Considering a CD ladder

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peterinjapan
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Considering a CD ladder

Post by peterinjapan » Wed Mar 21, 2018 10:56 am

One thing I struggle with is holding bonds. I'm 49 years old and hold only 7% of my portfolio in bonds. I know one holds bonds to provide stability and ballast rather than profit, but I've one of my bond holdings was $40k worth of BND, held since 2015, have yielded an actual profit of...$200.

Because of the challenges of bonds, and the likelihood that the bond ETFs I am likely to hold will yield 0% or -1% or even do worse, I'm having trouble seeing why my best option isn't to use the "ballast" part of my portfolio and build a CD ladder. 24 month brokered CDs at Fidelity are up to 2.55%, and they have a convenient system for building a CD ladder all at once fairly easily. A total APY of 2.2%, FDIC insured, seems like a better plan than holding AGG/BND/LQD in an environment when rates could still rise faster than expected, calling me to fret about my bonds' value and go nowhere.

So, is this plan totally wrong?

(This would be held in my IRA to avoid high taxes on the interest income.)

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Re: Considering a CD ladder

Post by Call_Me_Op » Wed Mar 21, 2018 10:58 am

No, it's fine. You have some minor misconceptions (regarding the differences between bonds and bond funds), but that's OK.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Golfview
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Re: Considering a CD ladder

Post by Golfview » Wed Mar 21, 2018 11:07 am

Don't feel bad Vanguard total bond fund is down almost 2%just this year!

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Re: Considering a CD ladder

Post by Call_Me_Op » Wed Mar 21, 2018 11:28 am

Golfview wrote:
Wed Mar 21, 2018 11:07 am
Don't feel bad Vanguard total bond fund is down almost 2%just this year!
A CD ladder with similar duration would be down about as much.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Golfview
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Re: Considering a CD ladder

Post by Golfview » Wed Mar 21, 2018 11:43 am

A CD would not have lost any principle for sure.

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Re: Considering a CD ladder

Post by Call_Me_Op » Wed Mar 21, 2018 11:46 am

Golfview wrote:
Wed Mar 21, 2018 11:43 am
A CD would not have lost any principle for sure.
Bonds do not lose principal either. They lose market value when rates increase - not principal. A rolling CD ladder would also lose market value. There is no difference.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

lahob
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Re: Considering a CD ladder

Post by lahob » Wed Mar 21, 2018 11:53 am

peterinjapan wrote:
Wed Mar 21, 2018 10:56 am
So, is this plan totally wrong?
It's perfectly reasonable to use CDs as part or all of your fixed income allocation.

I can't understand how you only made $200 holding $40k of BND for 3 years, but that doesn't change the answer to your question.

Golfview
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Re: Considering a CD ladder

Post by Golfview » Wed Mar 21, 2018 11:56 am

My CD'S haven't list any value principal or interest!

sport
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Re: Considering a CD ladder

Post by sport » Wed Mar 21, 2018 12:12 pm

Brokered CDs are a good idea only if you plan to hold them to maturity. They cannot be "cashed in" early. They can be sold on the open market and you might not get a good price for them if you sold them. Right now, the two year CD (2.55%) is yielding a lot more than the one year, so I would avoid anything less than two years, unless you will need the cash sooner. The three year CD (2.75%) is yielding a decent amount more than the two year, so that is acceptable. Beyond three years, the additional yield is very small. Since we seem to be in a time of rising interest rates, there is significantly more risk to holding longer CDs (the risk is that rates go up further and you are "stuck" at a lower rate). So, I would be reluctant to buy CDs longer than 3 years under current conditions. If/when the yield curve steepens for longer CDs, this should be reconsidered.

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Re: Considering a CD ladder

Post by mhadden1 » Wed Mar 21, 2018 12:44 pm

I use IRA CDs because I like very stable, low-risk FI holdings, taking almost all risk in equities.

I consider CDs to be special:

-- Federal deposit insurance removes CD risk without buyer explicitly paying for it.
-- Institutions sometimes pay above-market rates to get business.
-- EWP means the consequences of early exit are known at the beginning.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

bpg1234
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Re: Considering a CD ladder

Post by bpg1234 » Wed Mar 21, 2018 12:48 pm

peterinjapan wrote:
Wed Mar 21, 2018 10:56 am
One thing I struggle with is holding bonds. I'm 49 years old and hold only 7% of my portfolio in bonds. I know one holds bonds to provide stability and ballast rather than profit, but I've one of my bond holdings was $40k worth of BND, held since 2015, have yielded an actual profit of...$200.

Because of the challenges of bonds, and the likelihood that the bond ETFs I am likely to hold will yield 0% or -1% or even do worse, I'm having trouble seeing why my best option isn't to use the "ballast" part of my portfolio and build a CD ladder. 24 month brokered CDs at Fidelity are up to 2.55%, and they have a convenient system for building a CD ladder all at once fairly easily. A total APY of 2.2%, FDIC insured, seems like a better plan than holding AGG/BND/LQD in an environment when rates could still rise faster than expected, calling me to fret about my bonds' value and go nowhere.

So, is this plan totally wrong?

(This would be held in my IRA to avoid high taxes on the interest income.)
You reference the 2 year 2.55% CD but a total APY of 2.2% for the ladder. I too have thought about a ladder but considering taking the term risk and just going with the 2 year since it's a nice .50% bump over the 1 year or .40% bump over the 13 month shown on Vanguard site. So how many ladder rungs were you considering and what rung were you starting with?

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peterinjapan
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Re: Considering a CD ladder

Post by peterinjapan » Wed Mar 21, 2018 9:05 pm

lahob wrote:
Wed Mar 21, 2018 11:53 am
I can't understand how you only made $200 holding $40k of BND for 3 years, but that doesn't change the answer to your question.
That's what Fidelity tells me in the total profit. I have always had auto re-investing of distributions set to on.

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peterinjapan
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Re: Considering a CD ladder

Post by peterinjapan » Wed Mar 21, 2018 9:09 pm

bpg1234 wrote:
Wed Mar 21, 2018 12:48 pm
You reference the 2 year 2.55% CD but a total APY of 2.2% for the ladder. I too have thought about a ladder but considering taking the term risk and just going with the 2 year since it's a nice .50% bump over the 1 year or .40% bump over the 13 month shown on Vanguard site. So how many ladder rungs were you considering and what rung were you starting with?

This is the system they are showing me. Looks very reasonable, and equally important, something that is probably easy to stick with. Will probably sell all my bonds in my IRA and hold these and see how I like them. I seem to have a curse that *nothing* I do in my IRA every causes it to advance in value and I'm looking to change that.

Image

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Re: Considering a CD ladder

Post by zengolf2011 » Wed Mar 21, 2018 9:17 pm

I'm in the distribution phase. I keep a 5-yr. CD ladder in my TIRA. Always hold them to full maturity. It gives me another option for RMDs when both stocks and bonds decline. Why 5 yrs? Stock declines have typically lasted less than five yrs. (though extreme events can last much longer). Bonds historically are less likely to decline for prolonged periods than stocks. Is this time different? Who knows?

I always withdraw from the best performing asset. The CD ladder benefit for me is just a quirky feel-good tactic, I doubt it will make any difference in outcomes. But I believe in almost anything that helps me stay the course. Also, I think the argument for bond funds v. CDs is even more compelling in the accumulation phase.

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Re: Considering a CD ladder

Post by Iliketoridemybike » Wed Mar 21, 2018 9:19 pm

Call_Me_Op wrote:
Wed Mar 21, 2018 11:46 am
Golfview wrote:
Wed Mar 21, 2018 11:43 am
A CD would not have lost any principle for sure.
Bonds do not lose principal either. They lose market value when rates increase - not principal. A rolling CD ladder would also lose market value. There is no difference.
Market value is meaningless if you hold to maturity. Its like saying you lose money if you cash in your CDs early so don’t buy them. :oops:

eldinerocheapo
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Re: Considering a CD ladder

Post by eldinerocheapo » Wed Mar 21, 2018 9:27 pm

For what it's worth, I began staggering cd's over a five year range with an annual cd taken out each month for the past year through Ally. My statements are beginning to get really long but the comfort level I'm feeling with increased APR's nearly every month, and then locking in over 2% on maturities over two years on some cd's is beginning to make me very happy. I slashed my 401k contribution by 50% because I believe there is too much volativity going on right now.

It would not be the ideal move for many on this forum, but for me, it just makes sense right now. The intent is to augment my TIRA distributions and SS with a self funded "pension" of $15k per year for 20 years when I retire. I'll figure out what to do when and if I make it to 70 and deal with the RMD, which I suppose will be a good problem to have.

I believe you cannot go wrong with sufficient cash reserves, no matter how low the guarenteed returns.

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Re: Considering a CD ladder

Post by ChinchillaWhiplash » Wed Mar 21, 2018 9:31 pm

Seems like a good plan to me. I just switched over 50% of my bond index fund for a 3 year CD ladder. I kept some in bond fund to have liquidity for rebalancing AA if needed.

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Re: Considering a CD ladder

Post by bpg1234 » Wed Mar 21, 2018 11:51 pm

peterinjapan wrote:
Wed Mar 21, 2018 9:09 pm
bpg1234 wrote:
Wed Mar 21, 2018 12:48 pm
You reference the 2 year 2.55% CD but a total APY of 2.2% for the ladder. I too have thought about a ladder but considering taking the term risk and just going with the 2 year since it's a nice .50% bump over the 1 year or .40% bump over the 13 month shown on Vanguard site. So how many ladder rungs were you considering and what rung were you starting with?

This is the system they are showing me. Looks very reasonable, and equally important, something that is probably easy to stick with. Will probably sell all my bonds in my IRA and hold these and see how I like them. I seem to have a curse that *nothing* I do in my IRA every causes it to advance in value and I'm looking to change that.

Image
Thanks peterinjapan for the followup. This Fidelity ladder is very similar to what I was considering versus going with a simple 2 year CD @2.55% with the total amount. In working on the numbers I determined the renewal of each rung with a new 2 year CD at the 6, 12 and 18 month marks would as an example require roughly a 2.75%, 3.0% and 3.25% CD rate respectively to break even.

If 2 year broker CD rates go even higher during the 18 months then the ladder was clearly better besides appealing as a way to minimize term and interest rate risk as just keep rolling over every 6 months. Also, if the long end of the yield curve starts increasing then can always increase the length of the ladder.

So I too may just do the ladder as it is simple to manage but the lingering question for me is whether I think the estimated 2.75%, 3.00%, and 3.25% rates for the 2 year broker CD rates for the respective 6 month renewal rungs are reasonable assumptions based on the FED's dot plot and present economic growth projections.

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Re: Considering a CD ladder

Post by Call_Me_Op » Thu Mar 22, 2018 7:45 am

Iliketoridemybike wrote:
Wed Mar 21, 2018 9:19 pm
Call_Me_Op wrote:
Wed Mar 21, 2018 11:46 am
Golfview wrote:
Wed Mar 21, 2018 11:43 am
A CD would not have lost any principle for sure.
Bonds do not lose principal either. They lose market value when rates increase - not principal. A rolling CD ladder would also lose market value. There is no difference.
Market value is meaningless if you hold to maturity. Its like saying you lose money if you cash in your CDs early so don’t buy them. :oops:
Market value is not meaningless - and you completely misunderstood my point. When you look at the value of your bond fund today, that is its market value. That's the value it has today.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Considering a CD ladder

Post by mhadden1 » Thu Mar 22, 2018 8:02 am

For non-brokered CDs, return of principal prior to maturity typically involves a penalty of some amount of interest. Those conditions are known at purchase time and are not dependent on interest rates. People that want that kind of behavior use CDs.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

Call_Me_Op
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Re: Considering a CD ladder

Post by Call_Me_Op » Thu Mar 22, 2018 8:17 am

mhadden1 wrote:
Thu Mar 22, 2018 8:02 am
For non-brokered CDs, return of principal prior to maturity typically involves a penalty of some amount of interest. Those conditions are known at purchase time and are not dependent on interest rates. People that want that kind of behavior use CDs.
It's a good point that when people refer to "CDs" they should distinguish between direct CDs and brokered CDs, as the details of how they work are different. In terms of a comparison to bonds, a brokered CD is essentially a (FDIC insured) bond and behaves like one, although its market is rather thin. A direct CD is a fixed-income investment, but has no secondary market per se. It can be "sold" but only back to the bank - with a penalty.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

sport
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Re: Considering a CD ladder

Post by sport » Thu Mar 22, 2018 9:29 am

mhadden1 wrote:
Thu Mar 22, 2018 8:02 am
For non-brokered CDs, return of principal prior to maturity typically involves a penalty of some amount of interest. Those conditions are known at purchase time and are not dependent on interest rates. People that want that kind of behavior use CDs.
This is true. However, if an investor chooses to buy a direct CD, they should understand that this certainty may come at a price in the form a yield that is lower than a brokered CD of the same maturity.

bpg1234
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Re: Considering a CD ladder

Post by bpg1234 » Thu Mar 22, 2018 6:39 pm

sport wrote:
Wed Mar 21, 2018 12:12 pm
Brokered CDs are a good idea only if you plan to hold them to maturity. They cannot be "cashed in" early. They can be sold on the open market and you might not get a good price for them if you sold them. Right now, the two year CD (2.55%) is yielding a lot more than the one year, so I would avoid anything less than two years, unless you will need the cash sooner. The three year CD (2.75%) is yielding a decent amount more than the two year, so that is acceptable. Beyond three years, the additional yield is very small. Since we seem to be in a time of rising interest rates, there is significantly more risk to holding longer CDs (the risk is that rates go up further and you are "stuck" at a lower rate). So, I would be reluctant to buy CDs longer than 3 years under current conditions. If/when the yield curve steepens for longer CDs, this should be reconsidered.
sport, so if you didn't need the cash and could hold through to maturity in the broker CDs would you go with the four rung ladder as proposed by Fidelity for the OP at the 2.2% weighted average or go straight with the two year CD @2.55%. As I posted earlier my calculations show the break even for the 4 rung ladder would require roughly a 2.75%, 3% and then 3.25% two year CD rates at the 6, 12 and 18 month maturity marks of the ladder.

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Re: Considering a CD ladder

Post by sublimisdeus » Thu Mar 22, 2018 7:45 pm

sport wrote:
Wed Mar 21, 2018 12:12 pm
Brokered CDs are a good idea only if you plan to hold them to maturity. They cannot be "cashed in" early. They can be sold on the open market and you might not get a good price for them if you sold them. Right now, the two year CD (2.55%) is yielding a lot more than the one year, so I would avoid anything less than two years, unless you will need the cash sooner. The three year CD (2.75%) is yielding a decent amount more than the two year, so that is acceptable. Beyond three years, the additional yield is very small. Since we seem to be in a time of rising interest rates, there is significantly more risk to holding longer CDs (the risk is that rates go up further and you are "stuck" at a lower rate). So, I would be reluctant to buy CDs longer than 3 years under current conditions. If/when the yield curve steepens for longer CDs, this should be reconsidered.
Another option is Everbank's 3.5 year Bump Rate CD, currently 2.40% APY. If interest rates continue to rise, you can request a one time rate bump (increase) during the term of the CD. If you break the CD early, the penalty is 313 days of interest. I like the option to bump up the rate if rates rise.

https://www.everbank.com/banking/bump-rate

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Re: Considering a CD ladder

Post by sport » Thu Mar 22, 2018 8:51 pm

bpg1234 wrote:
Thu Mar 22, 2018 6:39 pm
sport wrote:
Wed Mar 21, 2018 12:12 pm
Brokered CDs are a good idea only if you plan to hold them to maturity. They cannot be "cashed in" early. They can be sold on the open market and you might not get a good price for them if you sold them. Right now, the two year CD (2.55%) is yielding a lot more than the one year, so I would avoid anything less than two years, unless you will need the cash sooner. The three year CD (2.75%) is yielding a decent amount more than the two year, so that is acceptable. Beyond three years, the additional yield is very small. Since we seem to be in a time of rising interest rates, there is significantly more risk to holding longer CDs (the risk is that rates go up further and you are "stuck" at a lower rate). So, I would be reluctant to buy CDs longer than 3 years under current conditions. If/when the yield curve steepens for longer CDs, this should be reconsidered.
sport, so if you didn't need the cash and could hold through to maturity in the broker CDs would you go with the four rung ladder as proposed by Fidelity for the OP at the 2.2% weighted average or go straight with the two year CD @2.55%. As I posted earlier my calculations show the break even for the 4 rung ladder would require roughly a 2.75%, 3% and then 3.25% two year CD rates at the 6, 12 and 18 month maturity marks of the ladder.
IMO, the CDs shorter than 2 years do not have enough yield. Those longer than 3 years do not compensate you for the risk. So, I would either go with all two year CDs or split them between 2 years and 3 years. I feel that these are the best risk-adjusted rates. If rates increase in the future, you are locked in for only 2 years. If rates should decrease, you have some decent current rates for 2 or 3 years.

bpg1234
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Re: Considering a CD ladder

Post by bpg1234 » Sat Mar 24, 2018 11:17 am

sport wrote:
Thu Mar 22, 2018 8:51 pm
bpg1234 wrote:
Thu Mar 22, 2018 6:39 pm
sport wrote:
Wed Mar 21, 2018 12:12 pm
Brokered CDs are a good idea only if you plan to hold them to maturity. They cannot be "cashed in" early. They can be sold on the open market and you might not get a good price for them if you sold them. Right now, the two year CD (2.55%) is yielding a lot more than the one year, so I would avoid anything less than two years, unless you will need the cash sooner. The three year CD (2.75%) is yielding a decent amount more than the two year, so that is acceptable. Beyond three years, the additional yield is very small. Since we seem to be in a time of rising interest rates, there is significantly more risk to holding longer CDs (the risk is that rates go up further and you are "stuck" at a lower rate). So, I would be reluctant to buy CDs longer than 3 years under current conditions. If/when the yield curve steepens for longer CDs, this should be reconsidered.
sport, so if you didn't need the cash and could hold through to maturity in the broker CDs would you go with the four rung ladder as proposed by Fidelity for the OP at the 2.2% weighted average or go straight with the two year CD @2.55%. As I posted earlier my calculations show the break even for the 4 rung ladder would require roughly a 2.75%, 3% and then 3.25% two year CD rates at the 6, 12 and 18 month maturity marks of the ladder.
IMO, the CDs shorter than 2 years do not have enough yield. Those longer than 3 years do not compensate you for the risk. So, I would either go with all two year CDs or split them between 2 years and 3 years. I feel that these are the best risk-adjusted rates. If rates increase in the future, you are locked in for only 2 years. If rates should decrease, you have some decent current rates for 2 or 3 years.
Thanks sport for your response.

I know it all goes to what CD interest rates actually do over the next 18 months but in light of the Fed's dot plot and growth projections I would be interested in any perspectives on:

- the brokered CD ladder as outlined by Fidelity for the OP with four 6 month rungs of 1.8%, 2.15%, 2.3% and 2.55% with a weighted 2.2% average
- versus going all in with the one 2 year CD @2.55%

Thanks in advance for any thoughts.

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Re: Considering a CD ladder

Post by sublimisdeus » Sat Mar 24, 2018 6:48 pm

Live Oak Bank is currently offering an 18 month CD at 2.40%. The CD has an early withdrawal penalty of just 90 days (vs 180 days for longer term CDs).

https://www.liveoakbank.com/personal-banking/

In the current environment of rising rates, I would consider the 18 month CD. If rates rise quickly, this calculator can help you calculate whether it is better to stay in the CD or take the early withdrawal penalty and move the funds to a higher yield CD: https://www.depositaccounts.com/tools/b ... lator.aspx

I prefer the flexibility of an 18 month term with 90 day EWP over longer term CDs or CD ladders, since rates are expected to continue rising.

bpg1234
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Re: Considering a CD ladder

Post by bpg1234 » Sat Mar 24, 2018 9:46 pm

sublimisdeus wrote:
Sat Mar 24, 2018 6:48 pm
Live Oak Bank is currently offering an 18 month CD at 2.40%. The CD has an early withdrawal penalty of just 90 days (vs 180 days for longer term CDs).

https://www.liveoakbank.com/personal-banking/

In the current environment of rising rates, I would consider the 18 month CD. If rates rise quickly, this calculator can help you calculate whether it is better to stay in the CD or take the early withdrawal penalty and move the funds to a higher yield CD: https://www.depositaccounts.com/tools/b ... lator.aspx

I prefer the flexibility of an 18 month term with 90 day EWP over longer term CDs or CD ladders, since rates are expected to continue rising.
Yes sublimisdeus, I too like and have utilized direct CDs with low EWP over the past several years. I really liked Ally when it had decent 5 year rates and only the 60 day EWP which I leveraged a couple of times a few years ago. But in my and the OP case we are looking at our IRAs in brokerage accounts, and at least in my case, would prefer to avoid the custodian to custodian IRA transfer process moving money out to a bank for a direct CD and prefer in this case to keep the money within my brokerage account for simplicity.

As such, in looking at CDs I'm looking at either one CD of two year maturity at the 2.55% APY or the broker CD ladder as outlined above, and in either case I would be holding to maturity as will not need the funds for the duration and would not want to take the hair cut trying to sell in the secondary market prior to maturity.

As you note "since rates are expected to continue rising" this is what makes me hesitate since the 2 year broker CD rate is presently at 2.55% APY while the four six month rung broker CD ladder weighted APY is only 2.2% but would reduce interest and term risk if rates do continue rising.

The ladder though would require rates on each new 2 year broker CD at the 6, 12 and 18 month marks to increase roughly 25 basis points to break even with the existing 2 year 2.55% term so since holding to maturity evaluating which option make most sense given what the Fed has indicated about their dot plot and economic growth projections.

bpg1234
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Re: Considering a CD ladder

Post by bpg1234 » Sun Mar 25, 2018 6:11 pm

bpg1234 wrote:
Sat Mar 24, 2018 9:46 pm
sublimisdeus wrote:
Sat Mar 24, 2018 6:48 pm
Live Oak Bank is currently offering an 18 month CD at 2.40%. The CD has an early withdrawal penalty of just 90 days (vs 180 days for longer term CDs).

https://www.liveoakbank.com/personal-banking/

In the current environment of rising rates, I would consider the 18 month CD. If rates rise quickly, this calculator can help you calculate whether it is better to stay in the CD or take the early withdrawal penalty and move the funds to a higher yield CD: https://www.depositaccounts.com/tools/b ... lator.aspx

I prefer the flexibility of an 18 month term with 90 day EWP over longer term CDs or CD ladders, since rates are expected to continue rising.
Yes sublimisdeus, I too like and have utilized direct CDs with low EWP over the past several years. I really liked Ally when it had decent 5 year rates and only the 60 day EWP which I leveraged a couple of times a few years ago. But in my and the OP case we are looking at our IRAs in brokerage accounts, and at least in my case, would prefer to avoid the custodian to custodian IRA transfer process moving money out to a bank for a direct CD and prefer in this case to keep the money within my brokerage account for simplicity.

As such, in looking at CDs I'm looking at either one CD of two year maturity at the 2.55% APY or the broker CD ladder as outlined above, and in either case I would be holding to maturity as will not need the funds for the duration and would not want to take the hair cut trying to sell in the secondary market prior to maturity.

As you note "since rates are expected to continue rising" this is what makes me hesitate since the 2 year broker CD rate is presently at 2.55% APY while the four six month rung broker CD ladder weighted APY is only 2.2% but would reduce interest and term risk if rates do continue rising.

The ladder though would require rates on each new 2 year broker CD at the 6, 12 and 18 month marks to increase roughly 25 basis points to break even with the existing 2 year 2.55% term so since holding to maturity evaluating which option make most sense given what the Fed has indicated about their dot plot and economic growth projections.
Bump, any CD experts want to provide your perspective on this?

Thanks in advance.

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Re: Considering a CD ladder

Post by whodidntante » Sun Mar 25, 2018 10:33 pm

You could buy and roll T-bills instead. Excellent liquidity, very little term risk, virtually no credit risk, zero or nearly zero costs to implement. The yield curve is so flat that you don't give up much right now by shedding term risk, but you could certainly add some longer term treasuries if you really want to. If this is a taxable account, and you live in a state with an income tax, treasuries are treated better from a tax point of view (no state tax).

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Re: Considering a CD ladder

Post by JBTX » Sun Mar 25, 2018 10:46 pm

Maybe not quite the right place to ask, and if not I apologize in advance, but why is there so much interest in CD and Bond ladders - vs say a Bond Index fund?

The only thing I can figure is that it hides interim losses in market value, so people don't feel like they have lost money, when in fact they may have. If you have a 2% CD, and interest rates go to 5%, you have lost a significant opportunity cost (and possible have a real inflation adjusted loss if inflation has increased). It seems like people getting a fixed nominal return gives them a feeling of comfort and risk aversion, even though in reality it doesn't, at least compared to some bond funds.

I have never given them much thought, so perhaps I'm missing something important.

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Re: Considering a CD ladder

Post by dbr » Mon Mar 26, 2018 8:44 am

JBTX wrote:
Sun Mar 25, 2018 10:46 pm
Maybe not quite the right place to ask, and if not I apologize in advance, but why is there so much interest in CD and Bond ladders - vs say a Bond Index fund?

The only thing I can figure is that it hides interim losses in market value, so people don't feel like they have lost money, when in fact they may have. If you have a 2% CD, and interest rates go to 5%, you have lost a significant opportunity cost (and possible have a real inflation adjusted loss if inflation has increased). It seems like people getting a fixed nominal return gives them a feeling of comfort and risk aversion, even though in reality it doesn't, at least compared to some bond funds.

I have never given them much thought, so perhaps I'm missing something important.
I think there is a rampant psychology that somehow there is some kind of safety in knowing with a certainty that the face value of the investment will be there at that future point one imagines one is going to claim the money. It might be a little like a rock climber frozen in place on a cliff because they know they won't fall where they are and are in a panic that any move in any direction might result in a fall. The same thing happens when you have to jump across a muddy stream, or even ask for a hand crossing an icy patch on the sidewalk. You just can't move.

A second reason is that people are reading too much news about how we are in a "rising interest rate environment," whatever that means, that there is going to be disaster in the bond market, and that therefore people need to do something to save themselves. Rationalizing that bond ladders evade the problem provides an incentive. At the same time one gets double duty in reducing "sequence of returns risk" in portfolio.

As for CDs, however, it is completely possible for CD interest rates to be high enough relative to expected returns on bonds to justify using CDs rather than bonds. But the reason is not that the CD has a fixed value in nominal dollars.

bpg1234
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Re: Considering a CD ladder

Post by bpg1234 » Mon Mar 26, 2018 9:11 am

dbr wrote:
Mon Mar 26, 2018 8:44 am
As for CDs, however, it is completely possible for CD interest rates to be high enough relative to expected returns on bonds to justify using CDs rather than bonds. But the reason is not that the CD has a fixed value in nominal dollars.
This is key as I personally think the 2.55% 2 year broker CD return is pretty good at this point with less interest rate for some of my fixed income in my TIRA compared to expected returns on many of the short and intermediate term bond funds.

The question I have though is whether I should go with the weighted 2.2% APY 2 year CD broker ladder to further reduce interest rate risk versus the straight 2.55% 2 year CD which requires roughly a .25% basis increase in each new 2 year CD added to the end of the ladder at the 6, 12 and 18 month marks to break even?

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Oak&Elm
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Re: Considering a CD ladder

Post by Oak&Elm » Mon Mar 26, 2018 9:15 am

I have been holding off buying CD's or building a CD ladder because I just don't see the big advantage. Is it really that much of a risk to purchase a short term investment grade bond fund such as VFSUX with a sec yield of 2.79%? I realize this fund could lose a little value (-.069% YTD) if interest rates raise but I can always sell it with no EWP in the event I need cash or just want to re-balance.

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peterinjapan
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Re: Considering a CD ladder

Post by peterinjapan » Mon Apr 02, 2018 7:41 am

Oak&Elm wrote:
Mon Mar 26, 2018 9:15 am
I have been holding off buying CD's or building a CD ladder because I just don't see the big advantage. Is it really that much of a risk to purchase a short term investment grade bond fund such as VFSUX with a sec yield of 2.79%? I realize this fund could lose a little value (-.069% YTD) if interest rates raise but I can always sell it with no EWP in the event I need cash or just want to re-balance.
For me, apparently a squeamish investor, a 100% guaranteed negative return over the next few years (assuming things proceed apace) is enough to make me want to try the CD ladder idea, yes. The 2 year did bump up to 2.6% after I started this thread, too.

lahob
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Re: Considering a CD ladder

Post by lahob » Mon Apr 02, 2018 9:58 am

peterinjapan wrote:
Mon Apr 02, 2018 7:41 am
a 100% guaranteed negative return over the next few years
I'll go on record to predict that Total Bond Market will have a positive return over the next 3 years, starting from today's date. (Considering TBM has never had a negative return in any 2 year period, I feel fairly safe making this prediction. Of course, I could still be wrong.)

I still think it's fine to use CDs instead of a bond fund, though.

dbr
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Re: Considering a CD ladder

Post by dbr » Mon Apr 02, 2018 10:05 am

lahob wrote:
Mon Apr 02, 2018 9:58 am
peterinjapan wrote:
Mon Apr 02, 2018 7:41 am
a 100% guaranteed negative return over the next few years
I'll go on record to predict that Total Bond Market will have a positive return over the next 3 years, starting from today's date. (Considering TBM has never had a negative return in any 2 year period, I feel fairly safe making this prediction. Of course, I could still be wrong.)

I still think it's fine to use CDs instead of a bond fund, though.
The 100% guaranteed part is flat out ridiculous. Anyway there is no particular dividing point between positive and negative that is significant. -0.03% and +0.03% are not different. Also, I am not sure CDs have a 100% guarantee for a positive real return.

why3not
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Re: Considering a CD ladder

Post by why3not » Thu Apr 26, 2018 6:31 am

lahob wrote:
Mon Apr 02, 2018 9:58 am

I'll go on record to predict that Total Bond Market will have a positive return over the next 3 years, starting from today's date. (Considering TBM has never had a negative return in any 2 year period, I feel fairly safe making this prediction. Of course, I could still be wrong.)
I have a $85,000 purchase of Total Bond made Aug '16 with dividends reinvested currently sitting at $82,900. I have a hard time seeing this thing gain $2,100 in the next 4 months to break even. I am guessing using the past to predict the future isn't the best move.

digit8
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Re: Considering a CD ladder

Post by digit8 » Thu Apr 26, 2018 7:58 am

Call_Me_Op wrote:
Wed Mar 21, 2018 10:58 am
No, it's fine. You have some minor misconceptions (regarding the differences between bonds and bond funds), but that's OK.
+1 on both counts. I think it's worth giving some serious thought to some of the counterpoints and alternative plans that have been proposed here- but in the end the CD ladder option is firmly in the "not optimal, but not a bad idea either" category.
"You can't latte yourself to bankruptcy. The bladder won't allow it." | -Katherine Porter

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Re: Considering a CD ladder

Post by lahob » Thu Apr 26, 2018 8:59 am

why3not wrote:
Thu Apr 26, 2018 6:31 am
I have a $85,000 purchase of Total Bond made Aug '16 with dividends reinvested currently sitting at $82,900. I have a hard time seeing this thing gain $2,100 in the next 4 months to break even. I am guessing using the past to predict the future isn't the best move.
I doubt you'll get back to $85k in 4 months either, but we'll see.

You had the unforunate luck of buying TBM at the highest price it's had in the past 6 years. If you'd bought 6 months earlier or 6 months later you'd be in the black. Of course, there was no way you could have known, and 10 years from now you'll be fine.

I don't think it makes much sense to look at TBM performance over a two-year period. It's meant to be a longer-term investment.

CRTR
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Re: Considering a CD ladder

Post by CRTR » Thu Apr 26, 2018 12:55 pm

I have some recent (~15 years) experience with CDs. Here are some thoughts . . . . .

There is nothing wrong with your idea. I've been doing it for ~7 years in my Mom's account. Her returns have outpaced Vanguard Total Bond fund by significant margin, with less "risk" (volatility and no loss of principal risk).

Historically, using brokered Cds via Fidelity -- or any large brokerage -- in past, would have cost you some in lower returns because higher rates were available directly from some credit uinions. Things are a little different today, however. With some patience and lucky timing, you can get some great YTW in secondary market. I've always been a tiny bit more leery of brokered CDs than those available directly from banks, etc. Why?? . . . because If rates rise quickly, you have 2 choices: live with the lower returns until maturity or try to upgrade (sell and lose some principle). Usually, brokered CDs are not "redeemable" but have to be resold on the open market if you need the cash (at your own risk). Buying the CD directly from a bank or credit union yields similar (usually higher) rates (in Mom;'s 5 year ladder, the 2 most recent CD have YTM over 3% and the worst is 2.35%). None of her CD's have higher than a 6 month early withdrawal penalty. So, if she needs a big chunk of cash, there's very little risk (although not gonna happen because she has a free HELOC for that purpose). The downside of this approach is that her CD's are held in 2 different institutions, making paperwork, taxes, etc more work. Over the past 7 years, she's handily out-earned VBTLX (Total Bond Fund) though not my PONDX (Pimco Income).

The math in this approach is hard to argue with. I'm not the only person who thinks this way: Alan Roth does too. Roth and his opinion re: CD's are well-known and responsible for a number of threads on this board (see below for an example).

viewtopic.php?t=118146
https://www.depositaccounts.com/cd/5-year-cd-rates.html

As an aside, I've also played with CD's and mortgage refinancing for years in my own accounts. In the early and mid 2000's, I refinanced my mortgage 3 times to low rate (0-1% ARM, interest only) loans, with 100% financing. I stuck the existing equity and would-be equity payments into CD ladders, which, at the time, yielded 3-5%. I kept doing this until ~2010. As close to easy, no risk money as I've ever seen. Honestly, I don't know everyone wasn't doing it back then. Wish I could still do it!!! On the other hand, my current mortgage (~$300k) is locked at 2.7% for 11 more years. Guess where I keep ~$300k? :)

blackcat allie
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Re: Considering a CD ladder

Post by blackcat allie » Thu Apr 26, 2018 4:44 pm

May I ask, is there a simple "CD Ladder for Dummies" approach that you recommend? :?: I understand Fidelity has options, but it would also seem there would be additional costs associated with that. Frankly the above conversations are above my level of understanding/expertise.
(thanks in advance)
“Nothing in life is as important as you think it is while you are thinking about it.” - Daniel Kahneman

Austintatious
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Re: Considering a CD ladder

Post by Austintatious » Thu Apr 26, 2018 5:12 pm

Black Cat wrote:
Thu Apr 26, 2018 4:44 pm
May I ask, is there a simple "CD Ladder for Dummies" approach that you recommend? :?: I understand Fidelity has options, but it would also seem there would be additional costs associated with that. Frankly the above conversations are above my level of understanding/expertise.
(thanks in advance)
I don't know if you're considering direct as opposed to brokered CDs but here's a little discussion about CD ladders using direct (bank or credit union) CDs, with an illustration of a ladder one might implement.

https://www.gobankingrates.com/banking/cd-laddering/

CRTR
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Re: Considering a CD ladder

Post by CRTR » Fri Apr 27, 2018 12:53 pm

Black Cat wrote:
Thu Apr 26, 2018 4:44 pm
May I ask, is there a simple "CD Ladder for Dummies" approach that you recommend? :?: I understand Fidelity has options, but it would also seem there would be additional costs associated with that. Frankly the above conversations are above my level of understanding/expertise.
(thanks in advance)
There are a number of websites with instructions. Vanguard even has a "ladder" function built into its bond/CD platform.

The process is simple: most people (myself included) seem to set up a 5 year ladder. To do so, you invest 20% of total oplanned investment in CDs that mature in 12 months, 20% in CDs that mature in 24 months, 20% in 36 month, 20% in 48 months and last 20% in 60 month. IN 1 year, when the 12 month CDs mature, you roll the $$ over into a 60 month CD. The net result is that you will have a CD(s) that mature every year and a "ladder" that extends out 4 more. It's best to keep buy all CDs in same place because it makes it easier to purchase another one when they mature. If you purchase directly from credit union or bank, it's best to buy CDs with small early surrender charges: if rates shoot up, you can convert to higher rate CD without taking a big penalty hit.

Here's another link that probably explains it better than I just did . . .
https://www.marketwatch.com/story/how-t ... 2017-10-19

blackcat allie
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Re: Considering a CD ladder

Post by blackcat allie » Fri Apr 27, 2018 6:27 pm

Thanks very much @CRTR for a wonderfully clear explanation, and also thanks @Austintatious for good resource overview. 👏
“Nothing in life is as important as you think it is while you are thinking about it.” - Daniel Kahneman

invstar
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Re: Considering a CD ladder

Post by invstar » Fri Apr 27, 2018 8:20 pm

:thumbsup
CRTR wrote:
Fri Apr 27, 2018 12:53 pm
Black Cat wrote:
Thu Apr 26, 2018 4:44 pm
May I ask, is there a simple "CD Ladder for Dummies" approach that you recommend? :?: I understand Fidelity has options, but it would also seem there would be additional costs associated with that. Frankly the above conversations are above my level of understanding/expertise.
(thanks in advance)
There are a number of websites with instructions. Vanguard even has a "ladder" function built into its bond/CD platform.

The process is simple: most people (myself included) seem to set up a 5 year ladder. To do so, you invest 20% of total oplanned investment in CDs that mature in 12 months, 20% in CDs that mature in 24 months, 20% in 36 month, 20% in 48 months and last 20% in 60 month. IN 1 year, when the 12 month CDs mature, you roll the $$ over into a 60 month CD. The net result is that you will have a CD(s) that mature every year and a "ladder" that extends out 4 more. It's best to keep buy all CDs in same place because it makes it easier to purchase another one when they mature. If you purchase directly from credit union or bank, it's best to buy CDs with small early surrender charges: if rates shoot up, you can convert to higher rate CD without taking a big penalty hit.

Here's another link that probably explains it better than I just did . . .
https://www.marketwatch.com/story/how-t ... 2017-10-19

Clamshell
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Re: Considering a CD ladder

Post by Clamshell » Fri Oct 04, 2019 8:36 am

Can anyone suggest what the expense rate is on brokered CDs at Fidelity? I have had a CD ladder at Fidelity for 3 years and it is dawning on me that the CDs on offer are giving less interest rate, by about 0.3% than CDs of same term at the issuing bank's web site? Is that what I should expect? Fidelity deserves some fee I guess but I need to know more.

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