Rate Chasers Start to Ask 'Why?"

Has rate chasing lost its allure?

From October 2008 to March 2009, in the midst of a global economic collapse, savings accounts were the only place to save keep your money safe.

You didn't need to wander far from the water cooler to hear the talk about how the great savings accounts were.  In a global collapse, savings accounts were the only place to save your money.  It was especially sexy to earn 2 to 4% safely in a bank account if you were internet savvy and went to BestCashCow.com to find the best rates. 

But, now the stock market has gone into a massive rally. moving up 2 to 3% each day on an almost constant basis.  Talk has turned again from earning a safe return to the guy down the hall who bet everything on Bank of America at $2 a share and earned a five fold return in a matter of weeks.  This is a country where we only dream big dreams.  Eventually, we reach a point at which it doesn't really matter whether the guy down the hall even existed.   We simply lose our ability to focus on investing only to earn the amount that the stock market appreciates over any given day, albeit without risk.  Our collective memory, even when the wounds are so deep and the pain so recent, seems to have disappeared.

Against that backdrop, many who have chased rates have done so only to find their savings rate drop quickly and dramatically.  Many of the best savings accounts offered on the BestCashCow.com savings rate table quickly fell off the table, with even established internet banks, such as HSBC or ING moving from the top of the chart to bottom in short order.  People are frustrated when they go from earning a decent return to earning a fraction of nothing. 

It is entirely unclear what is going to happen over the stock market for the rest of 2009 and into 2010.  It is entirely possible that we are at the culp of a new massive economic recovery.  It is also more than likely that savings rates remain low and not entirely competitive.  Some bank will invariably go from offering outstanding rates to dropping their rates and leaving depositors to earn nothing or need to move their money again for higher returns  However, it is also possible that we are in something other than an ordinary recession, that there are more shoes to fall, and the economic gets significantly worse.

Against this backdrop, there are many people of all ages who realize that they need to keep substantial amounts of assets outside of equity markets and cannot find other markets in which they feel comfortable.  For these people, rate chasing still makes sense.  While it can be frustrating, the reality is clear.  Those who are diligent about find the best rates will continue to be well rewarded when compared with those who do not not have that flexibility.

Let's take an example: If you were fortunate enough to have $2.5 million in cash, you could benefit from the reality that FDIC insurance limits have been temporarily raised to $250,000 and deposit it across the top yielding 10 bank accounts without putting a cent at risk and get no less than 2% return on every cent that you have.  That money would therefore yield in excess of $50,000 versus about $10,000 in a standard money market fund (before taxes of course).

While this is an extreme example, it underscores the point that if you have cash and cannot take the risk that we now know is all too real, you will still do very well by taking the time and the effort to find the best rates.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Comments

  • Tom

    May 19, 2009

    Good article. I think those that expect the equity markets to keep going up are going to be disappointed. Investing in stocks should be one part of your portfolio but keeping some money in cash is a must. If you're going to keep it in cash you might as well earn the highest return you can get.

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