The Case Against Principal Protected Notes

With the stock market at its all time high, brokers at Merrill Lynch, Morgan Stanley and JP Morgan Asset Management are touting an instrument called “principal protected notes.”  These notes come in a variety of different forms, but the structure is usually pretty similar.  You buy a note with a 100 par value tied to an S&P price that is set on the day of pricing.   If the S&P were to be trading at 2500, that would be your S&P price.   At the point of maturity, usually 5 years, you receive a percentage of the increase in the value of the S&P (usually between 50% and 70%) with your total appreciation usually capped around 30%).

These things are actually selling like hot cakes, especially now that the market is at its all-time high.   Brokers will tell you that you are not putting your principal at risk (which is correct so long as the underlying offeror does not default).  The notes, therefore, are very attractive to people who are risk averse and are upset that they have missed a huge run in the stock market.

Even if fear of missing out (FOMO) is your issue, this is not the right instrument for you.

Proper investing and proper financial planning involves having a portfolio of equity, debt securities, cash and other instruments (such as real estate, gold or other commodities).  

If you purchase one of these instruments, you are buying something other than equity.  Rather, you are buying an instrument that does not let you fully participate of the market, instead only giving you fractional participation, and that does not provide you with the dividend income on the S&P 500, currently about 2.2% annually.  That 2.2% dividend yield, when compounded, is roughly 11.5% over a five-year period.  Foregoing that yield is your "cost" of hedging the offeror's downside exposure in the instrument, but it is also cash out of your pocket if you have a long-term intention to stay invested in the market.

Likewise, the idea that your purchase of principal protected notes is just as good as cash if the market is lower in 5 years is also erroneous.  Your cash – if left in cash - will compound over the 5-year period no matter where interest rates go.  But, with interest rates poised to rise in 2017, 2018 and beyond, your cash could potentially compound at quite a high rate.  Even if you were to lock into a 5-year CD today (the best rates are currently just over the 2.2% S&P dividend yield), you are certain to see a compounded return over the life of the CD of just over 11.5%.

You need cash and you need equities.  A principal protected note is neither.

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Trump Does Not Mark the End of Civilization As We Know It

We have, indeed, elected a not very intelligent, unstable man as the next president of the United States.  He did, clearly, appeal to many of the least attractive aspects of human concerns and beliefs.  But this is nothing new: think even relatively recently of Nixon, George W. Bush, even Obama.  We have not done especially well, throughout history, of picking wise, even-handed, bold and prescient leaders.  Democracy may not be the best means to identify and to bring to power the best among us.

We’ve survived, and we will again – even the reign of Trumputin.  The people who voted for him, in spite of, or because of, his cabinet appointments, his continued embracing of Russia, his off the wall pronouncements, continue without interruption to champion his win and support his “positions.”   But the enthusiasm of a very different group, where one sees near ecstasy, is even more telling of how missing the mark are so many critics today.  I am talking about the market makers and large investors who are celebrating the end of massive regulations and the freedoms they see in this new administration.  One could explain the initial upswing in the market as just a knee jerk reaction to the end of the Obama regime and all the politically correct and anti-business policies of the past eight years.  But, that it continues unabated, two months after the elections, portends something much more – something major and important.  Because, if the market and the economy continue thrive anew after years of treading water and gasping for air – imbued with new energy - then there is and will continue to be something to celebrate. And, just maybe, we will also see an interest rate environment which isn't held artificially low by the Federal Reserve and a banking system which is no longer derailed by excessive regulation.

Two months, sixty days, is more than just a momentary burst of hope.  Let’s see it for what it well may be – a new and fresh moment for innovation and prosperity – and let’s move on with our lives in a country that may never get it absolutely right but that can embrace differences and silliness without revolution and disintegration.

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Trumputin

We should all be shocked by the unanimous findings of our intelligence agencies.  As the implications begin to sink in, the impact of an illegitimate president about to take office for at least four years are deep and far ranging.  And “at least four years” is optimistic.  Traditions will be violated and conditions will erode fast.  Hanging on may be the best we can hope for.

And, the double shock of comprehending that the one person who knew all and who could have taken bold and unprecedented action before the election to prevent this crisis – the then sitting two term president – did absolutely nothing.  Yes, nothing – his default position all these last eight years.

Relying on key members of Congress to take a stand now is not an option.  Every one of them, even those posturing loudly today, are too interested in protecting their own cushy jobs.

So, it behooves those with any money – large or small in sum – to take prudent, very prudent action now.  The market has taken off since Trumputin was elected, but that has been just a relief rally – a relief that Hillary Clinton will not extend the Obama years.  But, it won’t be long before investors come fully to grips with the implications of an illegitimate president – especially a dangerous and unpredictable one.

Given our new reality, we all need to consider carefully the proportion of our investments we leave in the market.  But we also need to adopt the mindset of our ancestors who confronting political instability converted many of their assets into cash, diamonds and gold.  You will want to consider doing the same – buy gold and diamonds and put money away in multiple federally insured bank and CD accounts, up to the limit of insurance for each.  

Find the best savings rates and CD rates on BestCashCow.


Toasters to Interest Rates

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"It's very important, if you have something really important, write it out and have it delivered by courier, the old fashioned way because I'll tell you what, no computer is safe." Donald J. Trump, December 30, 2016, Mar-A-Lago, Florida

Donald Trump announced last weekend that he favored returning to the past – turning off the computer, writing it down and having a courier deliver it.  I’m sure, he would also favor markets no longer driven by algorithms and millisecond transactions, returning instead exclusively to floor agents and floor trading. 

In fact, following all this to its natural conclusion, Trump might also champion banks, once again, offering toasters to those who would open new accounts.

Any of this would be a hard sell today.  Trump is going to discover quickly that there is no turning the clock back.  He will be surprised, once he leaves Trump Tower and Mar-a-Lago, that the world has changed dramatically.  Typewriters and fountain pens are hard to find: couriers are few and far between and toasters as incentives have gone the way of prizes in Cracker Jack boxes.

That said, he might be on to something here.  One could imagine, with interest rates finally on the rise and increased attention now on safety in very volatile markets, that banks might want to ADD toasters again to their menu of options.  Who knows?  It worked once, and with Trump as the champion, it might just work again.

Explore the most comprehensive database of bank rates to find the best rate here.


Competition For Your Money Finally Picks Up

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Following the Fed's movement of the Fed Funds rate to 50 basis points last week, we are finally seeing competition for your hard earned cash. Here are a couple of neat offers that caught our eye.

Here are some neat offers that have just come to market that may indicate that the long period of low interest rates may be ending, and competition among banks for your money may be picking up.

Savings Bonus – Up to $200 from CIT Bank

CIT Bank is offering depositors up to a $200 bonus for funding a savings account with new money between now and the end of 2016.  You can learn more about this offer here.  BestCashCow finds this offer particularly attractive as discussed in this article, especially as CIT Bank always has outstanding customer reviews.

CD – 11-Month No Penalty CD from Ally Bank

Ally Bank is offering depositors an 11-Month No Penalty CD paying 1.25%.  The rate is not particularly compelling as we have seen 1-year CDs paying 1.25% and over for some time now (see the best one year CDs here).   What is attractive about this offer, however, is that the CD can be terminated without penalty at any point following six days of opening.  Quite simply, there is no reason not to move your cash on deposit in an Ally savings account to their 11-Month No Penalty CD, even if you think you might need to access the cash over the next 11 months.

Online 2-Year CD Rates Cross 1.50% and Credit Union 5-Year CD Rates Cross 2.50%

A handful of online banks have begun to offer 2-Year CD rates over 1.50% (see the banks and rates here).    More than a handful of federal credit unions are now offering CD Rates over 2.50% (the credit unions which you can access may vary according to where you live, see the 5-year credit union rates where you live here).   BestCashCow does not currently recommend locking into CDs that are longer than 1-year in duration as we anticipate dramatically higher rates in 2017.   It is nonetheless very encouraging to see banks begin to offer compensation for time deposits that have been better than anything we have recorded in over a year.


How to Create A Budget

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Do you know how much money is coming in and going out of your paycheck each month? The best way to gather this information is by creating a budget. This will let you know where you spend your money. You’ll also discover where you can cut back on your expenses, which can help you save money. This article explains how to create a budget and make that budget work for your needs.

Write Down Your Goals

The first thing you need to do is write down your goals. These are goals that you have for your personal finances, which might include paying off your credit cards, becoming free from debt, and starting up a savings account. This is the first step since is helps you track your progress.

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Record Your Purchases

When you record your purchases, you need to record everything, even those little purchases, which you barely think about. While you may not think they’re a big deal, these little purchases can become an issue then you add them up.  A group of little purchases can equal the same amount of money as a big purchase.

When you have too many little purchases, you will find your money disappearing faster than you can track it. So, whenever you go out, at least for the first few weeks, you should record every purchase you make and this will help you see where your money is going.

Create Spending Categories

In order to determine where your money is going, you need to do a little organizing. Some basic categories listed in budgets include utilities, food, debts, work-related expenses and fixed expenses.

You can include categories for things that are important to you. This includes things like car insurance, birthdays, life insurance, and savings. Keep one category open for fun money that can be used for special occasions and just having fun.

Hold a Meeting About Finances

If you have a spouse or other household members, you will need to hold a meeting with them to discuss the budget. Talk it over. You can come up with a plan for your budget, compromising and negotiating until you find something that works for both of you.

When you work with your spouse, you’re more likely to keep on the budget. Then you’ll both be on the same page. Each person needs to be willing to work together and give a little to get the best results.

Schedule Time to Make the Budget

Create a budget can take some patience and work. Make sure you have some free time to get the work done. This budget needs to be something you can live with long-term. Keep some wiggle room in your budget in case of an emergency.

Take the time to make a budget that allows you to live within your means. If you have to make too many sacrifices then you may find it difficult to live within your budget.

Tweak the Budget

The budget you create may not always remain the same. You are not going to be in the same financial situation next year or five years from now. That’s why you should periodically take a chance to look at a budget.

In order to see if there are things that you can change, look at what you need to meet your needs and which items can be eliminated. While you want to make changes to your budget, you don’t want to tweak your budget too often.