Friday, August 21, 2015

The Value of an Investment Policy

If you've paid any attention to financial markets lately, days like today and weeks like this week provide examples of the value of establishing and following an Investment Policy (IP). Among other things, an IP establishes your target asset allocation and rebalancing policy. So when stocks drop much, all you do is check your current asset allocation to determine if your rebalancing policy requires shifting some money from fixed income (CDs, bonds, cash) to stocks.

Sunday, August 16, 2015

Consumption Smoothing and Adjusting Your Frugality Setting

Consumption smoothing is the economic concept used to express the desire of people to have a stable path of consumption throughout their lifetimesThe ideal consumption smoothing case, assuming no bequest motives, is to save just enough during your working years to be able to spend your retirement savings to fund about same lifestyle in your retirement years, and to die broke. Of course since we don't know how long we'll live, or exactly what our expenses will be in retirement, this is a difficult ideal to achieve.

To give yourself a reasonable margin of safety for retirement, you may need to be more frugal in your accumulation years than you want to be. Conversely, if your investment returns were better than expected, or perhaps you were just more frugal than you had to be while working and saving, it might be reasonable to be less frugal in your retirement years than you disciplined yourself to be in your accumulation years. Your consumption smoothing may not end up being ideal, but perhaps it then makes sense to work on overcoming your previously virtuous frugality, and spending more to enjoy your remaining years more.

Thursday, August 13, 2015

USAlliance Financial 2-year CD, 2.27% APY

Today I became a member of USAlliance Financial credit union, and opened a new 2-year CD with an APY of 2.27%. This is an incredible rate on a 2-year CD, with most of the 2-year CD competition in the 1.5% ballpark, and the 2-year Treasury yield at about 0.7%. This 2-year rate is even a bit better than the 5-year CD rate at Synchrony Bank (2.25% APY). This premium rate is available only to new members, and is a limited-time offer, with a maximum deposit of $100,000. I haven't paid much attention to laddering CDs, because generally I can earn a better return doing early withdrawals from longer-term CDs, than by holding shorter-term CDs in a ladder. But this CD is an exception to the rule, and provides a nice 2-year rung in a CD ladder.