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Buying CDs instead of bond funds

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Hi Cullen. Thanks for the recent articles on bond funds. I’ve enjoyed the lessons.

I was on the Bogleheads forum and saw this recent article about how Mike Piper, who seems like a prudent investor, was advocating a change to CDs from bonds.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=226129

I know you’re not a pure Boglehead, but you are an indexer so there’s a lot of overlap. And I also know you think investors should deviate from the aggregate bond index. So do you agree that swapping into CDs is a good move here?

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Posted by VG (Questions: 7, Responses: 26)
Posted on 08/23/2017 2:27 AM
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Hmmm. I really like Mike Piper’s work, but I don’t really agree here. Three points I’ll make:

1) I totally agree that active management in bonds makes a lot of sense. That is, deviating from the aggregate which I think is a fairly inefficient way to access the bond markets.

2) CDs will lock you into an illiquid cash-like return. What if the equity markets collapse and you need to access your liquidity to rebalance or for some other purpose? A CD defeats the purpose of liquid cash.

3) CDs don’t do what bonds should do – provide uncorrelated returns when you most need them. Your bond piece should provide you with protection against your equity piece. If you need cash then keep actual cash for liquidity purposes. But you own bonds to hedge your stocks. CDs won’t do that.

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Cullen Roche Posted by Cullen Roche (Questions: 10, Responses: 1749)
Answered on 08/23/2017 12:21 PM
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