Friday, June 16, 2017

Bank / Broker's accounts pay virutally zero interest

Important notice. I'm not liable for any of your losses and will not share your gains. I'm not a professional in finance. Consult a professional before any actions.


I have sold many stocks to prepare for a market crash. I’m a very conservative investor. Do not follow my actions exactly as everyone’s situation is different. Adjust your actions according to your risk tolerance.

As of 6/2017, the market is still making new highs. Using my own prediction, today may be similar to 2007, the peaking phase of the last market cycle.

I had too much cash and most were in money market funds in my brokers’ accounts. One-year CDs pay about 1.3%. After inflation and taxes, it is a loss, but it is far better than virtually nothing from the money market funds.

Our financial system punishes us for not taking risk. However, at market peaks, we need to play defense with conservative investments such as CDs.

The durations of my CDs depend on when I need the cash to buy contra ETFs such as SH during a predicted market plunge. I predict and plan if the market will not crash in 3 months. Even if it will, I should have enough cash then within a short period of time.

Another consideration is the interest hikes. I predict there would be 0.5% increase in 6 months. Hence, all the new CDs in 6 months will have 0.5% increase in interest in theory.

We can “ladder” the CDs letting them to mature in different months. For example, we can have one CD maturing in 3 months and another one in 12 months. When the first CD matures, we renew it for another 3 months. In this method, we always have cash in 3 months and one CD has a higher interest rate. The more the CDs, the better the distribution.

Ensure that the FDIC limit of $250,000 is per bank, NOT per account. Some CDs from foreign banks which are also insured by FDIC offer higher interest such as the Bank of China.

Some states offer special favorable treatments for taxing interest for CDs from local banks. Being a Mass. resident, I prefer local banks. However, the CDs from my brokers make it easy to trade and select better rates. In one case, my bank offers a special CD deal of 1.55% for 14 months. It saves me about $200 for 2 trips.

Do not select CDs that are callable. It means the banks have the right to cancel the deal to their advantage. It is no longer a popular feature – you can cheat folks sometimes, but not all the times. Try to select the CDs having the settlement date closest to today’s date. Otherwise, you do not get interest on the extra days.

For the last 5 years, SPY is returning 15% and beats the 1.3% CDs by a good margin. Today buying CDs is an insurance bet. When the market crashes, it usually is fast and deep.

SPY, simulating S&P 500, is market cap weighted. It means Apple has far larger share than the other 499 stocks. The top five stocks are the rocket stocks to me. It would be less risky if the 500 stocks are evenly weighted.

Besides CDs

You may also consider bond funds and bond ETFs. They have higher dividends but they are more risky. Today I do not consider long-term bonds. Their performances are inversely proportional to the interest rate.  I predict there will have interest hikes. Short-term (less than two years for me) bonds are fine to me.

Compare the performances of the bond funds. Most make a mistake by comparing the current performances. You should compare their performances during market peak such as 2007 and 1999.

The two ETFs I consider are HYG and JNK. Their annualized returns are compounded. SPY is the bench mark.

2008, the year of the market crash to most, was a bad year for bond funds and ETFs. Based on this, I would sell them when the market crashes. However, in 2009 both recover from the previous losses quite nicely.


2007
2008
2009
HYG
3%
-18%
29%
JNK
Not avail.
-25%
38%
SPY
5%
-37%
26%



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