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Online Savings & Money Market Account Rates 2019

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The Moderately Wealthy Need to Manage Money Differently From the Ultra Wealthy

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A person who has put together $5 to $10 million in liquid assets needs to manage cash differently from someone with $50 million +.

I recently renewed contact with an old buddy of mine from business school who now manages money for wealthy individuals.  When we got down to discussing our career paths and my role as Editor-in-Chief of BestCashCow.com, he became insistent that holding cash in savings or money market accounts and short term CDs is a bad idea.  I believe that he is dead wrong.

Of course, cash has dramatically underperformed a diversified stock portfolio and a diversified bond portfolio for the last few years.  Since you cannot time the markets or the economy, nobody should ever move entirely into cash.  I personally believe that an appropriate portfolio for even the most aggressive, moderately wealthy investor is 40-50% equities, 25% high grade municipal bonds or bank-issued structured notes, and 25-35% cash across accounts at top and well-known online banks.

My friend, however, suggested that instead of holding any cash, I take a look at a series of bonds, bank loans, hedge funds and managed future funds.  He recommended that a moderately wealthy investor should open an account with a money management firm (such as his) and place all cash in the account, accessing a line of credit for any expenses.  In particular, he proposed the following asset allocation as an alternative to FDIC insured savings accounts:

Global Bond Mutual Funds:

Templeton Global Bond Fund Adv 10.00%

 

Multisector Bond Mutual Funds:

Goldman Sachs Strategic Income I  10.00%

JPM Strategic Income Opportunity Select  12.50%

Osterweis Strategic Income Fund 10.00%

 

Bank Loan Mutual Funds: 

Nuveen Symphony Floating Rate Inc 7.50%

 

Diversified Alternative Mutual Funds:

Avenue Credit Strategies Inst  5.00%

Driehaus Select Credit Fund  2.50%

Litman Gregory Masters Alternative Strategy 7.50%

 

Hedge Funds:

Morgan Stanley Absolute Return  15.00%

 

Directional Alternative Mutual Funds:

ASTON/River Road Long-Short I5.00%

Mainstay Marketfield Fund 5.00%

Neuberger Berman Long Short Institutional  Fund  5.00%

 

Managed Futures:

AQR Managed Futures Strategy I 5.00%

 

The above portfolio, with an average annual return of 6.20% since 2009, would have slightly outperformed online savings rates over the last several years; it, however, would not have outperformed a five year CD initiated 2009 or most stock or bond portfolios.   

The problem here is that the portfolio was down dramatically in 2008, and again in 2011.   While it is diversified and conservative, some components have experienced negative quarters at other points in the last five years.   In 2014, importantly, there is a real risk of underperformance again should interest rates rise or should emerging markets continue to falter. 

Were those risks not present, ultra-wealthy investors (which I define as someone with over $50 million) would probably do well to invest a portion of their money in a series of funds like those presented by my friend.  They can easily get into the proposed funds directly with the fund managers (paying only a management fee which is often reduced).  They can ride out the shifts in the market.   And, in the worse case, were one of the funds to fail, they would be able to absorb the loss as my friend’s model portfolio places no more than 15% in any single fund.

A moderately wealthy investor (someone with between $5 million and $10 million in liquid assets) does not have any of those luxuries.  Moreover, without some sort of deep inside connections, they are likely placing their bets through a money manager who will charge a management fee.    For example, a 0.70% management fee would cause the annual return on my friend’s recommended portfolio to fall to 4.60% since 2009.

A 4.60% annual return in a strong economy (versus close to 1% in the leading online savings accounts) is not only not guaranteed but it is just not enough of a premium for a moderately wealthy investor to justify the loss of liquidity, the volatility and absence of FDIC insurance.   In fact, a prudent, yet aggressive, moderately wealthy investor would easily make up the 3.60% annual difference by taking on more risk in their other investment classes (something that they are more apt to feel comfortable doing if they have a cash portfolio, instead of an alternative portfolio of funds with fees on top of fees). 

The fact remains: Cash – particularly in the form of savings accounts divided across several FDIC insured institutions - remains an important base to any portfolio and it is not replaceable by anything else or a collection of anything else.  It is the part of your portfolio that isn’t to be risked.  Having more of it allows you to sleep at night.  It is liquid.  It enables you to deal with life’s traumas (unexpected health care expenses due to loss of health insurance because of Obamacare, divorce, etc.) and to pursue life’s opportunities without stress (private investments, real estate opportunities, etc.).

Don’t pretend to be ultra-wealthy if you are moderately wealthy.   Stick with cash.


Rate Chasing Seems Harmless Enough, but It Can Quickly Become Perilous

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A recent experience I had with an online bank after they lowered their online savings rate demonstrates how perilous rate chasing can quickly become.

For much of 2012 and 2013, a little known online bank offered an outstanding online savings rate that was well above that offered by the other major online banks.  The bank, New York Community Bank (NYCB), operates two online banking brands, Amtrust Direct and MyBankingDirect.com.  I, like many followers of BestCashCow, opened an account with Amtrust during this time and received an interest rate on my savings for more than a year from this bank several basis points above that which I would have received anywhere else.

In September 2013, however, the rate fell abruptly without notice of any sort to customers and all of the sudden depositors in NYCB brands were earning less in their online savings accounts than in accounts at more familiar names like American Express, CIT or GE Capital.  This underscores the first peril of chasing rates: rates on savings accounts can always fall dramatically and without notice.

A second peril came to light when I tried to redeploy money from NYCB to a bank with higher rates.   NYCB’s limitations on numbers of transfers and amounts of money that could be transferred out within a single timeframe made the process of winding down take two months for those who had deposited close to $250,000, the FDIC insured maximum on bank deposits.

To be clear, the bank’s abrupt rate change (during a period where their competitors were actually raising rates as bond yields were rising) and its obstacles to withdrawals were frustrating, but they were well within the bank’s rights.  And, they were necessary and understandable risks that I and many others took to earn a higher savings rate over the period. 

The third peril, however, was not one that I expected to encounter in the chase for the best savings rates. It arose when I stopped short of closing my account after withdrawing almost all of my balance with the bank.  I thought I was being clever by leaving a couple of dollars in my account so that I would be able easily to move money back were they to raise the rate again. Two months later, however, I received a strongly worded note from NYCB stating that they had just instituted a $10 monthly account service fee, resulting in my account having a negative balance.  The letter further stated that the negative balance, if not paid immediately, would result in a closure of my account and the bank reporting “information about your account to credit bureaus, such as Chexsystems” so that  “defaults on your account may be reflected in your credit report”.

I was able  to resolve this issue with the bank by phone, closing the account and avoiding any damage to my credit rating.  Nonetheless, this experience underscores another and perilous pitfall in rate chasing.

You can, however, mitigate these perils.  First, you must follow savings and money market rates closely, checking online with those banks where you have accounts and as well as checking with BestCashCow often to be sure rates have not changed.  Second, you may want to avoid banks that do not allow you to move the balances out quickly (major banks do not impose undue obstacles, but some smaller banks do have monthly limits).  Third, you should always be sure to close an account fully and immediately after you have received your final month’s interest in order to avoid a situation like the one I found myself in.

A Note on FDIC coverage:  Some banks, such as NYCB, operate online banks under multiple online brands.  BestCashCow.com follows an editorial policy of listing only one online brand associated with a single FDIC certificate.   This policy avoids confusion and prevents depositors from unintentionally exceeding FDIC limits.  Since both the Amtrust Direct and MyBankingDirect brands are covered under NYCB’s FDIC certificate, this site is only listed as Amtrust Direct in our rate tables.


Are Bitcoins for You?

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What are Bitcoins and should you get involved with the new currency that is all over the news and media.?

You've already probably heard something about Bitcoin over the last couple months (and if you haven't, you should probably pay some attention) and many are wondering exactly what is Bitcoin and is it for real. Since a Congressional hearing on the currency in November the value of a Bitcoin has soared from under $100 several months ago to over $1,000 today. 

So, what is a Bitcoin and is it something that you should consider getting involved with? Bitcoin is a new type of currency that takes advantage of peer-to-peer technology to facilitate transactions. Like many of the file sharing networks that sprang up around music, it uses connections between individual computers to transfer Bitcoins, or funds, eliminating the need for a central authority - no central bank, no bank, no credit card processor. So, how would a typical transaction work using Bitcoin? 

Anyone can create a Bitcoin by installing software and becoming a Bitcoin miner. A certain amount of work is required for the creation of every Bitcoin, and this amount is adjusted by the network so that the amount of Bitcoins in circulation is controlled and predictable. It's important to note that this is done automatically without the intervention of any central authority. Bitcoins are stored in a digital wallet, and when a transaction is created, the Bitcoins are given a unique digital signature. When you send money to pay for a good or service, the transaction is recorded in the network and the proper ledgers are automatically adjusted. These ledgers are all public, allowing anyone to review the transactions, although the personal information of the sender and receiver is not typically included in these transaction logs. As a result, every transaction is both encoded to ensure it cannot be tampered  and it anonymous, and made public, to ensure that it is executed in an open and transparent way. 

Several private markets have sprung up to allow users to convert Bitcoins to dollars, Euros, or other currencies. It is this conversion rate that has boomed since the hearings. 

So, what are the advantage of Bitcoins? 

  • Zero or low fees. Because there is no middleman, there are very little or no fees associated with transactions.
  • Fast international payments. Bitcoin transactions can be done in 10 minutes from any part of the world.
  • Identity protection. Because there is no credit card number or single number used to key a transaction, there is no chance of having your credentials stolen, like with a credit card.
  • Theft protection. Bitcoins are digitally signed too a user so there is no way to steal a Bitcoin.
  • Universal access. Anyone can pay or accept money via Bitcoin. The system is totally open and the documentation can be read and implemented by anyone.
  • No taxes. Since the transaction is entirely between two individuals, there is no record of the money transfer for tax purposes. Taxes would have to be levied in an entirely voluntary manner.

What are the disadvantages of Bitcoins? 

  • Because money can be sent anonymously, criminal networks and enterprises have begun to utilize the currency to facilitate payments.
  • Boom and Bust. Because no one really understands the value of a Bitcoin, there are wild price swings in the conversion rate of Bitcoins to dollars and other currencies.
  • Not widely accepted. At the moment, only a few merchants accept Bitcoins.
  • Bitcoins can be lost. If a hard drive crashes or a user misplaces their USB drive, the Bitcoins stores on there will be lost. Most experts advise users to store their Bitcoins on a computer device not connected to the Internet and use a backup.
  • No Buyer Protection. If a good is purchases using Bitcoins and the product or service is not delivered as promised, there is no mechanism to enforce refunding of the Bitcoins. Adding a third party escrow service would essentially mitigate the strength of Bitcoin, no middleman.

 Should You Buy Bitcoins?

 If you are just hearing about Bitcoins for the first time and have no desire to actively trade Bitcoins, then I would say know. While the value has shown spectacular growth in the past couple of years, the Bitcoin economy is highly volatile and values could crash any day. No one knows what the future of Bitcoins will be and whether they will eventually assume a widely accepted alternative form of payment, or if they will remain a fringe currency, used by drug dealers and money launderers to escape the spying eyes of law enforcement.

If you're interested in seeing what the future of currency may be about, then it might be worth it to purchase a few Bitcoins, understanding that the value may soar, or may drop like a rock. But it does seem that currency, like music, newspapers, books, and movies is not impervious to the impact of digital technology and the Internet.