Thursday, April 20, 2017

Investment Damage Control

The last meeting we had with an attorney and a financial manager 14 years ago, when we set up a non-revocable special needs trust for our daughter, was devoted to playing the devil’s advocate. “Lets review everything that can possibly go wrong with what we have written down in this will.” Now to do the same with the S&P 500 ETF reviewed in the past posts.

On the positive side, we have been advised that we may not run out of money living in residential care. We may not have to qualify for Medicaid. There may be an estate more than having everyone gather at Orange Leaf for a treat of his or her choice.

A prior post establishes that even with a 10% decline in the S&P 500 ETF, it can recover in between 2-3 years on average. The 5-year CD time span can be divided into two periods (of 2 1/2 years each) for comparison with the stock market.

Lets assume that half of the investment is unexpectedly needed at half way to five years. (An expected need would suggest a 2-year CD.)

CD damage control could be to invest in two 5-year CDs; save the $10,000 pot in two fractions. The cost would be one year of interest any time after 10 days from purchase ($5,000 * 2.3% = $115).

Stock market damage control could be to sell $5,000 of shares at a cost of $6.95 per trade. This assumes no change in share price. (This ignores the option of selling less than $5,000 as needed.)

The two above short term methods of damage control do not include the dynamic nature of the stock market. The CD is totally predictable. The ETF is subject to short term and long term trends that occasionally erupt into sudden large rises and falls.

The current 5-year CD earns 2.3% interest. The expected yield on the S&P 500 ETF (dividends and normal increase in value) is about 6.0%. Buying a CD is damage control, for the ETF,  costing about 4% from day one. (The CD is needed when there is insufficient time for the stock market to recover from a decline.)

S&P 500 Dividends
The S&P 500 dividend yield provides a tricky insight into the stock market. The years of high dividends are also the years of low prices ($2/$50 per share = 4%; $2/$200 per share = 1%). The entire historical trend is to a lower dividend rate (%) because of a higher share price ($).

And then something that has always bothered me is the way price is marketed. A 50% correction ($100 * 50% = $50 but is then listed as a 100% increase ($50 * 100% = $50; $50 + $50 = $100). This extreme change only happens if you sell and buy. Investors hold. They see a decline and then a recovery of 50% (-$50 + $50 = zero change in the pot). There is no 100% increase.

I interpret the statement that 2/3 of the time share prices were above 20% or below -10% of the average, also reflects the change in basis when prices fall (from the full pot) or rise (from the residue of panic selling).

A second insight, from the above post, into the nature of the stock market is the variation in prices. Only five times, in the past 42 years (12%), has the market been within 10% of the average. This makes sense. The stock market is a free wheeling system that tends to “hunt”; to overrun before changing course (like someone learning to balance on a bicycle).

This is normal human nature. The search for profit slowly drives prices to their maximum. Fear of short term loses, drives prices to their minimum, as people leave the market. I have found a number of ways built into the process of trading that limit loss and that take a profit before the price falls again. These devices become increasingly important as time to sell is reduced from twenty years (investing) to one minute (gambling).

So, CDs or S&P 500 ETFs (2.3% certain or 6.0% on average)? How long one has been in the market has no bearing on how to exit the market. (You expect to have more money, the longer you have been in the market.)

Waiting Period for Price Recovery
There seems to be no way to pick the best time to enter the market. But there is clearly a best time to exit the market: when you sell at a profit. My estimate is that waiting period, for an optimum time, can be around three years.

So, at 2 ½ years the unexpected happens. The 5-year $5,000 CD at 2.3% compounded interest for 2 1/2 years, minus one year of interest, yields ($5,293 - $115) = $5,178 for a gain of $178.

As an ETF, the $5,000 would earn, on average, $786 (6% total expectation). The increase over the CD is about $600 or $240 per year if all went well, about 12% of the time. The price for damage control by selecting CDs rather than ETFs, on average, would be $20/month.

Assume the market fluctuates +/- 10% ($500), as it, in general, does; the resulting yield would be between $286 ($786 - $500) and $1,286 ($786 + $500). Even at 2 ½ years, the ETF could be expected to match or exceed the CD, on average.

At five years and no damage, the two, $5,000, 2.30% savings CDs yield $11,200 with limited risk; the ETF is estimated to yield $13,380 for a difference of $2,180, on average, for taking unlimited risk. (Or lose $2,180 if all goes very badly on exiting the market.)

If we anticipate the unexpected, we buy two 5-year 2.30% CDs. If we do not anticipate the unexpected, we invest in ETFs with the expectation of more than doubling the return from the CDs down to an equal yield, on average (assuming an exit period of up to three years, a limited sell order, and a good credit card).

I have laid out the playing field; now to watch one of the many games being played.

Sunday, April 16, 2017

Time to Enter the Stock Market

It is time to put our money down. Internet brokers make this easy to do.

From here on, I will try not to serve as an advisor, but as a guide to where I have been and how anyone, including myself, can continue to learn what is needed as each investment situation arises, to comfortably, enter, remain, and leave (profitably, I hope) the stock market. (Even if you do not put money in, you can still learn to save, invest, and gamble with a trading game.)

1.    Search
2.    Click Invest Your Way
3.    Scroll to the bottom of the screen and under Research, click ETFs
4.    Hover over SPY (lower right side of the screen under Most Popular ETFs)
5.    Click Interactive Chart (center of popup screen)
6.    Look around the S&P 500 ETF chart.

You will find something different than the chart I have here. My chart is capturing some of the human aspect I have stumbled on to. Also see Investopedia for an understandable perspective of terms.

The story I have found goes like this: After each large decline or correction for whatever reason, investors and gamblers become accustomed to what at first was really uncomfortable. Investors hold steady.

Traders start to take bigger gambles that pay off more. The market becomes more and more fragile until almost anything that formerly had little effect brings down a new correction and a new buying opportunity for investors.

What is worrying people? Why has the several year bull market stalled again in the past few days?

The Mood or Comfort of the Stock Market
Click the blue spots with an N to show the news that people may have responded to and perhaps will continue to respond to. Every bend in the closing share price (red line) has an N flag during the last week. Something has the world concerned.

During the past month the two blue lines have declined; at first both lines. Then the lower line has declined even more. This is an indicator of a bear market. Then a week later, the upper line also falls. It is a bear market.

The market changes from bull, money flowing in and prices rising; to bear, money flowing out and prices falling. I would like to enter the market at the end of a bear market where I can buy the most shares for the pot I have in hand.

The two blue lines show averages of the highest prices and the lowest prices during each day. If people are willing to sell at a lower price or unwilling to buy at a higher price, it makes sense that people are uncomfortable with the situation they find themselves.

The stock market is like many other systems. Slow change is easily tolerated. A quick change can wreck havoc (our flood in Provision Living at Columbia after two days below zero); that ended up with us having a pot to invest. A large drop in the market does the same for many people but is also the time for others to buy. Every trade takes a buyer and a seller. We just need to be in a position that share price variations are to our benefit.

This is Easter weekend. The market is closed. I Googled the European and Asian markets just now to see that they are all down. Is it time to put our pot into the ShareBuilder plan that invests every dollar we put into the account each Tuesday? Or should I wait anther week?

7.    Click transfer money from bank to invest in one lump sum or in periodical deposits (Pending).

Now I too am a gambler. The first choice favors a price rise, for a $3.95 trade. The second choice favors a price drop, for a $3.95 trade each deposit. The third choice is to just wait a bit longer for a lower cost of a share:  A lose of about $2.00/day waiting vs. a decrease of $100/day cost, when buying shares, for each 1% in market decline. [Lucky trading makes money faster than dividends (1.92%) or CD interest (2.30%)]

To see my chart on line:

a.    Click Chart Style and select either Mountain ($, default) or % change.
b.    Click Events and select N for news.
c.     Click Technical Indicators and select Price Channel (bull & bear).
d.    Click 1m at bottom of screen for one month.
e.    Click Frequency: 1 Day.

The expense rate for a transaction is calculated for you ($1000 less $3.95 = 0.40%; $10,000 less $3.95 = 0.04%). A periodic investment of $100 would cost 4% of your money to enter the stock market. (That leaves 2% yield the first year, the CD rate, and 6% thereafter, on average.) There are no other fees or charges until you sell your shares ($235 per share this week with a $6.95 cost per sell of any number of shares.)

One reason for selecting Capital One Investing for this example is that it spans the full range from savings to investing to trading (gambling). Even starting at $100/month makes sense given the depressed interest rates on long term savings.

Saturday, April 15, 2017

Entering the Stock Market

A 20-year chart of the S&P 500 ETF shows the money you invested in 2009 would have more than doubled in value by now in 2017. No CD can do that today.

The CD has no risk today other than failing to keep up with inflation. At the end of five years, the result can be the same buying power as when the CD was purchased.

(The new rate for I Bonds, starting May 1, 2017, was set at 1.96% yesterday. That is 0.8% less than the last six months, $2.76. It has a three month penalty if cashed before five years. That leaves Bank CDs and the stock market to consider.)

The Exchange Traded Fund (ETF) is an invention that reduces risk when investing in the stock market. The S&P 500 ETF averages the results of the 500 companies in the S&P 500 index. The long term average is about 6% per year when dividends are automatically reinvested. That is much higher than 2% for CDs.

Compare CD and S&P 500 ETF
The comparison chart shows the return on savings CDs (only interest at risk on renewal, red line) and S&P 500 ETF shares (with the invested pot and dividends at risk daily, solid green line).

There is no way to accurately predict the price of shares at the time we invest. I set a 10% limit on possible gain or loss. If all goes, as most likely, the 5-year CD will be worth $1,120 (red) at 2.3% currently being offered. The shares of S&P 500 (solid green line) would have a value of $1338 after five years.

However a 10% loss at the start would yield $1,204; a 10% gain would yield $1,472 at the end of five years. If the gain or loss occurred later than the initial investment time, their lines would depart from the most likely (green line) to the dashed lines.

[Cashing an immature CD at four years yields about the same amount as a mature 3-year CD (1.60%, which is near current inflation).]

Time is now needed to recover from a decline in share value. In this example the value of shares at two years will equal the initial value of $1,000 with a 10% loss on entering the market. At three years the shares will equal the value of the 5-year CD if cashed at four years. At five years the shares will exceed the value of the CD and of current inflation ($1,204).

Time to recover is a normal part of the stock market. Time manages risk. Therefore we do not invest in the stock market if we need the money sooner than time can bring prices up to expectations. In this example, it takes about three years for the ETF to catch up to the 2.30% 5-year CD given a 10% loss.

There is no cost to the act of buying a CD. Capital One Investing charges $3.95 per buy, any amount of shares or dollars, and $6.95 per sell any amount of shares.

Investing in the stock market is still problematic. My wife has again, as I was typing this, defeated the security system again, for starters.

Also if I have learned anything about the stock market in the past two weeks that I have been working on this; this emotion, fear driven, engine is more apt to proceed as a bear market with lower priced shares than a bull market with higher priced shares. We will see if that bet is true next week.

Thursday, April 6, 2017

Tornado Drill

Yesterday we were to have a tornado drill: at 10:00 am. But the city does its monthly tornado horn test at 1:00 pm. It rained. By 1:20 pm it was evident there would be no tornado drill. The horns are not tested when people may think the test is for real.

The handout at breakfast only stated, "residents are to go to their bathrooms". We need simple, specific, effective directions to be in a safe spot that is conveniently designed into the building.

Provision Living at Columbia was marketed with concrete walled tornado proof stairwells. True. But the architect(s) put nice windows in the upper floor stairwells. Flying debris can take out any window in the building (the only tornado risk I can find in the building).
The Safest Spot

The two and three story building is in reality a collection of small brick-faced homes built on heavy concrete slabs resting on solid porous Missouri limestone. It is not going anywhere with a concrete wall between every two apartments. There has never been an F5 tornado in Boone County, Missouri, that could move it. There may never be one.

The brick facing offers (but does not guarantee) total protection from F1 to F3 tornadoes. There has never been an F4 tornado in Boone County.

The safest place in each apartment then, is sitting on the stool in the bathroom. Any projectile entering the room must pass through two closet walls (and all your clothes) and any furniture you may have placed against the closet wall.

The structure itself should protect everyone with the exception of breaking glass and flying debris.

Safe in Shower
Safe on Stool
                  Not Safe in View of Window


We need at least one internal wall to provide residents protection from an F3 tornado (only one F3 tornado has occurred in Boone County in the past 50 years).

(A closed bathroom door provides protection from flying glass and debris, if the resident is not sitting on the stool, in the area beside it, or in the shower.)

My proposed revision of the handout for the next tornado drill:

At 1:00 pm, dd/mm/yyyy, Provision Living will be participating in the city-wide tornado warning test.
There will not be an internal (fire - flood - evacuation) alarm, and no need to listen for the alarms outside.
Be sure all staff know and inform all residents so they know what to do when the test happens.
Once the warning begins, residents are to go to their bathrooms (or directed to a designated area).
Sit on the stool or the shower bench (out of sight of the window or close the bathroom door).

Monday, April 3, 2017

Saving and Investing Risk Management

In the previous three posts on saving and investing I tried to ferrite out the relationships between a number of common ways of holding money until it is needed. It is always cheaper to borrow from our own savings than from a credit card.

The Christmas savings account is a good example. You earn pitiful interest during the year, but escape a 20% credit card bill during the next year. The account has served its overall purpose. You are earning interest at a rate of 20% for as long as you would have had to pay on your credit card balance.

Now, if we keep this same line of thinking for CDs, the 2% rate is also low, but much lower than the rate we would have to pay on a credit card health care bill balance (20%).

The CD carries zero risk. It is government insured by the Federal Deposit Insurance Corporation (FDIC). Even at an up to a 2% interest rate, buying a CD has not been a valid investment practice for several years. It has not been keeping up with inflation. In that respect the CD is not safe. When it matures it buys less than when it was purchased.

I have found more than one source stating that interest rates are strongly related to inflation rates as well as to government agency manipulations for political and financial reasons. CDs do have zero risk for short term savings.

Comparable CD Payout Rates and ETF Values
CDs have considerable investment risk if interest rates rise and rise fast enough. The fixed return CD lags the open market stock exchange. An exchange traded fund (ETF) follows an index closely; there is little lag. (The S&P 500 ETF was invented January 1, 1993, three years after I was forced to take voluntarily early retirement because of tobacco smoke allergies). Some 20 years have gone by before I learned about ETFs (and I think, finally understand them)!

The 5-year fixed term CD only matures three times (thin solid red line) at which points it equals the comparable ETF values. The ETF values can closely follow interest rates and the funds are always available (less trading costs and adjusted for market fluctuations).

You have to accept the investment risk that is muted by averaging the performance of many stocks in an ETF. The S&P 500, today, yields about 3 to 5 times that of a CD when you accept the risk.

The normal investment risk is manageable by having sufficient savings to bridge the time between a decline and a recovery to the former fund value on the investment. This is pure math and probability. You lose nothing if you do not sell during a decline.

It has little to do with your risk tolerance, trading habits, and investment advisors (who currently can charge more than your investment is making). Fortune tellers, around the world, do a good business doing what investment advisors do here in the USA.

Since investment advisors cannot predict the future (and their contracts relieve them of any liability from following their advice), you need a balance between fixed rate low paying CDs and variable rate, much higher paying, ETFs. How much of your ETFs are you willing to lose if needed to sell on a short notice (less than a month)?

Or can you charge unexpected costs to a credit card with a low interest rate, far below 20% if your CDs cannot cover the cost? You can if you have a good credit rating. And then, possibly, pay it off at the next billing with no interest cost.

CDs and ETFs complement one another. You save and invest starting with CDs. You gamble starting with ETFs. Now to live long enough to see how this all plays out. (We bordered on gambling when we bought the annuity from our house sale and moved to Provision Living at Columbia. They were best buys a year ago and still are.)

An afterthought: Holding money to fill in a decline in an ETF is, in effect, being a self-insurer. Then buying CDs with that money, where it earns some interest, makes the CDs the secondary insurer. This makes sense; a common investment practice. It makes a decline in an ETF, a planned for unexpected cost, that the annuity cannot support along with other unexpected medical costs.

Saturday, April 1, 2017

ETF Index Mutual Fund

I have found that an index fund holds a collection of stocks and bonds that mirror the behavior of what ever is being indexed; in this case and exchange traded fund (ETF) following the S&P 500 index. Any increase in the S&P 500 after buying in, is a profit. Any decrease is a loss. Funds left in the cash managed account (CMA) and not invested earn nothing.

The ups and downs of each of the 500 companies is averaged to produce the current value of a share in the index fund. This guaranties that we will neither get the highest gain nor the highest loss.

Bank of America was “forced” to buy Merrill Lynch by federal authorities at the start of the Great Recession. Their on line stock trading is now done under the name of Merrill Edge. I am part way through an over 30-page document on setting up an account to follow the S&P 500 (we do not have green cards or passports).

Now to summarize the costs of using an index fund in relation to CDs. We need to pick a comparable time span. We have experienced few deaths here at Provision Living at Columbia memory care. Several residents have made repeated visits to the hospital and then returned about as good as before. Our unpredictable life span is not a very good factor.

I have already compared CDs designed for one to five year spans and an annuity set for 10 years in prior posts. The contracts are very clear on what we expect in return from what we have saved or invested (about 2% interest at best).

Merrill Edge marketing suggests that we need to consider, at a minimum, a 15 year horizon. Also, “Past performance is no predictor of future performance”; in the short term. The ever-increasing value of the stock market is a valid predictor of the future (but not the bumps along the way). This emphasis on long term has always intrigued me. [It is a key part of marketing and paid advising.]

I know it is based on the effect of compounding interest, but even the past 15 years of compounding is still subject to a decline tomorrow. It is tomorrow (when we may need the money) and the next few years that we must be concerned about; not the past.

To make sense out of the stock market means we must have other funds (CDs, or cash) to have the ability to wait out the recovery. CD interest rates have yet to recover after a decade, but the stock market is doing great, and always has; with enough time. 

[I did not include our annuity with the CDs above, as the marketing of annuities is also questionable. They do not protect us from large unexpected expenses. In fact, they make it worse if the annuity has left us with not enough funds to pay for large unexpected events.]

There is then justification to balance interest rates (that are manipulated by government agencies) with stock prices in an open market. [I-Bond rates are fixed to inflation rates. Years ago we had one that paid over six percent interest. They are now paying 2.76% with a three-month penalty at one year and no penalty after five years. The purchase limit is $5,000 per person per year.]

We need a means of waiting out the next down turn in the stock market, to get involved with it. One way I have found is to invest within our living revocable trust. If the market does go south, and we do not want to take the loss, the trust can continue for a time after our deaths and be managed by the trustee (unless we go broke prior to our deaths).

To put money into the stock market, we need a broker, Merrill Edge in our case. We transfer the funds from our bank account to an investment cash management (CMA) account. We then pay $6.95 per each order to buy S&P 500 index shares. There are nine flavors to choose from; large, mid, and small cap by value, blend, and growth; that range in price today between $69 to $236. We also pay $6.95 per each order to sell shares.

Our trading cost for putting $10,000 one year, with no change in the share values would be $13.90. A 0.01 to 0.03 charge per $1,000 is also levied each time (0.03 * 10 = $0.30). We are now at $14.20.

There is no minimum requirement and no monthly or annual fees with a self-directed account. A guided investment account is 0.45% a year ($45). A select managed account is 0.85% a year ($85). A full service account, as in the old days before the Internet, costs many times more.

The market must go up to pay for all of this, unless only the self-directed account is used. Then $14.20 would be a charge of 0.142%  (0.071% after two years and etc). An average increase in the stock market of 7% (1950-2009) would easily cover this ($700); and a return that is much higher than 2% CDs.

So, a mature CD pays at best about 2% after 5 years. An I-Bond pays 2.76% after 5 years. The ETF on the S&P 500, on average, pays about 6% with immediate access to the funds, if we are willing to wait out a multi-year recovery period or accept a credit card equivalent charge of about 20%.

BUT the loss on CDs, by our own selection, is only on the interest. The loss on the ETF, by chance, is on the entire POT! That is, about 20% x $40 ($8 a year from choosing a 3-year over a 5-year CD) vs 20% x $10,000 ($2,000 any year) with the ETF.

On the topside earned interest is about $40, certain from the CD, vs just 1% (out of an average of 6%) increase on the S&P 500 ETF would be 1% x $10,000 ($100). The stock market is at an all time high. In 10 years it can be expected to be higher.

Day trading and active management of a fund is now a questionable way of investing (unless you are very lucky). Robot management is now coming.

Over 40 years ago this was funny. Each person used the same trading software on his new desktop computer. The market took a fall when many of their computers said, “Sell”, all at the same time. That ended my interest in the stock market. Instead we bought a house.

Every trade requires a buyer and a seller. In general, to make the market work, it needs uneducated, uninformed or unlucky sellers to drop the market beyond “normal” variations from many unknown causes. These unknown causes make it impossible to predict short term events,

I can now understand the pricing structure of safe, limited access CDs, and immediate direct access to stock (highly variable), and to bundled stock, (low variable) ETF funds. The Internet and competition make all of this easy to do and inexpensive.

(I only need to fill out the eight-page application, call a phone number, transfer the funds from a checking account to the cash management account, and order a trade to buy the S&P 500 ETF flavor(s) of my choice at $1,000 per month; I think.

Any free advice or experiences that apply to this are welcome. The I-Bond window will still be open between April 14 and April 29 to give us the choice between the old or new rates..

Wednesday, March 29, 2017

CD Term Versus CD Fraction

Selecting the term of a CD (and as a consequence, selecting the interest rate) makes sense when saving for well-defined needs.  Selecting CDs by their interest rate, by other than the highest yield offered, in my opinion, is gambling with the protection of FDIC insurance.

The entire pot can be managed in another way: dividing the pot into fractions. Then cashing a fraction when the need arises. This is a common savings practice. Is it a good investment practice?

The table combines CD term (and thus interest rate) and penalty, for the year a fraction is cashed, after dividing the pot into one to ten fractions. Cashing a 5-year CD at the end of the first year is not a good investment practice: no interest is paid.

Cashing one of two 5-year CDs cuts the cost (or loss) in half. Three fractions bring the cost down below that of cashing a 1-year CD before maturity.
Comparative Yield

I find it interesting that the cost of cashing immature 1-year CDs levels out after dividing the pot into three factions. The cost of cashing immature 3-year CDs levels out after five fractions. A 5-year CD earns the most, costs the least, after just three fractions.
Comparative Cost

CDs are then designed for secure savings. They work best when held to maturity. They pay less than stocks and bonds.

Rising interest rates can be chased with cash, short term CDs that mature, and long term CDs that are cashed when immature. Do these work better than investing in an indexed fund that averages gains and losses and can be accessed at any time?

The overall answer, a year ago, was an annuity from our house sale that pays a fixed amount each month for ten years (it has been a good deal for year one).

Cash                            The total loss of interest (a 100% cost).

Short term CD            The discounted rate of interest from the 5-year CD (a 35% to 20% cost, in my example, for a matured 1-year and a 3-year CD).

Long term CD            The penalty on a single immature 5-Year CD (year one, 100%; and down to a cost of 20% thereafter on a 5-year CD).

CD Fraction                The cost of cashing an immature 1/5 pot fraction 5-year CD is 20%; which then yields the same rate (80%) that a matured 3-year CD is discounted to from a matured 5-year CD interest rate.

Indexed Fund              A variable cost that is not assessed an average 20% charge, as I have found for the above CDs. A drop in the market of 20% is highly unlikely (approximately what happens when you do not pay your credit card bill in full each month). The rate of return from the fund follows the market up and down.

Annuity                      The ten year contract we bought fixes the rate of return at the average low market value in 2016. It has a potential cost related to any marked increase in interest rates.

In summary, fixed rate CDs will always lag the market. This is very good when interest rates fall as they did in the past decade for economic and political reasons. The lag with rising interest rates, if it happens fast enough, will cost. That cost seems to be small (with a 2% CD interest rate) in relation to the about 20% difference between CDs and an indexed fund even on a stable year.

So, my best judgment is, buy maturing CDs to insure funds needed during the next three or so years. Buy long term CDs with the option of cashing a fraction of the pot before maturity for unexpected needs. 

Buying an annuity to insure funds for the next ten years is now questionable, unless there is a compelling situation (memory care). Learn about indexed funds and how they work today on the Internet for the $10,000 we have in hand from the flood at Provision Living at Columbia.

We can eat in the main dining hall tonight for the first time in three months!

Tuesday, March 28, 2017

Chasing CD Interest Rates

My previous post, CD Basics, explored the use of CDs as savings and as an investment in a stable normal financial market. Buy a CD to save for an expected expense that occurs well after the maturity date.

The length of the cashing penalty is a good guess if in doubt. Rather than having to cash a 3-year CD at two years with a six-month penalty (1.5 year term), buy a 2-year CD that matures.

But interest rates are now poised to remain stable or increase more than decrease. What increase is needed to justify cashing a CD with penalty to buy a new one at a higher interest rate?

Interest Rate Factors
The table contains the answer in simple interest; just spread out the penalty over the next few years. The table contains four and five year periods that are more investment than savings.

A CD paying 2% interest (our current top rate for a 5-year term) with a 1-year penalty would have to be reinvested in a 4-year CD paying 3% (2% * 1.50 = 3.0% per year) or another 5-year CD paying 2.4% (2% * 1.20 = 2.4% per year) just to break even. We would not be paid any interest for five or six years. That is the simple interest story (rate x time); nice straight lines when in a graph.

Interest Rates and Payouts
Compound interest (rate x time x compounding) produces curved lines. They start at the same points as simple interest (3-year, blue; 5-year, red). They then bend with time as the pot increases in size and the interest rate changes; presumably higher.

“A rising tide lifts all boats.” True and false. The company gives everyone an equal raise of 5%. Some pay checks show an increase for the year of $500; others show $50,000.

The same is true for interest rates on CDs. The higher the interest rate you start with (red), the higher the earned interest with an increase in rate.

The chart shows the result of the same an annual 24% increase in the interest rate (from 2% to 5% in five years) applied to CDs with different terms. The 5-year term CD grows faster than the 3-year CD. The actual payout percentage is also different.

The 5-year term CD starts with a higher interest rate than the 3-year term CD. At three years, the 3-year CD matures and is reinvested at an even higher rate. At five years, the 5-year CD matures to be reinvested at an even higher rate, assuming an increase in interest rates from 2% to 5% over the five years.

If you needed the money after three years, a 3-year CD would payout and/or would be ready to be reinvested at a higher rate.  If you would not need to use the money, a 5-year CD would win out in the long run.

You save for short term needs at the current interest rate with no penalties. The sooner you invest, and the more you invest, the higher the payout with compound interest, with no penalties; unless interest rates rise enough and fast enough. My Mom mentioned only one error she made: not cashing her 8% CDs and buying 5-year 18% CDs.

You get the chance to reinvest sooner with short term CDs, BUT you pay for this privilege by accepting lower starting interest rates. The lag in CD payouts, with respect to the compounded interest rate, results in an efficiency of 79% for 3-year and 72% for 5-year CDs, in this example.

The lag [21% and 29% for 3-year and 5-year CDs, the area between payout (solid) and compounded interest (dashed) lines] gets worse the longer and faster interest rates increase. This is the money you potentially lose if you do not cash and reinvest (7% and 6% per year); before also considering the penalty of 1/6 of a 3-year term (16.7%) and 1/5 of a 5-year term (20.0%) of the interest for each CD reinvestment, when chasing interest rates.

The penalty, in this example (interest rates increase from 2% to 5% in five years), is less than the lag one wants to close. With less of an increase in interest rates, they could be the same or less.  Short term security has a cost.

These gains and loses can be obtained daily on the stock market, if you buy or sell the stock or bond; over time, they balance out. But there is no short term guarantee of returns or insurance. Time and indexed funds (Warren Buffett’s ten year challenge to hedge fund managers) are your guarantee in the stock market.

Cashing and reinvesting sounds good, but if I am right on this, it only pays off if you guess right and interest rates rise fast enough. The result may be nothing more than the original payout with a delay of one year for each recycling.

I see holding money in cash, with no interest, until the “right” time a poorer option than investing in a long term CD with the potential of losing just one year of interest when the “right” time arrives. The “right” time may never come.

My Mom’s advice was invest, forget about, and live a long time. That was when banks were secretive and intimidating. The Internet and truth in advertizing laws have swept that away. Small banks pay better than large banks, in general. They are all FDIC insured.

Sunday, March 26, 2017

Timing Versus Drugs

My wife woke up under the control of the “worries”. We used to call it that before we heard of “sundowning”. But the worries happen at any time. They produce a stern expression, a determined effort, and a quick slap or strong hit if challenged when in near complete control of my wife.

South View
We needed to leave for her brother Bob’s funeral by 10:30. She moved at double speed in packing everything in the apartment into something. There was no interrupting her in her work. There was no time to get out of her nightgown and into her cloths. At 9:00 I discussed our situation with a caregiver. She was ordered out of the apartment.

The business manager (also a degreed caregiver) stopped by with equal success. Attending the funeral was problematic. “She may have been over stimulated at the family gathering yesterday evening in the (unrefinished) Hearth Room”. (A group of 15 lasting 3 hours from which she left in her usual way about half way, “Time to go.”)

Now several other caregivers considered a calming pill. By now even drawers from my old clothes chest were resting on the sleep number bed next to the bathroom. This has never happened before.
West View

I continued without forcing her to get changed or to leave things in place. I did put many things back only to have them migrate again. And then at 9:30 she sat down to rest. No order, of removing or dressing, one would normally use had worked.

“We need to get dressed to go to church.” “Oh!”, in that soft voice of recognition and understanding. The calming pill was ordered. I held out her pants. She put them on. “Lets wait on the pill.” Socks. Shoes. She put them on. The worry spell was over.

There was no taking off her nightgown. No putting on her brassier. I next held out her blouse. Off came the nightgown. On went the brassier followed by the blouse. I have to get things in the right order in her world.

When we stood to sing a hymn, she saw two of the picture books her younger brother and his wife have made of Bob’s life, in the pew before us. One has a high school picture and the other a collage picture on the cover. She again showed for a few seconds the same reaction as when I was finally able to tell her that Bob was gone.

I showed her Bob’s picture on the TV that was posted on Facebook yesterday, by a family member, and then asked her if she knew who that was. “Yes, Bob”. “Now read what is beside the picture.” Obituary . . . .

The service seemed uneventful for her. The slide show afterword did connect. Between about the third and fifth showing she watched intently and responded to many of the slides that are in the family reunion picture books that have been made for us. (These picture books tell a story as will as bind a collection of pictures that appear to be able to withstand a lot of use by her and for sharing with all the residents.) [They are perfect for memory care.]

She responded well to a large number of people we knew well. I have been told several times that this may just be an act. It may be, in part, but she never asked to leave the service.

The dinner after the service was a second crowd. We stood still looking for seating. A complete plate was placed on the table in front of us and my wife was directed to that chair. And this time, it happened by some one other than our caregiver from Home Instead (who attended the funeral). My wife never asked to leave.

We ate supper in memory care while other family members visited restaurants. She was content visiting with our two sons afterwards and with their departure for the airport. Everyone seemed in good spirits.

This is then another time in which my wife has gone from “highly agitated and over stimulated” to normal behavior solely in response to not forcing her to perform by the clock. At no time did she jump up, “It’s time to go”, or forcefully signed, “No. I am not doing that. Out.”

Good Morning - Welcome Home
She has spent almost three hours playing with her keepsakes this evening. At 9:00 pm she is still not ready to let a caregiver help her into bed. She is now busy putting a few things right in the apartment rather than randomizing them. (I know this happens in the night at times, but have never seen her do it.)

This was a most unusual day made possible by a number of family, friends, and caregivers. A thank you to each one.

This day presented the interplay between caregivers at all levels and my wife’s behavior at any one time. A significant time period can be as little as two seconds. The same behavior can support many stories; all of which may be wrong and all of which may be true for a moment.

The Last Flight
What is she telling us? This last balloon, from the 3rd of January, that I found tethered in the bathroom this Sunday morning, can no longer fly even with the ribbon clipped. Maggie is still with us. What is your story?

Thursday, March 23, 2017

CD Basics

The perfect CD is government insured, has a high interest rate, and is easy to cash and to change interest rates. If you get the first requirement, you cannot get the other requirements. They are found on the stock market were you average out returns over 10 or more years and expect that average value to grow about 10% a year.

Capital One 360 is now offering an FDIC insured 5-year term CD for 2% per year. I am using this and the discounted values (1.8%, 1.6%, 1.45% and 1.3%) for shorter term CDs in this post.

I have found four ways to manipulate CDs beyond investing $10,000 in one 5-year term CD ($10,000 * 2% * 5 year = $1,041 with compound interest). [Provision Living at Columbia credited our bill for the two months we were refugees.] 

Divide the pot into five $2,000 CDs, which can be manipulated in several comparable ways. The table shows how to build a ladder up from low to high rates. Replace these rates for the other ways to manipulate CDs. For example, delete the values for reinvesting (CDs 6-9) and the table turns into a savings mode.

1.    Building up a ladder of CDs that mature at different dates using different terms. In this case, five CDs ranging from one year to five years. The rate of return increases with the increased term from 1.3% to 2%.

This is touted on the Internet as a way of increasing our earnings. In a normal market, it does average out the earnings. This yields $959 or costs $82 ($1,041 - $959 = $82 or 8%) to build the ladder over a period of five years.

The usual example replaces matured CDs with the maximum rate (2% for 5-year CDs). The build is slow and the adjustment of the resulting 5-year term to current markets is also slow (which is good when interest rates fall as they did in the past decade). Interest rates are now at an historic low. Expectations are from continuing low rates to increased CD rates.

2.    Building down a ladder of CDs from the maximum rates by cashing one each year and buying a new one. That would cost $172 ($1,041 - $869 = $172 or 17% (a current credit card rate) in this example given no change in interest rates.

3.    Maintaining the range of rates (replacing each maturing CD with the same term) in the ladder would cost an estimated $199 or 19% over the five years and about $40/year (2%) thereafter.
4.    Treating the funds as a saving account with the expectation of removing 1/5 of the pot each year.

Interest on $10,000 over Five Years
Savings with Withdrawal

  Build Up (Selecting Rates)
$535 (zero balance)
  Build Down (From Maximum Rate)
$447 (zero balance)
Fractional (Cashing Each CD With a
One Year Penalty)

  One CD Cashed during 1–5 Years
$825-$954 ($8,000+ bal)
  Second CD
$615-$741 ($6,000+ bal)
  Third CD
$406-$531 ($4,000+ bal)
One 5-year $10,000 CD


Fractional investment yields the same thing as a single CD ($1,041) if no funds are withdrawn. Withdrawing funds turns the account into savings that far exceed up built laddering when used as savings; until you cash the last two CDs when the overall cost is again $200 to have maximum anytime access to the remaining funds instead of waiting for CDs to mature as in the above option.. Borrowing from one's self (less than 2%) is less expensive than using a credit card (16%).

Laddering makes sense in a calm market. The finer the total pot is fractionated, the more control you have in managing interest rates. if they do go up and fast enough to make a difference. As each long term (5-year) CD matures you have the option to cash or to reinvest with no penalty for that CD. The remaining CDs will be slow to adjust to any rapid change in interest rates.

You can manage interest rates by limiting the term of each CD or by buying the maximum return for the day and cashing in for a higher rate later. But when do you cash in an immature CD to take advantage of a higher interest rate? Does it make sense to buy short term, low rate, CDs that at maturity are replaced with long term higher rates; that are then again slow to respond to rapid changes in interest rates? What seems like a solution, short term, looks like it just recreates the original problem in the long term in un-calm markets.

Is this something to be concerned about given our short five-ten year horizon in which our cash flow far exceeds our finances? We will then be 90 and 97, which is highly unlikely. I still feel we need to adjust to going broke gracefully while currently enjoying a best buy in memory care for the two of us. Our two month stay in assisted nursing at South Hampton Place gave us a preview.