CD Deals Summary
Fed Meeting: Another 25-bp Rate Hike - Strategies for Savers
Fed Meeting Preview and Deposit Rate Forecast - March 15, 2023
Silicon Valley Bank Is Shut Down - Second Largest Bank Failure in HistoryThoughts on the Stock Market - Investment Strategies for Savers
There has been a massive amount of media coverage this week of stocks like GameStock that have surged to unbelievable price levels as small traders organized via Reddit attempt to profit from short selling done by hedge funds. Early in the week, it appeared the small traders were winning, but then on Wednesday, brokerage firms like Robinhood restricted access to these stocks. Almost everyone seems to be alleging that these brokerage firms have colluded with the hedge funds so that the hedge funds continue to win at the expense of the small traders.
How does this relate to deposits?
First, it doesn’t help the image of the stock market. Day traders who push stock prices to extremely overvalued prices give an impression that the stock market is just a casino. Hedge funds appearing to collude with brokerage firms give an impression that the casino is rigged against the average traders.
If you think the stock market is a rigged casino, you might think it’s safer to depend on just deposit accounts for your investments. Unfortunately, this has risks which I describe below.
Instead of thinking that the stock market is a rigged casino, people may think that the average trader has a chance to win big. The publicity of small traders making a fortune from these stocks may be encouraging more stock buying. Perhaps more of those government stimulus checks will end up in the stock market than in deposit accounts. A rising stock market helps deposit rates since it entices people to move money from their bank accounts into the stock market.
On the other hand, a falling stock market puts downward pressure on deposit rates. That’s especially the case when the market crashes and people start moving money from stocks to cash. Also, when the stock market crashes, the financial system and the economy will often take a hit. Bond yields fall and the Fed will pledge zero rates for even a longer period of time.
One worry from this week’s stock market news is that it could be an early sign of market troubles ahead. As this CNBC opinion piece warned, “GameStop is like past bubbles and investors should exit before it bursts like the others.”
A more worrisome bubble is the one that the Fed and other central banks may be creating. This article from market strategist Sven Henrich describes this bubble and the disturbing risks it poses to the markets and the economy. This bubble could have more of an effect on long-term investors.
Long-term Investing
Long-term investors don’t day trade stocks. Instead, long-term investors build a well-diversified portfolio of stocks and bonds. One strategy that is favored by many experts is a simple index fund strategy in which the investor buys a small number of well-diversified and low-cost index funds that are held for the long term (see this Bogleheads investment philosophy document for the foundation of this strategy.) Typically, financial advisors will recommend a balanced portfolio that includes bonds. So in addition to stock mutual funds or ETFs, an investor would include well-diversified and low-cost bond index funds as part of one’s portfolio. The generally accepted strategy would be to regularly rebalance your portfolio to maintain a certain percentage of stocks and a certain percentage of bonds. As you age, you slowly grow your percentage of bonds and reduce your percentage of stocks.
Where CDs may fit in a long-term investor portfolio
A small percentage of financial advisors suggest including CDs with your bond mutual funds and ETFs for that fixed-income part of your portfolio. Direct CDs that you get directly from banks and credit unions don’t have interest rate risks since their value won’t fall when interest rates rise. Allan Roth described his portfolio in this AARP article. In addition to index funds, a sizable amount of Allan Roth’s portfolio is in CDs:
I’ve written for over a decade about going directly to banks and credit unions to buy FDIC- and NCUA-insured certificates of deposits that pay more than high-quality U.S. government bonds and offer minimal early withdrawal penalties.
The risk with stocks
Unfortunately, the economy and the Fed are making it harder to include CDs and bonds as a large percentage of one’s portfolio. The zero interest rate environment has caused bond yields and CD rates to plummet, and the signs point to this lasting for many years to come. This is pressuring people to increase the percentage of stocks in their portfolios and it could be adding to the asset bubble that Sven Henrich described.
What if stocks crash with the S&P Index falling to disturbingly low levels? Will we see something like what happened in Japan when the Nikkei crashed in 1989, and after more than 30 years, the Nikkei Index has still not reached its 1989 high?
One thing that can reduce this risk is global diversification. Including mutual funds and ETFs with foreign stocks can reduce risks that are specific to one nation. However, the US is such a large part of the world economy that global diversification may not significantly reduce this risk. Also, the Fed isn’t the only central bank that has been pushing low rates and asset purchases.
The risk with deposit accounts
If you stay within FDIC-insured and NCUA-insured levels, at least you can maintain a high level of confidence of not losing your money. Of course, there will always be the risk of losing out to inflation. That’s the main risk of deposit accounts.
This MarketWatch article provides a short review of investments that can provide a hedge against inflation. These include gold, bitcoin, stocks, TIPS and I Bonds. Maxing out on I Bonds each year is a simple way to provide a little hedge against inflation. In addition to choosing investments to hedge against inflation, you can take other steps if high inflation hits. Several good tips are in this AARP article from Allan Roth, “8 Steps to Make Sure You Don't Go Broke in Retirement.”
Investing when there are risks of high inflation and asset bubbles?
In his press conference last Wednesday, Fed Chair Powell talked in depth about why the Fed isn’t worried about high inflation. According to the Fed Chair, “We know what to do with higher inflation. Should the need arise, we would have those tools, and we don’t expect to see that at all.”
Fed Chair Powell also tried to dispel worries that the Fed is creating asset bubbles:
The connection between low interest rates and asset values is probably something not as tight as people think because a lot of different factors are driving asset prices at any given time.
Many don’t have that much confidence in the Fed. As Sven Henrich warned in his article, “the Fed hasn’t been able to control anything in recent years.”
When you factor in inflation, no investments are without risks. The best you can do is to minimize risk with diversification and by sticking to investments that you understand and that allow you to sleep at night. Including some bank and credit union CDs, savings accounts and reward checking accounts in your portfolio can help.
I like the fund SCHD -- it's a very low cost portfolio of high quality US companies with a dividend yield of 3.58% and a record of increasing its payouts since 2011
https://seekingalpha.com/article/4207481-simple-3-etf-combo-for-complete-diversified-dividend-portfo...
The Wharton School where I learned the one takeaway lesson that made the onerous tuition worth it: that diversification was the key to risk mitigation.
My own revelation early on in my adult life that if the US Stock market was not a good investment over the long run that your money would not be safe invested in anything else.
Setting a long term goal. And mine was that I wanted to amass enough money by the time I was 65 so that if it earned nothing for the rest of my life, barring a major collapse of the economy, I could still live a comfortable lifestyle by spending the principle alone for the rest of my life.
A trip to Las Vegas in the 70s. I heard nothing but stories of big wins from everyone who ever went to Las Vegas. Everyone boasted about how they paid for their vacation there by gambling and it seemed like no one ever lost. It made no sense to me but I decided to take my vacation there one year and see what that was all about. I set a limit of $50 for gambling which for me was a lot of money in those days. I lost the whole thing within about 1/2 hour at the slot machines with one loss after another. By the time I had only half the money left I was so depressed that I almost stopped, but kept going anyway. Soon it was all gone and I had no feeling of "fun" no feeling of exhilaration, nothing but a sick feeling in my stomach like I had just done something really stupid. In fact later when the pain wore off I realized that I had just learned the best $50 lesson of my lifetime.
Having the right parents. It's not so much about inheriting money as it is the luck of the genes. My mother was about as conservative an investor as it gets, a "money in the mattress" kind of investor. My father was a gambling man and never saw an investment risk he didn't want to take. I had the good fortune of inheriting both traits and happily fell somewhere in the middle. I think that has served me well.
So where am I at? After a lifetime of commitment to the lessons I learned, a lot of hard work and a lot of doing without what I might have been able to have, I recently turned 65 and counted my beans. I'm there. I achieved my lifetime financial goal. And the backbone of my investment strategy, the one that derived from all of the above lessons I learned, was a to buy high quality US stocks and hold them to the bitter end. I rarely sold anything and I never tried to guess what stocks would make me a quick fortune. I just added quality stocks (almost entirely large US companies) to my portfolio every payday and kept them for decades. I didn't even bother keeping track of how the market was doing and try to time the purchases. Didn't do any "rebalancing" or fiddle with the proportions. Just put the money in big company quality stocks. Didn't care if the markets were up or down, because I believed in my philosophy that if the US stock market was not safe over the long run, your money was not safe anywhere. And I still believe it.
But there was one caveat in the goal I set: "barring a major collapse of the economy." I never dreamed that this would be a real concern until now. And the fact that it is happening just in the very year that I have been saving for and seemingly attained my goal makes it all the more disturbing. I am no longer focused on investment returns but on economic factors as these are the things that could now derail my financial future in spite of all my past efforts. And my principal concern in that regard is the reckless, out of control government spending. They seem bound and determined to drive up the debt and bankrupt taxpayers. This is an unsustainable course. It's my principal worry. Runaway US inflation or a collapsed US dollar means the destruction of your investments no matter what they are invested in. And I've never had more concern about these possibilities than I do now.
And so my latest lesson learned. No matter how hard won, there is no attainment of personal financial goals that the government cannot derail.
I think you are right to be concerned. If you want to forecast where the stock market is headed now, study where it languished during the years from 2009 to 2016. Past is prologue. I am significantly older than yourself. And frankly I'm quite comfortable with the CD portfolio, including a number of add-on CDs, acquired in recent years with Ken's help. I would not want now to be in the stock market given current circumstances.
I retired from corporate world over 20 years ago with no debt and sufficient CDs and IRAs but the establishment and growth of my self-employment was a key. Started the latter part time before “first retirement”. to see if demand, etc. was there. Worked out well now for over 25 years with speaking and writing gigs around world...nothing in last year, which I like!
My only regret is that I have no pension. It's all on me and my investments.
You could argue about who is more secure since a city can declare bankruptcy and cut pensions. But with the way the taxpayers' money is being frittered away, I'd give him a lot better odds than mine.
If my parents gave me any bum steers, it was not to be a cop or a fireman because they don't make out so well financially. Maybe they just wanted me to earn it the hard way! Talk about tough love.
My father joined the NYFD during the Depression, and after World War ll, often worked a second job to supplement his firefighter salary. He retired after 20 years, working various jobs until he was 83. In other words, his NYFD pension did not provide him the life of Riley. But boy, were we relieved when he came home safely every time from his firefighter job, while some of his co-workers didn't.
We should all support pensions as a cornerstone of the safety network for workers. A recommended read to all about the disappearance of private pensions : Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers by Ellen Schultz., a former investigative reporter for the Wall Street Journal.
Just sayin'.
And yes, I have the Schultz book (published back in 2011) as an ebook, and have read it. It is somewhat one-sided.
I also want to acknowledge the point that 111 alluded to that the nature of compensation for firefighters and police in places like New York has changed drastically over these last decades. When I was a kid, the understanding was that if you went into one of those professions, your pay would be less than you could make in the private sector, but your benefits (including pension) were better helping close the gap in overall compensation. But somehow, the pay kept getting higher and higher while the benefits not only remained rich, but also got even more out of line with the private sector. I know how that happened (as I'm sure many do), but that's beyond the scope of this comment.
The average pension for a New York City firefighter who retired in 2018 was $129,259. And that does not include the cost of benefits or cost of living increases (which I believe they get but I am not certain).
In order to earn even the pension itself, $129,259, in a bank at a 0.50% you would have to have almost $26 million dollars in your account. Yes, $26 million. And even if you had that much, there is no guarantee that you will get that amount for life. And you won't get any benefits or cost of living increases to go with it. You also won't get the tax benefits as the firefighter and police pensions are at least partially tax free. So you would have to have significantly more than $26 million if you want to have the equivalent value.
There are a lot of people who also had noble and essential careers that served the public, many of whom worked twice as long or nearly that before they were able to retire who don't have pensions, are making a fraction of what the retired firefighters and police are in their own retirement and yet are paying the taxes that pay for their pensions. And almost none of them have $26 million that would allow them to have the same kind of safe income in retirement (plus they would need enough extra on top of that to pay their taxes).
There have been studies over the past decade or more concluding that government workers are paid more for equivalent work than private sector workers, the people who pay their salaries. I think that is a problem that needs to be addressed. I am all for firefighters and police being paid as much compensation as possible. But the question is how much is that and what is also fair to the taxpayers who have to pay that compensation to them.
In the last few years I've made more changes in the non-volatiles. Since a 30-year secular bull market in bonds is now well over, it's hard for me to see how bonds or bond funds will have nearly as much success in the next 10-20 years as in the last 10-20. I see CDs, especially add-on CDs bought in brief periods of somewhat higher rates, as a proxy in some cases for bond funds in the non-volatile part of the portfolio.
Not to wander into political comment, but whatever else one might think of the last administration, it did seem to engender a sharp, though brief, period of somewhat higher rates. During that period I and many others used this website to stock up on add-on CDs at much higher rates than today's. (Unfortunately, I think the current lower rate environment might outlast the longest of these, which in my case mature in 2024.)
https://www.financialsamurai.com/how-high-net-worth-individuals-invest-asset-allocation-breakdown/
So 111 is right on target!
4 years...Donald Trump: As of the end of FY 2020, the debt was $26.9 trillion. Trump added $6.7 trillion to the debt since Obama's last budget, a 33.1% increase
8 years...Barack Obama: Added $8.588 trillion, a 73.6% increase from the $11.657 trillion debt at the end of Bush’s last budget in 2009.
8 years..George W. Bush: Added $5.849 trillion, a 101% increase from the $5.8 trillion debt at the end of Clinton's last budget, FY 2001.
4 years....George H.W. Bush: Added $1.554 trillion, a 54% increase from the $2.857 trillion debt at the end of Reagan's last budget
8 years....Ronald Reagan: Added $1.86 trillion, a 186% increase from the $997.8 billion debt at the end of Carter's last budget
4 years...Jimmy Carter: Added $299 billion, a 42.7% increase from the $698.8 billion debt at the end of Ford's last budget.
3 years...Gerald Ford: Added $223.7 billion, a 47.1% increase from the $475 billion debt at the end of Nixon's last budget.
8 years....Bill Clinton: Added $1.396 trillion, a 31.6% increase from the $4.4 trillion debt at the end of George H.W. Bush's last budget.
Clinton was the lowest..4 years...Donald Trump: As of the end of FY 2020, the debt was $26.9 trillion. Trump added $6.7 trillion to the debt since Obama's last budget, a 33.1% increase
8 years...Barack Obama: Added $8.588 trillion, a 73.6% increase from the $11.657 trillion debt at the end of Bush’s last budget in 2009.
8 years..George W. Bush: Added $5.849 trillion, a 101% increase from the $5.8 trillion debt at the end of Clinton's last budget, FY 2001.
4 years....George H.W. Bush: Added $1.554 trillion, a 54% increase from the $2.857 trillion debt at the end of Reagan's last budget
8 years....Ronald Reagan: Added $1.86 trillion, a 186% increase from the $997.8 billion debt at the end of Carter's last budget
4 years...Jimmy Carter: Added $299 billion, a 42.7% increase from the $698.8 billion debt at the end of Ford's last budget.
3 years...Gerald Ford: Added $223.7 billion, a 47.1% increase from the $475 billion debt at the end of Nixon's last budget.
8 years....Bill Clinton: Added $1.396 trillion, a 31.6% increase from the $4.4 trillion debt at the end of George H.W. Bush's last budget.
Bill Clinton: Added $1.396 trillion, a 31.6% increase from the $4.4 trillion debt at the end of George H.W. Bush's last budget.
Bill Clinton did the best job as far as the debt.
In very tough times the debt explodes... FDR was the worst with World War 2
I also hit 65 this year and am very concerned about the debt but that fear for me didn't just start now. We're a debt driven economy, just look at how much the debt has increased in % terms for each of these Presidents, now people are waking up because the numbers are huge but look at % increases instead, really no surprise. The federal reserve is the enabler with their low rates because the low rates makes it easier to take on the debt so the enemy grows but so does the debt. Raise the rates and the stock market will drop, companies will lay off workers so the cycle continues.....decrease the debt and the economy will contract imo so they keep piling it on. Look at the % increases by President and take into consideration how long they were in office.
4 years...Donald Trump: As of the end of FY 2020, the debt was $26.9 trillion. Trump added $6.7 trillion to the debt since Obama's last budget, a 33.1% increase
8 years...Barack Obama: Added $8.588 trillion, a 73.6% increase from the $11.657 trillion debt at the end of Bush’s last budget in 2009.
8 years..George W. Bush: Added $5.849 trillion, a 101% increase from the $5.8 trillion debt at the end of Clinton's last budget, FY 2001.
4 years....George H.W. Bush: Added $1.554 trillion, a 54% increase from the $2.857 trillion debt at the end of Reagan's last budget
8 years....Ronald Reagan: Added $1.86 trillion, a 186% increase from the $997.8 billion debt at the end of Carter's last budget
4 years...Jimmy Carter: Added $299 billion, a 42.7% increase from the $698.8 billion debt at the end of Ford's last budget.
3 years...Gerald Ford: Added $223.7 billion, a 47.1% increase from the $475 billion debt at the end of Nixon's last budget.
8 years....Bill Clinton: Added $1.396 trillion, a 31.6% increase from the $4.4 trillion debt at the end of George H.W. Bush's last budget.
Bill Clinton did the best job as far as the debt.
In very tough times the debt explodes... FDR was the worst with World War 2
I'm more concerned about government spending than debt, the part of the equation politicians don't want to talk about. Adjusted for inflation and population, the US government spent about $2,200 per capita in 1948. In 2021 they are projected to spend about $14,500 per capita, or almost 7 times as much. And that does not include the $6 TRILLION+ of new spending proposals that have been introduced by the new administration in just its first 10 days or any of the trillions more that are likely to be proposed in the near future.
And I don't see how paying people not to work, importing poverty, raising the minimum wage or banning industries that is already leading to mass layoffs, right in the middle of a pandemic, is going to decrease per capita spending. Spending is out of control. The government cannot tax and spend the country into prosperity. That is my most pressing concern.
Since there is nothing I can do about it I will give the new administration the same chance I gave the last one and see what happens.
That doesn't explain the nearly 7 times increase in federal government inflation adjusted per capita spending between 1948 and now. If you look at the historical chart you will see that it steadily increased throughout the entire period. The current period is not an outlier.
I don't know if your numbers are right or not but if I have time I will check them.
Bottom line, when you look at a normalized measure of government spending, spending per capita, the government keeps spending more and more and more every year. Reagan was right. The problem isn't that people are taxed too little, it's that the government spends too much. And by the way he did all he could to control the spending but the other party blocked all his attempts. Thank God he was able to cut taxes though or I'm not sure we would be having this same conversation today. If he had had his way with the spending cuts the deficits would have been much lower if not surpluses because his policies created the highest GDP growth in at least modern US history.
What I do know is that there has only been one president since WWII under whose administration per capita government spending actually decreased. And that president was President George H. W. Bush.
Just kidding. But oh, would it be nice to go back to those TRS-80 days (or Archer Walkie-Talkies)..
One should invest with logic and data, NOT the emotion of the moment. But at the same time, you have to realize that even for the best prepared, well-informed investor, while the matter of degrees may change based on how informed you are, in the end it's STILL a crapshoot. I don't know how many times over the last year I've read articles complaining that stocks, bonds, etc should historically be going THIS way... but they're going THAT way instead.
So my outlook:
(1) Don't waste money, live beyond your means, or buy a bunch of stuff you don't really need.
(2) Set aside amounts (if able to) for enjoyment, but do it consciously, don't just buy on impulse whatever you want at the moment.
(3) It's fine to gamble on the stock market, but look at your age (ie, how many years you can afford to be in the market before you need the $ for retirement) and for me, I;ve never ever put more than half of what I have into stocks. I'm not in my 20s so I don't have a lifetime to wait for stocks to correct themselves if an extended bear market comes.
(4) Where I currently am: Approx 35% in stocks, the rest in CDs (paying 3%).
I know some seasoned investors who sold their entire portfolio even before the pandemic, because stocks were so inflated even back then. I'm at the point in my life where I'll keep about 1/3rd in stocks (index & sectors but not individual stocks) but want the safety of a guaranteed return (even if lower, and even w/higher taxes on CD interest vs stock gains). 1/3rd is "too much" for those investors who think (with some good reason) that the market is way overpriced, and "too little" for those crazy bulls that would invest in a a shop selling sand in the Saraha. 1/3rd is the sweet spot for me. Even as CDs mature and I'm forced to find lower rates (though some are Add-Ons at 3% for a few more years) I'll still take the safety for 2/3rds. I'm willing to gamble with 1/3, but not more than that.
And dang it, that's just what my TRS-80 tells me to do!
I pay less in taxes now than when I was in my 60s...good luck!
I feel sorry for the current generations who have to deal with these abysmal savings yields on the relatively safe investments. They will have no such head start. And with the government's profligate out of control spending, which seems to have now stepped on a rocket, I don't see any relief on the horizon. Rates might go up, but I doubt real rates will. The Covid generation has been robbed of a decent education and a decent start to their financial life. I don't know how you can ever make that deficit up. And it's not just them. The Social Security and Medicare systems are Ponzi schemes that rely on the younger generations to pay for the older. It looks like an entire generation at least is being lost to this massive over-spending pandemic environment. I don't know if we are looking at generational warfare or outright economic pandemonium, but this scenario doesn't bode well for anyone... either younger or older.