Personal Finance Blog By MoneyRates - July 2009
July 30, 2009
Before the market crash of 2008, it had become accepted wisdom that stocks, over the long-term, will outperform conservative deposit account investments like Certificates of Deposit.
But is this accepted wisdom true?
CD Performance Weighted for Risk Aversion
The first item of business, when making such a comparison, would be to note the lack of risk in CDs. CDs may entail less risk because they're:
-- Backed by FDIC insurance up to $250,000 per depositor per account. Not one depositor has lost money in an FDIC-insured deposit account since the FDIC's founding in 1933.
-- Influenced by interest rates. During a period of high interest rates, CDs pay well. By laddering CDs over time, returns can be amplified.
-- Not tethered to the performance of any one company. In the stock market, today's star can morph into tomorrow's dog without warning.
CDs vs. Stocks by the Numbers
Barron's ran an interesting piece earlier this year that punctured some major holes in the "cult of equities" that has arisen over the years. According to figures cited by Barron's, bonds outperformed stocks from 1968 to 2009, as measured by the S&P 500.
It should be noted that the Barron's figures do not account for dividends paid by stocks. Nevertheless, such studies clearly show that the great majority of stock market gains occur intermittently, unsteadily.
CDs, meanwhile, plug along, slowly but surely.
July 29, 2009
Besides locking in interest rates, one potential advantage that certificates of deposits have over savings accounts is that they should not be subject to sudden fee increases. Looking to shore up profitability, banks have been raising a variety of fees lately. In turn, rising fees have increasingly been cited as the reason why customers switch accounts.
While checking accounts seem to have borne the brunt of this, other deposit accounts have not been immune to rising fees. There are a couple things going on here. First, the banks are trying to increase revenue wherever they can, and those extra fees help make up on lost revenue from lending. Second, in the ways they structure fees banks are trying to focus on the most profitable customers -- those that have the largest balances, make the fewest transactions, and bank electronically.
This is somewhat akin to the extra charges airlines are resorting to -- some of it is understandable, but when they go to far the nickle-and-dime mentality just drives customers away.
At MoneyRates, we are interested in the fee experiences of our site's visitors. What are some of the worst or best deals you've come across? While visitors to our site tend to be rate fanatics looking for the best interest rate deals, they are also smart enough to know that unfavorable fees can undermine those interest rates. We're interested in your comments on your experiences with bank fees.
July 28, 2009
Saving is back in style.
After years when many people thought it irrelevant to be worrying about getting the best savings account interest rates, the best CD interest rates, or the best money market account interest rates, Americans are realizing that if you don't save for a rainy day, you get rained on.
The headline statistic highlighting this trend towards saving can be seen in the sudden jump of the American savings rate to 7 percent. Bank deposit increases of 1.7 percent in May tell the same story. Also note the increasing reliance on debit cards for purchases, rather than credit cards.
These statistics, while insighftul, may be missing the larger big picture point: savers, it seems, have saved the banks.
As of the end of June, 52 U.S. banks had failed in 2009. That's more than double the rate of 2008, but not nearly as devastating as what could have been.
The FDIC raising of the insurance limit to $250,000 per depositor per account was a big move. But equally essential was the move by millions of individual people to start saving a little more.
That little more has added up to a lot, in the form of a solidly surviving U.S. banking system.
July 27, 2009
When markets are volatile and the economy is uncertain, it is easy to take a wait and see attitude toward financial decisions -- especially major ones such as buying a house. However, it is precisely at such times when opportunities can be greatest. To think of it with even more urgency, sometimes failing to act can cost you for years to come.
In this case, the opportunity comes in the form of mortgage rates. Current mortgage rates are a little higher than they were earlier this year, but are still at levels so low they had never been reached before this year. It is important not to get complacent about those low mortgage rates. Long bonds have been rising steadily over the past several weeks, and mortgage rates tend to respond to many of the same conditions as bond rates.
Certainly, for anyone with the opportunity to refinance, the decision should be a no-brainer. You have already made the big decision -- committing to a house and a mortgage -- so now you just have to spend a little time going through the process of refinancing.
As for potential home buyers, this is a bigger decision than simply refinancing, but if you are a first-time home buyer, you have the added incentive of an $8,000 tax credit. None of these conditions are permanent -- and if you don't act now, there's a good chance you will miss them when they are gone.
July 23, 2009
Stocks are surging, with the Dow passing 9,000 today. What does this mean for conservative investors in search of the best CD rates and the best money market rates? Is it time to shift more savings into equities?
Risk vs. Reward, and the Danger of Getting Greedy
Stock market returns, when they're good, are really good. Since the March 2009 lows, stocks have seen gains of more than 30 percent. Particular stocks, such as Apple Computer, have nearly doubled in value.
With CD rates below two percent, conservative investors may be rethinking their strategy. However, such investors must be wary of "chasing" a rising market, especially those investors who are approaching retirement.
There is absolutely nothing guaranteed about the stock market. Certificates of Deposit, by contrast, are a sure thing.
"A Trader's Market"
Anyone who watches CNBC has heard, perhaps more often than is healthy, the expression "it's a trader's market." Despite the hoary nature of his phrase, there's truth to it.
Investors who like the "set it and forget it" style of keeping money in sure thing instruments like high interest savings accounts may find that the time and energy needed to work the stock market is more hassle than it's worth.
Then again, 30 percent returns can be quite enticing...