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  1. #1
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    Lightbulb Investing Long Term In Bank Central CDs 30 Years Or So.

    Hello all, my first post here. Ive been reading for a while but now its time to raise my hand with a question.

    What do you guys think about investing in 3 year CDs at bank central and then reinvesting all the interest and principal every 3 years to kind of compound the interest long term?

    My thinking is that if one starts with 1million pesos today (about US$29,000), and just keeps the money there and keeps reinvesting it at an average 13% interest rate, it would turn into almost 40million pesos in about 30 years.

    Obviously in 30 years the peso/dollar exchange will be much different, I am thinking that since for the past 10 years the peso went up 20 dollars (from 1999 to 2009), perhaps it may go up another $60 pesos in 30 years. So the exchange would be close to 100/1. However, even then, a meager investment of US$29,000 turned into US$400,000. What if one added an additional US$10,000 every time the CD is reestablished to dollar-cost average the investment? Or what if the average interest rate turns out to be 14% as some years it may be 16% and others 15%, etc.

    I know this raises a lot of questions and theres a lot of risk, but even if the peso goes as high as 150/1 the investment would still grow to over US$250,000 in 30 years. And if one had an additional 10 years to invest the rewards would be even higher as the investment would double every 5.5 years at 13% interest.

    I look forward to your comments on this.

    Thanks,

  2. #2
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    Keep in mind that the interest is paid monthly to a bank account so you don't have daily or monthly compounding of the principal.

    Bank accounts are paying much less than 13%.

  3. #3
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    When you factor in the exchange rate and the inflation, i wonder if it would be worth the risks.

  4. #4
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    Thanks for the reply Celt202. I based my numbers on compounding only every 3 years. 1Million compounded monthly gives you about 9Million more than if you compound every 3 years. The key is to go to the country every three years and take the interest from the savings account and add it to the principal and start a new 3 year CD.

    liam1. The risk is that the peso/dollar will be very high in 30 years, what I don't know is how high it can go. I believe my estimates are just in the conservative side. However, I don't expect the peso to go over $150/1 in 30 years that would be just crazy. Even at $150 it would be disappointing, I guess $100/1 is my cap to be satisfied.

    At the end of the day you are just using about US$30k and even if the exchange got crazy you would be in the winning side. I dont see any scenario of losing here. Other than comparing the return to the stock market but no one knows how stocks will do either. My plan is to invest in both and diversify my investments and even add some real estate to the portfolio.

    I just wonder if Im overlooking something with this Dominican CD strategy.

  5. #5
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    Quote Originally Posted by DCarlos View Post
    ..... The key is to go to the country every three years and take the interest from the savings account and add it to the principal and start a new 3 year CD.
    .......
    You have to be careful to avoid the bank account becoming inactive and being subject to ridiculous fees and even being closed. You need to look into that carefully and be completely clear on the rules of the bank you might use.

    Expect the bank to change the rules without properly informing you.

  6. #6
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    Default Congratulations on recognizing...

    and thinking of a long term strategy to harness what some call the eighth wonder of the world (compounding).

    Aside from the economic risks mentioned above, as welll as the many bank failures that have occurred over the last 30 years, and the potential failures going forward, one needs to assess the political risk.

    Thirty years is a very long time, politically speaking, to keep that kind of money anywhere, not just the D.R. If you do a careful backward looking thirty year political analysis of the D.R., you will find more than a few heart stopping moments for those with capital invested there. Now you need to put forth your best intelligence as to what the next 30 years might look like. Once you have done that, you will determine the need to have a high risk premium for your investment. The question becomes how high...and can only be answered individually, as each persons risk tolerance is different.

    Just remember ten years ago, the peso was in the 12-13 range. Today it stands at 35.75 +/-.

    Good Luck.


    Respectfully,
    Playacaribe2




    Quote Originally Posted by DCarlos View Post
    Hello all, my first post here. Ive been reading for a while but now its time to raise my hand with a question.

    What do you guys think about investing in 3 year CDs at bank central and then reinvesting all the interest and principal every 3 years to kind of compound the interest long term?

    My thinking is that if one starts with 1million pesos today (about US$29,000), and just keeps the money there and keeps reinvesting it at an average 13% interest rate, it would turn into almost 40million pesos in about 30 years.

    Obviously in 30 years the peso/dollar exchange will be much different, I am thinking that since for the past 10 years the peso went up 20 dollars (from 1999 to 2009), perhaps it may go up another $60 pesos in 30 years. So the exchange would be close to 100/1. However, even then, a meager investment of US$29,000 turned into US$400,000. What if one added an additional US$10,000 every time the CD is reestablished to dollar-cost average the investment? Or what if the average interest rate turns out to be 14% as some years it may be 16% and others 15%, etc.

    I know this raises a lot of questions and theres a lot of risk, but even if the peso goes as high as 150/1 the investment would still grow to over US$250,000 in 30 years. And if one had an additional 10 years to invest the rewards would be even higher as the investment would double every 5.5 years at 13% interest.

    I look forward to your comments on this.

    Thanks,

  7. #7
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    ......and in 1984, the peso was trading at 3.45 to $1US -that's only 25 years ago. It only takes one bozo like Hipolito in the next 30 years to make your plan blow up! Under 2 or 3 years of his rule, he managed to change the exchange rate from about 17 :1 up to as high as 55:1 ! I remember him saying "the DR doesn't have enough debt," and his people proceeded to go out borrowing money.

  8. #8
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    Quote Originally Posted by GringoCArlos View Post
    ......and in 1984, the peso was trading at 3.45 to $1US -that's only 25 years ago. It only takes one bozo like Hipolito in the next 30 years to make your plan blow up! Under 2 or 3 years of his rule, he managed to change the exchange rate from about 17 :1 up to as high as 55:1 ! I remember him saying "the DR doesn't have enough debt," and his people proceeded to go out borrowing money.
    Before the Hipolimoto a Sicilian I know invested 250K US in Banco Central CD's when the exchange rate was 17:1.

    I haven't talked to him in years because he has dodgy vibes but if he still has the money in the Banco Central CD's his original principal is worth half what he started with.

  9. #9
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    Thanks, Playacaribe2. Would you say that the CD investing strategy is riskier than investing in the US stock market on index funds?

    I kind of trust the central bank as if that were to fail the entire DR economy would fail and I believe before that happens other countries would come to the rescue.

    I love the idea of compounding interest and I agree that it may just be the 8th wonder of the world. Seeing the opportunity of getting an interest rate over 10% is tempting and even if the peso devaluates it still sounds like a good strategy as long as one has a long term view of it. There will be ups and downs in the exchange rate but Im hoping that it doesnt increase more than $20 pesos per 10 year period.

    GringoCarlos If it went from $3.45 to $36 per dollar thats not so bad in 25 years. Remember that Im allowing a $20 pesos per 10 year period increase. Obviously Hipolito made things scary for those US residents who had money there, but even if the Peso was at 60/1 today and I began investing during the 80s at 2/1 3/1, the increase is only an extra $57 pesos during that 30 year period.

    My view is that if the peso/dollar goes up to $100/peso in 30 years the US$29k investment I make today will turn into $400k assuming an average of 13% interest rate throughout the years. I know that with inflation the return is much lower but all investments are subject to inflation anyway.
    Also, what if I dollar-cost average the peso by adding an additional US$10,000 every 3 years? That will protect me a little bit from fluctuating exchange rates.

  10. #10
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    A very interesting question.

    The history of Dominincan banking is usually the government loots the treasury or a particular bank at various intervals. It happened under the blanco administration as well as others. I personaly would nt go near a DR bank'. The interest rate in the U.S. is very low right now for them to give u 13-15 % means the people in the know think its a risky bet.
    What about tax liability from the U.S. and the DR ?
    The U.S. /world economy is in such upset right now....I would be wary of such a long term commitment.
    The IMFs most recent projections for the world economy are less than rosy. My feeling is we are in for some long term problems.
    Maybe look into a shorter CD time of maturity.
    Some people r putting their money into commodity ETF's betting their will be high inflation.
    There r safer countries in the world where u can invest and receive high interest.
    A good source for info on money is CNBC . Esp. jim cramer and Mackie of fast money.

    What ever u decide good luck

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