View Full Version : CD ladder vs. Treasury Bonds (or something else?)
mamalatte
12-27-12, 4:44pm
As I have posted before, my job is unusual in that I get paid practically nothing for several years and then a large sum of money all at once (hopefully). This was one of the years when a large sum of $$$ came in (after five years of little to no income since I started this job). It is too much money to leave sitting in a checking account, but I also do not want to "invest" it, as the current plan is to use it for living expenses, i.e., groceries, taxes, etc. over the next 1 to 4 years, anticipating that it will likely be another several years until I get any further income. In short, I need something with no risk, but more interest than the 0% I am currently getting in my checking account where the $$ are temporarily parked.
I am considering a CD ladder, which it seems would earn about 1%. I am leaning toward shorter terms for the CDs, since my time horizon is relatively short and so that the money will not be locked up long-term at 1% if interest rates go up.
I was also wondering whether some sort of Treasury Bonds might work for the situation, but wasn't sure if they would work for $$ that will likely be spent over the next 1 to 4 years. I have done some reading on the Treasury Direct website, but still don't really understand how it all works.
Between CD ladder vs. Treasury bonds, which would be preferable and why? Are there any other better options? Any advice much appreciated.
HumboldtGurl
12-28-12, 12:13pm
We've always done CD laddering and it's worked well for us.
I thought our financial adviser said bonds aren't a good idea right now but I could be wrong.
I have been a fan of I Bonds. If you think inflation could be higher than the rates you would receive from CDs, they might be something to consider. They can't be redeemed for a year and there is a slight penalty for redeeming before 5 years. It takes a little study to figure out how they work and there are limits on how much you can invest per year.
There was a long discussion on this forum recently that was sort of negative about I Bond returns. They won't give the return of a corporate type bond, but offer pretty low risk, have recently given higher returns than CDs, and have been a part of my investment strategy.
try2bfrugal
12-29-12, 2:29am
I also like I bonds and TIPS for retirement accounts. We try to make our money from our businesses and then invest what we can save in something relatively stable that keeps up with inflation.
I found the The Bond Book by Annette Thau to be a good read for learning the pros and cons of various types of bonds.
mamalatte,
The problem with trying to be "safe" with a chunk of cash is that being safe from default-risk isn't being safe from inflation-risk. So, though it might seem as if you could earn a nominal 1% on a CD ladder, you'll have to pay taxes on your gains at ordinary-income rates. Furthermore, because a realistic rate of inflation is 5% to 6%, you'll have to subtract that loss as well. In other words, to accept a nominal gain of 1% is to choose to lose your purchasing-power at a rate of about 4.5% per year. That's not smart. That's not safe.
Instead, do two things. #1, find a high-yield checking account that will offer a decent rate and dump in the max. E.g., I'm getting 3% on the first $25,000, which becomes my emergency fund. #2, dump the rest of the your windfall into a diversified portfolio of highly liquid investments. It was easy to make 11% to 14% on nearly anything in 2012. 2013 shouldn't be much different.
Charlie
If you believe the maxim that you need to work to build up a safety net for yourself to cover your expenses should you encounter an unexpected job loss or unexpected major expense, then just keeping a certain amount of money in cash and putting the rest into investments, even highly liquid investments, could be dangerous, depending on what you mean by highly liquid investments. I keep remembering what many experts have told us: "Only cash is cash." By that they mean (especially today) that (most/all?) bonds aren't cash; mutual funds aren't cash; stocks aren't cash. And past performance (2012 returns, for example) is no indication of future performance (2013 returns).
Now, to be fair, $25,000 might be enough for someone's emergency fund, depending on their spending, but I think it is important to really take a close look at your spending and recognize just how much you really would spend over 6, 8, 12 months. My spouse was out of work for 8 months last year. And it gets more troubling as you get older: My father's wife had been out of work for over five years when she finally reached retirement age.
As an aside... I'm curious how to get 3% on $25,000. I've looked high-and-low and the best deal I could find is 4% on $3,000 (and 0.25% above that). That sounds like you found a great deal. (Of course, my spouse has "forbidden" me from opening up any new accounts for anything for at least the next six months, so I couldn't take advantage of such an opportunity anyway.)
Anyway, if I was "free" to pursue other financial approaches right now, I would start learning about I Bonds and TIPS. I think most experts are willing to consider them "cash" for emergency fund purposes, and they address the concern you raised about losing purchasing power.
If you believe the maxim that you need to work to build up a safety net for yourself to cover your expenses should you encounter an unexpected job loss or unexpected major expense, then just keeping a certain amount of money in cash and putting the rest into investments, even highly liquid investments, could be dangerous, depending on what you mean by highly liquid investments. I keep remembering what many experts have told us: "Only cash is cash." By that they mean (especially today) that (most/all?) bonds aren't cash; mutual funds aren't cash; stocks aren't cash. And past performance (2012 returns, for example) is no indication of future performance (2013 returns).
Now, to be fair, $25,000 might be enough for someone's emergency fund, depending on their spending, but I think it is important to really take a close look at your spending and recognize just how much you really would spend over 6, 8, 12 months. My spouse was out of work for 8 months last year. And it gets more troubling as you get older: My father's wife had been out of work for over five years when she finally reached retirement age.
As an aside... I'm curious how to get 3% on $25,000. I've looked high-and-low and the best deal I could find is 4% on $3,000 (and 0.25% above that). That sounds like you found a great deal. (Of course, my spouse has "forbidden" me from opening up any new accounts for anything for at least the next six months, so I couldn't take advantage of such an opportunity anyway.)
Anyway, if I was "free" to pursue other financial approaches right now, I would start learning about I Bonds and TIPS. I think most experts are willing to consider them "cash" for emergency fund purposes, and they address the concern you raised about losing purchasing power.
bicker,
There are NO safe financial choices. Financial "safety" is an illusion. Yes, CDs offer protection from default-risk, but they don't protect against inflation-risk. The same is true of derivatives like I-bonds. Yes, they are indexed to the CPI and, hence, they are a way to short the CPI. But the CPI isn't an accurate measure of inflation as it is experienced at the household level. The CPI is merely economic propaganda intended to reduce the government's borrowing costs.
The opening poster reports having been given a windfall chunk of money that she intends to spend down and wants to "park it" someplace "safe" until those draw-downs occur. My question is this. Why squander that resource? Why not put that money to work, and why not spend only the money that money makes?
As for me getting 3% on the first $25,000 of a checking account, go to the home page for Advantis Credit Union. $25k is tiny money, not even 4% of my own assets under management. But it's plenty big enough for an emergency fund, and it's twice the non-home net-worth of 60% of the households in this country, according to a recent study by Ed Wolff.
http://appam.confex.com/appam/2012/webprogram/Paper2134.html
As for people losing their job, I say this. "Go find another one." I have ZERO sympathy for anyone too lazy to get out there and go looking. ZERO SYMPATHY. There are millions of jobs in this country waiting for someone to apply for them. Typically, they do require that the applicant actually have marketable skills. But there are also abundant opportunities for re-training. What those out of work lack, nearly to a man or woman, is gumption. They are unwilling to accept the risks that new challenges require. So they'd rather sit on their butts and feel sorry for themselves than take creditable action toward getting another job.
You don't have enough fingers and toes to count the numbers of times I've been laid off and had to go look for a new job. But I persisted, and even prospered, for two reasons: #1, a commitment to Voluntary Simplicity, meaning, I wasn't trying to support an stupid, extravagant lifestyle. #2, I didn't give up. If I had to go out of town to find new work, I did so. If I had to go out of state to find new work, I did so. I have ZERO sympathy for anyone who isn't willing to look for work and who isn't willing to relocate, retrain, or do whatever they have to to get themselves re-employed. The jobs are out there for those willing to look for them, and age is no barrier. If you're good at what you do, you get hired. It's just that obvious and simple.
And, "No", the frequent layoffs weren't due to poor job performance. The project had finished, and the crew was cut. But the upside to that frequent turnover was lots of free time. For the 30 years that I was in the workforce, my hours on the job averaged 25/week. Sometimes, those weeks were 12 hours/days and 7-day workweeks. But the money was decent, and I never spent more than I earned. Instead, I invested my surpluses. That is why I've got money today and an income-stream from investments that offers me three times my expenses, which means I'm still saving and reinvesting and getting further ahead. The opening poster has an opportunity to turn her life around financially. She could take that windfall and put it to work. Or she can do what most Americans will, which is to squander a precious resource. That's the whole point of the book, YMOYL. Wages are what you exchanged a bit of your life for. You can fritter away that resource, or you can put it to work, so that you don't have to be a wage slave any longer.
OTOH, if you like your job --and I would hope that most workers do-- then you have the opportunity to enjoy the best of both worlds, the challenges and satisfaction that paid employment can offer, plus the opportunity to run your own business, which is what trading for your own account amounts to, an owner-operator business. And don't try to argue that 'investing' is any different than 'trading' or that either is any different than 'gambling'. It's all gambling, meaning, making bets about future events. But there's smart ways to make those bets, and there's dumb ways to do it, and buying CDs (and similar) is a very clear example of stupid gambling. You're betting that taxes and inflation won't overwhelm the pitiful bit of yield such vehicles might offer. Well, making that bet is no smarter than walking into a casino and betting at roulette. The game has a known negative expectancy, and good investors NEVER play games with a known negative expectancy except for mere amusement.
Lastly, it needs to be asked whether anyone could become a successful investor. Oviously, the answer is "Yes". Merely put in the 10,000 of hours practice that seems to characterize success in any field. http://newswatch.nationalgeographic.com/2012/08/14/malcolm-gladwells-10000-hour-rule-visualized-practice-makes-perfect/ Not willing to make the effort? Then hire the job out, the same as you hire someone to do your dentistry or surgery.
Charlie
There are NO safe financial choices. Financial "safety" is an illusion.Of course, but experts do make a distinction between "these" and "those" based on relative levels of assurance - and don't permit the compelling nature of superior gains with significant greater risk violate the principles of "safety" that they promote.
Yes, CDs offer protection from default-risk, but they don't protect against inflation-risk. The same is true of derivatives like I-bonds. Yes, they are indexed to the CPI and, hence, they are a way to short the CPI. But the CPI isn't an accurate measure of inflation as it is experienced at the household level. The CPI is merely economic propaganda intended to reduce the government's borrowing costs.So you feel CPI understates inflation? Hmmm... I'm not so sure that that's true, on average. I've seen no significant analysis to that effect. I'm not doubting that it is inaccurate consistently, but I'm not sure it is inaccurate consistently in one specific direction and not the other. Is there someplace I can read about that?
The opening poster reports having been given a windfall chunk of money that she intends to spend down and wants to "park it" someplace "safe" until those draw-downs occur.Reasonable people disagree about the prudent path forward, for sure. I'm used to seeing, most often, an ordering that places retirement of higher interest rate debt, then maximization of matching funds opportunities, etc.
As for me getting 3% on the first $25,000 of a checking account, go to the home page for Advantis Credit Union.Thanks for the reference. Unfortunately, I cannot find a way to get that 3% rate. Maybe you have to have some sort of special status there?
As for people losing their job, I say this. "Go find another one." I have ZERO sympathy for anyone too lazy to get out there and go looking. ZERO SYMPATHY.I'm sorry to see you say that. As I mentioned, I not only know people who looked, looked hard, and didn't find anything, but they were close family members. I suppose it might be a matter of age, and perhaps younger people do have an easier time. Still, I would be concerned about anyone who indicates that they cannot find good jobs in our economy, and there are many people who despite diligent efforts haven't had the success you imply should be easy to achieve.
What those out of work lack, nearly to a man or woman, is gumption.Without knowing them, it is not appropriate for you to make that statement, and I'll leave the rest of your statement there, because it has gone beyond simply stating a perspective to directly insulting many many people whom you don't know.
bicker,
If you want to excuse employment failure, you're free to do so. If you want to cite financial "experts", you are free to do so. If you want to put me on your "Ignore" list, you are free to do that as well.
But what you shouldn't attempt to do in this forum is to argue that buying CDs is anything other than stupidity. What is it about deliberating destroying purchasing-power do you not understand? The fact that the nominal dollars returned to you will buy fewer good and services, or the fact that the government isn't go to bail out anyone but their buddies? Yes, right now, the government is casting a wide and generous social safety net. But as increasing numbers of the population attempt to draw on those resources, those resources are going to be cut, and a lot of people are going to be facing genuine poverty, and they will have only their own lack of foresightedness to blame.
I was born poor, and I've dug my way out of poverty many times. It's doable, but it ain't much fun, and it's going to become increasingly harder for the next generation to do the same. Since the 70's, the standard of living for the so-called "middle class" has gone downhill, mostly due to their own financial stupidity, which is why a book like YMOYL is so important. That book is a plan out of poverty. But the plan requires application and effort, which also mostly describes the "out of work". The world doesn't need yet another "management consultant". But it can't find enough good auto mechanics. Male or female, young or old, a two-year community college degree would give the graduate entry into a job paying $60,000-$80,000 per year. That's a decent family wage. But the out-of-work have a self-image of themselves that doesn't match the reality of the world they want to be a part of. They want "middle-class" wages and status, but they aren't capable of performing work that has market value. So they blame "the economy" rather than themselves.
Charlie
It isn't a matter of excusing failure. It is a matter of respecting and being considerate of others as much as I would like others to respect and be considerate of me. I've learned one thing about all others over the years - I can never know what it is like to live someone else's life.
<i>Without knowing them, it is not appropriate for you to make that statement, and I'll leave the rest of your statement there, because it has gone beyond simply stating a perspective to directly insulting many many people whom you don't know.</i>
bicker,
I "insulted" no one. I merely stated facts. Employers can't find qualified people. They have open positions they want to fill. But those asking to be hired can't meet even minimum qualifications, such as passing a drug test, much less offer credible prior experience. So getting hired becomes a Catch-22 situation of "no recent job, no future job" that is only overcome by showing more hustle than everyone else. In other words, "Quitters never win." If you find that insulting, then consider yourself insulted. But I can tell you plenty of stories of jobs that went to them that kept looking and never gave up.
Years ago, I did a turbine overhaul at the Weyco plant in K Falls. We were an outside crew that partnered with plant personnel, and we got to know some of them well. One was a "local boy", now an adult raising a family on his wages as a mechanic and ranching sheep with his brother.
"How did you get hired?" I asked.
"The day after I graduated from high school, I went out to the plant and put in an application. They took it, but said they weren't hiring. So I went out the next day and asked if they had started hiring. Again, they said "No." So I went back the next day, and the next day, and the next day, and the next day. Finally, about the end of July, one of the foreman coming in in the morning who had noticed me there every morning asked personnel who I was.
"Oh, he's just some local kid who wants a job. But we don't have any openings."
"Jesus Christ Almighty", said the foreman. " I don't care if you put him to work sweeping floors. Tell that kid he's hired, and tell him to come and see me. I'll find something for him to do."
It was sheer persistence that created his opportunity, and step by step, he worked his way into the maintenance department where he probably retired from with a fat pension and benefits. You can't find many unemployed who make a similar effort, because --if they made the effort-- they found work. It's the lazy that pretend to look who want their failures excused.
"Winners never quit."
Charlie
rosarugosa
12-30-12, 4:34pm
Hey Junkman: I gather that you are very disciplined about spending, so I have a question. I'm interested in those high-yield checking accounts, but the number of required debit card transactions always gives me pause. I could see us doing at least 8 per month with no problem, but I'm not so sure about 10 - 12. And I certainly don't want to do extra shopping to meet the requirement. Do you have a system for consistently hitting the number of transactions each month? I know we could do gas and groceries and Costco, but other expenditures aren't necessarily on a regular monthly basis. Although if I look at it another way, I suppose if the price was right I could go out and debit a candy bar.
Hey Junkman: I gather that you are very disciplined about spending, so I have a question. I'm interested in those high-yield checking accounts, but the number of required debit card transactions always gives me pause.
rosarugosa,
Much thanks for your question and for getting this thread back on track.
Yes, high-yield checking accounts typically have at least four requirements.
(1) You have to accept electronic monthly statements, rather than paper ones.
(2) You have to log into your account at least once per month.
(3) You have to have an automatic deposit (such as wages) or a withdrawal each month (such as paying a utility bill with "auto-pay" which the provider initiates).
(4) You have to use the debit/credit card attached to the account a minimum number of times (typically 10 to 12 per month).
Yes, I am very disciplined about my spending, and the last time I paid interest on a credit card was 1976. (The amount was $1.78, and I vowed it would never happen again.) But I can easily hit 30 debit/credit purchases a month due to the fact that on the backleg of my daily bike ride or walk, I'll swing by the grocery store, or I'll do some online shopping for books or rod building supplies, or --the rare times I'm traveling-- I'll eat out and pay the bill with a credit card. But what I will never do is use the card if there's a penalty for using the card rather than paying cash.
Yeah, if you're truly making very few purchases per month, then getting yourself up to 10 or 12 could be a hassle. But it's easy enough at the store to split a purchase into two purchases, and each will be credited separately and count toward the needed total.
Yes, there are hassles involved with parking your emergency fund in a high-yield checking account. But what's the alternative? Do you really want receive 1/10th of 1% interest on as much as $25,000 when you could be getting 3% with a tiny bit of work?
Again, much thanks for understanding the point I was trying to make to the opening poster that there's a lot better things she could be doing with her windfall cash than the truly stupid thing of buying CDs at this very late date in the interest-rate cycle. In time, CDs might again offer a decent rate of return. But if the counterfeiter-in-chief, Ben Bernanke, can be taken at his word, interest-rates won't be going up at least until mid-2015, and probably not even then, for a whole bunch of reasons, not the least of which is that rising interest-rates would increase the government's cost of borrowing. For that reason alone, the gov't will spin the economic numbers *and* squash any attempt on the part of "bond vigilantes" to increase rates. So, would-be "savers" have two choices. They can play patsy, buy CDs, and lose their purchasing-power. Or they can move a portion of their cash (what isn't needed to maintain a minimalist emergency fund) further out on the risk-curve and have a chance to earn a real rate of return on it though genuine "investing".
Charlie
rosarugosa
12-30-12, 7:28pm
Thanks for the clarification, Junkman. I totally get it about the guaranteed loss of wealth from "safe" investment vehicles, but I'm guilty of mainly laziness I guess, since I've got a bit of cash parked with ING/Capital One that isn't doing much. Although it's still doing a little bit better there than it would have been in the days when I might have "invested" it in new clothes :) We're going to have to replace a car in the not-too-distant future, so I don't really view this as investment money, but I should really consider how to make optimum use of it in the meantime. A high-yield checking account is certainly liquid enough.
Thanks for the clarification, Junkman. I totally get it about the guaranteed loss of wealth from "safe" investment vehicles, but I'm guilty of mainly laziness I guess, since I've got a bit of cash parked with ING/Capital One that isn't doing much. Although it's still doing a little bit better there than it would have been in the days when I might have "invested" it in new clothes :) We're going to have to replace a car in the not-too-distant future, so I don't really view this as investment money, but I should really consider how to make optimum use of it in the meantime. A high-yield checking account is certainly liquid enough.
Rosa,
Now let me argue the opposite side of topic.
If a person is rich enough to afford letting cash sit idle, then that's a choice they can make and be no better or worse off for it than buying clothes, a pizza, or whatever. What is irresponsible is for them that don't have "Enough" (in the YMOYL sense of the term) not to maximize their opportunities, and not for the sake of the pennies gained, but for the sake of the skills and discipline learned that will help them stay out of future troubles.
I've talked with a lot of "financial planners" (or been hauled along by friends as they talked to theirs), and to a man (or woman) not a one of them has any idea what they are doing other than creating fees for themselves. They parrot the standard nonsense about "Modern Portfolio Theory" (which takes ten minutes, freely downloaded data, and a spreadsheet to blow up), and they build model portfolios, not of one of which will meet their client's true needs, because the planners have over-estimated investment gains and under-estimated life-spans and inflation-rates.
I tend to go to the opposite extreme. I think that funding one's retirement to anything less than 3 standard deviations of the maximum lifespan for one's gender is irresponsible. But, also, I don't run out of money until age 157. That margin of safety lets me sleep at night, but it also means that when I get up the next morning, I'm back in the market grubbing for more. Fortunately, managing money is a game I enjoy, and even if I were to win the lottery (which I never play, exactly because it's a losing game), I wouldn't change much about how I run my day.
But that isn't the case with most people. They've done their 8 or 10 for the man that day, and the last thing they want to do is spend a couple more hours of their precious free time squeaking out tiny profits from the tiny money they have to work with. But what they should fear, as a new thread on emergency funds suggests, is the cascading effects of ever once falling behind in the bill-paying game. That's why efunds are serious matters that have to be given persistent attention. They are the life-jacket that will keep you from drowning when your financial boat does flip over.
That might never happen, though it becomes increasingly obvious that the mother of all financial tsunamis is coming our way, and not just because of going over the "financial cliff" (which is part of the solution, not a cause of the problem). So "preppers" and "worriers" should worry not just about getting a efund put into place but, also, about building financial survival skills, like, how to pull more money out of markets (on an after-taxes, after-inflation basis) than they bring to them.
This is an incredibly rich country with nearly endless opportunities *for them able to take advantage of them*, which increasingly is fewer and fewer people as they look to the government to bail them and fail to provide for themselves by failing to enhance the one thing that still is fairly cheap to access, namely, financial skills and knowledge. 'Cheap' doesn't mean 'easy', and that runs runs the grain with most Americans. They want financial success as fast as thy can buy and eat a hamburger. But journeyman-level skills in any field takes 8,000 to 10,000 hours of practice. Good money-management is no different. But running the best efund one can is as good a place as any to begin logging hours.
Charlie
mamalatte
12-30-12, 8:15pm
I'm not sure if I was clear, but my situation is not that I have a salary I can live on, and then this sum I am talking about was a bonus or windfall on top of that. On a regular basis, I literally make next to nothing, nowhere near enough to cover living expenses, a purely "nominal" amount. Kind of like a commission-only salesperson who only makes a sale every few years. So, in my mind, this is not money I'm "saving," it is money I need for living expenses for an unknown period of time starting now and ending most likely 1 to 4 years from now. I need these funds to be there when I need them, even if that means foregoing a *possible* upside return.
Separately, I have a fully-funded "emergency" fund and "investments." For this particular sum of money, however, the peace of mind of knowing that I will have at least the number of dollars I started with is worth a lot to me, even if those dollars (plus any minimal return), have slightly less purchasing power by the time I use them. It's hard enough not knowing how long the $$$ need to last. Big difference if they only need to last one year vs. four years. I'd rather know for sure that I'll have 99% of my "investment" one or two years from now than take the risk that I'll only have 80% of it, and I'm willing to forego the possibility that I'd have 120% of it.
That might not be everyone's choice, but I sleep well at night.
Mamalatte,
Actually, the math of inflation is a bit grimmer than than you want to believe. Rather than losing a mere 1% per year of your purchasing-power, 5% to 6% is far more realistic.
However, the choice you are making for yourself is entirely consistent with how we humans --all of us, even us naughty "traders" -- are hard-wired by evolution and genetics to give twice the emotional weight to downside 'risk' than to upside gains. In fact, the folk proverb "A bird in the hand... " captures exactly what those in behavioral finance who run lab experiments have documented. We make our financial decisions with our 'lizard brain' and then look for justification of that decision in our 'higher brain'. Unprogramming oneself from that disability is harder than most people want to do. So we all use the lame excuse --"it lets me sleep at night"- to justify not acting in our own best interests.
Charlie
rosarugosa
12-30-12, 9:01pm
Junkman: I'm sure you said it before, but if you don't mind saying it again, I promise to really pay attention this time. If one were willing to start on the road of gaining some knowledge in this realm, where would you recommend starting? It might actually be fun!
Mamalatte: It sounds like your cash flow situation must really push your budgeting discipline to the max!
mamalatte
12-30-12, 9:07pm
jman - Yes, I am typically risk-averse. But you seem overly optimistic in saying that it was easy to make 11 to 14% on anything in 2012 -- that's how it turned out, but it also could have turned out differently, say if this had been 2007 instead.
Can you explain where you get your 5 to 6% figure? And wouldn't it depend greatly on specifically what I spend money on?
More broadly, money (or maximum return) isn't everything. Another way of looking at risk aversion studies is to conclude that peace of mind and avoiding bad outcomes is "worth" a lot to people. Why is that necessarily illogical or something to be overcome?
rosarugosa
12-30-12, 9:29pm
Mamalatte: I think if it's your money (or mine as the case may be), we can do whatever we want with it, whether that helps us sleep well at night, look sharp at the office, buy more candy or whatever. But we do need to acknowledge that risk aversion and the associated "safe" investments equals guaranteed loss. So we just need to be honest with ourselves, e.g. "I understand that my $1000 in ING earning less than 1% of interest is actually losing X% in future purchasing power as measured against inflation. But I'm willing to accept that lesser loss and forgo potential gains so as to avoid the potential for larger loss." Or perhaps acknowledging that even if you lose a certain amount of buying power, you will still be able to make ends meet, but since a larger loss means you will not have enough to live on, you'll forgo potentially larger returns to avoid that possibility.
mamalatte
12-30-12, 9:34pm
rosa - Agree totally. Except that I would make a small amendment to say that "'safe' investments equal guaranteed monetary loss."
mamalatte,
I'm not "over-optimistic". Go to Morningstar and pull the YTD returns for the various mutual fund types. Average returns for nearly everything this year fell into the 11% to 14% range. Of course, most investors will never achieve those returns, because their emotional disabilities cause them to "buy high and sell low". But a disciplined investor could have matched that money. For my own portfolio, I pulled in 12.3% for 2012. Not the best of money, but good enough, and consistent with prior years.
Yes, one's actually experienced inflation rate will depend on one's actual expenses, which most people have no idea what they are, because they fail to track them, on an item-by-item, year-over-year basis, much less to the penny for every item as YMOYL suggests. Your inflation rate mighty be 1%. It might be 20%. Your budget will tell you that. But unless you neither buy food, nor any type of energy, your inflation-rate will run at least 5% to 6%.
Charlie
“Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to."
"I don't much care where –"
"Then it doesn't matter which way you go.”
― Lewis Carroll (http://www.goodreads.com/author/show/8164.Lewis_Carroll), Alice in Wonderland (http://www.goodreads.com/work/quotes/2933712)
Rosa,
I'd suggest you begin with some basics, such as Justin Mamis', The Nature of Risk, followed by Ben Graham's, The Intelligent Investor, and Benoit Mandelbrot's, The Misbehavior of Markets. In other words, stay away from the financial cookbooks and focus on gaining an overview of how the trilogy of Money, Market, and Mind intersects. Later, much later, can come some specifics.
Charlie
rosarugosa
12-31-12, 9:01am
Thanks for the recommendations. BTW, my 401K account had an overall rate of return of 12% for 2012, and fees for the individual funds ranged from .07% for equity index funds to .55% for int'l equity fund.
mamalatte
12-31-12, 1:03pm
jman - My point was not that people could not or did not make 11 to 14% in 2012. My point is that you could not have known in December 2011 whether you were going to make 11 to 14% or -11 to -14% in 2012. And you cannot say with confidence that you will make 11 to 14% in 2013. You may or may not.
mamalatte
12-31-12, 1:22pm
jman - Thanks for emphasizing the inflation point, which I have not previously spent much time thinking about. As my biggest expenses are oil, health insurance, property taxes, and food, my "personal" inflation rate is definitely significantly more than the 2 to 3% reported inflation rate of recent years.
rosa - yes, the budgeting is a bit tricky not knowing how long the budget is for . . .
jman - My point was not that people could not or did not make 11 to 14% in 2012. My point is that you could not have known in December 2011 whether you were going to make 11 to 14% or -11 to -14% in 2012. And you cannot say with confidence that you will make 11 to 14% in 2013. You may or may not.
mamalatte,
Ah, finally, the discussion is going somewhere fruitful. You report that you work at a job that offers intermittent payoffs. You don't know when those payoffs will occur, nor if they will occur, nor how big they will be. But those are all uncertainties you are comfortabe with.
However, you are uncomfortable with the uncertainties of investing. When you can answer for yourself why you think about the two so differntly, then you'll understand why that windfall should not be parked in CDs.
Charlie
jman - Thanks for emphasizing the inflation point, which I have not previously spent much time thinking about. As my biggest expenses are oil, health insurance, property taxes, and food, my "personal" inflation rate is definitely significantly more than the 2 to 3% reported inflation rate of recent years.
.
mamalatte,
Consider just one of your expenses, insurance premiums. Unless you're getting a very special rate, those premiums have probably increased at the industry trend-line rate of around 15% per year. But have the payoffs from your work increased at the same rate? That's the financial squeeze you should be worrying about. How long will it be before the rate of increase for your expenses (assuming the same level of consumption) overcomes the rate of increases for the money paid for your labor? And it's not just you who will be suffering that squeeze, but nearly all workers as the US economy adjusts to the "new normal".
One way to escape that poverty trap is to demand more money for your work. Another is to accept the same wages, but work longer. A third escape path is to stop screwing around with CDs and to put that currently surplus money to work in genuine investments that offer the 12% or so that Rosa and others report having achieved for themselves.
Charlie
try2bfrugal
12-31-12, 3:03pm
It is easy to make money in almost any type of bonds in a year when interest rates are falling. Some of my 30 year TIPS have gone up over 50% in value the last couple of years and many more have returned 20 - 30%. If interest rates rise, bond prices will sink and the default rate on junk bonds will increase.
You have to do what works best for you, but we try have a mix of investments that require very little active management and will even out with a decent return no matter what happens to interest rates or inflation. I feel the ROI on my time is better spent increasing our business income and the sales value of our businesses rather than researching junk bonds.
Rosa,
Thanks for reporting your returns for 2012 and for confirming the point I was making, namely, that very decent money was available to investors in 2012. The most probably bet is that similar money will be available in 2013, because those controlling the economy don't want the party to end.
Eventually, it will end, and very, very very badly for those who are unprepared. Countries are no different than households, and they can't run a budget indefinitely that requires $0.41 cents of borrowing for every $1.00 dollar it spends. But as long as the rest of the world is willing to accept the money the US is printing, the party is on.
Charlie
It is easy to make money in almost any type of bonds in a year when interest rates are falling. Some of my 30 year TIPS have gone up over 50% in value the last couple of years and many more have returned 20 - 30%. If interest rates rise, bond prices will sink and the default rate on junk bonds will increase.
You have to do what works best for you, but we try have a mix of investments that require very little active management and will even out with a decent return no matter what happens to interest rates or inflation. I feel the ROI on my time is better spent increasing our business income and the sales value of our businesses rather than researching junk bonds.
try2bfrugal,
Why scoff at the money to have been made in bonds over the last 30 years? Does "easy" money spend any less well at the grocery store than money that was hard to gain?
As for deciding how best to spend one's time to gain money, I totally agree with you. Go for the best opportunity. For most people, that won't be investing, because they are just going to screw it up. But I've found a niche in investing that suits my temperament exactly, and I make 3x the money I ever did "working for the man", not that I ever disliked my job, which was one adventure after another. But there's no way without working brutal hours that I could ever make the $8k/month that I currently am, and thanks to decades of practicing Voluntary Simplicity, I can easily live on one-quarter of that. So, finally, my money worries are at an end. I can buy whatever I want, and --more importantly-- I don't want much. To pull in that money, I've gotta "work" about 20 hours/week. But the rest of the time is my own. The boss is nice. The hours are flexible. So I'm content.
Charlie
rosarugosa
12-31-12, 5:11pm
"The boss is nice. The hours are flexible. So I'm content."
Can't ask for much more than that :)
ApatheticNoMore
12-31-12, 5:19pm
For most people it will be more work on top of 8-10 for "the Man" though, on top of whatever continuous education they need just to keep their profession etc.. I'm scared of an old age in poverty maybe, but I'm really really scared of dying not having lived almost any hours my own life. It's a deep existential core of being fear. I already know the hours for The Man, are for The Man, are stuff I don't even care about really and no don't even enjoy. The hours that are left ....
Rosa,
The three books I mentioned (as places where you might begin) were all written by males, a fact that some women find off-putting. My daughter --whom I’m trying to train to take over my portfolio when I’m dead—didn’t like Mamis at all. She understood his key point, namely, the trade-off one is always making between price-risk and information-risk. But she found him too “sexist” to engage her attention enough to learn his methods, whereas she felt completely comfortable with the writings of his former partner in business, Stan Weinstein, whose book (linked below) is also a place where you might begin.
Men and women really do think about money and money-management differently. That’s just a consequence of how the two genders are hard-wired and how those differences are exacerbated by culture. The result has been that the world of investing and finance is male-dominated and mostly an “old boys club” that women often dislike for very sound reasons. This isn’t to say there aren’t some really sharp gals in the field, and one of the best of the best --male or female—is Linda Raschke. Not only is she one of the world’s top traders, she’s one of the best and most accessible teachers. Here’s the link to one of her videos. http://www.youtube.com/watch?v=HsI2JxGx5Es&playnext=1&list=PLD693D2599B3B0567&feature=results_main
If you don’t use technical analysis in your own investing, you’ll find the video tough going the first time through. However, whenever she says “trader” or “trading”, you can substitute the words “investor” and “investing” without losing the importance of her message that “risk is risk, and it needs to be managed.” In that sense, there’s no material difference between ‘investing’ and ‘trading’. In both cases, you’re making probabilistic bets, some of which you’re going to lose, some of which will pay off. As long as your gains are greater than your losses, you’re winning the game.
Charlie
http://www.amazon.com/Stan-Weinsteins-Secrets-Profiting-Markets/dp/1556236832/ref=sr_1_1?s=books&ie=UTF8&qid=1356990209&sr=1-1&keywords=stan+weinstein%27s+secrets+for+profiting+ in+bull+and+bear+markets
For most people it will be more work on top of 8-10 for "the Man" though, on top of whatever continuous education they need just to keep their profession etc.. I'm scared of an old age in poverty maybe, but I'm really really scared of dying not having lived almost any hours my own life. It's a deep existential core of being fear. I already know the hours for The Man, are for The Man, are stuff I don't even care about really and no don't even enjoy. The hours that are left ....
Apatheticnomore,
And you don't find it a huge irony that, OTOH, you can say "hours for the man are hours I don't enjoy" and, OTO, "keep a positive attitude"?
Why not change jobs so that 'play time' and 'work time' blend seamlessly? Yes, for sure, there's always details of a job than can become tiresome or tedious. But when the overall picture is looked at, those detail are seen as being just as important as anything else, and there's a Buddhist satisfaction to be gained from being "in the moment with them" and from doing them well.
More than once when I was working ships, I'd end up with a complaining partner. But one classic day stands out. It was a Saturday, mid-morning, and we were walking toward the bow to repair the anchor windlass.
"I HATE ship repair", he said.
"Wait a minute", I said. "It's not raining. In fact, the sun is shining, and it's a really pretty day. We're on overtime, and no one's screaming at us to 'get the job done'. We're just heading up there to scope things out. So, they're paying us to play with some machinery that needs fixing. This isn't a bad gig."
In fact, it wasn't a bad gig at all, especially if one looked at it in the right frame of mind. Someone was willing to pay us decent wages if we'd turn to and do a creditable job. And if we liked what we were doing, we weren't paid any less. But if we chose to hate the job, the money would never be enough.
Charlie
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