Think Twice About 5-year California IRA CDs
Famed equities investor John Hussman, whom we greatly respect, once wrote an article where he predicted terrible results for the next 10 years of US equity returns. You must remember that U.S. stock returns for the last lost decade (0% returns for 10 years) were something we just went through, and Hussman does not see spectacular growth returns in the immediate ten year future.
Hussman said that his standard methodology estimated that the S&P 500 was priced to achieve a 10-year total return of just 5.05% annually. Using a second valuation method that involves forward operating earnings, he projected 10-year total returns of just 4.69% annually, which is still shy of 5% per annum. Using a dividend-based valuation model, the projected 10-year returns for stocks were about 2.30% annually, which is even less. In short, he expects about 5% per year for returns going forwards.
Which brings us to the case of 10-year bonds (T-notes) returns and long term CA bank CDs for your IRA. These forecasts suggest that whenever you can get a 10-year return greater than 5%, think about snagging it for your IRA.
Hussman commented that near-term returns much higher than 5% annually, such as what happened for 2010, would essentially be shifted from future years, so you cannot deceive yourself into thinking that large returns are here once again. In other words, any higher returns received today simply imply even lower long-term return prospects tomorrow. 2010 was a year of great returns because we came off a rebound. Hussman says that if you are looking at 15-year total returns, you can expect them to fall in the 5.8-6.5% annual range with enormous volatility in the interim. With the U.S. economy slowly becoming second place to China, this gives pause for concern.
What does this all mean for your IRA and the best CD rates you can get for IRA portfolios? Let’s take a look at the long term 5-year CD maturities, and see what the best California banks have to offer right now as their highest CD rates for IRAs:
OneWest Bank 2.50% 5 Year IRA
United Central Bank 2.27% 60 Month IRA CD
Excel National Bank 2.24% 60 Month Traditional IRA
Community Bank 2.07% 60 Month Fixed IRA
Union Bank of California 2.00% 60-120 Month IRA Time Deposit
First Republic Bank 2.00%* 5 Year IRA
Based on these highest California bank cd rates, which are usually in the 2% range, IRA certificates of deposit from CA do not look like a good deal at present. Interest rates will probably be heading up in the near future, and must if the recovery takes hold, so it makes sense to switch to shorter term maturities and investments geared to claiming that 5% return, if possible.
