Are CD's the Only Investment for Conservatives?

emilynewhomeJanuary 25, 2011

Last year we downsized to much smaller home, paid off mortgage and have $$ left over.

We are in our 60's, not eligible for SS yet, but hubby wants to start drawing at 62. We have modest military pension.

Interest on savings etc are very low. DH lost $$ a few years back in the stock market so is very wary.

Are short term CD's the only option at this time for us?

Thanks!

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steve_o

There aren't that many options. Almost nothing is guaranteed and some of the "safest" options will not hold up to increases in the cost of living. Strongly consider spreading any risk through diversification.

One way to guard against loss is to "ladder" bonds (Treasury bonds or high-grade corporates) of differing maturities. That way, you'll have bonds either of different due dates or staggered due dates and you won't expose your portfolio too much to dips in interest rates and you won't spend too much time with bonds locked up while interest rates are going up.

    Bookmark   January 25, 2011 at 8:22PM
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randy427

Talk with a Certified Financial Planner (CFP) who will be able to evaluate all of your your needs, goals, resources and risk factors. The first meeting should be free.

Here is a link that might be useful: Ric Edelman

    Bookmark   January 25, 2011 at 10:59PM
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patser

If you have a modest military pension, why not take advantage of the financial planning resources that USAA has to offer? I'd give them a call.

    Bookmark   January 26, 2011 at 6:43AM
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joyfulguy

Hi emilynewhome,

I grew up on a farm and when World War II started in 1939 when I was 10, became Dad's "right hand man" when the hired help became soldiers, so at an early age became familiar with the issue of financial uncertainties: loss of crops, cattle, etc.

After the Korean War I worked for a time helping refugees get their lives back on track, after having left their former lives behind with their only current assets being their clothes on their backs.

When, finishing her junior year in Univ., my ex- wondered about getting married, I said that she'd better get her degree, for in case she needed to become bread-winner for the family, three years of a four-year degree would be rather bad news.

I bought a Canadian bank stock over 40 years ago for just over $4.00, paying about 10 - 12 cents, which was taxed at low rate. Could have sold it in June '07 for $107., paying $3.08 annually, then $3.48 that fall .... but, as it was involved with the U.S. financial fiasco a couple of years ago, it dropped to about $40., has since recovered to about $75.

Having been a personal financial advisor for several years myself, on a province-wide phone-in program on our national radio I called a financial planner 10 years ago, saying that, at age 70, I felt that I should plan to finance my retirement to age 100, which appeared to me to be 6 blocks of 5 years each.

If I were wise, in the light of the first block being unable to produce any income when I'd spent it, it seemed to me that I should take care not to spend it all during the first 5 years, but should stretch it to cover 10 years.

Which would mean that I would aim to have over 80% of my asset still around and producing income in ten years time.

As a number of financial gurus say that a substantial portion of money that one does not plan to use for ten years of more can well be invested in equities, I felt that to be a reasonable path to follow.

He said that he approved of my reasoning.

As for your hubby having been burned in the stock market ... after his heart had been twisted by his experience with his first (or second) girl friend ... did he swear off of having anything to do romantically with females, after that?

When our kids are small, we tell them to stay away from the stove ... but when they grow up, they must either learn to use one skilfully (or marry someone who does) ...

... or eat raw food throughout life.

I've said to many over the years that learning how money works is a useful hobby ... that pays well.

In the light of the U.S. having built up such large increases in national debt in recent years, and being in the process of printing money hand over fist, I don't like the idea of having dollar-denominated assets. For there is every likelihood that interest rates will go up in the U.S. soon. And if you hold marketable assets denominated in dollars (e.g. bonds), when the interest rates go up, the market value of those bonds will fall. Held to maturity, your CD will give you back each dollar that you put out originally ... but there's a great possibility that it'll buy a lot less.

When I was 9 my Dad gave me a bike, and as I learned to ride it, on the gravel road by our farm, I thought what a great idea it would be if all of that gravel were gold.

But it didn't take me long to reason that if it were gold for me ... it'd be gold for everybody else ... and soon one would need a lot more than a pocketful to buy a loaf of bread.

Question: Do you figure that there's good possibility that Exxon may go down the tubes? Or the likes of Johnson & Johnson?

That said ... I had shares of Merrill Lynch Canada, exchangeable into Merrill Lynch U.S. ... that got into financial trouble ... and was eaten by Bank of America, a while back.

Also ... two or three years ago, 78 cents U.S. would have bought you Cdn$1.00 and had you used it to buy some quality Canadian stocks, they'd likely have gone up 15 - 20% and, should you choose to repatriate your dollars now ...

... Cdn$1.00 would buy you US$1.00 - 1.03 or so.

Good wishes as you make your plans as to the wisest way to deploy your assets.

ole joyful

    Bookmark   February 3, 2011 at 4:01PM
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caavonldy

Instead of investing in any particular stock, we have had good luck with mutual funds. While some stocks go down, others go up. The advantage of a good mutual fund is that you will have stock in a wide variety of stocks.

When the stock market dropped a few years back, some of our funds did go down. We held firm, didn't panic and now that same stock fund is back up again. The only problem with stocks is that you might have to hold on to the stock longer then you had planned. You got to have faith.

    Bookmark   February 3, 2011 at 11:37PM
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jane__ny

We are in the same situation. Sold our house and presently renting for a year. Rather than let the money sit collecting nothing, we opened an on-line account with one of the trading houses (there's a bunch which advertise), they charge $7.99 a trade. Slowly we took a little and bought a few shares of stock. If we got nervous, a click of the computer and we would sell.

We sold our house in March 2010. Not quite a year and we've made 18% so far with very slow, careful trading. We never did this before and knew nothing about the stock market. We check the computer each morning when the market opens and watch our stocks. We watch the stock channel (CNBC) and listen to what they are talking about. To be honest, this has been fun and we made good money. The computer makes it easy and we buy and sell on our own.

We left the rest of the house money in the bank. Almost a year later, it collected 1.2%. You could take a small amount - $2,500 (that's the minimum they required) and buy a few shares. You don't have to hold them at all. You can buy and sell the same day.

Jane

    Bookmark   February 4, 2011 at 8:50PM
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sushipup1

Jane, the money you invested in stocks would rise anyway, probably, given the market. You could do as well, or better, with mutual funds, which are far safer than individual stocks. The whole market has gone up in the time period you mention.

    Bookmark   February 4, 2011 at 9:42PM
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caavonldy

What is really nice, if you shop around, you can find no load mutuals. No extra trading charges.

    Bookmark   February 6, 2011 at 12:00AM
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jane__ny

We have money in mutuals. This is money we need to buy another house so we are keeping it liquid. We did not make anything near that amount in our mutual funds. Yesterday, I sold Caterpillar and Alcoa and made 28% on those.

Can't do that with mutuals. Plus this is more fun. I think it more risky to hand over money to someone and hope they are staying on top of things the way we do. Been down that road and lost a bunch during the crash.

No one watches out for your money like you do. I think its safer.

Jane

    Bookmark   February 6, 2011 at 12:42AM
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sushipup1

Jane, try the exchange traded MF, which trade with the market. So far you've been lucky and rising with the market as a whole.

Have fun.

    Bookmark   February 6, 2011 at 1:04AM
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emilynewhome

Thank you all so much for the great advice.
We are now reading and learning more about the financial world than we ever imagined we would need to. We would certainly like our money to start working for us!
Thanks again!

    Bookmark   February 7, 2011 at 10:50AM
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patser

emily, Please don't think that mutual funds never go down in value. They do.

    Bookmark   February 7, 2011 at 5:02PM
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joyfulguy

While your (i.e. U.S.) mutual fund people usually charge about 1.5% per year to manage equity-based funds, the managers in Canada mostly charge 2.5% or sometimes more.

That eats up a lot of the growth: if your assets are growing at 8% and the fund manager gets 1.5%, that's about 20% of the growth ... for me, it's over 25% of the growth.

The mutual fund managers like to tout their expertise, etc.

But if they're so smart, how come about 85% of mutual funds don't outperform the segment of the market in which they opperate?

It seems to me that the Management Expense Ratio is a lot of the reason.

ole joyful

    Bookmark   February 7, 2011 at 6:48PM
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sushipup1

OJ, some of the Vanguard index funds charge as little as .18%.

I'm not a great fan on managed funds, obviously.

    Bookmark   February 7, 2011 at 6:57PM
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jane__ny

Emilynewhome, check out the on-line trading sites...Fidelity, Scott Trade, Ameritrade, they all work the same way and charge about the same. I pay $7.50 a trade. You can set it up on-line.

We like watching CNBC with Jim Cramer. He explains why he likes certain stocks and thinks they will go up or if something is a good buy or not.

Watching Cramer is good because it gives us names of stocks, which we then research on-line. He gives a lot of information on a company and it helps educate us about stocks. If it looks good, I buy a some shares. All the on-line sites give research and analyst opinions. It does make me a bit nervous, but because I watch the stocks every day, I can always sell it.
The market has been steadily going up. I find it amazing as we have never looked at a stock before. Now I find myself glued to the computer every morning and checking on and off all day while at work. We have been making money I never knew was possible. We lucked out and bought some Apple stock when it was lower, last year. It keeps going higher. We keep saying we'll sell it, but it keeps going up. Has me a nervous wreck, but what fun!

Its easy because you do it all yourself on the computer. You don't need to invest a lot of money and no brokers involved. I wish I had time to take some courses to understand the market better. But at this point, we have been lucky and learning as we go along. I do like watching CNBC for information or going to their website.

Jane

    Bookmark   February 7, 2011 at 11:18PM
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joyfulguy

Learning how money works - an interesting hobby ... that pays well.

But you have to be interested in it. Some folks tell me that they have no interest in that kind of thinking.

I think it not such a good didea to be watching one's stocks every day. That tends to make one nervous if it slips a bit ... and there's a tendency to sell, about the time that one starts chewing one's finger nails.

Some (reportedly, only a few) short-term traders make money, but many don't, for the fluctuations in the market kill them (if you'll pardon the expression). Much of the trading is done these days on computer models, which are guided to buy stocks with good prospects on a slight slip in price.

Some people use stop-losses, i.e., they decide at the start that when the price drops more than about 7 - 10%, they sell. As the stock price moves up, some may choose to move the stop-loss price up with it, perhaps backing it off a bit, e.g. if they planned to sell originally at a 7% loss, they might make that an 8 or 9% loss as the price moved up.

They don't always work, though, for one's previously-placed limit order becomes a market order when the price hits the price at which one had placed one's acceptable loss level ...

... but if there are no orders to buy at the price that one is now asking, and some really bad news hit that company at the time, there might be no offers to buy until the bid price was down 10 - 12 - 15% or so ... and at that level, there might be a large nunmber of bidders, and one might not get one's order filled until the price dropped even more.

Most of us are substantially interested in preserving our capital, especially after retirement when we have little stomach for going back to work to recoup losses of a portion of our assets that were to fund that retirement.

Let's not forget that the cost of living rises in most years, and a number of retirees hadn't taken that adequately into consideration when they were making those retirement plans.

While my gov't. pensions, both the contributory and the non-contributory one, are indexed (or, have been, up until now) and my private one has been almost always, as well, the managers of the private one notified us late last year that there would be no increase this year.

I strongly suspect that, with both government and private debt being so high in the U.S., that interest levels will rise, and that before too long. It is worthy of note that the U.S. is printing money at great speed, these days ... which will debase the value of each dollar.

But - when one owns marketable bonds, when the interest rates rise, the price that folks are willing to offer for the bonds drops ... and the largest drop is in long-term bonds, ones not about to mature for years. If one holds them to maturity, one gets the face value, but in the years between, if current interest rates are substantially lower that that paid by the bond, the price will be lower than par.

Probably a good idea to have some of your assets based in the currecies of other countries, as many feel that the value of the U.S. (and with it, the Canadian) is at risk.

Had I owned U.S. stocks that grew in value by 25% in the past couple of years, I'd be just breaking even, for US 80 cents would have bought CDN$1.00 a couple of years ago ... and now, that CDN$1.00 would buy US 98 cents - US$1.00

Good wishes for wise investing - a cool head ... and a warm heart.

ole joyful

    Bookmark   February 8, 2011 at 6:36PM
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