With yields this low, avoid long-term CDs
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Dear Mr. Berko:
I have $31,000 to put in a certificate of deposit, but the best yield I can find is a one-year CD offered by my bank (Fifth Third) at a very low 1.75 percent. If Fifth Third goes under, will my CDs still be safe? I think I can afford a little risk and hope you could recommend something with a better yield of maybe 3.5 percent to 4.5 percent. I need this money liquid. I also own 280 shares of Fifth Third Bank that I bought in July 2007 at $41. Would you recommend that I sell the stock? And finally, because I’m certain our income taxes will be raised to pay for the deficit, what do you think about municipal bonds?
B.P., Aurora, Ill.
Dear B.P.:
Fifth Third is a terrific bank. It will probably be in the red in 2010, but your CD money there would be as safe as if St. Peter were holding it in his purse just for you. Fifth Third’s (FITB-$10.04) solvency or lack of solvency will not affect your principal, because your CD is guaranteed by the Federal Deposit Insurance Corp. (FDIC).
I’m certain as sunrise that in five years, CD rates will be significantly higher. So I and other professionals believe that you might be making a mistake committing your $31,000 for five years. There are higher-yielding alternatives to consider; however, you will have to assume some degree of risk.
There are a number of closed-end and open-end short- to intermediate-term bond funds with significantly better yields and a modest degree of risk. Vanguard Intermediate Term Bond Fund (VIBSX-$10.88) has a 4.6 percent current return, and Fidelity’s Intermediate Bond Fund (FTHRX-$10.19) has a 4.5 percent current return. Both are no-load, well managed, highly regarded and have a history of attractive short-term benefits for their investors.
Meanwhile, the Closed End Fund Association has a decent Web site that reviews nearly every closed-end fund trading in this galaxy. Rather than selecting a few of them, I suggest that you visit www.closed-endfunds.com.
As for Fifth Third, I suggest that you sell the 280 shares you bought at $41 in July 2007. Yes, I like the bank, I like the CEO and CFO, and I believe that in the next few years FITB can provide shareholders with some respectable capital gains. But in the meantime, I doubt that there’s any reason for FITB’s share price to move northward. Therefore, it makes sense to take the $8,700 loss, wait 31 days and repurchase the stock. Value Line thinks FITB could trade in the $30 range by 2013.
I’m not comfortable recommending a portfolio of municipal bonds, because I don’t trust the rating system used by Standard & Poor’s, Moody’s or Fitch, and I don’t trust the people they employ. So if you want to own municipals (a good hedge against potentially higher taxes – maybe), I recommend that you consider the no-load municipal bond funds offered by Fidelity, Vanguard and most of the other large no-load fund families.
However, back in July two of my sources in Congress told me that several members of the House and Senate are discussing a graduated tax on municipal bond income as a source of funds to help reduce the deficit. Though the probability may be remote, it’s still a possibility. Up until 1984, no one would have thought that Social Security would have been taxed.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service
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