Financial Planning Advice From Allan Roth’s 40 Years of Experience

Posted on November 20, 2020 // 3 Comments

Allan Roth is one of the financial planners whose independent opinions I have come to respect, and he shares seven takeaways from 40 years of financial planning. Financial Planning is an industry trade magazine targeted at (obviously) professional financial planners, but many of the articles are quite useful for DIY investors as well.

Read the article first, but here are my personal interpretations of his lessons (not his words):

  • A solid income and frugality both matter, but either one is not enough. He’s advised a high-income doctor with a net worth smaller than an emergency fund, and a 10X millionaire who is still afraid to spend their money. Both needed help.
  • Many people overestimate their ability to handle real-world risk. He has seen firsthand how clients answer the theoretical, as compared to how they later react during a real-world market crisis. Same idea as how paper trading is not real trading.
  • Indexing and low fees = higher returns. Some things take time to work out, especially when billions are spent on marketing against it.
  • You can’t predict the future. Other people can’t predict the future. Market cap indexing means that you will own the winners, many of which will be companies that don’t even exist today. Own bonds for safety, and accept whatever yield there is. You can’t predict rates either. The problem is that someone will always get it right any given time, and they’ll be loud about it.
  • The CFP designation doesn’t mean much (good or bad). CFP wants to be the gold standard for a professional financial planners, but they don’t do enough to put the clients first. It just means they have a minimum level of education, 2 years of industry experience, and chose to pay the annual dues that year. You could be a great planner without being a CFP, or a bad planner with multiple complaints and still be a CFP.
  • Financial planners provide the greatest value in: “real planning, improving tax-efficiency, behavioral coaching, and insurance analysis.” That means this stuff is harder and often benefits from an outside perspective. Note that this list excludes stock-picking and market-timing.
Filed Under: Investing, Retirement //

Best Interest Rates on Cash – November 2020

Posted on November 11, 2020 // 3 Comments

Here’s my monthly roundup of the best interest rates on cash for November 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 11/9/2020.

High-yield savings accounts
While the huge megabanks pay essentially no interest, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • Chime has the top rate at the moment at 1.00% APY with no minimum balance requirements. You can also get a $75 cash bonus if you open their checking account and make a payroll direct deposit of $200+ within the first 45 days of new account opening. There are several other established high-yield savings accounts at closer to 0.50% APY for now.
  • I opened an account with HM Bradley last quarter, shifted over part of my direct deposit, didn’t withdraw it, and am now earning 3% APY on up to $100,000 of my liquid savings from October through December 2020. My long-term concerns still linger, but I am impressed that they kept their rates high for this quarter. You can still earn 1% APY for this quarter (and hopefully qualify for the higher tiers next quarter) if you can move over a direct deposit.
  • See my recent post on the frozen deposits at Beam for a cautionary tale and tips on avoiding shady banking practices.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.55% APY with a $500 minimum deposit. AARP members can get an 8-month CD at 0.65% APY. Ally Bank has a 11-month No Penalty CD at 0.60% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.30% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • CommunityWide Federal Credit Union has a 12-month CD at 0.90% APY ($1,000 min). Early withdrawal penalty depends on how early you withdraw. Anyone can join this credit union via partner organization ($5 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.03%. Vanguard Cash Reserves Federal Money Market Fund (formerly Prime Money Market) currently pays an 0.04% SEC yield.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.63% SEC yield ($3,000 min) and 0.73% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.39% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.66% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a sudden, temporary drop in net asset value during the March 2020 market stress.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 11/6/2020, a new 4-week T-Bill had the equivalent of 0.10% annualized interest and a 52-week T-Bill had the equivalent of 0.12% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a -0.01% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.04% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between November 2020 and April 2020 will earn a 1.68% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-April 2021, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore.

  • One of the few notable cards left in this category is Mango Money at 6% APY on up to $2,500, along with several hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. If you want rates above 2% APY, this is close to the only game in town.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 2.50% APY on balances up to $25,000 if you make 12 debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 1.50% APY on up to $50k. Thanks to reader Bill for the updated info. Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • Hiway Federal Credit Union has a 5-year certificate at 1.35% APY ($25k minimum) and 1.25% APY with a $10,000 minimum. Early withdrawal penalty is 1 year of interest. 4-year at 1.20% APY, and 3-year at 1.10% APY ($25k minimum). Anyone can join this credit union via partner organization ($10 one-time fee).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard has nothing special right now, I see a 5-year at 0.45% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. At this writing, Vanguard has a 10-year at 0.75% APY. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 11/6/2020, the 20-year Treasury Bond rate was 1.37%.

All rates were checked as of 11/9/2020.

Filed Under: Banking, Deals & Offers, Investing //

My Money Blog Portfolio Income Update – November 2020

Posted on November 5, 2020 // 2 Comments

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While my investment portfolio is designed for total return, I also track the income produced. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. Interest from bonds and bank deposits are steadier, but these days it’s a struggle to simply keep up with inflation.

I track the “TTM” or “12-Month Yield” from Morningstar, which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. I prefer this measure because it is based on historical distributions and not a forecast. Below is a close approximation of my portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 12/24/19) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 25% 1.72% 0.43%
US Small Value
Vanguard Small-Cap Value ETF (VBR) 		5% 2.22% 0.11%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		25% 2.60% 0.65%
Emerging Markets
Vanguard Emerging Markets ETF (VWO) 		5% 2.76% 0.14%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.86% 0.23%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT) 		17% 1.72% 0.29%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 		17% 1.25% 0.21%
Totals 100% 2.06%

 

Trailing 12-month yield history. Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014.

Reality check. One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. I see it as a conservative, valuation-based indicator of how much I can withdraw perpetually, due to our very long retirement horizon of 40+ years. During 2020, the lower income rate suggests that while the value of my portfolio is up, the future returns also look lower due to high valuations and low interest rates.

Despite reading countless articles debating this topic, I still feel a 3% withdrawal rate remains a reasonable target for planning purposes if you want to retire young (before age 50) and a 4% withdrawal rate is a reasonable target if retiring at a more traditional age (closer to 65). If you are not close to retirement, your time is better spent focusing on earning potential via better career moves, investing in your skillset, and/or looking for entrepreneurial opportunities where you own equity in a business.

For the past few years, our portfolio has distributed about 2% to 2.5% in the form of dividends and interest. If we were to stop working, we would then take out another 0.5% to 1% by selling a few shares and then we’d have our 3%. Right now, we are both still generating some employment income (though significantly less in 2020) and withdraw less than this income number, so we don’t have to sell anything.

Practical and personal implications. I let all of our dividends and interest accumulate without automatic reinvestment. I treat this money as our “paycheck”. Then, as with a real paycheck, we can choose to either spend it or reinvest in more stocks and bonds.

Instead of trying to purely live off the income, we use it to enable us to have more flexible working hours as parents of three young kids. On a good day, we look forward to a day of work with adults (who can wipe their own butts) and then we look forward to the next day of spending all day with the kids (who can experience pure joy and wonder). If we’re being honest, I don’t think either of us truly wants to be a full-time stay-at-home parent while the other works for money full-time. Nor do we want to be the full-time worker while the other stays at home. There would likely be resentment issues both ways.

But the portfolio income is what makes it all possible. We are very thankful for this financial flexibility, which has been both a result of conscious preparation over 15+ years and good fortune. Others may use their portfolio income to pursue their passions, start a new business, travel around the world, sit on a beach, do charity or volunteer work, and so on. I may not be “retired”, but I am still glad we seriously pursued financial freedom before having kids.

Filed Under: Goals, Investing, Retirement //

MMB Portfolio Asset Allocation Update, November 2020

Posted on November 4, 2020 // 6 Comments

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I support the idea of skin in the game, and I wish more “experts” would simply share what they actually own. Here’s my current portfolio update as of November 2020, including all of our 401k/403b/IRAs, taxable brokerage accounts, and savings bonds but excluding our house, cash reserves, and a few side investments. I use these updates to help determine where to invest new cash to rebalance back towards our target asset allocation.

Actual Asset Allocation and Holdings

I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (free, my review) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation. I still use my manual Google Spreadsheet (free, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation.

Here are my YTD performance and current asset allocation visually, per the “Allocation” and “Holdings” tabs of my Personal Capital account, respectively:

Stock Holdings
Vanguard Total Stock Market (VTI, VTSAX)
Vanguard Total International Stock Market (VXUS, VTIAX)
Vanguard Small Value (VBR)
Vanguard Emerging Markets (VWO)
Vanguard REIT Index (VNQ, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt (VWITX, VWIUX)
Vanguard Intermediate-Term Treasury (VFITX, VFIUX)
Vanguard Inflation-Protected Securities (VIPSX, VAIPX)
Fidelity Inflation-Protected Bond Index (FIPDX)
iShares Barclays TIPS Bond (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Target Asset Allocation. I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. I mainly make sure that I own asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I make a small bet that US Small Value and Emerging Markets will have higher future long-term returns (along with some higher volatility) than the more large and broad indexes, although I could be wrong.

While you could argue for various other asset classes, I believe that it is important to imagine an asset class doing poorly for a long time, with bad news constantly surrounding it, and only hold the ones where you still think you can maintain faith through those fearful times. I simply don’t have strong faith in the long-term results of commodities, gold, or bitcoin.

Instead of staying with my fixed 50/50 target, I am explicitly letting my US/international ratio float with the total world market cap breakdown. I think it’s okay to have a slight home bias (owning more US stocks than the overall world market cap), but I want to avoid having an international bias. I just want to maintain the balance of the total world market cap, which has become roughly 60% US and 40% international. This also means less need for rebalancing.

Stocks Breakdown

  • 46% US Total Market
  • 7% US Small-Cap Value
  • 30% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 33% US Treasury Bonds, intermediate (or FDIC-insured CDs)
  • 33% High-Quality Municipal Bonds (taxable)
  • 33% US Treasury Inflation-Protected Bonds (tax-deferred)

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. I will use the dividends and interest to rebalance whenever possible in order to avoid taxable gains. I plan to only manually rebalance past that if the stock/bond ratio is still off by more than 5% (i.e. less than 62% stocks, greater than 72% stocks). With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Holdings commentary. 2020 has been… well… you know. Many times I just have to keep reminding myself that I cannot predict the future, even there appears to be impending doom around the corner. There is no possible way I will know how the stock market will react in a week, a month, or a year. Some businesses will fail and new businesses will start. I just have to trust in capitalism, human ingenuity, human resilience, and our system of laws to allow capital to flow where it can work best over time.

When my equities had dropped significantly and my unrealized gains were low, I thought about moving towards simplicity and selling my positions in the US Small Value (VBR) and Emerging Markets (VWO) classes. However, I realized I actually liked having some extra moving pieces that didn’t move in concert with my relatively large VTI and VXUS positions. I did sell some tax lots of Wisdomtree ETF positions and swapped over to the closest Vanguard ETF equivalents.

I was not disappointed in my decision to hold only the highest-quality bonds and cash equivalents. US Treasuries, TIPS, investment-grade municipal bond funds, FDIC or NCUA-insured certificates of deposit, US savings bonds.

Performance numbers. According to Personal Capital, my portfolio went up about 3% so far in 2020, although the ride has not been nearly as boring as that sounds! I see that during the same period the S&P 500 has gone up +7%, Foreign Developed stocks down -3%, and the US Aggregate bond index was up about +6.6%. These numbers could change quite a bit in a week, so it’s not very useful information.

An alternative benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund and 50% Vanguard LifeStrategy Moderate Growth Fund – one is 60/40 and the other is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of +3.8% for 2020 YTD as of 11/3/2020.

The goal of this portfolio is to create sustainable income that keeps up with inflation to cover our household expenses. I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //

Best 529 College Savings Plan Rankings 2020 – Morningstar

Posted on November 1, 2020 // 4 Comments

Investment research firm Morningstar has released their annual 529 College Savings Plans gold/silver/bronze medalist ratings for 2020. While the full ratings and plan analysis for every individual plan are restricted to paid premium members, the vast majority are mediocre and can be ignored. You choices are pretty much either your in-state plan for the tax benefits, or the best overall plan if you don’t have good in-state perks.

Morningstar changed their methodology slightly for 2020. The two changes that caught my eye were (1) the elimination of “Performance” as a standalone judged category, and the elimination of judging advisor-sold plans primarily against each other. Past performance is not a great predictor of future returns, while all fees are.

Here are the Gold-rated plans for 2020 (no particular order). Morningstar uses a Gold, Silver, or Bronze rating scale for the top plans and Neutral or Negative for the rest.

Utah My529 and Illinois Bright Start Direct-Sold were both Gold last year as well. California Scholarshare and Virginia Invest529 were Gold last year but downgraded to Silver for 2020.

Here are the consistently top-rated plans from 2011-2020. I’ve been tracking these rankings roughly since my first child was born. The plans below have been rated either Gold or Silver (or equivalent) for every year the rankings were done from 2011 through 2018. The Virginia CollegeAmerica Advisor-Sold plan was removed from the list as it was downgraded to Bronze in 2020. No particular order.

  • T. Rowe Price College Savings Plan, Alaska
  • Maryland College Investment Plan
  • Vanguard 529 College Savings Plan, Nevada
  • CollegeAdvantage 529 Savings Plan, Ohio
  • My529, formerly the Utah Educational Savings Plan

The “Five Four P” criteria.

  • People. Who’s behind the plans? Who are the investment consultants picking the underlying investments?
  • Process. Are the asset-allocation glide paths and funds chosen for the age-based options based on solid research?
  • Parent. Does the state trustee and its partners put education savers first?
  • Price. How are the total fees relative to the competition?

State-specific tax benefits. According to Morningstar, 42% of Americans live in states with no state income tax or state income tax benefit, and 12% receive state income tax benefits regardless of the plan they select. For the rest, remember to first consider your state-specific tax benefits via the tools from Morningstar, SavingForCollege, or Vanguard. Morningstar estimates that an upfront tax break of at least 5% on your contributions can make it worth investing in your in-state plan even if it is not a top plan (assuming that is required to get the tax benefit).

If you don’t have anything compelling available, anyone can open a 529 plan from any state. I would pick from the ones listed above. Also, if you have money in an in-state plan now but your situation changes, you can roll over your funds into another 529 from any state. (Watch out for tax-benefit recapture if you got a tax break initially.)

My picks. Overall, the plans are getting better and most Gold/Silver picks are solid. If your state doesn’t offer a significant tax break, I have recommended these two plans to my friends and family:

  • Nevada 529 Plan has low costs, solid automated glide paths, a variety of Vanguard investment options, and long-term commitment to consistently lowering costs as their assets grow. (It is not the rock-bottom cheapest, but this is often because other plans don’t offer much international exposure, which usually costs more.) This is only plan that Vanguard puts their name on, and you can manage it within your Vanguard.com account. This is the keep-it-simple option.
  • Utah 529 plan has low costs, investments from Vanguard and DFA, and has highly-customizable glide paths. Over the last few years, the Utah plan has also shown a consistent effort towards passing on future cost savings to clients. They lowered their fees again in 2020. This is the option for folks that enjoy DIY asset allocation (or simply don’t like all the tinkering done within some all-in-one funds). Since I like to DIY, the vast majority of my family’s college savings is in this plan.

Most 529 plans get better over time, but not always. I agree with M* that a consistent history of consumer-first practices is important, and I’ve experienced it with Nevada and Utah. It feels good to see my current plan just keep getting a little better every year.

Filed Under: College & Education, Investing //

MYGAs: Fixed Annuities with Higher, Guaranteed Rates Like CDs

Posted on October 25, 2020 // 5 Comments

I’ve been seeing a lot of articles about alternatives to traditional bonds and their ultra-low interest rates. The 5-year US Treasury rate is closer to zero than even 1%, an all-time low even considering the past decade (source):

Warnings about the dangers of chasing yield are for good reason. We need to be very skeptical. In a relatively quiet corner of the annuity world, you can get a “guaranteed” rate of 3% and above. This chart from Blueprint Income (via indexfundfan) shows the gap between the top 5-year MYGA rate and a 5-year Treasury, with a rate difference of 3.20% as of September 2020. The gap is slightly smaller as of this writing in late October 2020.

This is a huge gap if the level of safety is comparable. But is it? I actually bought a $10,000 MYGA contract back in 2015 as an educational investment, but never really wrote about it because it is relatively complex and I wasn’t sure it was worth the additional effort when the interest rate gap was much smaller. But given the growing gap, I think a DIY investor should consider at least learn about it as a potential part of their toolkit in 2020.

What are MYGAs? A “MYGA” is a form of fixed deferred annuity that offers a multi-year rate guarantee. For example, they may promise an annual interest rate of 3% for 5 years. This is similar to the rate guarantee from a bank certificate of deposit. However, there are several important differences between a MYGA and an FDIC-insured bank CD.

Annuities are bad though, right? Not all annuities are the same. I like the slogan of Stan “the Annuity Man” Haithcock: “Will do. Not Might do.” In others words, look for concrete promises with no wiggle room, not a “theoretical illustration based on historical returns”. A deferred annuity should state a fixed interest rate (ex. 3% for 5 years). A single-premium immediate annuity should promise you a fixed monthly income for the rest of your life (ex. $1,233 per month). Hard numbers, not a confusing formula based on the stock market (always quietly stripped of dividends).

Annuities also have a bad reputation because many have high commissions to encourage their sale. Often, the worse the annuity, the higher their commissions. However, MYGAs have relatively low commissions, often between 1% and 2.5% upfront (one-time) for the most competitively priced ones. On the flip side, many financial advisors won’t recommend an annuity because they don’t get paid an “assets under management” fee on them (which might be 1% every year, forever!).

Early withdrawal penalties. However, all annuities do have some complications to understand. Once you buy an annuity, you must keep it in an annuity and not withdraw until age 59.5, otherwise you will be subject to a 10% penalty on top of the taxes owed. It is a long-term commitment of funds, similar to an IRA contribution. However, after a 5-year MYGA contract expires, you can simply roll it over into another 5-year MYGA with the same or different provider. This is what I plan to do until I am past age 59.5. If you buy an MYGA with after-tax money, your interest gets to compound tax-deferred until you make a withdrawal. This can be helpful if you have already maxed out your IRA and 401k limits. (You could also convert to a single-premium immediate annuity with a guaranteed income stream.) Upon withdrawal, you will owe income tax on the gains (not principal).

Additional liquidity concerns. An early withdrawal before the end of your fixed term also will be subject to another large penalty, including a market-value adjustment and surrender charges. Some MYGA contracts allow small withdrawals, like 5% or 10% of the purchase amount per year. In general, this is not a good place for “emergency funds”.

“Guarantee”. This word is used frequently with insurance and annuity products. “Guaranteed income.” This only means it is “guaranteed” subject the claims-paying ability of the issuing insurance company. What happens if the insurance company can’t pay? This falls back onto the coverage limits of your state’s Life & Health Guaranty Association. From NOLHGA.com:

State guaranty associations provide coverage (up to the limits spelled out by state law) for resident policyholders of insurers licensed to do business in their state. NOLHGA assists its member associations in quickly and cost-effectively providing coverage to policyholders in the event of a multi-state life or health insurer insolvency.

When an insurer licensed in multiple states is declared insolvent, NOLHGA, on behalf of affected member state guaranty associations, assembles a task force of guaranty association officials. This task force analyzes the company’s commitments to policyholders; ensures that covered claims are paid; and, where appropriate, arranges for covered policies to be transferred to a healthy insurer.

The task force may also support the efforts of the receiver to dispose of the company’s assets in a way that maximizes their value. When there is a shortfall of estate assets needed to pay the claims of covered policyholders, guaranty associations assess the licensed insurers in their states a proportional share of the funds needed.

While the coverage limits vary from state to state, virtually all states offer at least $250,000 in coverage for the present value of an annuity contract. (Connecticut, New York, and Washington offer $500,000 in coverage. In California, the limit is only 80% not to exceed $250,000.) Look up your specific state’s limits here and here. Here is a reference chart (click to enlarge, source):

Unfortunately, this is not the same as being backed by the federal government, as with FDIC-insurance. It’s not even a state government backing, as only the member insurance companies have agreed to cover each other in cases of insolvency up to the policy limits. The guaranty system has not resulted in a loss to consumers within the limits since their inception in the 1980s, meaning it worked through the 2000 and 2008 market crashes. In order to be a licensed member of that association, you need to maintain a certain level of financial stability and under regular audits. Each individual insurer also rated by various agencies like AM Best, Moody’s, or Standard & Poors. In the end, there remains a possibility that an extremely large event could happen that would result in the inability of the stronger companies to help all the weaker ones. I recommend reading this paper about how the state guaranty system works in a failure.

It’s hard to put a number on the possibility of a partial loss even with this state guaranty system, but I’d definitely rather be covered with it than without. In this older 2013 post, I wrote about MYGAs and how to structure your accounts to stay within your state’s specific coverage limits.

Higher-rated insurers typically pay lower interest rates, and lower-rated insurers typically pay higher interest rates. There are different strategies on how to navigate this system. One is to decide on the lowest safety rating that you will accept, and then find the highest interest rate available with that minimum rating. Another is to simply trust in the state guaranty system and treat all the insurers as equal as long as you remain below the state-specific coverage limits. In that case, you simply buy the highest interest rate available from a licensed insurer.

If you are trying to understand what the ratings mean, first refer to the AM Best Ratings Guide [PDF], which states that “A Best’s Financial Strength Rating (FSR) is an opinion of an insurer’s ability to meet its obligations to policyholders.” followed by:

  • A++, A+. Assigned to insurance companies that have, in our opinion, a superior ability to meet their ongoing insurance obligations.
  • A, A-. Assigned to insurance companies that have, in our opinion, an excellent ability to meet their ongoing insurance obligations.
  • B++, B+. Assigned to insurance companies that have, in our opinion, a good ability to meet their ongoing insurance obligations.

I don’t know about you, but I would rate that as “Super Vague++”. Marginally more helpful is the fact that in the past, AM Best categorized the following as “Secure” : A++, A+ A, A- B++, B+. Anything below that fell to “Vulnerable”.

Here is another chart from AM Best that lists cumulative impairments over different time periods (via the Bogleheads forum):

It is important to note that an impairment does not necessarily mean that the insurer could not pay out the interest. It simply means that some sort of negative action was taken by a state regulatory agency. The insurer may be put under “administrative supervision” and may later exit while never missing any payments. Or, the insurer may be taken into conservatorship and the assets sold/transferred to a solvent insurer, again never missing any payments.

Again, I would spread out my MYGA contracts across multiple insurers and make sure the final size is well below your state’s contractual limits. For example, if the limit is $100k you put exactly $100k in a single contract at 3% interest for 5 years, at the end you’ll have over $115,000 and thus have $15k of your funds exposed.

Where do I buy a MYGA? I am not a insurance professional and I’ve probably missed some details. But I also get no commission if you buy one of these things. As a consumer, you should know the MYGA commission is baked inside and the upfront price is the same no matter who you buy it from. Back when I bought my MYGA in 2015, I did my own research and chose to buy from “Stan the Annuity Man”. You can find the MYGA section of his site here with rates for your specific state. I had a positive experience and would recommend him, especially if you prefer to have a reliable person-to-person relationship with good communication. I am not affiliated with Stan, other than being a satisfied customer. In 2020, there are more “fintech” options including the Blueprint Income marketplace. Both of those websites are have an educational section with more information about MYGAs in general.

At the end of your MYGA contract, you will have short (30-day?) window where you can make a 1035 transfer to another annuity provider (or renew with the same provider at prevailing rate). I was given plenty of heads up by The Annuity Man team. Again, the price should be same no matter where you buy it, so I would pick the place you think you’ll get better customer service. It might even be a local broker.

Bottom line. This is a brief introduction to a unique annuity product called the MYGA (multi-year guaranteed annuity) that offers a fixed, tax-deferred yield that may be significantly higher than that of other investment-grade bonds like US Treasuries. There are many important factors to understand, including insurer stability ratings, state guaranty limits, liquidity rules, and surrender charges. I’ve probably overlooked something as well. MYGAs are best if you are a motivated DIY investor looking for higher-yielding fixed-income investments and have maxed out your other tax-deferred options like IRAs and 401(k) plans.

Filed Under: Annuities, Banking, Investing, Retirement //

What Really Matters In Your Personal Finances

Posted on October 22, 2020 // 10 Comments

The best sentence about personal finance that I’ve read this week is from Beware of Financial Alchemy by Adam Collins of Movement Capital.

There are only a few things you can control that have a big impact on your finances:

If you’re young, how much you save
If you’re retired, how much you spend
How you behave when markets panic
Your allocation between stocks and bonds
How much you pay in fees

Everything else is a rounding error. The issue is we tend to focus on the rounding errors.

That’s exactly right. I write a lot about rounding errors because otherwise I’d just be saying the above sentence over and over again. Writing about personal finance often boils down to a game where you have to talk about the same 5-10 topics but manage to put a different spin on them so it feels fresh.

However, I try to focus on rounding errors that have a very high probability of helping you out without harming you. A little higher yield on an FDIC-insured bank account. A little more cash back on your existing credit card purchases. A little higher net return through lower cost index funds and no-commission-fee brokerage firms (or those that pay you to move over some assets). Piling on a few more data points on market drops to keep you in the long-term mindset. But don’t get scammed by someone promising what is simply too good to be true:

The truth about investing in 2020 is there isn’t an easy fix for high stock valuations and low bond yields. No strategy can magically transform today’s low return opportunity set into a high return future. So what can you do? Focus on what you can control and don’t get tempted by someone promising they can turn lead into gold.

Filed Under: Investing, Retirement //

Savings I Bonds November 2020 Interest Rate: 1.68% Inflation Rate, 0% Fixed

Posted on October 13, 2020 // 4 Comments

Update November 2020. The fixed rate will be 0% for I bonds issued from November 1, 2020 through April 30th, 2021. The variable inflation-indexed rate for this 6-month period will be 1.68% (as was predicted). If you buy a new bond in between November 2020 and April 2021, you’ll get 1.68% for the first 6 months. Don’t forget that the purchase limits are based on calendar year, if you wish to max out for 2020. See you again in mid-April for the next early prediction for May 2021.

Original post:

sb_posterSavings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. With a holding period from 12 months to 30 years, you could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the November 2020 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a October 2020 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a November 2020 purchase.

New inflation rate prediction. March 2020 CPI-U was 258.115. September 2020 CPI-U was 260.280, for a semi-annual increase of 0.84%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 1.68%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A simple “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in October 2020. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 1.06 = 1.06% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 1.68 = 1.68%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on October 31st, 2020 and sell on October 1, 2021, you’ll earn a ~1.04% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on October 31st, 2020 and sell on February 1, 2022, you’ll earn a ~1.10% annualized return for an 15-month holding period. Comparing with the best interest rates as of October 2020, you can see that this is slightly higher than a current top savings account rate or 12-month CD.

Buying in November 2020. If you buy in November 2020, you will get 1.68% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS. In the past 6 months, the 5-year TIPS yield has been consistently negative! My confident guess is that it will be zero (0%). Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (total bond rate has a minimum floor of 0%).

Buy now or wait? The fixed rate is most likely going to be zero for October and November purchases, and so I would personally wait until November and get the 1.68% inflation and unknown inflation rate after that, betting that it will be higher than 1.06%. Either way, it seems worthwhile to use up the purchase limit for 2020 as the rates will at least be slightly higher than other cash equivalents.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

Filed Under: Investing, Retirement, Savings Bonds //

Simple Credit Card / Brokerage / Bank Promotion Spreadsheet Template (Google Drive)

Posted on October 7, 2020 // Leave a Comment

gsheetsIf you can’t tell by now, I enjoy participating in various credit card, brokerage, and banking promotions throughout the year. I think of it as a profitable hobby, as I enjoy trying out different financial products in addition to the thousands of dollars in extra income each year. Below is the simple spreadsheet that I use to I track all of the various the requirements and deadline dates involved. I also set online calendar reminders using those dates.

I just moved it over to Google Sheets – the first link will allow you to make your own personal copy to edit as you wish. Please don’t ask for access to the original sheet, as that would mess it up for everyone else.

 

I intentionally keep it rather minimalist. This Reddit template by u/garettg is another example with many more bells and whistles.

See also: MMB Simple Portfolio Rebalancing Spreadsheet Template and How I store my physical credit cards.

Filed Under: Banking, Credit Cards, Deals & Offers, Investing //

Best Interest Rates on Cash – October 2020

Posted on October 5, 2020 // 2 Comments

Here’s my monthly roundup of the best interest rates on cash for October 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 10/4/2020.

High-yield savings accounts
While the huge megabanks pay essentially no interest, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • Affirm has the top rate at the moment at 1.00% APY with no minimum balance requirements. I wonder how long this will last, as the rate is high but Affirm also charges really high interest to let folks buy jeans on a payment plan. There are several other established high-yield savings accounts at a little below 1% APY for now.
  • As noted in my past two monthly updates, I took a gamble and opened an HM Bradley last quarter, shifted over my direct deposit, didn’t withdraw it, and am now earning 3% APY on up to $100,000 of my liquid savings from October through December 2020. My long-term concerns still linger, but I am impressed that they kept their rates high for this quarter. You can still earn 1% for this quarter (and hopefully qualify for the higher tiers next quarter) if you can move over a direct deposit.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.75% APY with a $500 minimum deposit. AARP members can get an 8-month CD at 0.85% APY. Ally Bank has a 11-month No Penalty CD at 0.60% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.35% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • CommunityWide Federal Credit Union has a 12-month CD at 0.95% APY ($1,000 min). Early withdrawal penalty depends on how early you withdraw. Anyone can join this credit union via partner organization ($5 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.05%. Vanguard Cash Reserves Federal Money Market Fund (formerly Prime Money Market) currently pays an 0.04% SEC yield.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.70% SEC yield ($3,000 min) and 0.80% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.47% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.64% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a sudden, temporary drop in net asset value during the March 2020 market stress.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 10/2/2020, a new 4-week T-Bill had the equivalent of 0.10% annualized interest and a 52-week T-Bill had the equivalent of 0.12% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.00% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.04% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between May 2020 and October 2020 will earn a 1.06% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2020, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See note about EE Bonds as a potential long-term bond alternative.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore.

  • One of the few notable cards left in this category is Mango Money at 6% APY on up to $2,500, along with several hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. If you want rates above 2% APY, this is close to the only game in town.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 2.50% APY on balances up to $25,000 if you make 12 debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 1.50% APY on up to $50k. Thanks to reader Bill for the updated info. Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • The Federal Savings Bank has a 5-year promo certificate at 1.50% APY ($10,000 min), 3-year at 1.20% APY, and 18-month at 1.10% APY. The early withdrawal penalty for the 5-year is 12 months of interest.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard has nothing special right now, I see a 5-year at 0.45% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. At this writing, Vanguard has a 10-year at 0.65% APY. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 10/2/2020, the 20-year Treasury Bond rate was 1.25%.

All rates were checked as of 10/4/2020.

Filed Under: Banking, Deals & Offers, Investing //

Skin in the Game: How Much Do You Have To Lose? (Book Notes)

Posted on September 27, 2020 // Leave a Comment

The central idea behind the book Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb is simple. Never trust anyone without skin in the game. In the real world, behavior changes for the better when you have to pay a price for your mistakes. This is a very handy heuristic to apply in everyday life and applies in many areas. A good example of why we shouldn’t allow people to not have skin in the game is Bob Rubin:

The Bob Rubin trade? Robert Rubin, a former Secretary of the United States Treasury, one of those who sign their names on the banknote you just used to pay for coffee, collected more than $120 million in compensation from Citibank in the decade preceding the banking crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check—he invoked uncertainty as an excuse. Heads he wins, tails he shouts “Black Swan.”

If someone is giving you financial advice, don’t worry about what s/he “thinks”, ask them what they actually hold in their own portfolio. Sure, what is optimal for them may be different than what it optimal for your own situation, but at least put it out there and let the consumer decide. Predictions are cheap without real risk of loss/pain.

In case you are giving economic views: Don’t tell me what you “think,” just tell me what’s in your portfolio.

How much you truly “believe” in something can be manifested only through what you are willing to risk for it.

Conflicts of interest can be good, if it means skin in the game. Taleb argues that while many people think it is better for CNBC “experts” and/or journalists to not own the stocks or companies they talk about, it’s actually better that they do.

There are two types of “talking one’s book.” One consists of buying a stock because you like it, then commenting on it (and disclosing such ownership)—the most reliable advocate for a product is its user. Another is buying a stock so you can advertise the qualities of the company, then selling it, benefiting from the trumpeting—this is called market manipulation, and it is certainly a conflict of interest.

We removed the skin in the game of journalists in order to prevent market manipulation, thinking that it would be a net gain to society. The arguments in this book are that the former (market manipulation) and conflicts of interest are more benign than impunity for bad advice. The main reason, we will see, is that in the absence of skin in the game, journalists will imitate, to be safe, the opinion of other journalists, thus creating monoculture and collective mirages.

In general, skin in the game comes with conflict of interest. What I hope this book will do is show that the former is more important than the latter. There is no problem if people have a conflict of interest if it is congruous with downside risk for themselves.

Bureaucracy too often means NO skin in the game. We allow people elected for only a few years be allowed to bind all of us into agreements that last for decades. We should also look more closely at the former “civil servants” that conveniently land high-paying jobs soon after their terms are over.

Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.

More critically, people with good lawyers can game regulations (or, as we will see, make it known that they hire former regulators, and overpay for them, which signals a prospective bribe to those currently in office). And of course regulations, once in, stay in, and even when they are proven absurd, politicians are afraid of repealing them, under pressure from those benefiting from them. Given that regulations are additive, we soon end up tangled in complicated rules that choke enterprise. They also choke life.

Employees have skin in the game, but perhaps not in a good way.

A company man is someone who feels that he has something huge to lose if he doesn’t behave as a company man—that is, he has skin in the game.

What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing. […] The more you have to lose, the more fragile you are.

It is no secret that large corporations prefer people with families; those with downside risk are easier to own, particularly when they are choking under a large mortgage.

People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.

How can you achieve true freedom?

Financial independence is another way to solve ethical dilemmas, but such independence is hard to ascertain: many seemingly independent people aren’t particularly so. While, in Aristotle’s days, a person of independent means was free to follow his conscience, this is no longer as common in modern days.

Intellectual and ethical freedom requires the absence of the skin of others in one’s game, which is why the free are so rare. I cannot possibly imagine the activist Ralph Nader, when he was the target of large motor companies, raising a family with 2.2 kids and a dog.

I have held for most of my (sort of) academic career no more than a quarter position. A quarter is enough to have somewhere to go, particularly when it rains in New York, without being emotionally socialized and losing intellectual independence for fear of missing a party or having to eat alone. But one (now “resigned”) department head one day came to me and emitted the warning: “Just as, when a businessman and author you are judged by other businessmen and authors, here as an academic you are judged by other academics. Life is about peer assessment.”

You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment.

Embrace taking some risk (those that don’t endanger your survival). Starting a business is one way.

Yes, take risk, and if you get rich (which is optional), spend your money generously on others. We need people to take (bounded) risks. The entire idea is to move the descendants of Homo sapiens away from the macro, away from abstract universal aims, away from the kind of social engineering that brings tail risks to society.

Doing business will always help (because it brings about economic activity without large-scale risky changes in the economy); institutions (like the aid industry) may help, but they are equally likely to harm (I am being optimistic; I am certain that except for a few most do end up harming). Courage (risk taking) is the highest virtue. We need entrepreneurs.

By definition, what works cannot be irrational; about every single person I know who has chronically failed in business shares that mental block, the failure to realize that if something stupid works (and makes money), it cannot be stupid.

A final summarizing quote:

Recall that skin in the game means that you do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line. Let survival work its wonders.

Filed Under: Behavioral Economics, Book Reviews, Entrepreneurial, Investing //

Best Interest Rates on Cash – September 2020

Posted on September 9, 2020 // 8 Comments

Here’s my monthly roundup of the best interest rates on cash for September 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 9/9/2020.

High-yield savings accounts
While the huge megabanks still pay nearly zero, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • Affirm has the top rate at the moment at 1.00% APY with no minimum balance requirements. I wonder how long this will last, as the rate is high but Affirm also charges really high interest to let folks buy jeans on a payment plan. There are several other established high-yield savings accounts at a little below 1% APY for now.
  • If you want some upside potential, HM Bradley is still advertising a 3% APY top rate for those that spent the previous quarter saving at least 20% of your direct deposit. It’s likely to drop next quarter starting 10/1, but if you can make a real direct deposit by 10/1 (and not withdrawal more than 80% of it) you’ll earn at least 1% APY in September and gain the possibility of a rate greater than 1% after 10/1.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.75% APY with a $500 minimum deposit. AARP members can get an 8-month CD at 0.85% APY. Ally Bank has a 11-month No Penalty CD at 0.75% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.35% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • CommunityWide Federal Credit Union has a 12-month CD at 1.00% APY ($1,000 min). Early withdrawal penalty depends on how early you withdraw. Anyone can join this credit union via partner organization ($5 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund (note the upcoming changes) currently pays an 0.03% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.08%.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.82% SEC yield ($3,000 min) and 0.92% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.51% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.64% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a sudden, temporary drop in net asset value during the March 2020 market stress.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section probably isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 9/8/2020, a new 4-week T-Bill had the equivalent of 0.10% annualized interest and a 52-week T-Bill had the equivalent of 0.15% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.08% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.04% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between May 2020 and October 2020 will earn a 1.06% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2020, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore.

  • One of the few notable cards left in this category is Mango Money at 6% APY on up to $2,500, along with several hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. If you want rates above 2% APY, this is close to the only game in town.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 2.50% APY on balances up to $25,000 if you make 12 debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 1.50% APY on up to $50k. Thanks to reader Bill for the updated info. Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • Greenwood Credit Union has a 5-year certificate at 1.50% APY ($5,000 min), 4-year at 1.00% APY, 3-year at 1.20% APY, and 2-year at 0.90% APY. The early withdrawal penalty for the 5-year is 6 month of interest. Anyone can join this credit union by maintaining $5 in a share savings account.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard has a 5-year at 0.50% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. At this writing, Vanguard has a 10-year at 0.85% APY. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. As of 9/9/2020, the 20-year Treasury Bond rate was 1.22%.

All rates were checked as of 9/9/2020.

Filed Under: Banking, Deals & Offers, Investing //
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