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Dr WLS, Investor
Category: Finance
Satisfied Customers: 483
Experience:  I manage millions in investments , and have outperformed the "experts"
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Is a $250,000 6-month 4% return CD advisable

Customer Question

In the near future I am going to receive between $320,000 to $350,000 cash from a mortgage being taken on a building that my brothers and I own in Manhattan, NYC. I plan to retire at the early age of 54 because I now have almost $100,000 in my 401K, my overhead living expenses are extremely low (my monthly rent-stabilized rent is $653.00 and I have NO debt at all), and I am single with no dependents. My question is, I see that some banks in NYC are offering 6 month CD's at 4% return. Would it be rational for me to put around $250,000 into one and after six months earn $10,000?I feel that I am already "playing the stock market" with my 401K plan (which I will leave alone even after retiring from my company), and I am not comfortable putting more money into the possibly volatile stock market. Is buying short - term CD's a good thing in my situation? Let me add that we plan in the forseeable future to either take a second mortgate on the building or sell it and invest in another property via the 1031 IRS Property Exchange Plan, so I feel that in the near future I will receive even more money from the building. Thank you for your input. (P.S. Is it really dangerous investing $250K when the FDIC only insures up to $100K?)
Submitted: 11 years ago.
Category: Finance
Customer: replied 11 years ago.
I am anxiously waiting for comments/suggestions. Thank you.
Expert:  Dr WLS replied 11 years ago.

I believe your idea for protecting the principle for 6 months while earning 4% interest is a wise one. You would gain very little by investing in longer term bonds at this point. I regard the American stock market as rather volatile and overpriced right now. One must take rather large principle risks for double-digit total return prospects.

The first rule of investing a windfall like this is "Don't lose it", especially when you may need the funds for a 1031 exchange later. The second rule i s"Don't forget rule 1".

I think you are probably 99.99..% safe putting it all in one place despited the FDIC limit. I don't foresee a wave of bank failures in the next 6 months. To be 100% safe, divide it among different banks. You wil still get your 4% interest.

Dr WLS, Investor
Category: Finance
Satisfied Customers: 483
Experience: I manage millions in investments , and have outperformed the "experts"
Dr WLS and 2 other Finance Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Dr WLS's Post: Thank you Dr WLS for giving me such a positive response. I do like your rule of "Don't lose it" feeling is I can keep putting $250K (or similar amount) into another short-term CD after the first one matures. I would pocket the interest and take out another short-term CD, instead of risking putting more of my money into the stock market. As I already mentioned, I already do have around $100K in my 401K, so that is enough "risk" for my taste. And I cannot imagine that a bank as large as Wachovia is going to fail, correct? Thanks, again.
Expert:  Dr WLS replied 11 years ago.
Correct. I have done quite well with stock in Wachovia, which I've had since it was First Union stock 5 years ago - WB bought them out after two mergers. I am holding it. It is solid and well managed, in my opinion.

Expert:  Chris replied 11 years ago.
I do agree with Dr WLS, however with that amount of money there are better alternatives to invest in. You may even try speaking with your bank to give you a better rate than 4%(are you sure that is the 6 month rate?). I encourage you to speak with a CFA because they can show you how to mix investments(ex. T-bills and stocks) to your appropriate risk level.
Expert:  Dr WLS replied 11 years ago.

I firmly believe in balancing your investments in both income instruments and equities, as Chris has suggested above. However, since you may need the money for a 1031 conversion, a six month guarantee of principal in today's market is a safe and reasonable choice for maintaining liquidity with principle protection. For the longer term, consider a 60/40 mix of equities and bonds, or a good balanced fund.

In your situation, IF it is likely you won't be needing that money anytime soon, I would consider putting 10-25% into New York municipal bonds or a mutual fund that holds them. Most brokers and CFA's won't tell you this because they don't make much money on the deal. Although the principal is not guaranteed in such funds, diversity provides protection from calamity, and you will find that you can still get yields of over 6% TAX FREE in the exchange-traded funds of Van Kampen Merrit, Pimco and others. You might also consider buying such NY muni bonds directly. I am about 40% in "laddered" variable maturity-date long term munis, and muni funds, myself, and have been retired for 13 years with that allocation ratio. I have not regretted it.