Tuesday, December 12, 2023

This personal blog has primarily been focused on finance over the past years.  In the upcoming months it will start to primarily revert to my insights on history and nautical information -- topics I have also always had a passion for as well.  I hope everyone enjoys the evolution of this blog and some further insights on everything from North Carolina to the age of sail.  

New financial posts by me can be found over at https://kineticinvesting.substack.com/

Wednesday, October 25, 2023

Unlocking Financial Success with CD Laddering

A significant concern in recent years is how to invest the fixed income component of your portfolio. Depending on your age, risk acceptance, and investment objectives, most people have 20% to 60% of their portfolio in fixed income investments such as bonds. 

Unfortunately, bonds have been doing terribly over recent years in a rising interest rate environment. For example, the S&P U.S. Aggregate Bond Index is down 4.8% over the past three years; this is painful when investors were getting a mere 3 or 4% yield on bonds during this overall period.   This leaves investors seeking an alternative investment to meet their fixed income objectives.

The best alternative is using CD Ladders.  It is not known where interest rates are going; however, the best bet from most market analysts is interest rates will continue to increase over the short term. 

Using a 2 year CD Ladder is a good method to ride out the short-term interest rate changes using a safe FDIC insured investment while also beating the rate of inflation.

Understanding CD Laddering

CD laddering is a strategy that involves spreading your savings across a series of CDs with varying maturity dates. The idea is to create a staggered or "ladder" structure, which allows you to access a portion of your funds at regular intervals while taking advantage of higher interest rates offered by longer-term CDs. As a the shorter team CDs mature; you will roll them into longer-team (the full-term time horizon for the ladder) CDs. Typically most investors consider a CD Ladder with a two year time frame as short-term time horizon, and a CD Ladder with a five year time frame as long-term.

There are numerous websites (including NerdWallet) which describe how to configure a CD Ladder in detail – plus many videos on YouTube.

Basic Description: How CD Laddering Works

  1. Divide Your Savings: Typically you will split your savings into equal parts, but unequal parts may be used based on your investment objectives and views on the interest rate environment. These will be allocated to different CDs, each with a different maturity date.  
  2. Choose CD Terms: Select CDs with varying term lengths, such as 3 months, 6 months, 9 months, 1 year, 18 months, 2 years, and so on.  For example, a 2 year CD ladder may include dividing your investments into 5 parts with 6 month, 9 month, 12 month, 18 month, and 2 year maturities.
  3. Open the CDs: Purchase the CDs with your allocated funds. As each CD matures, typically you will reinvest it into a longer-term CD set at the full time horizon of the ladder (e.g. two year, five year).

Benefits of CD Laddering

CD laddering offers several advantages that make it an appealing savings strategy:

  1. Liquidity: With staggered maturity dates, you have access to your funds at regular intervals. This liquidity can be crucial for unexpected expenses or to take advantage of investment opportunities if you decide not to simply rollover the money to a longer maturity CD.
  2. Higher Returns: Longer-term CDs typically offer higher interest rates than shorter-term ones – but this is not currently true where the max yield seems to be at the 12 or 15 month benchmark generally. CD laddering allows you to capture these higher rates across a set time horizon while still being flexible.
  3. Risk Mitigation: CDs are generally low-risk investments, making them a secure choice for your savings. Most are FDIC insured – even when they are brokered via Schwab or Fidelity.  A CD Ladder is much less risky than a bond fund or ETF.
  4. Consistent Income: With regular CD maturation, you can create a reliable income stream if needed. For those of us who are retired this can be particularly valuable for providing a steady income str.
  5. Savings Discipline: CD laddering encourages disciplined savings and investing, as you consistently reinvest or based on your needs access your funds according to your ladder's schedule.

A couple additional thoughts

  • Consider setting your CDs for automatic renewal.  Most banks and brokerages allow this.  You can normally also select your re-investment maturity time period (e.g. rolling a 6 month CD upon maturity into a 2 year CD).
  • Understand the penalties for early withdrawal.  Usually you will lose all or some of the interest you would have earned on the CD.

Rather than opening accounts at multiple banks in an attempt to get the best yields for different CD maturities and having to keep track of everything; there is a much better alternative.  Both Schwab and Fidelity offer FDIC insured brokered CDs from banks. You can search in their portals for the best yields for each maturity for new brokered CDs and perform all of your purchases in a single website. This makes tracking and following your CD ladder much easier; I also find that I get better yields since you can find the top yield across the U.S. when doing your purchase.

There are also numerous CD Ladder spreadsheets available online for download.  I am using the ExcelGeek's CD Ladder Spreadsheet to structure my 2 year CD Ladder strategy.  This spreadsheet can be downloaded as a zip file from - http://www.mdmproofing.com/iym/files/CD_Ladder.zip

There are also CD Ladder Calculator websites available online including -this one from Excel Bank - https://www.excel.bank/calculator/cd-ladder

 

Monday, April 6, 2020

NYT - They All Retired Before They Hit 40. Then This Happened

The New York Times outlines the impact of the COVID-19 market crash on FIRE plans. Most FIRE plans made assumptions about strong, consistent market returns each & every year.  Nearly none of the FIRE strategies model scenarios where the market falls 30% and does not recover for a significant period of time.  Due to this many FIRE "retirements" are now in the flusher as well as suffering from travel restrictions to low cost areas to live (“geographic arbitrage).

As stated earlier - "The primary failure of FIRE is that it does not plan for low, medium, and high scenarios in regards to market returns and inflation."

NYT - They All Retired Before They Hit 40. Then This Happened
https://www.nytimes.com/2020/04/02/style/fire-movement-stock-market-coronavirus.html

Wednesday, January 8, 2020

Pouring Ice on FIRE

Over the past couple years there has been endless promotion of FIRE (Financial Independence, Retiring Early).  Many of the advocates outline how saving hard while minimizing expenses will allow you to retire early - often while you are only in your 30s. YouTube videos and media provide all the basic math showing stock market investments over a decade followed by a 4% withdrawal rate.

There are many positive concepts promoted by the FIRE movement including notions of minimizing debt, not buying new cars, investing in 401Ks and being frugal.  Some of these are generic ideas which make common sense for every generation.  Many of these concepts are covered in my "So You Want To Be a Millionaire" article from 2008 -- well before the FIRE movement appeared.

The primary short-coming of FIRE is that it does not consider all the possible events and complex (and likely) future scenarios.  In other words it is a simple "answer" for a "complex" problem.

Most FIRE promotional material do not account for the following:
  • Medical Insurance costs when no longer covered by your employer.
  • Medical Costs for serious illness (even when you have insurance it can be expensive)
  • Losing a partner (divorce or death)
  • Having Children (cost over $300,000 to raise each)
  • Marriage (many FIRE proposals assume you will forever be single)
  • Location issues (not being happy about where you moved for a low-cost lifestyle)
  • Social Security - not getting significant payments due to not working 35 years
There has been a slew of recent articles that covered some of the FIRE drawbacks (and benefits) including the question of what to do after "retiring". A few articles are provided below:


The real problem with FIRE is that it does not take into account all the possible future scenarios.  What happens if inflation greatly increases? (Most millennials have never experienced this). What is the consumer index on many core consumer  items goes up greatly?  What happens if the stock market greatly under-performs? 

Most FIRE articles assume that the stock market will continue to perform well over a decade period before you start withdrawing money.  What happens if the market sinks for a decade?  The primary failure of FIRE is that it does not plan for low, medium, and high scenarios in regards to market returns and inflation.  Most FIRE planning scenarios are too simplistic; at minimum you should create a spreadsheet with assumptions about market returns, savings rate, inflation, and your expenses.  This spreadsheet should be easily alterable so that you can plan a low, medium, and high scenario for review.  Plan across all possible scenarios.

Most FIRE scenarios assume a fixed 4% withdrawal rate.  Withdrawal rates are a complex problem without a single fixed answer.  Individuals must take a look at withdrawals in more detail.  One good source of information is - The Ultimate Guide to Safe Withdrawal Rates – Part 19: Equity Glidepaths in Retirement

One other item to note is that many FIRE plans promote saving with 401Ks and IRAs.  Using 401Ks is important to get an employer match (effectively free money). The one detail that FIRE articles fail to usually mention is that while 401Ks / IRAs are tax-protected -- there are significant penalties for early withdrawal. Usually you will not be able to withdraw this money (without penalties) until long after you retired early.

While I agree with many of the investing and savings concepts driving the FIRE movement, there is a need to pour some ICE on FIRE due to the lack of effective scenario planning and the failure to account for common life events.


Saturday, January 4, 2020

Welcome to 2020

The new decade has kicked off. Many economic headwinds remain in place including China tariffs, the U.S. manufacturing slowdown, an election year, and economic policy uncertainty.  A new heightened concern with events involving Iran in the Middle East is an addition to the list.

Despite the long bull run and macro-economic concerns that may tip over the stock indexes; the investment focus of Financial Insight will remain on long term planning for your personal economic future and how to ride out the market roller-coaster.

Over the upcoming weeks there will be articles that focus on:
  • Retirement Planning
  • 401K Diversification
  • FIRE (Financial Independence, Retire Early)
  • Stock Selection
  • Social Security Guidance

There has been a continual set of articles in the mainstream media in recent days that has greatly amused me.  The media has bombarded us with assertions implying that it is critical that you write "2020" as the year rather than "20" - otherwise scammers will take advantage of you on monetary instruments such as checks. Even misinformed police departments have joined in the fray. Several outlets provided an example of a scammer turning a check with "20" on it to "2017".  I don't see how altering the date on a check (or other instrument) to "2017" will aid a scammer.  Most likely it will only make the check non-despositable due to not being cashed for three years. Most checks are good for a mere 6 months.