Image Credit: Christophe Vorlet
By Jason Zweig | Apr. 29, 2016 12:50 pm ET
Low interest rates have made many investors too complacent with their cash.
Squeezing more income out of your cash hardly seems worth the bother in today’s yield-parched world. The average bank money-market account yields 0.11%, according to Bankrate.com. At those rates, $10,000 will earn $11 in a year — enough to buy a few bags of potato chips at Wal-Mart. The Crane 100 Money Fund Index, a measure of returns on money-market mutual funds, yields a still-woeful 0.22%.
With yields so low, even the personal-finance columnist of The Wall Street Journal has thousands of dollars languishing in a bank savings account earning 0.04% a year.
Yes, I know that at that rate, my money won’t double for another 1,733 years. But, along with many other investors, I have what economists call a delay-discounting problem. The work of having to move my money is immediate, while the rewards that come from moving it are delayed.
So, I tell myself, I’ll do it tomorrow. When tomorrow comes, I put it off until the next day. And so on; I’ve been procrastinating on this for years.
Until now, that is. Earlier this month, Goldman Sachs — the Wall Street giant that has long personified wealth and power – began offering savings accounts and certificates of deposit through its online GS Bank.
Goldman’s initiative has prodded me to wring more return out of my cash. Over the next few weeks I’ll finally move out of bank accounts with miniaturized returns into higher-yielding choices.
You should follow suit. Getting extra yield without extra risk takes a bit of work. But cash accounts are perhaps the only area of investing where you can increase your returns 25-fold — or more — without incurring greater risk. For larger investors, wringing out more yield this way can add up to hundreds, even thousands, of dollars in extra income annually.
How attractive are Goldman’s rates? At 1.05% for a savings account and 2% for a five-year CD, they are quite competitive.
“This enables many customers to engage with Goldman Sachs in ways that weren’t possible before,” says the firm’s chief strategy officer, Stephen Scherr.
Goldman’s savings-account rate is the 14th best among the 2,650 ranked by DepositAccounts.com, which tracks rates. You can find considerably higher CD rates, although that takes a bit more work.
“On savings accounts, you’ll get your biggest bang for the buck with an Internet bank,” says Ken Tumin, editor of DepositAccounts.com.
Goldman’s GS Bank is one good choice. This week, seven other online banks offered savings-account rates of 1.15% or greater, including the Bank of Princeton and UFB Direct.
In CDs, your money remains locked up if interest rates rise, unable to capture the new higher rates. But, unlike more-nimble bond funds, CDs have the guarantee of federal insurance if you observe the deposit limits set by the government.
Say you’re looking to invest $100,000 in CDs. First, says Allan Roth, a financial planner at Wealth Logic in Colorado Springs, Colo., spread your money across four or five CDs rather than one. That way, if you unexpectedly take some of your money out, you won’t have to pay an early-withdrawal penalty on the full $100,000. Otherwise you could have to forgo several months’ of interest.
Then calculate what the penalty would cost. On SallieMae Bank’s five-year, 2.1% CDs, for instance, you would miss out on 180 days of interest, or about $10.50 per $1,000. If rates rise one percentage point one year from now, you could cash out into a new CD and earn an extra $10 in interest for each of the next four years, nearly quadruple the penalty.
“If rates go up, I can pay the penalty and get a higher yield somewhere else,” says Jory Olson, a 55-year-old electrical engineer in the Portland, Ore. area. “If they don’t, I get a higher yield than in a bond fund.” Since 2010, he has held seven-year CDs, yielding 3.49% and maturing in 2017, from Pentagon Federal Credit Union — which, he found out, he could join because his father served in the U.S. Navy.
Fred Wagner, 60, a retired petroleum engineer for Exxon Mobil in Houston, owns several “brokered CDs.” These instruments are issued by banks but generally available only through brokerage firms.
In his Fidelity Investments discount-brokerage account, Mr. Wagner filters the offerings to exclude “callable” CDs, which can be taken back by the bank if rates fall.
On a typical day, most brokered CDs don’t trade. If you could find a buyer, you might be lucky to get 98 or 99 cents on the dollar. So don’t buy at all if you will need to sell before maturity.
Mr. Wagner says most of his brokered CDs mature in 2024-2025 and yield around 3%.
He doesn’t feel he’s taking too much interest-rate risk. “I might have a little remorse if rates go up,” he says. “But bond funds would go down too, and I’m getting well beyond market returns in the meantime.”
Source: The Wall Street Journal