CD ladders vs bond funds

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CD ladders vs bond funds

Post by danielc » Sat Jun 16, 2018 6:51 pm


I was hoping to get your opinion on something:

The wiki explains how a rolling bond ladder is mostly equivalent to a bond fund. But I'm thinking that the argument does not apply to a rolling CD ladder. A CD is basically a bond with a put option. It's NAV is 100% predictable. If interest rates rise, you can pay some fixed penalty, withdraw, and re-invest. So I think that a rolling CD ladder can be an interesting alternative to a bond fund. For example, instead of putting $5K in VFITX (5.2 yr duration, 2.66% SEC yield) I could make a rolling 5-yr CD ladder with Ally (2.65% APY). The expected return is the same, but the risk properties are different.

So if I was mostly worried about rising interest rates, a CD ladder would actually be the better option. Right?

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Re: CD ladders vs bond funds

Post by sport » Sat Jun 16, 2018 7:15 pm

You should consider both direct and brokered CDs. Brokered CDs do not have the early-withdrawal-with-a-penalty feature. If you want to get your money out of one, you have to sell it on the open market. However, they tend to pay a higher yield to make up for this "inconvenience". Five year brokered CDs are presently available at 3.3%.

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Re: CD ladders vs bond funds

Post by Call_Me_Op » Sun Jun 17, 2018 5:54 am

Sounds like a lot of aggravation for little if any benefit - unless perhaps if you are dealing with 6+ figures.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: CD ladders vs bond funds

Post by averagedude » Sun Jun 17, 2018 6:18 am

Just my opinion. CD's seem attractive in the short term as it is very likely that bond funds will have a negative return for the next 12 months. Since we are in a rising interest rate environment, i would suggest doing a 2 year ladder instead of a 5 year ladder. Vanguard has a 2.8% two year CD and you can get a 1 year treasury at around 2.4%. When interest rates seem to stabilize, a 5 year ladder or a bond fund would be wise. Of course this is a tactical way to handle your fixed income investing and noone knows where interest rates are heading in the long term. Most people including me, have been wrong for over a decade of where interest rates are going.

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Re: CD ladders vs bond funds

Post by aristotelian » Sun Jun 17, 2018 7:00 am

Why are you holding bonds? If you are seeking stability rather than income/return, consider weighting short term bonds that will be less sensitive to interest rate changes. Vanguard Short Term Bond Index has not had a single negative total return year since 2003. It did have principal loss in ranging up to 2%, but in those years the principal loss was balanced out by the yield.

Vanguard Short Term Treasury would also be a possibility (total return of -0.10% in 2013).

I doubt the difference between a CD ladder and ST bond fund will make any difference in your life whatsoever...but if the CD ladder helps you sleep at night, go for it. Up to you if it is worth the trouble.

Also consider the impact on your beneficiaries if you leave them with an overly complex portfolio.

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Re: CD ladders vs bond funds

Post by dbr » Sun Jun 17, 2018 8:06 am

Why are you concerned about the exact risk in fixed income? Are you in a position where you are depending on exactly what happens to a very large amount of money with significant consequences for small differences in exactly what return materializes in the near term? Or, is your position that you are invested in a portfolio of stocks and bonds for the long run and these concerns are just simply irrelevant and don't need to be worried about?

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