Certified Deposits [Certificates of Deposit - CDs]

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jordan
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Certified Deposits [Certificates of Deposit - CDs]

Post by jordan »

Hello ,
Is it good idea to invest some amount in Certified Deposits ? I heard its risk free upto250,000. Guaranteed return (better then bond).Most of the banks provide that and longer duration gets Good Return.

Can any one please share their views on it..

Regards
Jordan

[edited thread title for clarity - moderator prudent]
alex_686
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Re: Certified Deposits

Post by alex_686 »

It is "Certificates of Deposit" or CDs.

Yes, your deposits are insured up to 250k by FDIC. This is by person, not by account. Read up on that if you get close because the details matter.

CDs are a special class of bonds. Many people here on Boggleheads favor CDs. I hate to do a blanket statement - The are pros and cons. This is one of the rare areas where regulations favor the little guy.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Tyler Aspect
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Re: Certified Deposits

Post by Tyler Aspect »

You have a John Hancock 401k plan without a good bond option. I would suggest IBonds for you and your spouse. The annual contribution limit is $10,000 per person. Some additional options would be putting a bond index fund or brokered CDs in your Roth IRA.
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mega317
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Re: Certified Deposits

Post by mega317 »

Should I point out that while your balance won't decrease, you are exposed if rates increase, or that you'll have a difficult time keeping up with inflation?

I'm definitely not saying don't use CDs, but they aren't "risk-free".
lhwerdyt*1791c
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Re: Certified Deposits

Post by lhwerdyt*1791c »

Does laddering of CDs help protect from inflation?
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Tyler Aspect
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Re: Certified Deposits

Post by Tyler Aspect »

lhwerdyt*1791c wrote: Mon Nov 27, 2017 7:28 pm Does laddering of CDs help protect from inflation?
Not specifically. You need to buy CD with coupon rate higher than projected inflation rate, and hope the inflation rate does not exceed your coupon rate while you own the CD. Stock is generally considered to be inflation beater, up to a certain point.
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Rob5TCP
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Re: Certified Deposits

Post by Rob5TCP »

If increases in interest rate are a concern; find a CD with a low EWP (early withdrawal penalty).
A good site to find these is
https://www.depositaccounts.com/blog/

he gives all the best rates for 1 month to 10 years.
He also shows the health of the bank or C.U. as well as the EWP.
Johm221122
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Re: Certified Deposits

Post by Johm221122 »

jordan wrote: Mon Nov 27, 2017 3:24 pm Hello ,
longer duration gets Good Return.

Can any one please share their views on it..

Regards
Jordan
I don't consider it a good return,especially after inflation.But it is a good option,we can't change today's interest rate environment
Topic Author
jordan
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Re: Certified Deposits

Post by jordan »

Hello ,
Thank you for your Response. I would like to invest some part as secure money . I read online and people says bonds are also not risk free.I am putting 10% money in CDs and also planning to put some money in bond outside 401k.. (401k following three fund strategy where put 20% in bond)..

Can you suggest any good bond out side 401k to invest for good long term return. My strategy is dividing money in different form of investment . Dont want to concentrate at one place..

Regards
Jordan
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dm200
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Re: Certified Deposits

Post by dm200 »

jordan wrote: Tue Nov 28, 2017 4:28 am Hello ,
Thank you for your Response. I would like to invest some part as secure money . I read online and people says bonds are also not risk free.I am putting 10% money in CDs and also planning to put some money in bond outside 401k.. (401k following three fund strategy where put 20% in bond)..

Can you suggest any good bond out side 401k to invest for good long term return. My strategy is dividing money in different form of investment . Dont want to concentrate at one place..

Regards
Jordan
Ohers here may have a different opinion, but I like the Vanguard GNMA fund (especially if you can qualify for Admiral class)
Topic Author
jordan
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Re: Certified Deposits [Certificates of Deposit - CDs]

Post by jordan »

Thankx .. Will take a look...
UncleBen
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Re: Certified Deposits [Certificates of Deposit - CDs]

Post by UncleBen »

Also, check your 401k's Stable Value fund. Some have better yields than CD's.
dbr
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Re: Certified Deposits [Certificates of Deposit - CDs]

Post by dbr »

CDs are a reasonable option for low risk investing. Returns may or may not be greater than some choice in bonds. Right now CDs are certainly an attractive alternative if one wants to manage them. One thing not available in CDs is an inflation indexed longer term product. The rough equivalent, I bonds, can only be purchased in relatively small (for some investors) annual amounts.
lhwerdyt*1791c
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Re: Certified Deposits

Post by lhwerdyt*1791c »

Tyler Aspect wrote: Mon Nov 27, 2017 8:25 pm
lhwerdyt*1791c wrote: Mon Nov 27, 2017 7:28 pm Does laddering of CDs help protect from inflation?
Not specifically. You need to buy CD with coupon rate higher than projected inflation rate, and hope the inflation rate does not exceed your coupon rate while you own the CD. Stock is generally considered to be inflation beater, up to a certain point.
Very good, thx.

Is a coupon rate rate same as interest or APR rate?

Also, is there a time or situation when laddering is good to use?
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Tyler Aspect
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Re: Certified Deposits

Post by Tyler Aspect »

lhwerdyt*1791c wrote: Tue Nov 28, 2017 8:23 pm Very good, thx.

Is a coupon rate rate same as interest or APR rate?

Also, is there a time or situation when laddering is good to use?
I wrote a presentation on brokered CDs for our local Bogleheads group; link below.

Brokered CD in Retirement Portfolio
https://drive.google.com/file/d/1UWtp_S ... sp=sharing
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.
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dm200
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Re: Certified Deposits

Post by dm200 »

lhwerdyt*1791c wrote: Tue Nov 28, 2017 8:23 pm
Tyler Aspect wrote: Mon Nov 27, 2017 8:25 pm
lhwerdyt*1791c wrote: Mon Nov 27, 2017 7:28 pm Does laddering of CDs help protect from inflation?
Not specifically. You need to buy CD with coupon rate higher than projected inflation rate, and hope the inflation rate does not exceed your coupon rate while you own the CD. Stock is generally considered to be inflation beater, up to a certain point.
Very good, thx.
Is a coupon rate rate same as interest or APR rate?
Also, is there a time or situation when laddering is good to use?
For savings products, the term "APY" [annual percentage yield] is used to take into account compounding of interest.

The coupon rate is the interest rate paid on the face value of the CD. "Brokered" CDs do not compound. They do, however, pay interest at different frequencies - some at maturity (no more than 1 year), some twice a year, some quarterly and some monthly. Your actual return, then, because of the time value of money, would be very slightly better if you received the interest monthly vs. quarterly, sem-annually or at maturity. With these low rates, though, that is "noise level".

I like "laddering" because you spread out the interest rate and liquidity risk. BUT - it all depends on your situation.
cjg
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Re: Certified Deposits [Certificates of Deposit - CDs]

Post by cjg »

Im not very familiar with the product but It looks like you could use inflation swaps to add inflation protection to a CD. Might be worth considering as an alternative to TIPS since CDs often offer premium interest rates.

They would introduce counterparty risk and increase portfolio complexity so I'm not sure it would be worth it. Anyone more familiar with inflation swaps have thoughts?
alex_686
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Re: Certified Deposits [Certificates of Deposit - CDs]

Post by alex_686 »

cjg wrote: Wed Nov 29, 2017 9:50 am Im not very familiar with the product but It looks like you could use inflation swaps to add inflation protection to a CD. Might be worth considering as an alternative to TIPS since CDs often offer premium interest rates.
IIRC, swaps are restricted to institutional investors. Plus nominal value tend to be in the millions, as a bespoke and rare product I would think the implicit expense ratio would be high. On the flip side, counter-party should be low - most of these things are marked to market regularly.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
lhwerdyt*1791c
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Re: Certified Deposits

Post by lhwerdyt*1791c »

dm200 wrote: Wed Nov 29, 2017 7:16 am
lhwerdyt*1791c wrote: Tue Nov 28, 2017 8:23 pm
Tyler Aspect wrote: Mon Nov 27, 2017 8:25 pm
lhwerdyt*1791c wrote: Mon Nov 27, 2017 7:28 pm Does laddering of CDs help protect from inflation?
Not specifically. You need to buy CD with coupon rate higher than projected inflation rate, and hope the inflation rate does not exceed your coupon rate while you own the CD. Stock is generally considered to be inflation beater, up to a certain point.
Very good, thx.
Is a coupon rate rate same as interest or APR rate?
Also, is there a time or situation when laddering is good to use?
For savings products, the term "APY" [annual percentage yield] is used to take into account compounding of interest.

The coupon rate is the interest rate paid on the face value of the CD. "Brokered" CDs do not compound. They do, however, pay interest at different frequencies - some at maturity (no more than 1 year), some twice a year, some quarterly and some monthly. Your actual return, then, because of the time value of money, would be very slightly better if you received the interest monthly vs. quarterly, sem-annually or at maturity. With these low rates, though, that is "noise level".

I like "laddering" because you spread out the interest rate and liquidity risk. BUT - it all depends on your situation.
Very helpful explanations re terminology. And thanks for contextualizing "noise level" and explaining why you like laddering.
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whodidntante
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Re: Certified Deposits

Post by whodidntante »

Tyler Aspect wrote: Tue Nov 28, 2017 11:25 pm
lhwerdyt*1791c wrote: Tue Nov 28, 2017 8:23 pm Very good, thx.

Is a coupon rate rate same as interest or APR rate?

Also, is there a time or situation when laddering is good to use?
I wrote a presentation on brokered CDs for our local Bogleheads group; link below.

Brokered CD in Retirement Portfolio
https://drive.google.com/file/d/1UWtp_S ... sp=sharing
Nice work.
lhwerdyt*1791c
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Re: Certified Deposits

Post by lhwerdyt*1791c »

dm200 wrote: Tue Nov 28, 2017 8:50 am
jordan wrote: Tue Nov 28, 2017 4:28 am Hello ,
Thank you for your Response. I would like to invest some part as secure money . I read online and people says bonds are also not risk free.I am putting 10% money in CDs and also planning to put some money in bond outside 401k.. (401k following three fund strategy where put 20% in bond)..

Can you suggest any good bond out side 401k to invest for good long term return. My strategy is dividing money in different form of investment . Dont want to concentrate at one place..

Regards
Jordan
Ohers here may have a different opinion, but I like the Vanguard GNMA fund (especially if you can qualify for Admiral class)
I currently have a GNMA fund, too. Last week or so, I read that Warren Buffet is not keen on GNMA funds -- if -- you are looking for bond funds because GNMA does not consist of just bonds. (I'm looking for the article link for can't yet find it.) Thx.
lhwerdyt*1791c
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Re: Certified Deposits

Post by lhwerdyt*1791c »

whodidntante wrote: Wed Nov 29, 2017 11:32 pm
Tyler Aspect wrote: Tue Nov 28, 2017 11:25 pm
lhwerdyt*1791c wrote: Tue Nov 28, 2017 8:23 pm Very good, thx.

Is a coupon rate rate same as interest or APR rate?

Also, is there a time or situation when laddering is good to use?
I wrote a presentation on brokered CDs for our local Bogleheads group; link below.

Brokered CD in Retirement Portfolio
https://drive.google.com/file/d/1UWtp_S ... sp=sharing
Nice work.
I second that!
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dm200
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Re: Certified Deposits [Certificates of Deposit - CDs]

Post by dm200 »

because GNMA does not consist of just bonds
.

While there are (or may be) reasons for not holding the Vanguard GNMA fund - I do not believe there are any significant holdings other than "bonds"
lhwerdyt*1791c
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Re: Certified Deposits [Certificates of Deposit - CDs]

Post by lhwerdyt*1791c »

Thx for additional info.
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