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Anticipating that I would soon be starting the decumulation phase, I recently set up a five year CD ladder, using brokerage CDs bought through Vanguard. Yesterday I ran Vanguard’s Portfolio Watch. Aside from finding that my stock percentage had gone from 50% to 54%, and my international stock percentage from 20% to 10%, I found that Vanguard counted my CDs as bonds, not as “short term reserves”. Can anyone explain that?
Also, since I need to do some rebalancing, any thoughts on short vs intermediate bond funds, and Treasuries vs corporate, for the long haul? I can’t do anything about the muni fund in taxable, but I can certainly move money around in my IRA.
I think the responses below together capture the reason. Vanguard only sells brokered CDs. They don’t hold bank CDs. Brokered CDs act like bonds as Ken described below – they are subject to market risk. If you hold CDs in a bank, I would count them as cash, although you might want to discount the value per any early withdrawal penalty.
I think the answer is that a CD is similar to a bond or it’s bond-like, which is why Vanguard did that. Like a bond, a CD is an instrument where you’re (effectively) loaning money to someone in exchange for their promise to pay you back your principal and interest.
A CD is also often consider a cash-like instrument. Some people put cash in an entirely different realm than bonds, but in some ways they are similar. If you stuff cash in a bank account, it’s similar to a bond in that (effectively) you’ve lent your money to the bank with the promise that when you want it back they give it back to you (and ideally with some interest).
The failing in communication is on the communicator (in this case Vanguard). But I don’t think their broad classification is wrong or unjustified, per se.
Probably not unjustified, but annoying. I count them as cash equivalents and I’ll have to calculate bond percentages myself.
Right up front I want to admit that I don’t know the answer. However, I once had a tax client who was in a panic when he saw the value of his bonds decreased. He said he should have kept the money in CDs. I explained how a bonds current value was effected by current interest rates. Then I tried to explain that if it were possible to sell a CD, he would see the same fluctuation in the value of the CD. And finally I explained that if he held on to the bond to maturity he would be made whole, plus interest.
Or perhaps it has to do with the CD’s maturity dates.
I wonder if I’m on the right track here.
I’ve bought CDs through Vanguard before. They actually show the estimated (not guaranteed) sale value of brokered CDs. Currently, all four of mine are below face value. When interest rates drop, they usually go above face value.
Actually that makes some sense. I don’t plan to sell the CDs prior to maturity, so I hadn’t considered the fluctuation in value. One of the CDs expires early next year so I wouldn’t think it had to do with maturity dates.