Flaw in Logic? CD ladder instead of bond funds

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Austintatious
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by Austintatious » Sat Jun 16, 2018 5:17 pm

billthecat wrote:
Sat Jun 16, 2018 3:05 pm
CountOnIt wrote:
Fri Jun 15, 2018 2:26 pm
Michele in TX wrote:
Fri Jun 15, 2018 1:54 pm
see the bigger picture
You obviously can't make a big shift into them all at once ($10K/year/person), but if you have a spouse, you could acquire $40K exposure across the next 7 months.
Isn't it really $15k/year/person, if you game it right? That is, $10k electronic and $5k paper via a tax refund? And gaming it by withholding too much, so you are entitled to at least a $5k refund? Looking for verification on all that.
From the Bogleheads WIKI;
Purchase and redemption
Direct purchase
As of January 1, 2012, paper savings bonds are no longer sold. This action supports Treasury’s goal to increase the number of electronic transactions with citizens and businesses. See the press release.
Those currently holding paper savings bonds can continue to redeem them at financial institutions. Bonds which have not matured, but were lost, stolen or destroyed, can be reissued in paper or electronic form.

Series I paper savings bonds remain available for purchase using part or all of one's tax refund.
I Bonds are sold at face value; for example, you would pay $100 for a $100 I Bond. I Bonds are not marketable securities, meaning that, unlike other bonds and stocks, you cannot trade I Bonds in the secondary market.

Electronic I Bonds - You can buy electronic I Bonds at TreasuryDirect. Purchases may be made in amounts of $25 or more, to the penny.
Purchase limits - $10,000 maximum purchase in one calendar year per Social Security Number, with an additional $5,000 in paper I Bonds per Social Security number using your IRS tax refund.[4] Savings bonds purchased as gifts aren't included in your annual limit.[5]
Paper I Bonds - Paper I Bonds may be replaced if they are lost, stolen, mutilated, or never received.[note 1]
Purchasing with your IRS tax refund
You can purchase an additional $5,000 in paper I Bonds per return using your IRS tax refund. The bonds are purchased in multiples of $50, for up to 3 different registrations.[6]

If your refund is less than $5,000, yet you still want the additional $5,000 in paper bonds for a given tax year, the following options may be open to you:

Send an estimated tax payment with form 1040-ES before filing your tax return such that your refund ends up being at least $5,000. This will bring the amount you receive as a refund up to the required $5,000. However, note that there is a "due date" for form 1040-ES, usually the end of January the following year.
Send a tax payment with form 4868 (request to file an automatic extension) such that your total refund will be at least $5,000. This may be submitted up to April 15th.
Taxpayers filing as Married Filing Jointly will be limited in the individual refund amount, as the combined total refund cannot exceed $5,000.[6][7]

J295
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by J295 » Sat Jun 16, 2018 6:14 pm

Doesn’t have to be either/or. Can be both/and.

Personally, we have BND, CD, I bond, tip, floating rate, and savings on the “non-equity “side of things.

InvisibleAerobar
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by InvisibleAerobar » Sat Jun 16, 2018 6:21 pm

Kevin M wrote:
Sat Jun 16, 2018 5:12 pm
AlphaLess wrote:
Sat Jun 16, 2018 4:45 pm
Meg77 wrote:
Fri Jun 15, 2018 2:50 pm
Many banks are and have been so flush with demand deposits (those paying nothing or very little, like checking accounts) that they haven't needed to pay anything for money markets or even CDs
This! Golden.

So there is so much money on the sidelines, it is hard to imagine.
BofA
Chase
Citi
WellsFargo

are sitting on trillions of deposits.
Interestingly, Wells Fargo has pretty consistently been among those offering the highest 2-year and 3-year brokered CDs rates lately. As someone mentioned earlier, some of these banks offer good rates on brokered CDs, but terrible rates for CDs sold directly to customers. They currently offer a 3-year brokered CD at 3.00%, while I see a 39-month direct CD at 1.20% APY for the "bonus" CD.

Kevin
Do you know if there are minimum purchase requirements? And how does one go about purchasing these products? Do I open a CD directly, or is it as part of a taxable account?

Also, how easy would it be to purchase similar products from Schwab/Fidelity/Vanguard? For example, I attempted doing a CD ladder in my Schwab Roth IRA account, but realized that I needed to put in a minimum amount of $1000/order. Given that i'm capped at $5500/year, it really won't work too well.

Lastly, where would you suggest one look to get good deals on brokered CDs? Many thanks in advance

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Kevin M
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by Kevin M » Sat Jun 16, 2018 8:00 pm

InvisibleAerobar wrote:
Sat Jun 16, 2018 6:21 pm
Do you know if there are minimum purchase requirements? And how does one go about purchasing these products? Do I open a CD directly, or is it as part of a taxable account?

Also, how easy would it be to purchase similar products from Schwab/Fidelity/Vanguard? For example, I attempted doing a CD ladder in my Schwab Roth IRA account, but realized that I needed to put in a minimum amount of $1000/order. Given that i'm capped at $5500/year, it really won't work too well.

Lastly, where would you suggest one look to get good deals on brokered CDs? Many thanks in advance
For brokered CDs (and bonds), a quantity of 1 = $1,000 face value, so you can't buy less than $1,000 worth of a new issue. On the secondary market it could be a little less, but not much less.

At Vanguard the minimum quantity for new-issue CDs seems to be 10. At Fidelity it seems to be 1. I don't have a Schwab account, but based on what you say, perhaps it also is 1.

On secondary market, it depends on the particular offer. Minimum quantity could be 1 or it could be 50.

I'm not necessarily recommending it, but with $5,500 you could buy five CDs and put the leftover in a fund of some sort, or just leave it in a money market account. I have been buying small quantities of CDs for family member's relatively small accounts. I wouldn't worry about a ladder, but just buy some 2-year CDs, as those are the best deal now.

For new issue CDs you'll probably find about the same deals everywhere, which is 2.80% on 2-year and 3.00% on 3-year, for example. Sometimes one broker might have a slightly higher rate for a day or two, or they might come out with a higher rate a day or two before another broker. This is based on just watching Fidelity and Vanguard.

I seem to generally find better deals on secondary market at Fidelity than at Vanguard, but good deals on very small quantities sometimes pop up at Vanguard. Also, secondary market commission for small accounts at Fidelity is 0.1%, while at Vanguard it is 0.2% unless you have at least $500K of Vanguard products. There is no commission at either for new-issue CDs.

No recent experience with Schwab.

Kevin
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CountOnIt
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by CountOnIt » Sat Jun 16, 2018 9:56 pm

billthecat wrote:
Sat Jun 16, 2018 3:05 pm
CountOnIt wrote:
Fri Jun 15, 2018 2:26 pm
You obviously can't make a big shift into them all at once ($10K/year/person), but if you have a spouse, you could acquire $40K exposure across the next 7 months.
Isn't it really $15k/year/person, if you game it right? That is, $10k electronic and $5k paper via a tax refund? And gaming it by withholding too much, so you are entitled to at least a $5k refund? Looking for verification on all that.
You are correct billthecat, as Austintatious also confirmed.

I didn't recommend the extra $5K via tax refund because of the additional drag created required to obtain it (and it also slipped my mind). You need to make an interest free loan to Uncle Sam (granted, it could be relatively short if you time things well), take care of the extra administrative work, and then you are rewarded with a paper bond to deal with. I haven't viewed it as being worth the hassle, but others can certainly disagree. Part of my prejudice is just simply that I haven't personally done it before.

Now if the fixed rate portion if bumped up a little more in November (from the 0.3% it is currently at), then my feelings may change.

billthecat
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by billthecat » Sat Jun 16, 2018 9:58 pm

CountOnIt wrote:
Sat Jun 16, 2018 9:56 pm
billthecat wrote:
Sat Jun 16, 2018 3:05 pm
CountOnIt wrote:
Fri Jun 15, 2018 2:26 pm
You obviously can't make a big shift into them all at once ($10K/year/person), but if you have a spouse, you could acquire $40K exposure across the next 7 months.
Isn't it really $15k/year/person, if you game it right? That is, $10k electronic and $5k paper via a tax refund? And gaming it by withholding too much, so you are entitled to at least a $5k refund? Looking for verification on all that.
You are correct billthecat, as Austintatious also confirmed.

I didn't recommend the extra $5K via tax refund because of the additional drag created required to obtain it (and it also slipped my mind). You need to make an interest free loan to Uncle Sam (granted, it could be relatively short if you time things well), take care of the extra administrative work, and then you are rewarded with a paper bond to deal with. I haven't viewed it as being worth the hassle, but others can certainly disagree. Part of my prejudice is just simply that I haven't personally done it before.

Now if the fixed rate portion if bumped up a little more in November (from the 0.3% it is currently at), then my feelings may change.
Well, having to deal with paper is a major drag.

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Kevin M
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by Kevin M » Sat Jun 16, 2018 10:43 pm

You can buy an additional $10K/year of I Bonds at TD for your living trust using an entity account. You could make your own living trust using the NOLO press book and template, if for no other reason than to get an additional $10K/year of I Bonds. When I was buying I bonds, I was buying $20K/year--$10K in my name and $10K for my living trust. So a couple with a living trust could buy $30K/year.

Kevin
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MrPotatoHead
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by MrPotatoHead » Sat Jun 16, 2018 10:53 pm

Tycoon wrote:
Fri Jun 15, 2018 3:09 pm
Hey! Wait a minute! This guy has 10 million and he didn't go to an Ivy? What? How did that happen?

Oops! Wrong Thread. :?
LOL! Much appreciated.

sport
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by sport » Sun Jun 17, 2018 8:56 am

Kevin M wrote:
Sat Jun 16, 2018 10:43 pm
You can buy an additional $10K/year of I Bonds at TD for your living trust using an entity account. You could make your own living trust using the NOLO press book and template, if for no other reason than to get an additional $10K/year of I Bonds. When I was buying I bonds, I was buying $20K/year--$10K in my name and $10K for my living trust. So a couple with a living trust could buy $30K/year.

Kevin
I would think a couple could each have their own trust. So they could buy $40K/year. $20K in their own names and $20K in the trusts.

thx1138
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by thx1138 » Sun Jun 17, 2018 9:39 am

vineviz wrote:
Sat Jun 16, 2018 7:05 am
Kevin M wrote:
Fri Jun 15, 2018 8:23 pm
At the time the 5-year Treasury was 0.78%, so my yield premium was about 1.5 percentage points (150 basis points). So I was guaranteed to earn 1.5 percentage points more per year than a comparably safe fixed-income investment held to maturity, and I did.
You were certainly guaranteed to earn the yield promised on your CD. However, you had no way in 2012 of knowing what the total return of any bond fund over the next five years would be.
What he said is exactly correct. He was guaranteed to earn a higher return than a comparable safe fixed-income invested (the 5 year treasury). He could for zero additional risk earn a higher return by going with the CD.

The bond fund comparison you bring up is irrelevant since it is as you state NOT a comparably safe fixed income investment precisely because its value in five years has significantly more uncertainty than either the CD or the five year treasury. One would hope on average the bond fund would return more than the CD precisely because the bond fund holder is taking more risk than the CD holder. In that particular time period the bond fund holder did not get any reward for their risk taking. In another time period they might have, after all that's how risk works. And Kevin already outlined that quite clearly in his post.

Make sure you compare apples to apples and recognize risk where it exists or you'll make a lot of investing errors...

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Kevin M
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by Kevin M » Sun Jun 17, 2018 12:56 pm

sport wrote:
Sun Jun 17, 2018 8:56 am
Kevin M wrote:
Sat Jun 16, 2018 10:43 pm
You can buy an additional $10K/year of I Bonds at TD for your living trust using an entity account. You could make your own living trust using the NOLO press book and template, if for no other reason than to get an additional $10K/year of I Bonds. When I was buying I bonds, I was buying $20K/year--$10K in my name and $10K for my living trust. So a couple with a living trust could buy $30K/year.

Kevin
I would think a couple could each have their own trust. So they could buy $40K/year. $20K in their own names and $20K in the trusts.
Sure. My wife and I each have our own trusts, and one shared trust, so we could buy $50K per year if we wanted. I was single when I was buying $20K per year, but my now-wife, then-partner, also was buying $20K per year (for her and her trust).

Kevin
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InvisibleAerobar
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by InvisibleAerobar » Sun Jun 17, 2018 10:01 pm

Kevin M wrote:
Sat Jun 16, 2018 8:00 pm
InvisibleAerobar wrote:
Sat Jun 16, 2018 6:21 pm
Do you know if there are minimum purchase requirements? And how does one go about purchasing these products? Do I open a CD directly, or is it as part of a taxable account?

Also, how easy would it be to purchase similar products from Schwab/Fidelity/Vanguard? For example, I attempted doing a CD ladder in my Schwab Roth IRA account, but realized that I needed to put in a minimum amount of $1000/order. Given that i'm capped at $5500/year, it really won't work too well.

Lastly, where would you suggest one look to get good deals on brokered CDs? Many thanks in advance
For brokered CDs (and bonds), a quantity of 1 = $1,000 face value, so you can't buy less than $1,000 worth of a new issue. On the secondary market it could be a little less, but not much less.

At Vanguard the minimum quantity for new-issue CDs seems to be 10. At Fidelity it seems to be 1. I don't have a Schwab account, but based on what you say, perhaps it also is 1.

On secondary market, it depends on the particular offer. Minimum quantity could be 1 or it could be 50.

I'm not necessarily recommending it, but with $5,500 you could buy five CDs and put the leftover in a fund of some sort, or just leave it in a money market account. I have been buying small quantities of CDs for family member's relatively small accounts. I wouldn't worry about a ladder, but just buy some 2-year CDs, as those are the best deal now.

For new issue CDs you'll probably find about the same deals everywhere, which is 2.80% on 2-year and 3.00% on 3-year, for example. Sometimes one broker might have a slightly higher rate for a day or two, or they might come out with a higher rate a day or two before another broker. This is based on just watching Fidelity and Vanguard.

I seem to generally find better deals on secondary market at Fidelity than at Vanguard, but good deals on very small quantities sometimes pop up at Vanguard. Also, secondary market commission for small accounts at Fidelity is 0.1%, while at Vanguard it is 0.2% unless you have at least $500K of Vanguard products. There is no commission at either for new-issue CDs.

No recent experience with Schwab.

Kevin
Many thanks for taking time to explain all that :)

protagonist
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by protagonist » Mon Jun 18, 2018 5:05 pm

vineviz wrote:
Fri Jun 15, 2018 2:36 pm


Look back to the summer of 2012, when Treasury yields were even lower than today. You could have purchased a five year CD then that yielded 1.1%, which might have seemed like a good deal.

Between 2011-2012 I purchased a 5 year CD at Ally yielding 2.4% with, I think, a 2 or 3 month EWP. I purchased a 10 year CD at Discover Bank yielding 3% with a 9 month EWP. In 2012 I purchased a 5 year CD at North Country FCU yielding 3% with a 6 month EWP. I held the Ally and North Country CDs to maturity. I still have the Discover CD maturing in late 2021- if I cashed it in prematurely now I would probably get about 2.7-2.8% annualized looking back.

Michele in TX
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Re: Flaw in Logic? CD ladder instead of bond funds

Post by Michele in TX » Tue Jun 19, 2018 12:14 pm

Hello Munemaker. My apologies for the delay in responding to your question. Likely you've found the answer on your own. I think you are asking if I needed to register on Vanguard's Financial Advisor portion of the website to use it.

The only account I have on Vanguard.com is as a personal investor. Once I logged onto Vanguard.com I was able to access the Financial Advisor portion on the website. No other registration required.

(This reply also sent in message to Munemaker. I need to figure out how to "tag" other folks in my posts)

Thanks everyone for your help. My lesson learned from everyone's help is there is more than one way to achieve our objectives. I appreciate everyone's help is pointing out some interesting options.

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