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But replacing my 5 year CD’s that mature in 2015 is a different matter. Now that will be a real problem!


Possibly, and maybe even probably. But, also, maybe not. It all depends… on factors far beyond Bernanke’s control, such as an increasing global unwillingness on the part of lenders to let themselves be taken advantage of. To some extent, there were the beginnings of protest in Europe as lenders backed away from Italy’s bond auctions, forcing a rise in rates to about 7%. But fearing a spillover-effect, the problem was papered over by printing money, as was done for Greece, Spain, UK, US, which the emerging nations are beginning to protest as inflation is forced upon them by the currency skirmishes (not yet ‘wars’, though coming soon to a country near you). In short, Bad Things could easily happen, and interest-rates could rise, though I’d bet against it, too, which raises a larger question:

What, really, should the role of CDs be in an investment portfolio? What are the investor’s characteristics that determine allocations to this instrument? The desire to avoid the loss of nominal principal? The need for short-term liquidity? A desire for not much more market-risk than cash but a better rate of return?

Except in the rarest of circumstances, i.e., coming off the top of an historic, Volker-style spike in interests-rates, cash-equivalents, such as CDs, short-term Treasuries, prime agencies, corporates and minis, will never offer a real-rate of return after taxes and inflation. They offer a better rate of return than "mattress cash”. But they still lose their buyers his or her purchasing-power at steady, predictable rates. But like rocks in the hold of old-time sailing ships, those cash-equivalents are ballast in a portfolio, offering a bit of stability. So the question becomes, What is the price of that dampened volatility in terms of missed opportunities, and are there other ways to achieve an equivalent, ballasting effect? In other words, rather than replace those CDs with other CDs, but at prices that are likely to be adverse, what else could you do with the money that might serve the same purpose?

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