Synchrony Bank 5-Year CD

Note: Since originally publishing this, GE Capital Retail Bank has been renamed to Synchrony Bank, and the 5-year CD rate now is 2.25% instead of 2.30%. I have re-titled the post accordingly and done a few minor edits since I refer to this blog post so often in my Bogleheads posts.

I am in the process of transferring out of some bond funds and a money market fund in my IRA at Fidelity to a new IRA CD at GE Capital Retail Bank (GECRB, now Synchrony Bank). The CD interest rate is 2.30% APY (now 2.25%), and the early withdrawal penalty is six months of interest. This is an excellent fixed-income choice in today's ongoing-low-rate environment. PenFed credit union offered a much better deal back in December 2013 and January 2014, with a 5-year CD earning 3.03%, but nothing has come close to that since. Top CD rates have been hovering around 2.25% lately. Following are some details about what I've done so far to open the account and transfer the funds, and a recap of why I like CDs purchased directly from banks and credit unions.

Market Update

Financial markets have been relatively calm so far in 2014: US stocks have gained about 1-2%, total international stocks are up almost 3%, and total return on US bonds has been about 3.5% (I'm using returns from Vanguard's Total Stock Market Index, Total International Stock Index, and Total Bond Market Index funds). There was a mild correction in late January with US stocks down about 5% and international stocks down about 7%, but other than that, stocks have been mostly bouncing around the +/-2% range.

By contrast, 2013 was a big up year for stocks and a down year for bonds. US stocks returned more than 30%, international stocks returned about 15%, and the Total Bond Market index fund lost about 2%. US stocks got an extra boost from small-cap stocks which returned about 38% in 2013. International stocks were dragged down by emerging markets which lost about 5% in 2013, while developed international markets gained about 22%. Bond fund losses, caused by generally rising interest rates, were proportional to interest-rate risk (average maturity/duration of fund), with Vanguard's Inflation-Protected Securities fund losing almost 9% and its Long-Term Government Bond Index fund down about 12.5%.

Mountain America Credit Union 5-Year CD

It's sad to say, but these days finding a 5-year CD that earns even 2% is becoming difficult. Mountain America Credit Union (MACU) is one of the few credit unions or banks that currently offers a nationally available CD that earns 2.0% APY. Of course I learned about this CD from www.depositaccounts.com, which is my standard source for good CD deals. About 10 days ago I joined the credit union, opened an IRA account, and started the process of transferring money from two other IRA accounts into an MACU 5-year CD.

2012 IRA Contributions: Not Too Late

This is a reminder that you have until April 15 to make your IRA contributions for 2012. This could result in a lower 2012 tax bill if you make a deductible  contribution to a traditional IRA (TIRA), or lower future taxes if you make a contribution to a Roth IRA (Roth). While you're at it, go ahead and make your 2013 IRA contributions if you have the money. The rest of this post summarizes your options and my thoughts on what makes the most sense.

I Bought a Barclays 5-Year CD

I just opened an account at Barclays online bank, and bought a 5-year CD, which currently is one of the best CDs available nationally. It earns 1.85% APY with an early withdrawal penalty (EWP) of 90 days of interest. This makes it a better deal than Ally Bank's 5-year CD which currently earns about 1.6% APY with an EWP of 60 days of interest, or PenFed's 5-year CD earning 1.65% APY or their 7-year CD earning 1.75%, both with an EWP of 365 days of interest.

Barclays 5-year CD

One of the best CDs currently available for taxable accounts (IRA accounts are not available) is the Barclays 5-year CD, with an APY of 1.85% and an early withdrawal penalty (EWP) of 90 days of interest. See Ken Tumin's blog post CD Rate Hike at Barclays at DepositAccounts.com for details.

Stocks Are Up; I'm Rebalancing

You may have heard that stocks have been hitting five-year highs lately. When you hear this in US news sources, they usually are referring to the S&P 500 or the Dow Jones Industrial Average. Of these two, the S&P 500 is more representative of the broad US stock market, but it leaves out most smaller cap stocks.  Broader indexes that represent the total US stock market are up even more over the last five years. Given this strong performance, I have come close enough to my rebalancing band for stocks vs. fixed income that I have sold some of my US stock funds.

I'm Buying More I Bonds

Sometime toward the end of this month I will buy more I bonds for my personal and trust accounts at TreasuryDirect. The current annual rate is 1.76%, so I will earn half of that, or 0.88% for the first six months (January through June). The rate for each subsequent six month period depends on inflation as measured by the CPI-U. If inflation is 0% or less for the six months ending March 31, 2013, the rate for the second six months would be 0%, so I would earn a total of 0.88% over one year (actually a little more, since I'm buying toward the end of January, but will earn interest for the full month of January). Even this worst case scenario isn't bad, since I'm earning a little less than 1% in my online savings account. More importantly, I increase my allocation to super-safe, inflation-protected investments.

What About Europe?

It's old news that Europe has been having serious economic problems. How has this affected my investment strategy? The short answer is that it has not affected it at all. My investment strategy is not dependent on economic events. What has already happened is already reflected in stock prices. Current fears about what might happen also is already reflected in stock prices. Since I can't invest in the past, bad things that have already happened and have pushed stock prices lower have no impact on my investment strategy. Since I can't forecast the future (no one can), I have no special insight into what bad things may or may not happen, so I don't invest based on widely known information that causes many to fear that bad things will happen in the future (also already reflected in lower stock prices). This doesn't mean that I haven't made any changes in my portfolio as a result of the economic turmoil in Europe, concerns about slowing growth in China, etc. So what have I done and why?

PenFed Credit Card Deal

Hopefully you don’t have any high-interest-rate credit card debt that you don’t pay off every month, but if you do, you might be interested in the balance transfer deal currently being offered by PenFed Credit Union on all of its credit cards. There is no transfer fee, and you pay 4.99% APR for the life of the balances transferred by June 30, 2012. This seems better to me than the typical balance transfer deal where you pay a fee of 3% to 5% on the balance transferred, and then pay 0% on the balance for a limited time (typically one year, but perhaps up to 18 months).

One Goal, One Portfolio

“In which mutual funds should I invest in my new IRA?” This is typical of one type of question we get a lot on the Investing Help subforum of the  Bogleheads investment forum. The answer is: “we can’t advise you until you tell us about all of your investment accounts” (e.g., IRA, 401k, 403b, individual, etc.). This is because the decision to hold an investment in one account should not be made in isolation; it should be based on all investments related to a particular goal; e.g., retirement. It may make sense to design separate portfolios for separate goals, for example college expenses, a house down payment, and retirement, but there should be one portfolio for each investment goal, regardless of the number of accounts used. A portfolio is simply the collection of investments designated for a particular investment goal.

INOVA Slashes CD Rates--No Longer Competitive

INOVA Federal Credit Union has slashed the rates on their 5-year and 6-year CDs. They no longer are competitive with PenFed's 5-year and 7-year CDs. So for holding periods of three years or more, the PenFed 7-year now is the way to go. For shorter holding periods, the Ally 5-year CD paying 1.69% (APY) still is the winner. As always, you may be able to find a similar or better deal at a local credit union, and you may find comparable rates from other banks or credit unions at DepositAccounts.com. Congrats to those of you who got in on the good deal while it lasted.

Science or Sales?

Investors can be placed into one of two categories: those who base their investment decisions on the massive amount of academic research that has been done over the last 60 years (science), or those who base their investment decisions on the marketing machine of the ginormous financial industry (sales). Which category are you in? Which category of investors do you think is likely to do better in the long run?

Back to Basics

For some time I’ve been posting about specific topics like CDs, I Bonds, Reward Checking accounts, Vanguard Target Retirement and LifeStrategy funds, etc. I’ve decided that it’s time to review the basics. If you want to read another perspective on the basics of investing, a good resource is the Bogleheads Investment Philosophy. Watch the video version of it if you learn better by watching and listening to someone speak. For fun, I am  writing this without referring to those resources. Let’s see how many points we agree on (feel free to check). Here we go …

Why Vanguard?

It has occurred to me that I might sound like a Vanguard shill or salesman to those of you who do not have experience with a number of mutual fund and brokerage companies, including Vanguard. I assure you that I receive no benefit of any kind in recommending Vanguard funds, other than the satisfaction of seeing my friends and family benefiting from using the best mutual fund company on the planet (there I go again!). So, what is so special about Vanguard?

Vanguard LifeStrategy Funds

In previous posts I've recommended Vanguard Target Retirement funds (minimum investment $1,000) as a way to own a broadly-diversified, low-cost portfolio using a single mutual fund. Vanguard offers another group of all-in-one funds that are worth considering: the Vanguard LifeStrategy Funds. The main difference is that the LifeStrategy funds maintain a constant asset allocation (ratio of stocks to bonds), whereas the Target Retirement funds gradually reduce the stock/bond ratio as you approach retirement. Also, the minimum investment in a LifeStrategy fund is $3,000.

Blog Problem

I had a problem with my blog. A post I had published disappeared, and an old post was emailed to subscribers. Apologies to subscribers about receiving the old post; hopefully it did not hurt to be reminded that paying down high-interest debt is a good investment.

Although more than half of the post I had written had disappeared from the draft version, a kind member of the Google Blogger forum informed me that the blog post was "cached", and provided a link to the cached version, so I was able to retrieve the full post, and did not have to rewrite it. It has since been posted (Vanguard LifeStrategy Funds).

Wedding Costs: 1974 vs. Today

In 1974 when I got married, my in-laws offered to spend $2,000 on the wedding or give us the cash. That seemed generous to me. Being the poor, frugal hippie-types, we took the cash (but due to the generosity and love of family and friends still had a wonderful wedding). My older daughters are at the age at which a wedding could be on the horizon. This got me to wondering how much a $2,000 wedding in 1974 would cost in 2012. Considering only general inflation, this is easy to calculate.

Bogleheads

I spend a lot of time participating in the Bogleheads investment forum, and recently also contributing to the Bogleheads Wiki (a collection of articles on investing and other personal finance topics). So, what are Bogleheads? Here is a description straight from this page on the Bogleheads website:

Bogleheads, a term intended to honor Vanguard founder and investor advocate John Bogle, are investing enthusiasts who participate in the Bogleheads Forum. The forum's regular posters discuss financial news and theory, while also helping less experienced investors develop their portfolios. There are nearly 26,000 registered Bogleheads Forum users who normally make between 500 and 1,000 posts each day.

INOVA Drops Rates on 6-Year CDs

Update: INOVA has slashed its rates, so their 5-year and 6-year CDs no longer are competitive with the PenFed CU 5-year and 7-year CDs.

My shortest blog post ever ... INOVA credit union recently dropped the rates on their 6-year CDs. They now match the rates on their 5-year CDs, so now I would go for the 5-year CDs unless you think rates are going to stay this low for more than five years. Here are the current rates (APY):

• Taxable 5/6-Year CDs: 2.10%
• Taxable 5/6-Year step up CDs: 2.00%
• IRA 5/6-Year CDs: 2.20%
• IRA 5/6-Year step up CDs: 2.10%

The rates are still competitive with the PenFed CU 5-year CD at 2.00% APY, and the Ally Bank 5-year CD at 1.74% APY. The PenFed CU 7-year CD is a better deal if you hold for at least about four years. The break even point with the Ally 5-year CD (if doing an early withdrawal) is about two years. The step-up option still is a nice sweetener. See my recent posts for more details on the INOVA CDs.