CD or Bonds?

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jkgn
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CD or Bonds?

Post by jkgn » Mon Jun 18, 2018 12:24 pm

Bothe CD and bonds are components of the fixed income portion in a portfolio. Given the performance of bonds/bond funds over the last few years, the anticipated rate rises in this year and 2019 is it better to put money in CD rather than buying bonds/bond funds/bond EFT?

2015
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Joined: Mon Feb 10, 2014 2:32 pm

Re: CD or Bonds?

Post by 2015 » Mon Jun 18, 2018 6:37 pm

jkgn wrote:
Mon Jun 18, 2018 12:24 pm
Bothe CD and bonds are components of the fixed income portion in a portfolio. Given the performance of bonds/bond funds over the last few years, the anticipated rate rises in this year and 2019 is it better to put money in CD rather than buying bonds/bond funds/bond EFT?
Like Buffet/Munger, I never make decisions based on macroeconomics, only microeconomics (e.g., my own economics). So you are asking a question based on linear thinking regarding "anticipated rate rises" this year and the next. I will counter your question with another: how do you think interest rates would be affected if a terrorist dirty bomb were detonated in San Francisco, Los Angeles, or New York? Moreover, how do you think the entirety of that complex adaptive system otherwise known as your entire life situation would be impacted were such an "unthinkable" event to occur?

Via Tres Griffin:
What is new about business today is that the many systems that make up businesses, markets and economies are part of globally connected digital networks. We live in an interconnected, or rather a hyper-connected society. Organizations and markets “behave” like networks. This triggers chaotic (complex) rather than linear behavior. When systems get connected via digital networks, feedback effects become stronger. When feedback effects get stronger, outcomes become more uncertain and nonlinear.

Nassim Taleb calls this phenomenon Extremistan. Taleb advises that in such an environment: “Be prepared for the fact that the next large surprise, technological or historical, will not resemble what you have in mind (big surprises are what some people call ‘unknown unknowns’). In other words, learn to be abstract, and think in second order effects rather than being anecdotal – which I show to be against human nature. And crucially, rare events in Extremistan are more consequential by their very nature: the once-every-hundred-year flood is more damaging than the 10 year one, and less frequent.”
Emphasis added

Dandy
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Re: CD or Bonds?

Post by Dandy » Tue Jun 19, 2018 7:44 am

I like diversity in fixed income so having both bond funds and CDs makes sense to me. I currently I would lean to adding shorter term CDs e.g. 2 yrs rather than add to bond funds. But, remember the bond funds will recover as they replace older lower interest bonds with newer higher interest bonds. Unless there is a lot of money involved it won't make a major difference in your total assets/income.

dbr
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Re: CD or Bonds?

Post by dbr » Tue Jun 19, 2018 8:57 am

Neither is categorically better than the other. For the long term investor in stocks and bonds intermediate term bond funds are just fine and don't worry about "performance over the last few years" (whatever you mean by that anyway). For that same investor attention should be focused on the overall allocation between stocks and bonds. For a person saving for an immediate need CDs are often a very good idea though even bonds such as Treasury Bills might be useful.

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Sandtrap
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Re: CD or Bonds?

Post by Sandtrap » Tue Jun 19, 2018 9:16 am

Apples vs Oranges.
Think of it this way.

Different types of "fixed" whether CD's, Treasuries, Bonds, Bond Funds, etc, have varying degrees of:

1 Liquidity (CD/Treasury/Bond locked in per term vs Bond Fund)
2 Security of Principal
3 Volatility

So each serves a purpose and has a different place (though overlapping) in your financial picture, (regardless of perceived market fluctuation).

j

dbr
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Re: CD or Bonds?

Post by dbr » Tue Jun 19, 2018 9:25 am

Sandtrap wrote:
Tue Jun 19, 2018 9:16 am
Apples vs Oranges.
Think of it this way.

Different types of "fixed" whether CD's, Treasuries, Bonds, Bond Funds, etc, have varying degrees of:

1 Liquidity (CD/Treasury/Bond locked in per term vs Bond Fund)
2 Security of Principal
3 Volatility

So each serves a purpose and has a different place (though overlapping) in your financial picture, (regardless of perceived market fluctuation).

j
Good description. However, the actual difference in those properties may be irrelevant to most investors here most of the time. That is, for a long term investor in stocks and bonds the difference between CDs and a bond fund in respect of those properties is no difference of concern, though many investors imagine so in their heads.

One of the more interesting phenomena on this forum is how much discussion there is of differences that exist that most of the participants in the discussion have no reason to care about. There are exceptions which I am confident usually get addressed pretty well.

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Sandtrap
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Location: Hawaii😀 Northern AZ.😳 Retired.

Re: CD or Bonds?

Post by Sandtrap » Tue Jun 19, 2018 9:33 am

dbr wrote:
Tue Jun 19, 2018 9:25 am
Sandtrap wrote:
Tue Jun 19, 2018 9:16 am
Apples vs Oranges.
Think of it this way.

Different types of "fixed" whether CD's, Treasuries, Bonds, Bond Funds, etc, have varying degrees of:

1 Liquidity (CD/Treasury/Bond locked in per term vs Bond Fund)
2 Security of Principal
3 Volatility

So each serves a purpose and has a different place (though overlapping) in your financial picture, (regardless of perceived market fluctuation).

j
Good description. However, the actual difference in those properties may be irrelevant to most investors here most of the time. That is, for a long term investor in stocks and bonds the difference between CDs and a bond fund in respect of those properties is no difference of concern, though many investors imagine so in their heads.

One of the more interesting phenomena on this forum is how much discussion there is of differences that exist that most of the participants in the discussion have no reason to care about. There are exceptions which I am confident usually get addressed pretty well.
So true.
"Bogleheads" do tend to go a bit detailed with the "caulking" long after the house is built. :D

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