CD versus Vanguard Life Stategy Income

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woodedareas
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Joined: Mon Aug 20, 2012 6:55 pm

CD versus Vanguard Life Stategy Income

Post by woodedareas » Sat Nov 28, 2015 11:43 am

If Vanguard Life Strategy Income fund is doing about 1%, would it not Make sense to buy CD,s @ about 1.2'% and have no risk? I am 75 and possibly the rates may be higher for 2016.Neither option helps very much but the CD's seem safer and without risk? I will,of course wait for th Fed to make up,their mind but it may not be in my life time.
Appreciate your thoughts.

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Kevin M
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Re: CD versus Vanguard Life Stategy Income

Post by Kevin M » Sat Nov 28, 2015 12:02 pm

With about 20% in stocks, we don't really know what LifeStrategy income will return. Returns are not certain for either the stock portion no the bond portion, but of course stocks are riskier, so returns are less certain.

We can roughly estimate the 5-10 year bond returns as 1%-3%, and stocks at maybe 5%-8%, so with an 20/80 stock/bond portfolio, a weighted return of maybe 2%-4%, but there's uncertainty even in this range.

A good 5-year CD earns an almost certain 2.25% for the five year holding period. So it's at the low end of the expected return range for the stock/bond fund, but it's much more certain.

If purchased directly from a bank (direct CD), you can do an early withdrawal by paying a penalty of six months of interest, so a maximum loss of about 1.13%. You might do an early withdrawal if interest rates went up enough; e.g., if the 5-year CD rate went to 3.4%, you could do an early withdrawal, pay the penalty, recoup the penalty in about a year, and then be earning the higher rate for the rest of the CD term.

I am retired, age 63, and keep about 50% of my portfolio in direct CDs, 20% in bond funds, and 30% in stock funds. So I have something similar to LifeStrategy Income, but a little more stocks (30% instead of 20%), the majority of the fixed income in CDs, but some still in bond funds for higher yields as a hedge against continued low interest rates, or even falling rates.

Kevin
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