BUY A 5% CD FOR 5% CASH FLOW—EASY!
Many folks I talk to just can’t see why they need any stocks at all. They consider themselves frugal. Not greedy. They see themselves as “conservative.” Maybe they have $500,000 saved up—which isn’t a lot or unusual for folks nearing retirement who’ve had a lifetime to save and done it reasonably. They want just $25,000 a year to live on—plenty for them. Maybe they’ll get a bit more from Social Security. They’ve decided to take as little risk as possible. They’ll buy 5 percent CDs—or maybe some other super-safe instruments yielding 5 percent. Everyone knows CDs are safe! No stocks for them. To them, that’s not a risky approach—it’s a safe one.
Yet it’s one of the riskiest things they can do long term. Set aside the fact that, as readers in 2010 and probably even 2011 will know, finding a 5 percent CD is close to impossible. If someone offers you one, it is surely from a very risky institution that runs the risk of failure. (Worse, remember the high CD rates alleged Ponzi schemer R. Allen Stanford offered—Bunk 11.) In the future, it’s impossible to know where interest rates will go. And no one can guarantee that when one CD, bond, note, or bill matures, you can always find one to replace it with a similar or better yield. You might have to buy something yielding less! Happens often.
But this scenario ignores the elephant in the room: inflation. Inflation is punk but it’s no bunk, and it can be devastating to a poorly constructed portfolio. ...