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IRA CD Account / Savings Account Blog and a Whole Lot More
Posted by Investing on December 1st, 2009
inI’m taking a moment to announce a series of blogs on IRA CD account usage and online savings accounts in combination with a regular IRA or 401K portfolio (or mutual funds). In today’s high risk investing environment and atmosphere I am very concerned with the high level of risk many boomers and younger 40 somethings are willing to take with their nest eggs.
IRA CD Combined with a Risky Asset Portfolio – The Whole Is Greater Than the Sum of the Individual Parts
A portfolio is capable of a great return on investment without necessarily taking on undue amounts of risk. This is done typically by matching an essentially no risk asset such as an IRA CD or online savings account or money market account (paying low fixed interest rate income) with a set risky portfolio such as a group of stocks or mutual funds. When done correctly matching a risk balance optimized (or efficient) portfolio with a fixed asset security essentially creates a two-asset portfolio with a linear relationship between risk and return.
A Standalone IRA CD or Standalone Mutual Fund or Stock Portfolio Leaves a HUGE Hole in the Risk Return Profile/Frontier
Contrast the mixed risk-free / risky asset portfolio combination with a standalone risky asset portfolio. Note how the return on investment prospects are non-existant from a zero level of risk essentially out to some mathematical limit of the effectiveness of the portfolio. The magic of combining the IRA CD or high interest savings account (or online money market account for that matter) is that the portion of the risky portfolio which is least efficient (providing the least return for each additional unit of risk) gets ignored and is supplanted by the combined portfolio of the risky and risk-free asset. Not having a risk free asset in combination with the portfolio of risky assets leaves a barren gap of highly desirable risk/return possibilities where the investor has no options between no risk at all (a simple IRA CD or savings account / money market account) and the highly risky portfolio with wildly variable expected returns.
For Further Reading on Fixed Income Assets (CDs, Savings Accounts, and Money Market Accounts) See:
IRA CDs and Improving Risk/Return Frontiers in Retirement Accounts
Savings Account Information for Parents Who Want to Raise Financially Prepared Children
Keeping Tabs on Best Savings Account Rates Online
Highest Return CD Column / Blog
No Comments updated July 26, 2013
Understanding How to Use a High Rate CD in an Investment Portfolio
Posted by Investing on November 24th, 2009
inGiven the question came from my friends at kidssavingsaccount.info I offered to write a guest post on the topic and explain how a high interest savings account or high rate CD could function to improve the risk/return profile of a risky asset portfolio.
What I discuss is what the risk/return profile looks like when you take a risky asset portfolio and allocate some portion of the investment in a ‘risk-free’ asset such as a CD and the remainder in your efficient portfolio of risky assets. KidsSavingsAccount.info probably isn’t the right venue for such a high level discussion true, but we aren’t really getting into the mechanics of how these portfolios are created – we only discuss what the expected performance of said portfolios looks like, and how a fixed income asset can enhance that picture. Clear as mud, right?
Think of it another way. You don’t have to know how an engine works to use a car to get from point a to point b – but you do have to be able to recognize that a car needs an engine to move. Likewise an efficient portfolio needs to be paired with a risk-free asset or fixed income asset to acheive an optimal profile picture.
1 Comment updated November 24, 2009