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Posted by W. Wells on April 9, 2007, 4:53 pm
Which is better for income: A CD paying 5% or a fund yielding 4.83% and
growing @ an average of 5% per year? Would I be better off putting my money
in the fund and drawing out 5% per year (my income) ? The fund expense
ration is .44%.
Am I missing something here are is this a no brainer to use the fund?
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Posted by PeterL on April 9, 2007, 5:14 pm
> Which is better for income: A CD paying 5% or a fund yielding 4.83% and
> growing @ an average of 5% per year? Would I be better off putting my money
> in the fund and drawing out 5% per year (my income) ? The fund expense
> ration is .44%.
>
> Am I missing something here are is this a no brainer to use the fund?
You have a fund that's yielding 4.83% a year and growing at an average
of 5% a year on top of that? What's the name of this fund?
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Posted by Jose Bailen on April 9, 2007, 7:11 pm
> Which is better for income: A CD paying 5% or a fund yielding 4.83% and
> growing @ an average of 5% per year? Would I be better off putting my money
> in the fund and drawing out 5% per year (my income) ? The fund expense
> ration is .44%.
> Am I missing something here are is this a no brainer to use the fund?
Is the 4.83% yield of the fund sure, or just expected? Also, is the
4.83%yield net of expenses, or gross? If 4.83% is the net yield and
as safe as the 5% yield of the CD (i.e., you apply the same discount
rate to the two streams of income), then the net present value of the
fund is higher than the net present value of the CD if you plan to
hold both investments for 3 years or more.
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Posted by Elle on April 10, 2007, 5:01 am
The fund's a no brainer: Its principal keeps up with
inflation (at least, as inflation is conventionally
measured) while you still get around 5% income from it each
year.
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Posted by nomail1983@hotmail.com on April 13, 2007, 3:18 pm
> Which is better for income: A CD paying 5% or a fund yielding 4.83%
> and growing @ an average of 5% per year?
For my edification, please explain those terms with respect to the
fund. I thought "yield" and "growth" were almost synonyms, except
that in this context, 4.83% might be the 7-day yield, whereas 5%
might be an historical average over some (how many?) months or
years.
In any case, I could not answer the question without knowing the
volatility (std dev) of the fund growth rate, what the fund invests
in,
your tolerance for risk, and your time horizon. Also, is the CD rate
fixed or variable?
> Would I be better off putting my money
> in the fund and drawing out 5% per year (my income) ?
The correct answer depends on individual factors that you have
not even hinted at. Obviously if you depend on 5% per year income
from these funds, the CD is not an option, no matter how the yields
compare. Most CDs do not allow you to make withdrawals (without
penalty) until maturity. (Exceptions are made for RMDs from
Traditional IRAs.) But that does not necessarily make the fund your
"best" option.
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