Buy Ladder CD's or wait

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Thefielder
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Buy Ladder CD's or wait

Post by Thefielder » Tue Nov 10, 2015 11:03 am

My broker wants me to take $200K of cash and buy 5 ladder CD's, one for each of the next 5 years ($40K each), as safe
component of my total investment portfolio of $900K. If interest rates go up in December, as presumed,
should I now wait and then I could get more interest income for any ladder CD's I buy if rates do go up?
Thanks for any advice.
the fielder...

livesoft
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Re: Buy Ladder CD's or wait

Post by livesoft » Tue Nov 10, 2015 11:05 am

Your broker must have some CD's that they have been requested to move, uh sell now. I personally would be skeptical of anything a broker told me.
Are the rates for the CDs competitive? How much money does the broker get if you buy these CDs? Can they just give you that money, too?
Last edited by livesoft on Tue Nov 10, 2015 11:07 am, edited 1 time in total.
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Longdog
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Re: Buy Ladder CD's or wait

Post by Longdog » Tue Nov 10, 2015 11:06 am

What are the yields on each of the CDs?
Steve

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saltycaper
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Re: Buy Ladder CD's or wait

Post by saltycaper » Tue Nov 10, 2015 11:24 am

I would not put all of my "safe" money into brokered CDs, only some, as they are not the most liquid of instruments.

For each CD term, compare the rate you can get through your brokerage with the rate you can get through a bank. If this is a taxable account, I'd go with the direct bank CD if the rate there is higher or equal. If this is a retirement account, it would depend on the difference and how much the convenience of a single account matters to you. What's more, you can usually break a direct bank CD, pay an early withdrawal penalty, and get your principal back, which is useful if rates go up; but a brokered CD cannot be redeemed early. Instead, it is marked to market, and you have to sell it (or a portion of it) to someone else if you need the money. In this way it trades like a bond, and you can lose money if you must sell or want to sell.

Regardless of whether you go with direct bank CDs, brokered CDs, or some of both (the latter being my choice), I'd also keep some "safe" money in bond funds for easier rebalancing.
Quod vitae sectabor iter?

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dm200
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Re: Buy Ladder CD's or wait

Post by dm200 » Tue Nov 10, 2015 11:26 am

For the funds I manage for an organization, most are in brokered CDs at Vanguard, laddered over 5 years, with more in the shorter end of the ladder (because of the nature of the organizaion and possible need for funds). So, I watch the brokered CD rates very regularly. Over the past few days, I have noticed that the Vanguard Brokered CDs are generally paying 5-10 bp more than just a few weeks ago.

I manage all this myself and I really like the fact that no broker ever calls me about CDs - I look myself onlne when I want to consider a CD.

The question (I do not know the answer) is whether the anticipated short term rate increase in December by the Fed is already being priced into the market. My guess is that it is, at least to some degree. Whare is this $200k now? One possibility is to go 3 or 6 months with part of the $200K and have more rungs in the ladder. Maybe $25K at 3 months, 6 months, 9 months, 12 months, 24 months, 36 months, 48 months and 60 months. Then, you have $25K coming due every 3 months. After 3 months, buy a 5 year ... and so on.

Just my skeptical, seat of the pants opinion, but I think it is often the case that brokers push CDs that are in the broker's best interest and NOT, necessarily in the best interest of the investor. From time to time, brokers contact me about getting our business in brokered CDs. They ALWAYS claim that, for one reason or another, THEY have access to better deals. One of these guys sent me emails almost every day for a few months and many (if not most) were the identical offerings from the same banks that I would see at Vanguard. Almost none were ever better than Vanguard.

I suggest looking at the Vanguard availability of brokered CDs and compare that to what the broker is pitching.

As of earlier this morning, these were the rates available at Vanguard:
3 months - 0.40%
6 months - 0.50%
9 months - 0.60%
12 months - 0.75%
24 months - 1.25%
36 months - 1.70%
48 months - 2.05%
60 months - 2.30%

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saltycaper
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Re: Buy Ladder CD's or wait

Post by saltycaper » Tue Nov 10, 2015 11:33 am

^ Same rates at Fidelity for new issues.
Quod vitae sectabor iter?

Thefielder
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Re: Buy Ladder CD's or wait

Post by Thefielder » Tue Nov 10, 2015 11:37 am

The rates quoted me by Fidelity two weeks ago are almost spot on to the rates shown above.
the fielder

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Kevin M
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Re: Buy Ladder CD's or wait

Post by Kevin M » Tue Nov 10, 2015 1:41 pm

Instead of buying a ladder of brokered CDs, I'd just buy a 5-year CD directly from a bank or credit union (direct CD). You'll get about the same rate as a 5-year brokered CD, but importantly, you'll also have the option to do an early withdrawal at the cost of an early withdrawal penalty (EWP) of six months of interest.

For a 2.3% CD, this comes to 1.15% maximum downside. Compare this to the almost 5% downside if the rate on 5-year brokered CDs jumped by one percentage point (e.g., from 2.3% to 3.3%). In addition, the price you received on a brokered CD sold before maturity probably would be discounted by 1%-2% due to large bid/ask spread, so it actually would be to your detriment to sell a brokered CD before maturity to reinvest.

Typically you'll do better with an early withdrawal from a 5-year direct CD than by holding shorter-term maturity CDs in a ladder, and if rates don't rise, you end up much better off. Check out this CD Early Withdrawal Penalty Calculator, and compare to rates for shorter-term CDs.

An alternative would be to put some of the $200K into a good 5-year CD now, and keep your eye open for great CD deals at http://www.depositaccounts.com. We've had a few great ones come up over the last few months: a 2-year at 2.28% APY and a 3-year at 3.04% APY, both with maximum limit of $100K. A ladder makes tons of sense if you can find deals like these for the shorter-term rungs.

Kevin
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john94549
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Re: Buy Ladder CD's or wait

Post by john94549 » Tue Nov 10, 2015 8:25 pm

Break strategies do have their downsides. Another strategy is to ladder from a bond account. Buy a five-year CD this year from a bond account (say 20% of the fund value). Next year, buy another 5-yr CD with 25% of the fund account. And so on.

Swampy
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Re: Buy Ladder CD's or wait

Post by Swampy » Tue Nov 10, 2015 8:37 pm

My broker wants me to take $200K of cash and buy 5 ladder CD's...
To quote Bernstein, "Brokers service their clients the same way Bonnie and Clyde serviced banks."

Let's put things in perspective - whose money is it? Your's or the brokers?
The more I listened to brokers, the broker I got. My advice - steer clear of brokers.
Especially this one.

CIT Bank in Missouri has a savings account yielding 1% where you can park your money until you decide what to do with it at your own schedule.
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

fundseeker
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Re: Buy Ladder CD's or wait

Post by fundseeker » Tue Nov 10, 2015 8:38 pm

Just so you know, there are several differences between brokered CDs and those bought from a bank. There is more to know about the differences, but here is some information from Vanguard:

Bank CDs:
•Can only be held by the issuing bank.
•Do not have CUSIP numbers.
•Interest is compounded.
•Interest penalties if redeemed prior to maturity.
•May "roll over" into another CD at maturity.
•FDIC-insured.
•Stable market value.

Brokered CDs:
•Offered by banks and sold through brokerage firms.
•Have CUSIP numbers.
•Similar to bonds.
•Simple interest paid directly to Vanguard money market fund.
•Traded in a secondary market.
•Receive all accrued interest if sold prior to maturity.
•Can be sold prior to maturity in the secondary market.
•Does not "roll over" into another CD at maturity.
•FDIC insured.
•Fluctuating market value.

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dm200
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Re: Buy Ladder CD's or wait

Post by dm200 » Tue Nov 10, 2015 9:28 pm

fundseeker wrote:Just so you know, there are several differences between brokered CDs and those bought from a bank. There is more to know about the differences, but here is some information from Vanguard:

Bank CDs:
•Can only be held by the issuing bank.
•Do not have CUSIP numbers.
•Interest is compounded.
•Interest penalties if redeemed prior to maturity.
•May "roll over" into another CD at maturity.
•FDIC-insured.
•Stable market value.

Brokered CDs:
•Offered by banks and sold through brokerage firms.
•Have CUSIP numbers.
•Similar to bonds.
•Simple interest paid directly to Vanguard money market fund.
•Traded in a secondary market.
•Receive all accrued interest if sold prior to maturity.
•Can be sold prior to maturity in the secondary market.
•Does not "roll over" into another CD at maturity.
•FDIC insured.
•Fluctuating market value.
Two comments on direct issue CDs:
1. The points under Bank CDs above generally apply to Credit Union Issued "Certificates", but federal insurance would be NCUA, not FDIC. There are a few credit unions that are not NCUA federally insured, but have private insurance (ASI)
2. it is not always the case that interest is compounded for direct issue CD/Certificates (although it commonly is)

One comment on Brokered CDs:
1. There is a significant bid-ask spread if you sell on the secondary market, in addition to interest rate change affects.

NYCwriter
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Re: Buy Ladder CD's or wait

Post by NYCwriter » Wed Nov 11, 2015 1:06 am

duplicate post, sorry. Bogleheads is acting weird today.
Last edited by NYCwriter on Wed Nov 11, 2015 1:14 am, edited 1 time in total.

NYCwriter
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Re: Buy Ladder CD's or wait

Post by NYCwriter » Wed Nov 11, 2015 1:14 am

Instead of laddered CDs of 1-5 years, I went with a small set of 4-5 year bank CDs on a 2-2.25% high-yield offer. Doing the math, I calculated I could break one at after a year and come out ahead of a 1-year rate with the 6 month penalty (more than 1% return as opposed to the low-ball 1 year rate).

I didn't go for brokered CDs at the time because of the additional complexity. But if I had an advisor I felt comfortable with, I might look into it. Vanguard offers them. Advisors do earn money from selling products, so you want to be aware of the risks.

Remember when you could get 18%? Is that an urban legend? LOL. But inflation was crazy for a while, too.

SteveKL
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Re: Buy Ladder CD's or wait

Post by SteveKL » Wed Nov 11, 2015 1:21 am

Kevin M wrote:Instead of buying a ladder of brokered CDs, I'd just buy a 5-year CD directly from a bank or credit union (direct CD).
Most banks and credit unions do not offer the same CD rates to businesses, trusts, and nonprofit organizations as they do to individuals. Depending on how the assets are held, brokered CDs may be the only option for organizations looking to establish a CD ladder.

jimkinny
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Re: Buy Ladder CD's or wait

Post by jimkinny » Wed Nov 11, 2015 7:20 am

Thefielder wrote:My broker wants me to take $200K of cash and buy 5 ladder CD's, one for each of the next 5 years ($40K each), as safe
component of my total investment portfolio of $900K. If interest rates go up in December, as presumed,
should I now wait and then I could get more interest income for any ladder CD's I buy if rates do go up?
Thanks for any advice.
the fielder...
As far as waiting for interest rates to go up/down: no one can accurately predict the future course of interest rates. The best indication of future interest rates, is current interest rates. Not a good indicator in the longer term but it is still the best we have. If you have qualms about investing now, consider making a make a plan to invest over a period of time. Of course, interest may sky rocket for some reason, or plummet for that matter. No one knows.

When you write "broker", I interpret this to mean sales person, but maybe not. Others have given you indications of no cost options like searching online for direct CDs, one poster even listed the current rates of "brokered" CDs available at Vanguard up to a term of 5 years but you can get brokered CDs up to a term of 10 years or so. New issue brokered CDs from Vanguard cost me nothing to buy.

If you go with a CD, make sure it is either FDIC insured or insured by the credit union equivalent of FDIC.

Swampy
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Re: Buy Ladder CD's or wait

Post by Swampy » Wed Nov 11, 2015 7:31 am

NYCwriter wrote
Remember when you could get 18%? Is that an urban legend?
No, it's historical fact. Soon after IRA law was enacted, I practically forced my dad to open a 5 year CD IRA at 15.5%. I think rates went as high as 22% for a short time. He was terrified of inflation at the time. When the came due, he renewed the IRA CD for around 10% and the rates kept going down after that.
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Kevin M
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Re: Buy Ladder CD's or wait

Post by Kevin M » Wed Nov 11, 2015 2:07 pm

SteveKL wrote:
Kevin M wrote:Instead of buying a ladder of brokered CDs, I'd just buy a 5-year CD directly from a bank or credit union (direct CD).
Most banks and credit unions do not offer the same CD rates to businesses, trusts, and nonprofit organizations as they do to individuals. Depending on how the assets are held, brokered CDs may be the only option for organizations looking to establish a CD ladder.
I didn't see that OP mentioned anything about being other than an individual.

With respect to trusts, all financial institutions I've dealt with and have requested it have allowed me to hold financial accounts, including CDs, in the name of my living trust. Ally Bank, for example, doesn't distinguish between individual and living trust in terms of rates. Wouldn't know about the other categories.

Kevin
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BV3273
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Re: Buy Ladder CD's or wait

Post by BV3273 » Wed Nov 11, 2015 2:21 pm

If I was in your situation and you really wanted to put some of your money in a CD Ladder than do it. You can't time rates or the market for that matter. My plan when I am finally liquid is to setup a 5 year CD Ladder. When the 1 year CD matures I am just going to roll it over into another 5 year CD. This limits any downside risks that I could possibly think of and at least every year, if there is an increase in rates, I can take advantage of the higher rate.

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dm200
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Re: Buy Ladder CD's or wait

Post by dm200 » Wed Nov 11, 2015 2:29 pm

SteveKL wrote:
Kevin M wrote:Instead of buying a ladder of brokered CDs, I'd just buy a 5-year CD directly from a bank or credit union (direct CD).
Most banks and credit unions do not offer the same CD rates to businesses, trusts, and nonprofit organizations as they do to individuals. Depending on how the assets are held, brokered CDs may be the only option for organizations looking to establish a CD ladder.
Yes, this is true in many cases. I manage funds/investments for an organization and many of the best deals for overnight deposits are not available to organizations/companies like mine.

rj49
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Re: Buy Ladder CD's or wait

Post by rj49 » Wed Nov 11, 2015 4:25 pm

If you want to wait until yields improve, you might look at P2P lending as a source of reasonably safe fixed income, especially with a high enough investment to diversify to get the average return of 5-9%, depending on the type of notes you invest in. I invest my fixed income in Lending Club, using automated investing that simply mimics the note distribution by interest rate for the platform, and currently I'm getting 9.3%, although the average over time after defaults is 6-7%. You can set up reinvestment to get compounding advantages, or simply get your money returned with the interest payments. The negative part for a high-worth investor is that interest is charged at ordinary income, unless it's in an IRA, but then you'd face the same issue with CDs as well. It's certainly a growth industry now, with the companies expanding into other forms of lending, and hedge funds and others have jumped on the bandwagon and snap up a lot of the better loans before the general public can, but even at an average 6% return for investing in the higher-quality loans, it should still beat CDs and bank accounts and bond funds for some time, barring a recession or some other economic shock that would increase loan defaults significantly.

The other advantage is that you don't have to pay a broker, but I'm a novice and LendingClub makes it easy to set up automated investing and makes it clear what sort of returns you can expect based on the amount of risk you take.

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patrick013
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Re: Buy Ladder CD's or wait

Post by patrick013 » Wed Nov 11, 2015 6:20 pm

All my CD's mature early next year.

Next target date is 2020 which is the last date for interest
rate hike related to the Fed funds rate per their published
but not always followed schedule for rate hikes.

2020-2021 might be a good time to go long term in absence
of other information. Have most of your CD's mature then
without any other clue of any higher rates then.
age in bonds, buy-and-hold, 10 year business cycle

rimfire
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Re: Buy Ladder CD's or wait

Post by rimfire » Wed Nov 11, 2015 10:55 pm

Hi Fielder,

Your broker is giving you good advise if you want that portion of your portfolio in fixed income. The idea behind a five year ladder ( or really any reasonable term ladder) is to take some of the uncertainty out of where interest rates are going. You could wait for interest rates to rise however as had been said before the market may have partially/mostly compensated for that possibility already.
The fixed income portion of portfolio at the moment is not really being bought so much for the return it will bring, it is rather for the certainty of out come. I wouldn't worry about where rates are going or trying to predict or wait for something that may cause them to rise. If they do go up then the 1 year maturity which will come due in November 2016 ($40000) plus the interest can be reinvested at the end of the ladder to mature in 2021 at higher rate because, and if rates have gone up. I would disregard the advise to says the you should cash parts of your ladder in and reinvest in higher rate CD's. This kind of defeats the purpose of the ladder in the first place. The ladder gives you one opportunity a year to change you mind where 20% of your fixed allocation goes.(assumes equally spaced ladder) Most likely the best option will still to reinvest at the long end of the ladder.
The fixed income portion at current is kind of anaemic as far as return goes thats why you look at it for certainty rather than return. The certainty is what allows you the own the so called uncertain or volatile positions called equities.
Personally I wouldn't buy a ladder although I have owned zero coupon bonds in the past for years and benefited from rates going down. However at the moment I think owning longer dated bonds/CD's is not a good idea for return. It is however a good Idea for certainty and that is what I think your broker is trying to do for you.
I'm more in the WEB camp where you have 90% in equities ( S&P 500 index) and 10% in cash. However I don't think it is a bad idea to have say 5 years of your income needs in cash or CD's :happy if that coincides with the the 10% in cash then all that much better.
We can really over think the whole investment process and the industry and some forum participants sometimes try to make it way harder than it really is.
Long time lurker, first time poster.

Thanks jb

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