No. of Recommendations: 6
When PenFed mailed the CD offer to selected customers in late August, someone initiated a post on the topic. Doing her due-diligence, Wendy phoned PenFed and reported that: To qualify for the special CD, the money has to be "reserved" before the CD matures. The proceeds from the matured CDs will be put into my Pen Fed savings account. On January 1, the money will be used to open 10 year CDs at 5%. I asked whether new money could be added, but the answer was no. This is apparently a special deal for customers who joined Pen Fed during the heyday when they were offering 6.25%.

I, too, phoned. As I reported: When I asked about the rate on 10-year CDs, there was a long pause and a reluctance on their part to be more specific, as if this was some inside secret that I wasn't supposed to know about. The details that Wendy reports seem to be correct. Any CD that is maturing in October will be eligible to be rolled into a 10-year CD at the 5% rate provided that arrangements are made with PenFed to roll it before the CD matures.

Subsequently, I did receive an invitation to participate. I thought about it and decided against it, because I don’t like losing money, which will be the net effect of buying that CD, due to taxes and inflation. The only thing that can be in doubt is how big the loss will be, which will depend on one’s marginal tax-rate and one’s personally-experienced rate of inflation. But last weekend, I reviewed the matter again, and I posted my thoughts on the topic, trying to lay out for myself a plan of investigation and action whose essence was this: If I could do better with the money elsewhere, then I shouldn’t buy the CD.

Yesterday, when markets were open and prices were live, I went shopping, looking at Treasuries, Agencies, Munis, and Corporates, trying to see if I could beat PenFed’s offer on a risk-adjusted basis. My conclusion was that, for me, there weren’t any easy alternatives. To beat PenFed’s rate, I’d have to do a lot of work that I wasn’t inclined to do, not given the huge amount of buying I’ve done this year. I’m comfortable taking on the risks of those 80 new positions, but I just didn’t want to do any more of the sort of work that buying new positions requires.

In short, I really did want to choose “easy and lazy”, which means that I was willing to lose money, which is an awful thing to admit. But my thinking was this. My CD at PenFed is small, less than 1% of assets-under-management. So whether I roll or not really won’t matter in the larger scheme of things. Also, if market events prove that I made the wrong choice, I could always pay for my mistake by forfeiting a year’s interest and break the CD. But I really didn’t like accepting the easy way out. A “true” investor would do the work required to put the money to work at its best, possible rate. But against that assertion I could make this counter-argument. My gains on the other 99% of my assets-under-management are currently on schedule to hit 25% for 2010. So it wasn’t as if I couldn’t afford a predictable loss of –3% on 1% of them for the years 2011 through 2021 compared with a possible loss that would be multiples of that if I “chased yield” at current prices and the position blew up. So was that my conclusion: “Better a small, known loss than a possible, much larger one.”

In my conversation this morning with PenFed’s rep, she reviewed the process by which the maturing CD would be parked in one’s regular savings account until the January 1 re-investment into the new CD. She mentioned that new money could be added to the savings account and that it could become part of the CD. That is exactly the opposite of what a rep told Wendy, and, if true, that fact might be of interest to anyone who intends to participate in PenFed’s offer.

So, the process seems to be this: If you are eligible to participate in PenFed’s offer, because you are "a selected portion of our membership”, then you can choose the amount of the new CD, and you will have until January 1 to fund it. Meanwhile, within 5-7 business days of arranging for the roll-over, you will receive the proper paperwork whose terms can be changed by you anytime before the new CD begins on January 1, 2011.

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When Life Gives You Lemons
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