lot of money chasing REITs, and that scares me.

I have discontinued dripping into the TIAA fund, because I think the real estate market in general has boomed too fast. I will probably go return to dripping when interest rates go up enough to dampen the chase after real estate and may look at the REIT Index Fund, as well, though it's not good in a taxable account and that's about the only place I could use it.


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Author: SisypheanFool Big red star, 1000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12012 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/7/2005 10:27 PM
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I agree with you that a home is not an investment. TO go further anything that holds the label of 'home' for an individual is best consider a liability and not an investment. You have to pay to live there so you need to produce income (even if it is free and clear as there are taxes and maintenance).

Not that I disagree with your statements John, but I still look at my RE as part of my asset distribution. Between my home and an inherited house, RE makes up some 20% of my net worth. So if RE were to make a big correction, it's not a hard impart (hurtful still). But if I were to be additionally invested in RE, via REITs and REIT funds, it can become a more painfully losing impact.

Not that I'm prognosticating that RE is destined to a major correction. It's more of a by-product of me not wanting to invest the time to better understand RE investing. With heighten trepidation from watching some developer clients lose their property portfolio when RE took a dump during my previous professional life in the early 90's.

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12020 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/9/2005 6:42 AM
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SisypheanFool,

First, thanks for the post.

You and I will need to disagree on how to view net worth. I acknowledge that the textbook definition does include your home. Here is why I plan differently. This might be an extreme view BTW.

We all talk about pensions and making sure we have saved enough so that the day we die is the day we run out of cash. That way we have perfectly balanced the savings with the life span over which the savings needs to support us. Because no one can get this right we either leave the issue to someone else (pension or annuity) or we in effect over compensate and leave money in our estate.

To some large degree we will always need a home. Hence we will always have a housing expense or capital tied up in a home. If we assume that the capital in our homes is dead money and more or less going to be left to our estate then it really does not help to consider it as part of our net worth.

Similar to the diamonds my wife wears on her finger. Nice to think it has value but the value is mostly lost until death as rarely would such an item get traded for cash. There are lots of things that get sold during an estate sale that had one value on the net worth statement and a completely different one after the relatives have picked over the items and now the auction is liquidating them. Houses have a more obvious market value but this is largely trapped until you do not need a home.

If you work the numbers and do not include a primary residence then you can see more clearly the actual assets you own that can be used to support you in the later years. Not a perfect way to view this as the home is a factor in that there are housing costs of some sort in any mix.

IMHO - Just because one owns a home does not mean they have a position in the asset class of real estate. Unless that asset can be sold off and the funds moved into an alternative asset class I claim the funds are captive and should not really be considered when re-balancing the different asset classes. If you will not or can not re-balance the house portion then I am not sure keeping it in the mix helps. The view that re-balancing lessens the risks is based on the idea that you can move in and out of the assets.

RE might not be a good investment. Just because you happen to own some that you really do not hold for investment purposes is no reason to think you have sufficient exposure. You hold it for personal reasons and even if the value was to double or half there would be personal reasons for not trading out of the position. Hence I assume it is not a position when thinking about my 'portfolio'.


Not that I'm prognosticating that RE is destined to a major correction. It's more of a by-product of me not wanting to invest the time to better understand RE investing. With heighten trepidation from watching some developer clients lose their property portfolio when RE took a dump during my previous professional life in the early 90's.


Investing in your education will allow you to achieve a return that is not directly correlated to the market. Meaning you can do better then the average if you know what you are doing. The basis to the Buffet strategy for stock investing.

Developers are largely speculators in that they take a view of the market and then develop without having locked in the exit. Many times the exits they are expect to be there will be there but few developers completely pre-sell or otherwise lock in the exit before starting.

For many people RE investing is about cash flow while waiting for appreciation. Hence much less speculation. I am assuming positive cash flow with sufficient CF to cover all running costs including vacancies.

John B. Corey Jr.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12022 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/9/2005 9:29 AM
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On homes/vacation homes in asset allocation:

As usual, it really depends on personal circumstances. As I've tried to outline my retirement strategy, which is definitely not for everyone and is highly dependent on really being able to put away oodles of cash, I want to be able to have enough in principal protected assets to make it through until we are statistically dead, with a margin for error if we get some Social Security. This leaves stocks and home/property for the period beyond being statistically dead when we almost certainly will not be able to continue using the property and cashing in the equity on the home (moving to some old folks facility) is presumably in the cards. (Chances are some of the stock holdings will be cashed in earlier to maintain a more even asset allocation, but the idea is not to have to do that if the stock market tanks.) With this in mind, I think it is reasonable to see home/property as part of asset allocation.

However, since we have no intention of selling until we're too old to use, these real estate holdings are useless in any kind of "rebalancing" asset allocation strategy. This is where I would like to increase my real estate allocation, without having to become an expert like John, or own and manage rentals or anything like that. The easiest way to do this would be REITs or the TIAA Real Estate fund, and I fully intend to use one or both of these (probably TIAA, because I don't have much money in retirement accounts elsewhere) after interest rates go up and I feel whatever bubble effect is going on in real estate has been worked through. I am also going to keep my eye on vacation property, in areas I know, to look for opportunities, again probably after interest rates go up.

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Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12023 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/9/2005 7:07 PM
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When I have done so in the past people critise or claim that they can not do as well as they are not versed in the asset class. Hence I learned it was better to remain quiet about the specifics and just discuss what people are comfortable with.

Are you talking about the discounted fixed notes you mentioned on the "Investing for Income" board a while back?

http://boards.fool.com/Message.asp?mid=21641911&sort=whole

I don't mean to be a stalker, but your statement got me curious enough to search your back posts, and that was the closest match I found. It sounds like interesting stuff to me, actually. It looked like you got a lot of reactions that boiled down to "I don't understand this, sounds too good to be true, you must be lying." From what I can see, there are a fair number of barriers to entry, such as high minimum investment and the difficulties in finding the notes. Those barriers prevent them from becoming popular and thus driving down the general return.

I find the subject fascinating, but I personally probably won't pursue them, because for the time frame you're discussing (5 years?) I currently prefer stocks. Eventually I'll switch from accumulating savings to living off the income, at which point I'll be more interested in low-risk investments with a 5 year horizon for part of my portfolio.

Right now I'm reading this thread because I'm in a similar situation to the original poster. I have $290,000 in cash that I'm sitting on because I don't want to invest it in the stock market all at once. I'm frequently wrong about my initial impression of a stock, so I'd prefer to spread that investment over the next year or so, re-evaluating investments every 3 months. I've invested all I want to this quarter - I originally had $375,000 in cash - so I was curious what alternatives I had to my 2.6% ING account.

- Gus

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12027 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/11/2005 1:04 PM
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Lokicious,

We are close to being on the same page.

When I say to not include your residence in your 'portfolio' or your net worth calculation I am largely making the same point that you illustrated. You would sell the house to move to a care facility. In my terms this is selling one home to pay for another where the second one you happen to not control the title. The idea being that the capital from the first home (the one you sell) is used again to provide the funds for the assisted living. A simple view and one that glosses over then specific but not too dissimilar.

John B. Corey Jr.


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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12028 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/11/2005 1:25 PM
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Gus,

Discounted notes is one option. Others are a variation or all somehow related to real estate (loan portfolios are different instruments but are tied to RE).

You hit the nail in the head when you wrote:

It sounds like interesting stuff to me, actually. It looked like you got a lot of reactions that boiled down to "I don't understand this, sounds too good to be true, you must be lying.

I was mostly trying to get people to read a few books or spend some time researching alternatives that pay higher returns. As this is MF I figured that people valued education and building an understanding through doing some homework. I suspect I was a bit naive given that once the subject became a bit exotic or off the mainstream people responded in the way you noted. I am told that Americans have half their wealth in RE so maybe exotic is the wrong label for the majority asset class.

John B. Corey Jr.


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Author: EdParrot One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12030 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/11/2005 8:18 PM
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JOhn -

I agree with your opinion that most people "should" invest the money differently - I certainly do with mine. However, every single asset class has some level of risk of losing funds - including stuffing cash under your mattress. If I were to tell you that my level of acceptable risk is securities backed by the full faith and credit of the U.S. government, you might argue that is an uninformed approach, but it would be hard to argue that there are any asset classes with equivalently low risk to treasuries and bonds - possibly CD's. Close, yes, but not equivalent risk.

To get me to change my mind about my strategy, you'd have to convince me that not taking "more risk" with part of my portfolio is actually riskier due to several factors, most notably inflation. I know loads of people who will never be convinced of that, no matter what you tell them. It's not about risk, it's about perception of risk and all the education in the world won't convince some people. That's why - I would assume - someone would put 400K in cd's.

- ed Parrot

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12031 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/11/2005 11:26 PM
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Ed,

You are an honest man.

I agree that within a country such (1st world countries mostly) the government issued securities have the lowest risk of default and are therefore the benchmark for zero risk in a specific currency. Most all other investments are a degree of risk greater from that point. Liquidity forming a different axis along with duration of the investment.

Inflation is a risk that is hard to avoid when an investor is trying to be ultra conservative. The inflation linked assets tend to address the issue.

As to my views on people choosing lower returns for what they believe is lower risk.

I am fine with people having preferences. Particularly if they are honest preferences based on a personal evaluation of the options and then a choice. This is opposed to a choice followed by evaluation of the specific choice to come up with reasons why it should make sense.

I love it when people tell me that they know what they could do and then they choose what makes them happy.

John B. Corey Jr.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12034 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/12/2005 10:55 AM
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"Inflation is a risk that is hard to avoid when an investor is trying to be ultra conservative. The inflation linked assets tend to address the issue."

I just want to point out that laddering of "fixed income" options (e.g., 5-year CDs) that are beating the current inflation rate should also provide inflation protection, at least on the level of inflation linked assets. There's no guarantee, of course, which is why, if you can get a fixed component on TIPS or I-bonds that fits you needs that is probably more comfortable. But as long as I can get a 5-year CD that pays substantially better than a 5-year T-bill (10-year T-bills, with the recent increases in yield are getting close, though we'll have to see if CDs adjust upward), I'm going to bet that traders are close enough on their guesses about inflation for the next 5 years that my CD will beat inflation by more than 5-year TIPS.


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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12038 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/12/2005 6:18 PM
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I just want to point out that laddering of "fixed income" options (e.g., 5-year CDs) that are beating the current inflation rate should also provide inflation protection, at least on the level of inflation linked assets.

I am not sure this is inflation protection. The 'margin' will vary so you are not hedged against inflation. You have a return that varies and it varies in a lose way as inflation varies is how I see it. Maybe I am missing something.

John B. Corey Jr.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12039 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/13/2005 9:48 AM
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"I am not sure this is inflation protection. The 'margin' will vary so you are not hedged against inflation. You have a return that varies and it varies in a lose way as inflation varies is how I see it. Maybe I am missing something."

John,

If I buy TIPS, I am guaranteed to beat inflation. With CDs, there is no guarantee. However, I am taking the bet that a 5-year CD will beat a 5-year TIPS, because even with the strong increase in bond yields over the last few days, I can get a 4.6% APY CD for about .45% higher yield than 5-year T-bills (ignoring state tax issues).

As of the end of Friday, 5-year T-bills were at 4.13%, 5-year TIPS at 1.25% (fixed).

http://www.federalreserve.gov/releases/h15/update/

This means TIPS are trading with a presumption of an average inflation rate for the next 5 years of 2.88%. So if CPI actually stays under 3.35% average, the CD wins (say 3.25% to cover compounding and tax advantages with TIPS).

The differential between 5-year TIPS/T-bills and CDs suddenly got closer over that last week, though I still think the margin makes the choice clear—however, I wouldn't go out an buy a CD this next week, since I want to see if this surge in Treasury yields gets reflected in CDs. (I only checked my Credit Union, and there is no increase for next week, but I doubt they make decisions Friday afternoon for new listings on the Web on Saturday.)

The thing about laddering is: each time you have new money for "safe" fixed income, you have to assess the choices for which option has the best chance of beating inflation by as much as possible. TIPS (and I-bonds) provide a sure thing, and if they were paying a high enough fixed-rate above inflation, I'd be more inclined to take the sure thing. But, if you are laddering CDs (or T-bills), just like dollar cost averaging with stocks, you can figure that, even if the traders are way off on their inflation estimates, sometimes they will be off above, sometimes below, so things will average out. As long as the CDs are substantially beating T-bills, seems like a good bet. (5-year CDs have been crushing 10-year T-bills, though the margin just got close.) Now, what is really going to be interesting is to see what happens with T-bills—is this surge just the start of the long anticipated increase in intermediate and long term yields, or just a blip that reverses as soon as there's news about economic slowdown and flight from stocks.

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Author: splotto Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12040 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/13/2005 6:50 PM
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If I buy TIPS, I am guaranteed to beat inflation. With CDs, there is no guarantee.

You are guaranteed to beat the CPI....not inflation.

Splotto

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Author: EdParrot One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12041 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/13/2005 9:12 PM
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John -

Appreciate the kind word. If I didn't make it clear, I (at age 34) certainly strive for a diversified portfolio, not one blindly (or not blindly) tied to low-risk investments. This includes real estate, foreign government bonds, munis, a whole variety of different equities(primarily funds), and a small percentage in treasuries, agencies and CD's. Diversification is quite possibly the best hedge against undue risk when one is trying to balance risk and return.

I think you hit the nail on the head - many people make their choice first and come up with the reasons later.

- Ed Parrot

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12043 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/14/2005 8:25 AM
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Lokicious,

I agree with how you compare CDs with TIPS.

If you boil down what you said, you are taking an informed decision as to which investment will do better and both are weighted to deal with expected inflation.

The 'hedge' is therefore less then perfect in that the CD hedge does not completely cover the inflation risks. This is not meant to mean that the CD option is a bad one. Just that we are talking about a lose hedge if I can use that phrase.

John B. Corey Jr.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12044 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/14/2005 10:07 AM
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"The 'hedge' is therefore less then perfect in that the CD hedge does not completely cover the inflation risks. This is not meant to mean that the CD option is a bad one. Just that we are talking about a lose hedge if I can use that phrase."

John,

I hope this is a "loose" hedge, not a "lose" one. But, yes, there is less certainty of CDs beating the CPI than TIPS. I would argue, however, that there is a very high probability of a 5-year CD yielding .4% higher than a 5-year T-bill beating a 5-year TIPS over the next 5-years.

I think going with the "sure thing" makes sense if you are getting a high enough return above CPI (i.e., allow a margin of error for real inflation) to fit with a "year to zero" strategy. (There is are equations that can determine how long until you run out of money with an initial withdrawal % from total assets given a certain % return above inflation.) Currently, even 20 year TIPS are paying too little above inflation to satisfy my needs. If 5-year TIPS get to 2% above inflation, I may go that route, even at that point CDs are paying .4% higher than T-bills. Get me 10-year TIPS at 3% above inflation (the projected rate for Social Security, though I believe that is 15-year bonds) and I'll jump.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12045 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/14/2005 10:10 AM
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"If I buy TIPS, I am guaranteed to beat inflation. With CDs, there is no guarantee. "

"You are guaranteed to beat the CPI....not inflation."

Splotto,

I humbly stand corrected. Guess, I'm not qualified to be president, since I am not infallable (or, because I make the mistake of admitting when I make a mistake).

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Author: DoLoop Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12046 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/14/2005 10:11 AM
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If I buy TIPS, I am guaranteed to beat inflation. With CDs, there is no guarantee.

You are guaranteed to beat the CPI....not inflation.


And, based on my experience, if you buy TIPS in the form of the ETF, you may not beat inflation, CPI or anything else. My current investment in these is only about break-even AFTER accounting for the dividends received.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12049 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/14/2005 2:07 PM
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"And, based on my experience, if you buy TIPS in the form of the ETF, you may not beat inflation, CPI or anything else. My current investment in these is only about break-even AFTER accounting for the dividends received."

Of course, if you buy a TIPS ETF, you are buying a fund, not buying TIPS, so if the fixed component of TIPS trades at higher yields than when you bought shares in the ETF, the share price goes down.



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Author: splotto Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12050 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/14/2005 4:18 PM
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I humbly stand corrected. Guess, I'm not qualified to be president, since I am not infallable (or, because I make the mistake of admitting when I make a mistake).

That and you are too smart for the job.

Splotto

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12072 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/15/2005 6:45 PM
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So, if you could confidently earn +3% over inflation then you would be more then willing to switch to an alternative investment.

Is this correct?

How one defines confident is not something I want to debate as it is personal and rather emotional. Just trying to understand if you mean that once you comfortably above inflation you are not concerned about locking the risk for some period of time.

John B. Corey Jr.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12078 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/16/2005 8:12 AM
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"So, if you could confidently earn +3% over inflation then you would be more then willing to switch to an alternative investment.

Is this correct?"

John,

What I'm talking about is a basic, conservative (in the true meaning of the word), investment philosophy.

1) Set cautious, realistic, goals for how much money and how much of a return on that money you will need to cover expenses, leaving a margin for error.

2) Try to reach those goals with the lowest risks possible.

In a sense, a CD that is currently paying a higher rate than the fixed rate of a TIPS plus projected CPI component, is more risky—if the traders are way off and CPI surges, the CD won't provide the same kind of inflation protection. On the other hand, if the fixed rate on TIPS is below the rate of return above inflation needed to meet one's goals for the fixed income part of one's asset allocation, then it is necessary to take on more risk.

In order to have the margin of error I'm looking for, I want my fixed-income assets to return at least 2% above inflation (with sufficient liquidity after retirement to cover ongoing expenses). TIPS are not offerring that, now; 5-year TIPS aren't close enough even for horseshoes. Since 5-year CDs are offerring closer to 2% above trader projections for CPI, it is worth the risk that the traders are going to be way off—by keeping maturities to 5-years and laddering, there's good protection, anyway. The alternative would be to change my overall asset allocation in the hope of a better return—more money in higher risk asset classes (stocks, real estate) that I think are broadly overvalued.

If I could get better than 2% above CPI guaranteed—3% would be great—then I would be reaching my goal without taking on the risk that CPI would be a lot higher than traders are projecting. In that case, even if CDs were paying .5% above T-bills, locking in the guaranteed CPI protection from TIPS would be a lower risk strategy for getting what I need.

Of course, the big problem we are all facing, despite the constant wringing of hands about the low national savings rate, is that saving is paying way too little above inflation, which not only pushes disproportionate asset allocations into stocks and real estate (for people who aren't aware that's what they are doing), it encourages the "spend now, pay later" approach to economic stimulus. I've just decided to get a major job done on the house, beyond just painting we had in the budget, because it needs to be done eventually, and with the low return on savings, we might as well spend 2-years worth of big-ticket budget, now.


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Author: GREYFOX Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12105 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/20/2005 8:50 AM
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" Currently, even 20 year TIPS are paying too little above inflation to satisfy my needs. If 5-year TIPS get to 2% above inflation, I may go that route, even at that point CDs are paying .4% higher than T-bills. Get me 10-year TIPS at 3% above inflation (the projected rate for Social Security, though I believe that is 15-year bonds) and I'll jump"
Loki: I believe that buying 5 year CDs vs TIPS is a reasonable risk for me to absorb.However the risks involved in 20 year duration is simply unacceptable. The reduced risk in TIPs is reflected in the lower return-this is viewed by me as an insurance premium. Over the next 20 years if inflation returns to double digits I simply would lose more then I can afford. That means I should insure against this risk if it is one I can not absorb(self-insure). While the probability of inflation going above 8% per annum(for example) may be less then 10% the result to my personel situation would be unacceptible-ergo I MUST be hedged for inflation. In short one must consider not only the probability of occurance of the unusual event but the magnitude of the consequences should the event take place.
Greyfox

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12110 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/20/2005 10:43 AM
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"Loki: I believe that buying 5 year CDs vs TIPS is a reasonable risk for me to absorb.However the risks involved in 20 year duration is simply unacceptable. The reduced risk in TIPs is reflected in the lower return-this is viewed by me as an insurance premium. Over the next 20 years if inflation returns to double digits I simply would lose more then I can afford. That means I should insure against this risk if it is one I can not absorb(self-insure). While the probability of inflation going above 8% per annum(for example) may be less then 10% the result to my personel situation would be unacceptible-ergo I MUST be hedged for inflation. In short one must consider not only the probability of occurance of the unusual event but the magnitude of the consequences should the event take place."

Greyfox,

I think we're in almost complete agreement. I'm not looking at 20-year CDs (if such exist) or 20-year T-bills (still findable). If the fixed component on 20-year TIPS was high enough, that might be a good choice, working around liquidity problems (i.e., only some money could be in such long maturities).

I'm counting on laddering to solve both the liquidity and inflation problems. As long as new money goes in or old CDs come due on a regular basis, if inflation is high, new CDs can be bought at higher rates. It's less certain than getting TIPS, but as long as the fixed rate on 5-year TIPS is this low, I think the CDs will do better over next 5-years. At some point, if 5-year or 10-year TIPS' yields respond to increasing Fed rates (if they really increase), then I may very well put new or rolled over "fixed income" assets into TIPS (or even a fund).


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Author: SangalSK One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12125 of 35351
Subject: Re: CDs? Bonds? Notes? - Where should my money g Date: 3/21/2005 3:52 PM
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I have just bought a new issue of a 15-yr Step CD, from Hepaline, NY Bank thru TD Waterhouse. It is callable, starting Sep,2005. Interest
rates are 5% thru March,2010, 6% thru 2015, and 8% after 2015.
I am willing to live with these rates. One risk is of its being called,
but at least I would receive 5% interest in the meantime. This is part
of my Laddered CD Portfolio. I am retired, and want a Safe and Simple
Portfolio.
Any comment will be greatly appreciated.
I enjoy and benefit from your posts. Thanks

sangalsk

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