Is There A 'Perfect' Investment For Every Market?

by: David Crosetti


My mother was not a risk taker. Like many people who grew up during the Great Depression, she valued the notion of "safety" when it came to saving her money. She was very fond of Certificates of Deposit. Over the years with that particular strategy she became a master at laddering her CDs and got herself way ahead of the interest rate declines that hit later in her life. Her philosophy was a simple one. It's not always how much you make with an investment, but it's also about how much you end up keeping.

Unlike her son, she never experienced stock market declines. Her CD investments always returned her principal and gave her interest income as well. At the end of the CD term, she would redeposit that money into a new CD.

The strategy served her and many folks of her age, very well. When she retired from her job with the state of California, she drew a pension; she also drew survivor benefits from my dad's union pension; she had Social Security and she had her interest money from her CDs.

What You Need To Know:

I didn't go back very far, looking at interest rates for savers. I started in 1993, because that's about the time where my mother started sharing her financials with me. Dad had passed away and she wanted a sounding board. She didn't want my advice. She just wanted to keep me in the loop. She did not care about my advice. After all, I was her kid. What the heck did some 44 year old "kid" know about investing money? So, let's take a look at interest rates for 3 year CDs beginning in 1993:

During this period, 1993-2008, 3 year CD rates did not drop below 3%. When you contrast that with dividends paid by stocks, CDs look to be a very interesting investment choice.

The Rest of the Story:

When her health began to decline, in 2008, Mom decided to move to Mississippi to be with us. She was pretty independent, so she settled into an assisted living apartment just down the road from where we live. Those days were wonderful as mom got the chance to be with my kids, her grandchildren and attend their sporting events, dance recitals, and graduation ceremonies.

She seemed to realize, when she got here, that I wasn't a kid anymore. I was now 59 years old, had plenty of gray hair, and the usual physical impairments that most of us experience with age. I think she was surprised that her "Davy" was an old man, much in the same way when we go back to our 40th high school reunion, we realize how old those other guys have gotten.

She began to allow me to handle most of her financial matters once she came here. I paid all her bills, managed her personal life, and in effect took on the responsibility for an 86 year old child. The assisted living bill was over $4000 a month. Her income from her Social Security and pensions was not going to cover that expense. While she had laddered her CDs, my concerns were about the declining interest rates moving forward. Those declining interest rates told me that I needed to find other sources of income for her and find those as soon as possible.

With the melt down in the banking industry, in 2008, the whole world began to change for those who were CD investors. Banks like Citi (NYSE:C), Bank of America (NYSE:BAC), JP Morgan-Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) all announced dividend cuts. Their price in the stock market also started dropping. When BAC announced that they would be cutting their dividend in half, the stock dropped 10% in after hours trading.

But, because Mother was not invested in stocks, she had managed to build a CD ladder with 4% yields coming to her every month until February, of 2011. Now the CDs that she opened in 2006 were coming due in 2009. That money and the money from CDs maturing in 2010 and 2011 were obviously not going to receive anywhere near the interest yield that they had been getting in the past. So this "gravy train" was coming to an end.

Investing For the Future:

With the first CD that came due, we decided to invest in 10 different companies that were mostly consumer product companies. We took 100k and invested 10k in each position. Here is what we purchased:

(Click to enlarge)

A second CD came due in 2010 and we decided to reinvest that money in the same shares of the companies of the first portfolio.

(Click to enlarge)

Both portfolios gave us income from dividends, in excess of 4%. We had been able to maintain our targeted income stream and at the same time do it with companies that Mother was familiar with. Of course, there are not two portfolios, but they are held in one Schwab account. When we look at the blended results of the investment of these two CDs, this is what we have:

(Click to enlarge)

Not only has the portfolio grown in value, but the income stream from the investments has continued to grow as well. Mission accomplished.


My mother passed away on July 24, 2010. Having her here to be with us over the last days of her life was quite an experience. While she missed California and particularly San Francisco, she did enjoy spending time with the kids and they enjoyed spending time with her. We laughed a lot and we exposed her to a Southern way of life that she found fascinating, to say the least. One of her comments to my in-laws was "You guys are so Italian, it's incredible!"

The portfolio that we started for her income has grown. The last CD came due in 2011. We invested that in some different companies than the ones we own here. We added companies like Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Aflac (NYSE:AFL), Exxon (NYSE:XOM), Verizon (NYSE:VZ), and a few others. Since we inherited the portfolio, our cost basis for the companies that we owned prior to her death were stepped up in value to the price they closed at upon her death. These stocks are held in a taxable account and dividends are now being reinvested as opposed to being used to supplement income.

Here's what I learned from this exercise:

1. At any given time in the economic cycle, there is a "perfect" investment. When interest rates are high and falling, it is a good idea, in my opinion to be invested in the stock market.

2. When interest rates are high and dropping, you should probably consider being invested in bonds and other interest bearing investments. When interest rates are low, being invested in stocks is the place you want to be.

3. Risk is always a concern. As an older investor, I don't need to be trying to hit home runs. I need to improve my on-base percentages and drive in runs the old fashioned way--moving the base runner one base at a time.

4. Slow and steady wins the day. Always look for opportunities. Purchase companies that you understand and that you can explain. Never forget who brought you to the dance.

Disclosure: I am long KO, CL, CVX, JNJ, KMB, MCD, MO, ABT, PG, T, XOM, VZ, MSFT, INTC, AFL.