Skip to main content
No. of Recommendations: 0
Hey all,

Any suggestions where I can learn more about this? I want to park some savings in 1-5 instruments. I'd like to do a recurring purchase (DRiP like) thing...

I have been reading up on TreasuryDirect, and on TMF. I am thinking it might make sense to invest in some TIPS now, but I'd like to learn a bit more before I do...

Any advice appreciated!
K
Print the post Back To Top
No. of Recommendations: 3
I have written extensively on TIPS before. You can look up those posts and also the FoolWiki I wrote.

In my opinion, this is not a good time to put fresh money into TIPS. The yield is extremely low (actually negative on 5-year TIPS).

http://www.bloomberg.com/markets/rates-bonds/government-bond...

Also, many believe that the government is deliberately understating inflation to reduce its payments on many obligations, including TIPS.

Treasuries are also less safe than alternatives for small investors seeking the safety of government insurance.

http://stockcharts.com/freecharts/candleglance.html?$IRX,$US...

You would be better off getting a CD from Pentagon Federal Credit Union than a Treasury.
https://www.penfed.org/productsandrates/checkingandsavings/m...

First, the interest rates are higher on most maturities.

Second, your principal is not at risk with a CD. Your principal IS at risk with a Treasury, since the value of the bond will decline if interest rates rise (as often happens in an economic recovery).

If you buy Treasuries, you are basically betting that the economy will get worse. (You will get your entire principal back if you hold the bond to maturity, even if interest rates rise. If you bought into a bond fund instead of an individual bond, your fund's NAV would drop and you would not recover your principal, since bond funds do not have a maturity.)

Please read the Bond Board FAQs before investing.

Wendy
Print the post Back To Top
No. of Recommendations: 0
If you buy Treasuries, you are basically betting that the economy will get worse. (You will get your entire principal back if you hold the bond to maturity, even if interest rates rise. If you bought into a bond fund instead of an individual bond, your fund's NAV would drop and you would not recover your principal, since bond funds do not have a maturity.)

Hi Wendy,

This is sort of a red-herring, in that, if you hold your bond to maturity, in a constantly rising int. rate environment, one would invest 2011 dollars, and get back 2021 dollars, massive loss of purchasing power! If this scenario occurs, one would be better off with the fund, selling out with a small loss, and waiting for a better entry point, bonds or funds. The commission from Scottrade would be miniscule, compared to the commissions from a broker to sell a few indiv. bonds, IMO.

The bond fund however, consists of an extensive ladder, with bonds maturing every few months. The proceeds are then utilized to buy more bonds with the current(at that time) yield.

A never ending conundrum...

rk
Print the post Back To Top
No. of Recommendations: 0
Wow! Thanks for the reply!

I actually picked up a couple of books (Dividend Stocks for Dummies and Getting Started in Bonds/Saltzgiver) and plan on thoroughly reading and learning before I do anything.

Main thing is this: I am looking to build up a medium/long term (1-5 year) savings cushion by (bi-weekly) putting 2% of my salary there.

I was initially thinking bonds/treasuries, but now may be leaning more in the DRiP/DIP direction--again, after much research.

I am getting 1% on my ING account currently, was hoping for something worthwhile with higher returns for modestly higher risks (arent we all).

I checked on that CD... Dont know that the rate justifies locking it up yet.
Print the post Back To Top
No. of Recommendations: 0
<I am looking to build up a medium/long term (1-5 year) savings cushion by (bi-weekly) putting 2% of my salary there.>

This is a good way to begin building up an emergency fund (called an e-fund by many). Even if you keep it in cash while you are studying your investment possibilities, it's worth starting right away.

I suggest that you set up a spreadsheet showing your age, your savings, and how much you will have with different yields by retirement age. With safe investments yielding so little, begin by just adding up the savings (without interest). You can then add columns where you include interest -- but, in the current environment, this adds risk.

When I was young, I began to save 20% of my income, not 2%. Unless your salary is very high, you won't be able to save enough to safely retire unless you save a significant proportion.

Another way to approach the math is to begin with your goal -- how much you will need to save to live on the often-discussed 4% Safe Withdrawal Rate (SWR) from your savings. Input your number of years until retirement, then see how much per year you will need to save.

Wendy
Print the post Back To Top
No. of Recommendations: 2
kmart00,

You wrote, I checked on that CD... Dont know that the rate justifies locking it up yet.

I think you can beat PenFed's rates by a little bit. Also, if you go with Ally, they only require 2 month's worth of interest as the penalty for any CD. That means you can opt for a 5 year CD at 2.40% APY and still break the CD after only 4 months and take away an annualized return of 1.20% APY. Put another way with a 5-year CD, you only risk 0.4% of your principal in exchange for a guaranteed 2.40% APY.

If rates rise much over this rate, you can always afford to break the CD and buy another with the proceeds.

- Joel
Print the post Back To Top
No. of Recommendations: 0
Wendy makes a really good point about massively increasing your savings rate if you can esp. if you are just starting out with investing.

Think about it: If you save 2% of $100 and get say a 5% return on that, you end up with 2.10.

However if you can manage to save 10%, or $1000, that additional savings completely swamps your return under any circumstances, which allows you to keep the principal safe.

If you can do the 20% like wendy says you will be way ahead of the game.
Print the post Back To Top
No. of Recommendations: 1
You might also want to seriously consider investing in a bond mutual fund or ETF with Vanguard, which I believe now charges no sales fee or commission for its ETFs or funds if you have an account with them; or Ameritrade, which I believe has a very long list of ETFs which it does not charge a trading commission on.

You will probably be pretty safe with a short term or intermediate term bond fund or ETF, even if interest rates go up somewhat. You probably don't want to go long term due to the risk of rising interest rates.

TIPS should not be invested in unless it's a tax advantaged account such as IRA because you get taxed on phantom income. Also as noted intermediate TIPS are now offering zero or negative real yields.

What a lot of people do to establish a core/beginning bond position is open up an account with Vanguard and buy TBM, their Total Bond Market fund. This is a good place to park your money while you are figuring things out. Another one is BIV (intermediate term bond ETF) or the equivalent mutual fund, I don't know the symbol offhand. There are others which vary by duration and mixture of types of bonds (corporates, treasuries, mortgage-backed).

If you have only a few thousand or less to invest at this time, it probably doesn't make much sense to bother with individual bonds or a bunch of different funds, you should probably just put it in a single intermediate or short term bond fund which is in the middle of your comfort zone, then you can add to it over time.
Print the post Back To Top
No. of Recommendations: 1
<quote>When I was young, I began to save 20% of my income, not 2%. Unless your salary is very high, you won't be able to save enough to safely retire unless you save a significant proportion.
</quote>

I should clarify... I am already saving 8% of my income to my 401k (company matches 6%+ a 1% year end company contribution)

I need to boost my e-fund and mid-term savings, that is why I am thinking of looking at treasuries or DRiP investing... I stopped a 2% Roth 401k contribution for the purpose of saving for the near/mid-term as DW & I are thinking about having a child this year or next
Print the post Back To Top
No. of Recommendations: 0
<quote>
If you have only a few thousand or less to invest at this time, it probably doesn't make much sense to bother with individual bonds or a bunch of different funds, you should probably just put it in a single intermediate or short term bond fund which is in the middle of your comfort zone, then you can add to it over time. </quote>

This is my dilemma. I could probably invest about $2500 to start and then put 2% of my income into whatever vehicle I choose (I was thinking about TBM, but am now considering the DRiP angle, as some folks I am talking to think that the Bond Market has been run up and may be due for a 'correction')

All: thanks SO MUCH for the thoughts here! I have always found TMF Boards as THE place to really learn about personal finance, insurance, retirement, etc. This is great!
Print the post Back To Top
No. of Recommendations: 0
hmmmm

this is interesting

https://www.ally.com/bank/high-yield-cd/index.html#tabs=fees...

"...if you go with Ally, they only require 2 month's worth of interest as the penalty for any CD. That means you can opt for a 5 year CD at 2.40% APY and still break the CD after only 4 months and take away an annualized return of 1.20% APY. Put another way with a 5-year CD, you only risk 0.4% of your principal in exchange for a guaranteed 2.40% APY..."

By my calculation, if I deposit $5k in a 5 year CD with Ally @ 2.37%, and I need to withdraw in, say, 6 months, I would receive approx. $39.50 in interest ($59.25 - 2 months interest of $19.75). On my original deposit, this would give me a yield of around 1.27%? Is my math right here?

If this is the case, this almost seems too good to be true. Park all of your money here in, hypothetically, $1k increments and let it grow! Only redeem what you need and pay a penalty on that.

Am I reading this right?
Print the post Back To Top
No. of Recommendations: 2
kmart00,

You wrote, By my calculation, if I deposit $5k in a 5 year CD with Ally @ 2.37%, and I need to withdraw in, say, 6 months, I would receive approx. $39.50 in interest ($59.25 - 2 months interest of $19.75). On my original deposit, this would give me a yield of around 1.27%? Is my math right here?

I'm not sure you annualized the yield correctly. The current APY on a 5 year CD is 2.40%. You would be surrendering 1/3rd of that if you cash out in 6 months. So the APY should be close to 2/3rds of 2.40% or about 1.60% APY - not the 1.27% you are estimating.

The risk here is that if you withdraw within the first 2 months, you could have a negative return.

Also, If this is the case, this almost seems too good to be true. Park all of your money here in, hypothetically, $1k increments and let it grow! Only redeem what you need and pay a penalty on that.

Am I reading this right?


Yeap, that's right. In theory you could open CDs at Ally for as little as $1; but my account integration site treats them all as individual accounts, which can get kind of silly. Also, I'd worry about loosing interest because of rounding.

The one down-side to Ally is it's strength. Ally was GMAC Bank, which was owned by GM. Ally is not a financially strong bank and it offers such relatively good terms to attract customers. Unfortunately when rates reverse, Ally is going to see people breaking their CDs to chase rates. This could cause them a very real liquidity problem and if deposits leave the bank, it could impact their capital ratios. Worse case would be an FDIC seizure.

But as a depositor, that just means you can't be 100% certain the bank won't eventually have to break your CDs mid-term and you might have to go looking for another place to put the funds at an otherwise inconvenient time.

BTW, most of my e-fund has been sitting in 5-yr CDs there at 2.95% APY for the past 6+ months.

- Joel
Print the post Back To Top
No. of Recommendations: 0
try this site "bogleheads" too, lots of helpful info re: bond investing here--


http://www.bogleheads.org/
Print the post Back To Top
No. of Recommendations: 1
"BTW, most of my e-fund has been sitting in 5-yr CDs there at 2.95% APY for the past 6+ months."

Boy, have you got me thinking!

Just checked on my local CU, they have 2.75% yield, but the penalty is 180 interest for early withdrawal.

If I dont need the funds for 9 months, that might be interesting... would yield .6875% if I pay the penalty. If I have 5 CDs at $1k each instead of one $5k cd (and if I only need to break 1), then the picture is even better

Of course, the idea is to not break any :-)
Print the post Back To Top