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Personal Finance Blog By MoneyRates - March 2010

What a Difference a Year Makes

March 31, 2010

| MoneyRates.com Senior Financial Analyst, CFA

As March draws to a close, the U.S. stock market is looking at a year-over-year gain of close to 50%. That's an amazing turnaround -- it was during March of last year that the stock market hit bottom, and at the time, the hope of such a recovery would have seemed like a pipe dream.

It's at times like these that investors start getting a little bolder, and investment industry professionals start making more aggressive recommendations. Of course, the really shrewd investors and savvy professionals were aggressive last year when prices were much lower, but they are the minority. The important thing to remember is this: don't chase returns.

That's not to say you shouldn't own stocks, but if you are going to own stocks, don't try to jump in when the market's been hot, or jump out when you've had some setbacks.

The reminder not to chase returns is important now not only because the stock market is hot, but because bank rates are so low. Anyone mired in minuscule savings account rates, money market rates, or CD rates couldn't be blamed for looking for alternatives. In fact, that feeling is no coincidence -- besides stimulating the economy, one purpose of a low-interest rate monetary policy is to stimulate investment by making sitting in cash unattractive.

The point is, you have to be disciplined, or else you will be whipsawed by market fluctuations. Stocks have their role, as do deposit accounts. Just make sure those roles are determined by your long-term needs and risk tolerance, and not by trying to chase returns you've already missed.

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Does Increased FDIC Insurance Ensure Low CD Rates?

March 30, 2010

By Andrew Freiburghouse | Money Rates Columnist

In response to the banking crisis, the Federal Deposit Insurance Corporation (FDIC) raised the limits on bank deposit accounts from $100,000 to $250,000 per depositor, per bank. This move may have been pivotal in preventing a run on banks in America.

Nevertheless, there may be a convincing argument to be made that the increase in FDIC insurance, insofar as it shows how utterly committed the U.S. government is to protecting bank deposits, is actually a negative for higher bank rates.

In essence, banks are able to charge bank customers a premium--in the form of paying a lower interest rate--because these accounts are backed by the full faith and credit of the United States Treasury.

In the case of savings accounts, it's not likely that many conservative investors would trade the added security for an extra half-point interest rate hike on savings accounts.

However, for the crowd that cares about CD rates, this trade might be more appealing. A one percent higher interest rate on a $200,000 CD means an extra couple hundred bucks per month--and the possibility, over time, to build wealth through consistently seeking out the best CD rates.

What do you think? Would you rather have your jumbo CD money slightly more at risk, in return for a higher interest rate in the meantime?

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Surge in Bond Yields a Hopeful Sign for CD Rates

March 29, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Last week saw a surge in yields throughout most of the Treasury bond market. This is a sign of hope for bank rates in general, but in particular for longer-term CD rates.

So far this year, bond yields have seemingly defied logic in much the way bank rates have -- they started 2010 at extremely low levels, and then just proceeded to get lower. For bond yields at least, things took a sharp turn for the better last week.

Most of the action was in the intermediate-to-long area of the yield curve, i.e., 3-years and out. This is why these moves in the bond market might translate more to CD rates than to bank rates in general. Improbably, short-term Treasury yields actually fell last week, but 3-year, 5-year, and 10-year Treasuries all moved up and now have impressive yield gains to show for the month of March.

While savings account rates and money market rates have more in common with short-term Treasuries, 3-year and 5-year CD rates are more likely to move in concert with Treasuries of similar terms.

If you are shopping for bank rates, and especially if you are rolling over a CD, this means two things:

  • First of all, take a fresh look at the 3-5 year range. It is still a tough call to commit to such long terms when CD rates are generally low, but the more these CD rates start to rise above short-term rates, the more attractive making that commitment becomes.
  • Check rates from different banks. Banks do not respond to changes in the market all at the same time, and the more market rates are moving, the more likely you are to see significant differences among bank rates.
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The Next Act in the Reform Drama -- Fannie and Freddie

March 24, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Even as reform of Wall Street entities continues to wend its way through Congress, the spotlight has shifted to the next act in the regulatory reform drama, which involves what are formally known as Government Sponsored Entities (GSEs), but which are more familiarly called Fannie and Freddie.

Fannie Mae and Freddie Mac are entities that purchase mortgages as part of government-sponsored programs. They started life as government agencies, but over the years acquired a weird, hybrid status. They became independent, for-profit companies, but their obligations were implicitly backed by the federal government.

This arrangement proved to be disastrous. Their for-profit status gave the GSEs an incentive to be as aggressive as possible about generating business, so they did not provide rigorous enough standards to the loans they were insuring. At the same time, the government's implicit backing helped cushion the impact from the inevitable consequences of that laxness.

Now, both the House Financial Services Committee and Treasury Secretary Timothy Geithner have started to talk about the importance of reforming the regulation of these entities. From the nebulous state of reform proposals so far, it appears that actual action is still a long way off. Even so, it can't come soon enough.

The government remains thoroughly tied up in orchestrating the recovery of the housing market. Even as it plans to scale back its direct intervention in the mortgage market, continuing to keep short-term interest rates low is a way of helping beef up bank profits on mortgage loans.

Any bank depositor can tell you the result of this -- low savings account rates, money market rates, and CD rates mean depositors are effectively paying for the past abuses of the mortgage lending system.

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Planning for Old Age Part of Planning for Retirement

March 23, 2010

By Andrew Freiburghouse | Money Rates Columnist

Yahoo Finance ran an insightful, albeit somewhat morbid, article the other day talking about two major roadblocks to retirement wealth. Anyone over age 40 who has multiple bank accounts can benefit from reading this article.

The first major roadblock outlined by the author of the article, Robert Powell, is Alzheimer's disease.

The Alzheimer's Association reports that 5.3 million Americans currently have Alzheimer's, with that number expected to grow to 19 million by 2050. Wow.

No, it is not pleasant to think about what you will do with your money if and when the time comes that you're not able to handle it yourself. But the cost of not undertaking that difficult thinking can be utterly disastrous.

It is such a shame when someone who has worked hard and saved money all their life becomes confused or gets taken advantage of in old age. Proper preparation can prevent this tragedy.

In terms of your bank accounts, simplicity is of the essence if you're concerned about Alzheimer's affecting your money.

Yes, it's smart to shop around for the best CD rates, best savings account rates, and best money market account rates, but it's also a great idea to keep things simple enough to be understood by someone other than you.

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