Etrade Complete Savings Accounts Being Sold to Discover

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Etrade sent an email today that notified its Complete Savings customers that their accounts were going to be converted to Discover Online savings accounts in March.

Etrade sent an email today that notified its Complete Savings customers that their accounts were going to be converted to Discover Online savings accounts in March.

In many ways this is no suprise. Etrade took severe losses from its foray into banking and mortgages and now appears to be trying to get back to its founding purpose - serving as an online brokerage. In recent months, it has reduced its Compete Savings rate to .50% APY, which is uncompetitive in the online savings account space.

Discover Bank has long had competitive rates. It's online savings account is paying 1.35% APY, which is okay compared to the top savings rates. Tne online bank's Achilles heal has been its service and online banking functionality. There are a litancy of complaints on Discover's BestCashCow page about the service. The good news is that the bank seems to be listening and is getting ready to roll-out a totally redone online banking platform. I've received a sneak-peak and it will singificantly upgrade the experience and remove many existing frustrations.

For Etrade customers  this is a win. They will reveive a better rate and hopefully a better online banking experience.


The Advantages of Managing your Own Money

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Private investors and individuals who manage their own money have many structural advantages over large fund managers. Here's what they are and how you can profit.

Many investors who manage their own money and their own investments have several tremendous advantages over fund managers. Investors who have bypassed the allure of the fund management industry often come to realize that through diligent research and logic, they can keep up with the returns of the big boys.

My investment business, albeit in the fund management profession, is run along the private investor’s lines. All of the advantages below are practiced by my fund.

While this may appear to be caused by superior market knowledge and over-confidence, there are in fact a number of advantages the small guy has. I advise all amateur and part-time investors to read over these structural advantages and use them to your benefit.

1. You can wait.
Private investors have the luxury of time on their side. If you cannot find anything attractive you can stay in cash. Fund managers do not have this luxury for two reasons. Firstly, they have to invest to their mandate irrespective of current market valuations (for example equity funds must have a certain percentage of their money in equities at all times). Holding cash in the fund is also a risky strategy for fund managers as they run the risk of being left behind by their peers, whom they are compared to on a quarterly, monthly and sometimes even daily basis.

2. You can invest anywhere and everywhere.
Without an investment mandate, you can invest in any type of asset in any country that offers an attractive risk return trade-off, be it corporate bonds, equities, options, real estate etc. As mentioned above, fund managers have to stay within the fund's investment area. In the case of pension funds, there are even more severe limits that, in my opinion, limit the returns the fund can provide.

3. You can invest in any size
Similarly to investing anywhere, there are no size constraints on your investment. Fund managers are faced with ridiculous restrictions as to how much to “weight” to certain indexes in order to match their performance as closely as possible.

4. You have no benchmark
You only have one goal in mind, and that is to grow your investment portfolio each year irrespective of what the market does. I do not consider it a good year if I have lost 25% while the market has lost 40%. Fund managers are groomed to beat their benchmark and this performance is always viewed in context, irrespective of absolute return.

5. You can focus and ignore
Studying, understanding and applying what has worked in investing is all you need to do to be successful as a private investor. I advocate reading Benjamin Graham classic, The Intelligent Investor. The rest should follow. Pay no attention to market noise, alternate opinions or what the television “talking heads” say. Do your own research and arrive at your own conclusions.

6. No conflict of interest
The individual investor has only their interest to look out for. This is a big advantage when it comes to large fund managers catering to larger institutions. Fund managers have to think of keeping their jobs, increasing their assets under management and keeping clients happy, suggesting that performance is not the most important thing on their minds. Also, clashes between investment banks and fund managers are regular occurrences and sometimes result in inopportune purchases by fund managers.

7. You can have a long view.
According to a study by the New York Stock Exchange the average holding period of shares held has declined from five to six years in the 1950s to 11 months, meaning the average holding period is less than one financial year. It is extremely unlikely and almost impossible that an undervalued company can right itself in such a short period of time. This may be the largest competitive advantage you have: The ability to look at a company solely on valuation and keep it as long as it is undervalued, irrespective of what the competition is doing or market price.

8. No peer pressure.
There is no pressure to buy or sell any investments. Fund managers get compared to benchmark indices and other funds, including the individual fund holdings. If you manage your own money you have none of these problems.

9. You decide.
The private investor is in control of all their decisions. You make the final decision after you have done the analysis. You may be wrong but at least you make the calls either way. Many fund managers are run by committee which leads to inherent clashes. Try telling your boss that his investment ideas are wrong!

10. You don’t have to di-worse-ify!
Every individual should hold only as many stocks as they feel comfortable with. There is no set limit either on the low or high end. However, most mutual funds hold positions in excess of 100 stocks. My business has only 7 positions. While I advise 10 as the optimal, we won’t buy stocks just because we hold seven and need ten!

11. You control the costs
Controlling costs and fees (the friction of investing), is a very important part of realizing superior long-term results. Discount brokers provide ideal services for the private investor, so long as you are not a day trader! Calculated over a period of 20 to 30 years keeping costs low makes a huge difference.

12. You can be fully invested
This is a huge structural advantage you have and is the bane of the fund management business. Fund managers are bound to get redemption requests when markets fall, and to meet such requests either need to be in cash or sell shares. However, as we have seen in 2008 in particular, when markets are falling liquidity drops, sometimes to the point where a fund manager is unable to sell his position. This results in selling pressure on stock prices leading to further market falls, thus triggering more redemptions, and so on.

There are of course a few funds where the drawbacks mentioned below do not apply but they are in the minority, my fund being one of those. The large bulk of fund management companies are focused on growing the amount of money they manage, while the performance of your portfolio is not the utmost concern.

If you do not want to manage your own investments then find a fund manager who is not bound by parameters and can show clearly that the performance of your investment is there foremost concern.

 
 

These pointers are an adaptation of an article written by Tim du Toit of Eurosharelab.com


Savings and CD Rates Continue to Drop - Weekly Rate Update

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Most savings and CD rates hit record lows last week. Average savings rates reached a new record low of 1.47% APY last week, down 4 basis point from 1.51% APY the previous week. Average one-year cd rates showed the largest drop, falling 10 basis points to 1.85% APY. Average three-year cd rates dropped four basis points to 2.63% APY. The only glimmer of good news were five-year CD rates which increased from 3.18% APY to 3.20% APY.

The two big news events over the last week were the Federal Open Market Committe statement, in which the Fed committed to keeping rates low for the foreseeable future and for kind've slowing its purchase of mortgage backed securties and President Obama's whopping $3.8 trillion budget.

The Fed, as it has for the last year, committed to keeping the Fed Funds rate pegged close to 0%. At the same time, the Fed said that it was beginning to slow its purchase of mortgage backed securities.

" To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets."

That's the way to sit on the fence.

I've been expecting mortgage rates to begin to rise with this announcement but the opposite has happened over the last month. After peaking at close to 5.2% in late December, mortgage rates have come down and are now once again below 5%. This is a gift for those that want to purchase or refinance a home.

Many still predict that as the Fed lays off the MBS juice, mortgage rates will begin to go higher.As I wrote last week, low rates are both a benefit and a boon. You'll have to decide if getting a low rate is worth the risk that your house will lose value once rates start to move up.

President Obama's budget is also front and center to our rate discussion. $3.8 trillion is a lot of money and the budget shortfall is expected to reach a record $1.6 trillion in 2010 with whopping deficits going out beyond the horizon. What does that mean? More issuance of Treasuries. Eventually the market will be flooded with US debt and unless corrective action is taken, which seems doubtful, we're all looking at longer-term interest rates.

Right now though, higher interest rates would be welcome news for the savers of the world.

CD and Savings Rates

Most savings and CD rates hit record lows last week. Average savings rates reached a new record low of 1.47% APY, down 4 basis point from 1.51% APY the previous week. Average one-year cd rates showed the largest drop, falling 10 basis points to 1.85% APY. Average three-year cd rates dropped four basis points to 2.63% APY. The only glimmer of good news were five-year CD rates which increased from 3.18% APY to 3.20% APY.

Like the Treasury yield, BestCashCow has developed its own yield ratio for deposit accounts (a short duration deposit account) and 3 year CDs. As the chart below shows, the yield has been on the rise and is currently at 1.16. This is the second highest reading since we began compating this data. The yield ratio continues to mimic the Treasury yield curve, which is low on the short end and rises on the long-end.

At this point it's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising rate risk. CD laddering may be a good way to smooth out the return you receive from your CD portfolio. Several banks have come out with breakable CDs, that allow users to withdraw money penalty free, and still other banks are lowering the withdrawal penalty, as Ally Bank recently did, for removing money before maturity.


Compound Interest

What is Compound Interest?
 
Albert Einstein, well known for being smarter than the average, once called compound interest "the greatest mathematical discovery of all time". However it’s not totally necessary to be as intelligent as Einstein (or even half as smart for that matter) to understand compound interest.
 
When you save money in a bank savings account or a CD, you earn interest on that money. The next year, you earn interest on both the original capital and the interest earned from the previous year. In the third year, you earn interest on capital and interest on interest earned in year one and year two. It goes on and on with no limits. And that, in a nutshell, is the seventh wonder of the world – compound interest!
 
The effect is most often described similarly to that of a snowball. If you stand atop a mountain and gather some snow into a ball, then roll it down the mountain, it gathers snow as it goes creating a bigger and bigger snowball. If your hill is steep enough you could end up with a very large snowball at the bottom!
 
While compound interest itself is a basic concept, there are several ways to maximize the amount of money you could be due. Here are five key points to keep in mind:
 
1. Start as soon as you can: The earlier you start investing, the more time you have for the effects of compound interest to accrue. A person who invests $200 a month from age 25 to 35 and then lets their investments grow is likely to have more money at age 60 than a similar person who invests $200 a month from age 35 to 59.
 
2. Small differences in return are crucial: While 1% might not seen like a lot, the difference between 6% or 7% over long time periods is gigantic.
 
3. Don’t disrupt the cycle: It’s important only to invest money and let it grow when you have no pressing need for it. While there is nothing wrong with keeping money in a bank account, the more time your money has to grow the more it will.
 
4. Don’t laugh off the small stuff: Contributing just $100 a month for 40 years at 12% will see you end up with close to $1,000,000 in savings.   And that’s just $100 a month.
 
5. Give it time: You must be patient. There is no such thing as a quick buck. Compunding takes time but the benefits are way in excess of the time costs.
 
A Practical Example

$20 000 invested at a compound rate of 15% for 30 years provides some astonishing results:

YEAR                                                                      AMOUNT
1                                                                                $23,000
2                                                                                $26,450
3                                                                                $30,418
4                                                                                $34,980
5                                                                                $40,227
6                                                                                $46,261
7                                                                                $53,200
8                                                                                $61,180
9                                                                                $70,358
10                                                                              $80,911
11                                                                              $93,048
12                                                                            $107,005
13                                                                            $123,056
14                                                                            $141,514
15                                                                            $162,741
16                                                                            $187,152
17                                                                            $215,225
18                                                                            $247,509
19                                                                            $284,635
20                                                                            $327,331
21                                                                            $376,430
22                                                                            $432,895
23                                                                            $497,829
24                                                                            $572,504
25                                                                            $658,379
26                                                                            $757,136
27                                                                            $870,706
28                                                                         $1,001,312
29                                                                         $1,151,509
30                                                                         $1,324,235

An investment of $20,000 turns into $1,324,235 after thirty years, without a single cent added.


Savings Rates Hit New Lows, CD Rates Flat - Weekly Review

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Savings and CD rates continue to hover at pitiful rates. Average savings rates reached a new record low of 1.51% APY last week, down 3 basis point from 1.54% APY the previous week. Average one-year cd rates actually rose 3 basis points 1.95% APY. Average three-year and five-year CD rates remained steady at 2.67% APY and 3.18% APY respectively.

Last week was nother relatively quiet week in the markets. News was dominated by the devestating earthquake in Haiti as well as the battle over healthcare and the election in Massachusetts. I live in Massachusetts and never in my life have I seen so much campaigning. Usually Massachusetts receives little to no attention in national elections since the race is usually a foregone conclusion. Now, every twenty mintes the phone is ringing with an ad for one candidate or the other and almost every commercial is an election ad.

The stakes are large no matter who wins. Health care eats up 16% of the Federal budget and that number is expected to rise as the cost of healthcare continues to grow at 7-10x the rate of inflation. A friend of mine works in the benefits department of a major corporation and he told me that no matter what happens, the quality of healthcare is going down, or the price is going up. Companies can no longer afford to subsidize as much of the cost. Many of you have already seen it in high-deductible plans or plans with very expensive premiums. Expect this trend to continue.

Now, onto the rates.

CD and Savings Rates

Savings and CD rates continue to hover at pitiful rates. Average savings rates reached a new record low of 1.51% APY last week, down 3 basis point from 1.54% APY the previous week. Average one-year cd rates actually rose 3 basis points 1.95% APY. Average three-year and five-year CD rates remained steady at 2.67% APY and 3.18% APY respectively.

Like the Treasury yield, BestCashCow has developed its own yield ratio for deposit accounts - the spread between savings rates and 36-month CDs. In some ways, this ratio is purer because it cannot be influenced by government debt, Fed Treasury purchase programs, and other attempts to manipulate rates. As you can see below, the ratio between savings accounts (a short duration deposit account) and 3-year CDs is 1.15%. Savings and money market rates have dropped while 3 year cds have essentially stayed flat. The ration remains very elevated, mimicking the Treasury curve. We'll be watching how the ratio develops over the next month to see if it provides any additional clues to the state of the market in 2010.

At this point it's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising equity markets and signs that the economy may be coming back to life. Many depositors may be willing to lock money away for 5-years at close to 3%. To me that's just not enough of a return for that period of time. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.


ING Direct Survey - 64 Percent of Americans Will Stash More Cash in 2010 Than 2009

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A survey commissioned by ING Direct has some interesting findings on American attitudes towards savings and debt.

A survey commissioned by ING Direct has some findings on American attitudes towards savings and debt. Amongst the findings:

  • Two-thirds, (64 percent) of Americans plan to stash more cash in 2010 than in 2009;

  • More than nine out of ten (93 percent) Americans with children under 18 in the household say earning enough to cover monthly bills is important as a financial goal for the New Year;

  • Close to nine out of ten (89 percent) say building an emergency fund is important;

  • More than two thirds, (71 percent) of Americans say investing more for retirement is important, while 60 percent say paying off credit card debt is an important financial goal for 2010; and

  • Spending less overall is an important financial goal for 91 percent of Americans.

None of this strikes me as surprising.

In addition, the survey found that nearly four in ten (37 percent) Americans are hopeful about America's recovery in 2010, while about one in five (19 percent) are feeling pessimistic or anxious and stressed about the economy. Somewhere in-between these two extremes are a lot of people who don't know which way the economy will go.

The press release quotes the President of ING Direct. He says:

"Americans believe 2010 will bring some economic recovery," said Arkadi Kuhlmann, President of ING DIRECT USA. "However, before Americans can say goodbye to the recession, they must first get their home economics in order. Having a savings account with emergency funds, managing expenses to avoid late fees and interest payments, and eliminating debt should be top priorities this year."

I don't see how the results support that statement. After all, only 37% of Americans were hopeful about America's recovery. But hey, it helps to be optimistic, right?