Where to Keep your Cash



If you are holding on to some amount of money now and you want to stash it away somewhere, you might be led to choose the nearest or the most available financial institution already knocking on your door. Do remember that it is not about them but about you, the owner.

Deciding on the best kind of short-term savings account requires satisfying your own best interests and needs in such areas as the following:

Accessibility: Which do you prefer to use to access your account – check, ATM, online and others? How frequently do you expect to use it??

Interest Rate: Is the interest rate your bank or institution giving the highest you can get? If not, scout around for a better deal, if you can.

Quality of Service: Do you demand personalized service or are you more comfortable doing things yourself or do you prefer some minimal customer assistance?

Penalties: In case you have a change of mind and want your money back sooner, what penalties will you incur?

It will help us assess the candidates now: 

Checking accounts

Generally, checking accounts best serve business transactions, not just personal savings. Most checking accounts, therefore, do not pay interests although there are banks who bundle the facilities of checking with money-market account earnings. Likewise, "asset management" accounts provided by brokerages which contain several attractive features, such as limitless check-writing, use of ATM access, and high money market interests, making brokerages more appealing to people with time.

Benefits

You can access your money readily with a check or an ATM.

Also, if you long for the traditional personalized bank services of a teller, your bank is just around the next street corner.

Federal Deposit Insurance insures checking accounts like they do every bank account.

Downside

Your bank may not offer any return on your deposit; or if it does, it might be very minimal as to matter.

As most of us know, checking accounts may require a minimum retaining deposit or bank services charges --- maybe both, which could make you think twice before getting one.

Savings accounts

Formerly, savings accounts (also referred to as passbook accounts) were the most common places to keep money for a short duration. However, people are learning to stash away their treasures in investment instruments that offer greater returns. Today, savings accounts have practically shrunk in their ability to make money for you, if you have not noticed yet.

Benefits

FDIC insures your savings account to a certain amount.

You can open an account with a minimal starting deposit.

Downside

You get almost nothing for parking your money with a bank – a parking meter makes a lot more money just standing there.

Bank accounts with high returns

Today, savings and checking accounts can provide high returns, making them great money storage to cover your essential expenses. Flexible and liquid, these accounts allow you to put in or take out conveniently and any time you want to. There are some which offer interest rates equal with more exclusive investments, such as CDs. You can gain extra mileage on your money if you apply for an online-only bank which saves on costs by having fewer features than those offered by other accounts.

Benefits

Higher returns compared to conventional bank accounts.

FDIC insures high-yield accounts at par with other accounts.

Downside

Online banking can constrain you access to your money without the conveniences of checks and ATM cards.

Clients need to arrange their expenses by moving money to and from the online bank to a linked checking/savings or brokerage account. If you cannot wait for the usual delays – up to almost a week at times – for transactions to clear, then this may not be for you.

Beware of limited-time promo rates by investigating the provider’s six-month interest rate stats.

Money-market deposit accounts

Banks also provide money-market deposit accounts which often demand a minimum deposit balance, and allow a certain number of monthly transactions (six transfers, which include three checks issued on the account).

Benefits

Money-market deposit accounts can be easily accessed using checks, ATM cards and cash transfers.

FDIC insures money-market accounts like all bank accounts.

Downside

Because of the conveniences, you get lower returns compared to certificates of deposit.

You can be charged with penalty fees for going below your minimum balance or when you make more than the allowed number of transactions.

Money-market funds

Mutual families and brokerages provide money-market funds which are funds invested in highly-liquid, safe securities, e.g., certificates of deposit, commercial paper (short-term obligations offered by companies) and government securities.

Benefits

Money-market funds can be accessed readily using checks or ATM cards – a boon for the eager beaver.

Money-market funds often higher returns than money-market accounts.

Issuers of these funds work overtime to maintain the NAV (the funds’ unit price) at $1, making your principal rather secure.

Downside

FDIC, unfortunately, does not insure money-market funds.

The NAV limit may go higher than $1.

Certificates of deposit (CDs)

Debt instruments, such as CDs, have a prescribed maturity, between 3 months to 5 years. Banks usually issue CDs although brokerages also offer them.

Benefits

CDs are quite secure because they are FDIC-insured.

CDs can provide higher yields than money markets, especially if they have longer maturity periods.

Downside

You will have to wait for the CD to mature before you can get hold of it. Nevertheless, you can withdraw it earlier but with a penalty charge.

U.S. government notes or bills

Also called "treasuries", these notes or bills are fully secured by the trust and credit of the U.S. government. Treasury bills take less than one year to mature; while treasury notes take 2 to ten years to fully mature.

Benefits

These are considered the safest investments in almost all countries.

You can buy these directly and commission-free, at TreasuryDirect.

They are also exempt from local and state taxes.

Downside

In terms of yield, you might be able to find higher returns from CDs, money markets and corporate bonds.

Withdrawing your money before maturity may cost you some losses on your original investment.

I Bonds

I Bonds are inflation-indexed savings bonds offered by the U.S. government which yield inflation-adjusted semiannual returns, thus, protecting your money’s buying power.

Benefits

The US government also fully guarantees I Bonds.

You are protected against inflation -- a capital personal “I” for any investor.

Many will be happy to know that these bonds are available in affordable denominations, as low as $50 and as high as $10,000.

You can acquire them from any reputable financial institution, as well as at TreasuryDirect.

Your returns are tax-exempt, locally and state-wide, and can also be tax-free if applied for post-secondary education purposes.

Moreover, taxes on your earnings can be deferred for as long as 30 years.

Downside

The minimum holding period for an I Bond is one year 12 months, and if you redeem it within less than 5 years, you have to pay a penalty equivalent to your three months' earnings.

Municipal bonds

Also called "munis" by the big players, municipal bonds are offered by local and state governments for the purpose of constructing schools and other public infrastructure projects. Munis appeal mostly to high-income investors seeking tax-friendly returns.

Benefits

Munis are almost as secure as U.S. securities.

Munis are exempt from federal taxes, and, perhaps, also local and state taxes, especially if you reside in the town government that issued the bond (look into the tax advantages before buying).

Downside

Munis offer comparatively lower Interest rates. If you belong to a high tax category, you can get better returns from other investment options.

You must shell out a commission to purchase munis.

Like some other investments, you cannot get all your money if redeem it before the maturity date.

Corporate bonds

Corporate bonds are debt bonds offered by firms, ranging from the high-yielding blue chips to the less-productive "cow chips". The higher the creditworthiness of the issuing company, the lower interest it pays. Moody's and Standard & Poor's classify firms that issue these bonds according to their ability to pay out their debts. Remember that only short-term bonds are suitable for short-term savings.

Benefits

Corporate bonds often give higher returns compared to money markets, government securities and CDs.

Downside

The issuing firm may end up defaulting on interest payments or even totally fold up.

Commission fees are charged to buy these bonds.

In case you have to withdraw your money, you will not get back your original invested amount.

Bond funds

Bond funds are mutual funds that put together investors’ money to purchase bonds of all kinds.

Benefits

These provide an attractive means to buy bonds in affordable denominations while providing the diversification to reduce the risks of picking out dud bonds from sluggard companies.

Downside

The NAV or the share price of a bond mutual fund varies, as interest rates of the bonds bought and sold within the fund fluctuate. As a result, it is uncertain whether you can recover your original investment when you need to. Moreover, returns on a mutual fund can fluctuate.

Owning the fund requires you to pay an ongoing expense called the "expense ratio" as well as a commission fee or "load".

tag : Southbourne Group Singapore, Tokyo Japan

The Perfect Time to Invest

length of your first investment

In trading with stock, timing does not matter as much as time itself.

Most novice investors fret about the timing of their first stock acquisitions. Kicking off from the block at the wrong time within the market's fluctuations can mean being left behind holding nothing but your shirt and pants.

Not to worry! For first investors, time is your friend. In the long run, the compounding effect of a properly researched investment will yield high returns, no matter how the market was doing at the time you bought the shares.

Use your time well

Instead of worrying about when to buy your first stock, focus on the length of time you plan to hold your money in the market. Each investment provides its own unique levels of risks and returns and, as such, has its own unique and suitable investing time requirements.

Most bonds generate smaller and steadier returns for investors who prefer short-term investments. Ibbotson reports that short-term U.S. Treasury bills generated approximately 3.7% annual returns from 1926 to 2003, 2003 being the tail-end of a bear market. Although the figure is not so attractive today, we have to consider that inflation was almost nonexistent during that period; earning 3.7% average annual return then would have been a desirable level before the turbulent 1970s.

For longer investments, such as government bonds, one can gain a somewhat better return, which had an average annual gain of 5.4% from 1926 to 2003. Unexpectedly, such gains were comparatively volatile. For example, in the 1980s, they generated almost 14% per year while, in the 1950s, they lost an average of about 4% annually.

In general, stocks have also benefitted investors. Large-cap stocks, for instance, offered an annual average of 10.4% from 1926 to 2003 – relatively a step higher than bonds. Nevertheless, the range of the returns for stocks is nowhere higher than that for bonds during the same time frame. Stocks declined slightly in the 1930s but also regained during some significantly solid decades, during the 1950s (at an average annual return of 18%), the 1980s (16.6%) and the 1990s (17.3%). We can all appreciate that consistent performance of stocks.

At what point will you need the money?

Keeping your investment for a longer period will allow you to grow your money as you will have the time to weather periods of low returns and to accept risks.

However, if you want your money within the five years from now, you may have to forget individual stocks and stock-centered mutual funds. In case your time frame is only three years, you must likewise leave out bond mutual funds and real estate investment trusts (REITs), which tend to go down as interest rates climb.

Having eliminated those choices, what do you have left? You can invest in individual bonds or certificates of deposit (CDs) which have less than three years durations, in a money market fund, or in a savings account. Each of these options delivers returns while assuring you of getting your principal back. With your short time-frame requirement, you cannot afford to accept more risks for your money.

Nevertheless, stocks can provide potentially high returns you will need for your long-term objectives, such as a dream house or retirement. Many cannot pass up the opportunity to gain higher returns.

When to sell

Having decided where to invest and when to invest, your next hurdle is when to recover your money. This will not cover bonds which automatically sell themselves once they mature; but it will cover stocks or stock mutual funds.

Some “expert” investors claim to have the ability to "divine" the market’s timing, knowing its rise and fall. With their advice, you will need to sell their stocks just before the market drops, or buy them all back as the market gets ready to climb. Sadly, if it were all that simple, these “experts” would all be vacationing in the Maldives and in Monaco, instead of spending their time selling their expertise to other investors.

Be that as it may, when you see a general economic crisis crushing corporate revenues and companies folding up, you have no other choice but to unload some of your expensive, lower-quality investments. Aside from such overall dire economic events, we cannot find a foolproof method for timing the market’s movements.

Many investors in mutual funds withdraw their cash as soon as returns slow down. However, some academic researchers claim that butterfly investors who fly from one fund to the other, looking for performance, end up worse than those who remain in place. The simple rule is: Stick it out with a fund no matter what happens – except for one case.

An actively managed fund provides protection through a dependable professional money manager. However, if that he or she leaves your fund to manage another, another manager will take over to handle your money with the same expertise – although you can always decide to sell instead. Remember that three or more lean months are not enough reason to bail out.

In selling stocks, you need to consider two warning signs that will compel you to sell:

When the company’s fundamentals change:

The possible presence of a new competitor has made its essential products obsolete. The business may have branched out into concerns significantly disconnected from its central skills, confusing your appreciation of their business.

The stock becomes overvalued:

The market may have bid the company's shares up to unsupportable levels. The stock may crashed based on the smallest negative press releases. The risk of such a fall may outweigh any tax hit you would take if you sold today.

With these two questions in mind and carefully considered, you may ignore other warning signals on the horizon.

Do not let the market buzz bother you 

Media focus on Wall Street activities, although concentrating mainly on a single index, as if it represents the market as a whole. High index level? We have a bullish market! Index is down? The bear market is here! Index fluctuates? We have a volatile market!

There are investors, especially those who are essentially technical analysts, who observe market fluctuations to determine whether investors will take the market higher. For us, this is a meaningless exercise. In the long run, effective investing does not depend on understanding the market as a whole, but on comprehending the strengths and weaknesses of each concerned companies. In spite of the noise and the hype going on in the market, buying and holding on to your investment is still the finest method to gain sound long-term benefits.

Review, review, review

On the other hand, you may decide to fill your portfolio with only a few stocks – no matter how judiciously picked -- and leave them to germinate. Just like plants, investments require periodic care and attention in order to grow. But if you do not have money in government bonds, which have guaranteed rates of return, you will have to monitor your investments now and then to see if they are afloat -- and doing so more aggressively and economically than other, like alternatives.

Assessing your investments, especially when you make mistakes, provides a vital lesson for future growth. Learn to overcome such errors by not repeating them   your success depends on it. Spend enough time to evaluate your portfolio every quarter, at least – but weekly is better. Although you do not need to sit -- and sleep -- before your computer to monitor your investments, never leave them unattended either.

Beyond the basics

There you have it – with your first lessons in Basic Investing, may you have a happy time investing in the future! Still, there is much to learn, for instance, how to value stocks, and many more. Go slowly, relax along the way when you can and enjoy learning the adventure of investing.

Read our newsletter for free within a month. While we have different views, our diversity provides us a deep source of valuable insights, thus, making us more sound investors. We have a disclosure policy.

tag : Southbourne Group Singapore, Tokyo Japan

Profile

Southbourne Group Singapore, Tokyo Japan

Author:Southbourne Group Singapore, Tokyo Japan
Welcome to FC2!

Latest journals
Latest comments
Monthly archive
Category
Search form
Display RSS link.
Link
Friend request form

Want to be friends with this user.

QR code
QR