Investing Long Term In Bank Central CD?s ? 30 Years Or So.

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%.

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

DCarlos said:

..... 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.
.......

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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.

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

DCarlos said:

Hello all, my first post here. I?ve been reading for a while but now it?s time to raise my hand with a question.

What do you guys think about investing in 3 year CD?s 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 there?s 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,

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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.

GringoCArlos said:

......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.

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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.

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

Say that peso is at 36:1, if it goes to 37:1 you have lost over 2.5% of your investment. If it goes to 40:1 you lost over 10%. Most likely PRD will win the next election, and they have been proved as economic wizards. That is looking forward only 3-4 years, and you are talking about a 30 year plan.

If the current CB administration stays over the next 30 years I would say go for it. But as you know governments changes hands and that includes the CB, I can't give you advice on plans after 2012. From there I would say you are on your own.

The idea perse is very interesting, and would account for very good business if everything goes according to plan.

DCarlos said:

Hello all, my first post here. I?ve been reading for a while but now it?s time to raise my hand with a question.

What do you guys think about investing in 3 year CD?s 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 there?s 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,

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In this country, with it's currency and the sharp turns it all takes with a government change plus the currently internationally uncertain times as far as the economy goes... We don't really know wha't coming tomorrow, much less in over 2 or 3 years.

I remember coming to Ecuador in '93... the Sucre/USD was at 2000/1...
two years later it moved up to 3000/1 upping 50%. Another 2 years later it topped 47'000/1!! up 1500%.

I remember times when Brazil counted it's currency loss in single digit %'s PER DAY... and then it stabilized.

Spain saw it's Pesetas sliding until it was locked onto the future Euro... those who bought CD's at 16% a year or so before.... made a killing for the remainder of the "contract term".

In other words, historically volatile currencies are difficult to predict and thus I would NOT bank on them when they are (held) relatively stable... and only consider them when they are slumping as they should... hoping to get a high return locked in for the day they get stabilized.

In other words... HIGH RISK and only to be done with PLAY money you can live with loosing while keeping, maybe not a smile but at least a smirk on your face.

... J-D.

The CD investing strategy...

DCarlos said:

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 I’m hoping that it doesn’t increase more than $20 pesos per 10 year period.

GringoCarlos – If it went from $3.45 to $36 per dollar that’s not so bad in 25 years. Remember that I’m 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 80’s 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.

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you propose is exponentially riskier than investing in U.S. index funds. Index funds by their very nature are designed to minimize risk in the sector(s) they seek to mimic. Instead of investing in one or two company stocks in, lets say Gold, where a a nationalisation of a private mine takes place with one of your stocks and/or civil war breaks out in the country of your other stock. I think you can guess what might happen to the price of those individual stocks.

Now, lets say you own an index fund with 20/30 gold mining companies and two of them are the ones mentioned above. The blow to your portfolio will be cushioned by the other 18/20 companies who may be having banner years. But, then again, the upside is limited too.

As I said above, your basic strategy is sound, but for me, way too risky in having all your proverbial eggs in one basket.

A good strategy, but not the only one, using index funds would be, depending upon your age, 50-60% Wilshire 5000, 20-30% International, 10% bonds, 10% gold, 10% emerging markets. While not as potentially lucrative as your D.R. strategy, it is infinetley safer and at the click of a mouse during normal trading hours, you can be out of one and into another.

Additionally, and related to risk, Mexico has on a number of occasions in the past devalued its currency overnight. I ask you if going to bed one night with the equivalent of $100,000 U.S. in your account and waking up with $12,000 is acceptable risk to you? If so, then you just might be a candidate for your strategy outlined above. While some might argue that is what has happened to most of the G7 countries, that decline took place over many months and with plenty of warning signals for those who cared to heed them.

Finally, to give you an example of the power of compunding in the form of a question, If offered $1,000,000 USD or 1 cent per day doubled, which would you take? The answer is 1 cent doubled....by a wide margin.


Respectfully,
Playacaribe2

Sounds like you have...

DCarlos said:

What do you guys think about the "dollar-cost" average effect, if I add 5 to 10 thousand US$ every 3 year period to the new created CD? Would it shield the devaluations by an increase in buying power?

My intention is not to do this sole thing as a retirement plan; I'm just considering it as another option. If my US$30k become US$10k in 30 years (factoring in inflation) it'll be disappointing but it won't kill me. I know I'll always wonder what it could've been if I had put that money somewhere else but that's the risk you take...

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already made up your mind! If that is the case, then go for it. Just remember that if you dollar cost average with 5-10k every 3 year period...you will have far more than $30k at risk. Once money is commited to that strategy, nothing can shield you from a currency devaluation.

Good Luck.


Respectfully,
Playacaribe2