MarketWatch columnist Chuck Jaffee's Stupid Investment of the Week is on deposits earning low interest rates.
With stocks, “buy low, sell high” sounds easy but is hard to achieve.
With bank deposits, the low hurdle of “something is better than nothing” is easily met, yet a huge percentage of savers fail to do so. Instead, they settle for yields on interest-bearing checking accounts, savings accounts and money-market deposit accounts that are below the industry average and amount to next to nothing.
At a time when many average investors are scared out of the market, settling for bank-deposit yields that are below average means giving up on the one sure thing left. As such, it’s the Stupid Investment of the Week.
Stupid Investment of the Week highlights the concerns and conditions that make an investment less than ideal for the average consumer, and the average yield numbers for bank deposits are so bad that there’s no denying that anything less than that midrange cutoff is silly, especially when the alternatives can be so much more rewarding.
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It starts with stunning statistics.
According to BankRate.com, the nation’s average interest-bearing checking account yields 0.21 percent, the average savings account had a 0.37 percent yield and the average money-market deposit account carries a rate of 0.7 percent. Things are a bit better in certificates of deposit, where the average six-month CD yield currently stands at 2.1 percent.
By comparison, a saver who goes to the top of the yield charts will find that the top-paying checking, savings and money-market deposit accounts yield in excess of 3.7 percent, and the top six-month CDs are paying double the average, putting them north of 4 percent.
It’s a straight apples-to-apples comparison of bank accounts covered by the Federal Deposit Insurance Corp. While none of those yields are keeping pace with inflation, the top marks at least get someone close. During times when many people are simply trying to park their cash, keep it safe and avoid market risk, staying at the high end of the yield curve helps to minimize purchasing-power risk.
That’s not necessarily a call to pull everything and park it in a bank account, although some investors have done just that. It is simply saying that if the money is going to be on deposit, it should be getting the highest take-away possible while still maintaining federal deposit insurance.
“Whether you are going to cash or just holding your cash, do it the right way and don’t settle for average,” said Greg McBride, senior financial analyst for BankRate. “Letting money stand in a low-yielding account is not the answer. … You may be looking at your cash and saying that the return you are getting is better than nothing, but the idea is to turn it into something.
“As long as you have FDIC insurance, the additional return is risk-free return,” McBride added.
That said, consumers have a lot of reasons they may not be pursuing above-average bank yields, starting with the fact that the top yields typically come from online institutions, rather than the bricks-and-mortar building in the center of town.
“There are better options than just going to your local bank and putting it in a savings account, and for some people that starts with getting comfortable with computers,” said Don Blandin, president and chief executive officer at the Investor Protection Trust. “You’re dealing with an institution that you may not have heard of, so you have to go check the validity of the institution. Do whatever you have to so that you can get comfortable, but don’t settle.”
Typically, that means knowing who runs the bank you are dealing with. That sounds odd, until you consider the way online banks are named. It’s one thing if you are looking at any bank with “direct” as part of its name, where an HSBC Direct, for instance, is linked so clearly to global banking giant HSBC.
That’s not always the case.
For example, OnBank is offering bank money-market savings accounts at 3.75 percent, the second-highest yield in the nation, according to BankRate. But if you go to the FDIC Web site (www.fdic.gov) and use the “bank find” feature, it would be easy to come away unsure if the institution really has coverage (though the OnBank.com Web site clearly says it does). It turns out that OnBank is a division of M&T Bank Corp., so its coverage is active through the parent bank, which is easily found at the FDIC site, ending the concern.
Such due diligence is easy and worth the effort if it results in a few extra percentage points of yield.
Keep checking returns
One other common concern that savers have about high-yield payouts is that they’re not safe. With current bank failures reminding many people of the savings-and-loan collapses of the 1980s — when troubled banks routinely paid much more than their healthy rivals — some people worry that stretching for yield will leave them with money in the next bank likely to fail.
So long as the accounts stay under the new temporary $250,000 per account per institution limit (recently raised by the FDIC from $100,000, through Dec. 31, 2009) that’s not a huge problem — even if the bank failed the customer would get their money back — but it’s also not a sign of the times.
Said McBride: “Yields are a reflection of what the bank is willing to pay, not dependent on any underlying investments. It is not hard to find highly rated banks that have some of the highest yields.”
One issue for consumers is that staying above the average may also require some moving of assets over time. Yields vary widely — beware those that offer the highest rates only when your deposit exceeds FDIC limits — and institutions offer short-time teaser rates hoping to attract customers who then stay put when the lower long-term rate kicks in.
“Have you checked your return lately?” asked Blandin. “That may spur you to make a change, but don’t move your money and forget to check the yield again. The fine print of these offers means the percentage rates will change over time. … Doing nothing — not paying attention to the rate — is what got you into this problem now, so once you fix it and move to a higher rate, make sure it stays that way.”
Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at email@example.com or Box 70, Cohasset, MA 02025-0070.