Why not a T-bill instead? Aren't they north of 4%?
Personal Finance: Financial Planning & Investing
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Why not a T-bill instead? Aren't they north of 4%?
Ally savings is 3.8% now. CIT bank is 4.35% . There are others in this range of 3.5-4.4. Most are online-only. Many have gimmicks so pay attention.
We use Ally exclusively for HY savings because, IMHO, it's the easiest to work with and most reliable (again, IMHO).
Can transfer funds from / to in 1 business day.
T-bills don't have the same inflation-protection as iBonds. iBonds are limited to $10K/ year per person. So there are some differences. Also, the treasury website was built in 1855 and still looks/acts like it
There are also differing tax treatments for interest and when it is paid for different treasury options, so again, pay attention. That 4.5% may actually be a 3.2% tax equivalent after you pay taxes. iBonds can pay interest when you withdraw which - if you do so when you retire or have lower income - will probably have lower tax.
Finally, Vanguard's Federal Money Market (VMFXX) is 5.23% yield today. So, if you have vanguard, extra cash there is earning at a high rate right now. It will have a monthly interest payment that you'll pay taxes on and is a money market fund so like all money market accts, there is that kind of risk that is not protected by the good faith and credit of the good ol' USA gov't and there could be limits on how much you can withdraw in a 2008-like crisis.
All of these are good options depending on your hold time, access needs, tax bracket, etc. Also pay attention to expense ratios, too.
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I'll also extend my remarks on the emergency fund.
Everybody has to figure out what your own risk and risk tolerance is.
If you have a stable, gov't type job, you're less likely to be laid off or fired tomorrow so your need for, say, saving "six months of expenses in liquid assets" might be less than a software developer or salesperson with a high salary but s/he's in a high-risk-for-getting-laid-off career. Gauge that and save appropriately. Emergency savings shouldn't mean no return. Plenty of safe, available, easily accessible, decent return options out there.
One guideline that isn't a bad idea for salaries under, say, 120K ... for every 10K of salary, expect it will take you 1 month to find an equivalent job if you're laid off, and, thus, need 1 month of expenses for every 10K in salary, saved in an emergency fund. YMMV on this, but it's a starting point (and maybe a corollary to Benz's suggestions).
Also... Three things to avoid: guaranteed returns, get rich quick schemes, and variable universal life insurance
Everybody has to figure out what your own risk and risk tolerance is.
If you have a stable, gov't type job, you're less likely to be laid off or fired tomorrow so your need for, say, saving "six months of expenses in liquid assets" might be less than a software developer or salesperson with a high salary but s/he's in a high-risk-for-getting-laid-off career. Gauge that and save appropriately. Emergency savings shouldn't mean no return. Plenty of safe, available, easily accessible, decent return options out there.
One guideline that isn't a bad idea for salaries under, say, 120K ... for every 10K of salary, expect it will take you 1 month to find an equivalent job if you're laid off, and, thus, need 1 month of expenses for every 10K in salary, saved in an emergency fund. YMMV on this, but it's a starting point (and maybe a corollary to Benz's suggestions).
Also... Three things to avoid: guaranteed returns, get rich quick schemes, and variable universal life insurance
Are you referring to CDs? Right now 3 & 4 month CDs are paying in the 3.5 - 5% range and govt. insured for.I'll also extend my remarks on the emergency fund.
Everybody has to figure out what your own risk and risk tolerance is.
Also... Three things to avoid: guaranteed returns, get rich quick schemes, and variable universal life insurance
No - I'm referring to get-rich-quick schemes and the like where the "broker" guarantees you a return.
Also, as an aside one can check https://www.bankrate.com/ for the latest daily rates on HYSA, checking, CDs, HELOCs, Loans, etc. I advise staying away from financial institutions you''ve not ever heard of and away from chasing returns. It's usually not worth the hassle to switch accounts for less than 0.5% and maybe even 1% differences because if there's that much difference between that rate and, say, Ally, CIT Bank, or Marcus, there's usually a gimmick (or obscure requirement) that makes it a hassle.
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I would add Synchrony and Discover Bank (the CC company) to that list of reliable financial organizations continually paying (not intro offers) good rates and being government insurred.
BamaNation is absolutely right. Just one example of what he's talking about: A lot of high-yielding CDs are now callable.
That means the issuer can pay you back at any time up to maturity -- and the only circumstances under which they'd do that are if rates fall materially.
They still have to pay you all your principal, plus the promised interest rate up to the date they call the CD. Then you're left to reinvest the money at the now-lower prevailing interest rates.
IOW, they shift the burden of interest rate risk to you.
Here's how that works: If rates go up, they have your money for cheap and won't call the CD. At maturity you get your principal back, plus the originally-promised interest.
But if rates go down, you get the principal back plus the promised interest rate. However, that promised interest rate is paid only through the date the CD is called. Note that as a practical matter, the decline has to be steep enough to make the administrative hassle of calling worth their time and effort.
Greatly Simplified Example: You buy a $10,000 callable CD paying 5%. Maturity is a year from now.
Scenario 1: Subsequent to your purchase, rates go to 8%. The issuer has your money for 5%, but the new market rate is 8%. They're not calling that CD. They'll pay you your principal, plus the originally promised $500 interest at maturity, thank you very much.
Scenario 2: Six months after your original purchase, rates go to 2.5%. The issuer can pay you 5% or pay the new market of 2.5%. So they call your CD. They pay you your $10,000 principal, plus $250 in interest (5% per annum, pro-rated for 6 months). You now have to invest your $10,250 at the new lower interest rates.
Doesn't necessarily mean that callable CDs are a bad deal. Just that you need to understand what you're buying and be aware of what could happen. Caveat emptor.
That means the issuer can pay you back at any time up to maturity -- and the only circumstances under which they'd do that are if rates fall materially.
They still have to pay you all your principal, plus the promised interest rate up to the date they call the CD. Then you're left to reinvest the money at the now-lower prevailing interest rates.
IOW, they shift the burden of interest rate risk to you.
Here's how that works: If rates go up, they have your money for cheap and won't call the CD. At maturity you get your principal back, plus the originally-promised interest.
But if rates go down, you get the principal back plus the promised interest rate. However, that promised interest rate is paid only through the date the CD is called. Note that as a practical matter, the decline has to be steep enough to make the administrative hassle of calling worth their time and effort.
Greatly Simplified Example: You buy a $10,000 callable CD paying 5%. Maturity is a year from now.
Scenario 1: Subsequent to your purchase, rates go to 8%. The issuer has your money for 5%, but the new market rate is 8%. They're not calling that CD. They'll pay you your principal, plus the originally promised $500 interest at maturity, thank you very much.
Scenario 2: Six months after your original purchase, rates go to 2.5%. The issuer can pay you 5% or pay the new market of 2.5%. So they call your CD. They pay you your $10,000 principal, plus $250 in interest (5% per annum, pro-rated for 6 months). You now have to invest your $10,250 at the new lower interest rates.
Doesn't necessarily mean that callable CDs are a bad deal. Just that you need to understand what you're buying and be aware of what could happen. Caveat emptor.
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Not really. Callable CDs typically pay a higher initial rate than non-callable ones. And the terms are fully disclosed. So the buyer does get something in exchange for shouldering the interest rate risk, and should be (key words) fully informed of that.
IOW, buyers get paid for the risk and have everything they need to assess whether the higher rate offsets the risk of callability.
It's just that, to paraphrase Simon & Garfunkel, too many people hear what they want to hear (the higher rate) and disregard the rest (the callable feature).
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Not really bait and switch - it's just good business on their part and part of the contract but definitely caveat emptor! Reading the fine print is imperative.
Some other crazy requirements are (for example) 5% checking accounts. You get 5% on the first $1000 deposited and 0.01% on anything above that plus you have to make 10+ purchases using your ATM card at retail stores (or some similar crazy thing like that). Absolutely not worth it but again, reading the details matters.
Agreed, not bait and switch as the terms are very clearly laid out. But every investment vehicle is offered with the premise that the financial institution is the real winner. They all shift as much risk as possible. They offer returns, but they are not charities.
May be time to cut holdings in S&P 500 indexed and similar indexed funds?
Depends on your situation. If you've decided your risk tolerance has changed, maybe. If you're still contributing / buying funds and nothing else has changed, I might say no. Otherwise, you may be just chasing returns and you're almost always gonna be late to that party.
Jack Bogle had a great saying: “Don't just do something, stand there!†and "Stay the course"
We use VTI or VTSAX (or similar) - Vanguard's Total Stock Market Index whenever it is available in our retirement accounts if we are buying a total mkt index. We use an S&P 500 fund when it is not or approximate the total index fund ourselves by allocating to equivalent underlying funds. Historic return on the SP500 is about 10.4% vs total market return of 10.2%. But there's also (potentially) some risk you take on in the SP500 by not being as diversified.
There are differences in how each index is constructed (i.e. S&P500 vs VTI vs LageCap vs...) and that obviously makes a difference in returns, but there is high correlation over time between SP500 & total stock market indices. SP500 accounts for like $46B of the $54B in the market and has 500 funds. The other $8-10B are 5000+ mid & small caps that will go up/down with typically high betas that can only be captured if you're invested in the total market (or a small cap fund) when you rebalance.
The philosophy is that if you're only in the SP500 then you may not see that extra few % pts every so often, but if you want less stress and complexity just set and forget on one of them and don't worry about small fluctuations or differences.
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Two Interesting observations from yesterday in my personal accounts...
total stock market index was down -1.4%
Total bond market index was up +0.53%
Total international market index was down -0.6%
S&P500 index was down -1.46%
some of our non-index investments up slightly (+0.1%)
Observations:
1) Our overall portfolio was down -0.4% on a day when $1T was wiped out of the market (mostly AI / growth companies)
2) FINALLY the bond market acted in the way one would expect in conditions like this
The moral of the story: Stay calm in the storm.
total stock market index was down -1.4%
Total bond market index was up +0.53%
Total international market index was down -0.6%
S&P500 index was down -1.46%
some of our non-index investments up slightly (+0.1%)
Observations:
1) Our overall portfolio was down -0.4% on a day when $1T was wiped out of the market (mostly AI / growth companies)
2) FINALLY the bond market acted in the way one would expect in conditions like this
The moral of the story: Stay calm in the storm.
I was a bit surprised at the amount of interest I made last year with my CDs, money market savings, and checking. I made double what I was expecting
Yesterday's market activity was unusual, but highly instructive. It was a great illustration of the different composition and calculation methods of the big three indices -- Dow's up about .6%, S&P down a bit over 1%, and NASDAQ down about 3%.
So how'd that happen? It's all in the definitions.
(Note: The nitty gritty calculations change every day. The numbers quoted below are the latest ones I could find on short notice. While they will not be pluperfectly accurate at the close of business today, they're still valid for purposes of this discussion.)
Dow Jones 30 Industrials
The Dow is 30 companies. This is important: It's weighted by share price, not market cap. It's also diversified across a lot of industries.
A bit of foreshadowing here -- tech is a component, but not a massively outsized one.
Still, even at the Dow (remember, it's calculated based on share price, not market cap), tech has a bit of outsized influence because tech companies tend to have low to mid 3-figure share prices.
S&P 500
Obviously, 500 companies. But their individual influence on the index is determined by their market capitalization, not their share price. Market cap = (share price) x (# of shares outstanding).
This means huge companies have far more influence than smaller ones. How much more?
5 Largest S&P Companies By Market Cap = 26% of the index. IOW, the other 495 companies are 74%
10 Largest S&P Companies by Market Cap = 36% of the index. IOW, the other 490 companies are 64%
Tech accounts for 26% of the index.
NASDAQ 100
Biggest 100 Companies listed on the NASDAQ exchange. Also weighted by Market Cap.
5 Largest NASDAQ Companies By Market Cap = 36% of the index. The other 95 companies are 64%
10 Largest NASDAQ Companies by Market Cap = 52% of the index. The other 90 companies are 48%
Tech accounts for 58% of the index. NVIDIA and Microsoft alone account for about 17%
Point of all that geekiness? Tech drives the NASDAQ. It has a big influence on the S&P, but not so much as it has on the NASDAQ. It's one of a bunch of components of the Dow, and has less influence there.
So NVIDIA was the story yesterday. Lost 17% of its value, or about $600 Billion dollars. It alone accounted for a huge chunk of the overall decline in the S&P and NASDAQ.
And BamaNation was spot on in that this move isn't a reason to change your investment allocation. It's very seldom that market events on any one day are.
What is a good reason to change your allocation? A change in your risk tolerance. Usually, that involves a change in your time horizon. It could something happy....like you just turned 55 and are 10 years out from retirement. Or just life...like a child turning 10, and you have about one business cycle before you have to pay for college. It could be something sad....like a bad diagnosis for your or your spouse.
Regardless, the point is that it's not often a good idea to change your allocation in response to moves in the market. That's also known as chasing the market, really means you're buying high and selling low, and almost never works out. A good reason to change is because something in your own personal life has changed. Or it's part of a periodic rebalancing of your portfolio.
So unless something changed for you personally, "Don't just do something....stand there!"
So how'd that happen? It's all in the definitions.
(Note: The nitty gritty calculations change every day. The numbers quoted below are the latest ones I could find on short notice. While they will not be pluperfectly accurate at the close of business today, they're still valid for purposes of this discussion.)
Dow Jones 30 Industrials
The Dow is 30 companies. This is important: It's weighted by share price, not market cap. It's also diversified across a lot of industries.
A bit of foreshadowing here -- tech is a component, but not a massively outsized one.
Still, even at the Dow (remember, it's calculated based on share price, not market cap), tech has a bit of outsized influence because tech companies tend to have low to mid 3-figure share prices.
S&P 500
Obviously, 500 companies. But their individual influence on the index is determined by their market capitalization, not their share price. Market cap = (share price) x (# of shares outstanding).
This means huge companies have far more influence than smaller ones. How much more?
5 Largest S&P Companies By Market Cap = 26% of the index. IOW, the other 495 companies are 74%
10 Largest S&P Companies by Market Cap = 36% of the index. IOW, the other 490 companies are 64%
Tech accounts for 26% of the index.
NASDAQ 100
Biggest 100 Companies listed on the NASDAQ exchange. Also weighted by Market Cap.
5 Largest NASDAQ Companies By Market Cap = 36% of the index. The other 95 companies are 64%
10 Largest NASDAQ Companies by Market Cap = 52% of the index. The other 90 companies are 48%
Tech accounts for 58% of the index. NVIDIA and Microsoft alone account for about 17%
Point of all that geekiness? Tech drives the NASDAQ. It has a big influence on the S&P, but not so much as it has on the NASDAQ. It's one of a bunch of components of the Dow, and has less influence there.
So NVIDIA was the story yesterday. Lost 17% of its value, or about $600 Billion dollars. It alone accounted for a huge chunk of the overall decline in the S&P and NASDAQ.
And BamaNation was spot on in that this move isn't a reason to change your investment allocation. It's very seldom that market events on any one day are.
What is a good reason to change your allocation? A change in your risk tolerance. Usually, that involves a change in your time horizon. It could something happy....like you just turned 55 and are 10 years out from retirement. Or just life...like a child turning 10, and you have about one business cycle before you have to pay for college. It could be something sad....like a bad diagnosis for your or your spouse.
Regardless, the point is that it's not often a good idea to change your allocation in response to moves in the market. That's also known as chasing the market, really means you're buying high and selling low, and almost never works out. A good reason to change is because something in your own personal life has changed. Or it's part of a periodic rebalancing of your portfolio.
So unless something changed for you personally, "Don't just do something....stand there!"
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A decent quick and dirty rule of thumb for figuring out what one's asset allocation should be...
some may quibble with the philosophy label and the exact calculation (i.e. "conservative should be moderately conservative and it should be 90 minus your age") etc. Couldn't care less. This is decent way of figuring out where you are currently and where you might want to get back to in a reallocation.
We look at reallocating around July 4 and during Christmas holidays. We also have a +/- 5 pct points band that could trigger reallocation at other times (i.e. if we want to be 25% bonds and it goes to 19% that would trigger a reallocation for us). Some have tighter or looser bands. The key is to develop a philosophy and stick to it so that market events don't cause you to panic buy or sell. This alone has spared me from all kinds of stress I would have otherwise incurred over the last 10 years.
| ALLOCATION PHILOSOPHY | EQUITY ALLOCATION % CALCULATION |
| Conservative | 100 minus your age |
| Moderate | 110 minus your age |
| Aggressive | 120 minus your age |
We look at reallocating around July 4 and during Christmas holidays. We also have a +/- 5 pct points band that could trigger reallocation at other times (i.e. if we want to be 25% bonds and it goes to 19% that would trigger a reallocation for us). Some have tighter or looser bands. The key is to develop a philosophy and stick to it so that market events don't cause you to panic buy or sell. This alone has spared me from all kinds of stress I would have otherwise incurred over the last 10 years.
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Transitioning to a lower risk portfolio makes perfect sense -- not because of an unsustainable three-year runup (which was in part a function of a pandemic-induced low starting point), but because you're in a later phase of your working career.
IOW, you no longer have nearly as much time on your side to recover from a downturn....which will come, it's just a question of when.
There are several ways to plan for that, and you'll need to work with your financial advisor to determine the right one for your specific circumstances -- this is an area where one size definitely doesn't fit all.
A lot of people use the 60% / 40% allocation -- as in 60% diversified stocks and 40% bonds. Mrs. Basket Case and I have a barbell portfolio -- 5 - 7 years worth of living expenses in laddered CDs and money market funds, with the rest in a diversified portfolio of mostly US equity index funds.
Between SSI, a pension and the cash (or near-cash) holdings, it's enough to bridge an economic downturn and keep us from having to liquidate stocks at depressed prices in order to put food on the table and gasoline in the car.
We don't have any long-term bonds because rates are still low when viewed against long history.
For reasons discussed earlier, their market value (as distinct from their ability to pay interest) is really vulnerable to increases in interest rates. For my blood, the additional yield you get for going out long today is just too small to justify the associated risk of a hit on MV. I'll take a yield that's only slightly lower in order to have minimal exposure to declining MV on shorter-term instruments.
But like I said, that's us. Everybody's situation is different. Your financial plan should reflect your situation, not anybody else's.
I poured everything into the market after it crashed, twice. Payed off both times. I am through gambling. I am really worried about the damage that Trump's policies will have in my investment time frame. Yeah, time to reallocate.
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