Unless something very different in the US is available to what I can get in the UK, I think this is very dangerous advice.
If I put £100 in a savings account with 4% interest, I can withdraw that £100 (plus interest) at any time.
If I buy put £100 into government bonds with 4% yield and I check back in a year's time, if bond yields have increased (say, due to increased base rate) then the "balance" I can withdraw is _less_ than £100, since the underlying bond is less valuable!
Putting money in bonds exposes you to market volatility, which banks shield you from (which is why they get to take a cut)
Edit: a money market fund appears to absorb this volatility for you by balancing their bond portfolio, but ultimately you are still relying on the fund being well managed. The failure mode here isn't the govt not paying the coupon on the bond - it's the fund not having the liquidity to pay you if you withdraw. I don't understand enough how money markets are regulated to understand the risk, whereas banks are required to have deposit insurance in UK & US.
Since bonds are always reaching their promised payout terms upon their maturity, you can manage that risk through proper alignment in maturity dates.
You can purchase multiple bonds that are spread around their term duration. E.g. buy now 1-year bonds, and repeat every 3 months. After 4 such cycles, you will now always have bonds reaching maturity every 3 months.
Or just buy shorter term ones to begin with (if the interest is still appealing), and move to longer term ones once you have enough maturity diversity for the advice in the previous paragraph.
This works if you never need to liquidate early. For most people such a need to get their cash out occasionally happens. Regardless of how you stagger your bonds, if you need to sell before maturity, there is a chance they will be worth less.
Bond ladders are almost exactly the same as CD ladders. Bonds and CDs are almost exactly the same thing, mathematically.
The tax treatment is a tiny bit different. T-bill interest is exempt from state/local tax. CD interest is not.
Default risk is the tiniest bit different, but not by much. With the CD, there is some probability that the bank will fail, at which point you then need to wait for the gears of the FDIC to slowly turn to pay you your CD insurance. The FDIC actually doesn't have that much money, so in a sufficiently large bank run the Federal Reserve will have to backstop it. On the other hand, you can just buy a T-bill directly from the Treasury, which is also backstopped by the Fed. So there are some additional middlemen in the case of the CD. Maybe that's good -- more failures in a row are necessary before you get to the Fed. Maybe that's bad -- there are more parties and more bureaucracy involved in the unlikely event of a bank failure. I think you might as well go straight to the Treasury for the high rate and better tax treatment.
(Or I'd plow it into the S&P 500 because T-bills ain't never gonna outpace inflation, no matter what they say the numbers are.)
It should be clarified that the advice is to purchase short-dated Treasuries, which have negligible exposure to short term volatility (and are typically the place people park money in times of distress).
Also, an important note is that none of the major banks in the US pay 4% or anywhere near that amount on deposits. Think 0.01%.
Long term bonds, as you correctly point out are extremely sensitive to changes in interest rates.
In the current (rather unusual) situation, where deposits pay nothing and short term Treasuries pay reasonably well, this advice is sound.
You can get 4+% at US online banks. Short term CDs have been over 5% for the past year. You have to skip the brick and mortar banks with high overhead.
I was with Vanguard for many years. Fidelity has too many things I like to split between two brokerages. Using 4-week treasuries on auto-roll is close enough to VUSXX for me. You really can't go wrong with Fidelity, Vanguard, or Schwab if all you need is a brokerage. But Fidelity has a much broader set of products that it offers compared to Vanguard.
That's if you're only judging by APY. Vanguard has an atrocious app, and is missing many 'bank-like' features that Fidelity provides - I've enumerated some in a sibling comment. I don't think Vanguard even has a debit card, unless that's changed recently.
If you want to pay $330/year on $100k or $1650/year on $500k to Fidelity so they can pay themselves 0.42% expense on MM fund (atrocious if you ask me) but have a pretty app, that's of course your choice as a customer. I'd spend it on something else.
There is also something to say about diversification across finance orgs. I am not sure having all the funds for banking and investing using the same org is healthy. Diversification helps with SIPC/FDIC/FCUA coverage too.
I think most people know that Vanguard has lower expense ratios than Fidelity. What you give up are products and excellent customer service that some of us find worth paying a bit more for.
I don't use an MMF as an investment vehicle. It holds my daily cash. I can't use Vanguard for that sort of thing, so it's not an apples-to-apples comparison. Excess cash (e.g. emergency fund) is in an auto-roll 4-week treasury ladder.
I was previously a Vanguard customer. It's not like I don't have experience with both Vanguard and Fidelity. I understand the trade-offs.
High APY ( ~5% ). Keep in mind this is a MM account that works exactly like checking. I don't have to worry about the money in it - don't have to reinvest money earned myself or sell to spend money - it's all transparent. When you spend money, it works, and you'll just see it removed from your MM balance. I mention this because Schwab has a similar account, but makes you manually buy and sell holdings instead as needed.
In above account, you can also make selections here to not need to pay state tax on earnings, but that doesn't apply to me anyways. Nice for people in high tax states, though.
Paper checks in a checkbook. This is something you'd assume is standard but actually hard to find at online banks today.
Debit card with ATM fee rebates worldwide. I don't travel worldwide much anymore, but there's only 3 or 4 banks total that do this and it's a nicety.
Instant P2P between accounts. I often send my wife money for various reasons. This is another one that's surprisingly not standard at a lot of banks.
Free same day wires. Very straightforward, no hassles here, though I've only used it three times.
Customer Service. When you call them, someone in the US answers within a few seconds. They'll talk investing with you, goals, or general troubleshooting things. They also call to check in about twice a year which I find annoying, but some people might like it.
Money guarantee. Luckily I haven't had to use this yet, but any money stolen from hackers/fraud is supposedly 100% covered by Fidelity.
Currently trying to figure out where to start with an IRA (probably Roth) after learning about it recently and seeing it's something I probably should have started like over 15 years ago...
Which would you suggest between Schwab and Fidelity? Is it something I can/should easily do by myself as a financial layman? I have no experience with either of them, though I am slightly leaning towards Schwab since they have some tie-ins with American Express whom I like.
Trying to read up on this is almost worthless because past a certain point it's all just snake oil peddlers wanting me to part with my money (eg: all the Vanguard fanbois).
There's a lot to consider here that may be worth talking to an advisor at both. Traditional, Roth, or Backdoor Roth? Look at investible options, fees associated, etc.
As for Schwab vs Fidelity, your money is in safe hands with either. Might want to call and talk shop with both, and choose whoever you feel gave you better answers, all other things equal.
Vanguard has low fees, but it shows in every facet of their existence. I don't hate it, but I'll make marginally less money perhaps for better experience. YMMV.
I RTFM'd courtesy of the IRS and banks I trust since personal finances is a pretty important subject and worth spending some time and effort to learn it myself, even if I ultimately toss all the paperwork at my CPA to deal with come April.
I'm more than likely going for a Roth IRA given my income (well below threshold) and a strong desire to just keep things simple. Traditional IRA with tax deductions sounds nice, but it's also overhead and effort I just don't want to deal with regardless of potential tax savings (and I need to pay the taxes eventually anyway); the old saying that time is money.
It's great and much appreciated to hear from someone who's not marketing at me that Schwab and Fidelity are more or less objectively the same. That means the deciding factor is simply which one I'm more biased to, which means Schwab (aforementioned AMEX tie-ins).
Fidelity has the better website (but Schwab's site is not nearly as bad as Vanguard) and has had fewer weird financial problems in recent years than Schwab. That said, either one will work. I've got everything moved over to Fidelity right now because I like having my free cash in a decent money market fund, and I somehow found that more difficult with Schwab.
If you hit the limit of what you can put in a Roth IRA (good choice) and still have money to save, I Bonds through treasury direct are something to consider.
Doing more research, everyone seems to agree Fidelity is the most handy when it comes to using a brokerage like I would a bank. Their 2% all-around cashback Visa credit card is also admittedly nice. They outsource the banking aspects, though.
On the other hand, Schwab has an actual bank as a subsidary if I do want to use them also for banking, which is great for feeling reassured as a client/depositor if I want to diversify my current banking with US Bank.
Schwab also has those AMEX tie-ins, which is again reassuring because I really like and respect AMEX. Yeah it's just marketing, but damnit if it isn't effective. :V
Though either way I'm not concerned with the finer points of brokerage-banking or investing right now because I'm not sure if I will get into the whole investment money games beyond a Roth IRA. Maybe I will, but I can worry about that when I get to that point.
I understand the concern regarding banking. I keep "cash" in my Fidelity account in one or the other of two Fidelity money market funds that invest in US Treasuries. That's as safe as a bank, after a fashion (if the treasury starts defaulting on t-bills, everything including banks' FDIC insurance is going to go down the tubes). There was an extra step with Schwab that I found a little irksome - your free cash in one of their accounts goes into a sweep account that may or may not be FDIC insured (I don't remember), but it doesn't earn much interest. Moving that money into a money market fund that invests in treasuries was an extra step.
But they're both good choices. I remember when paying $15 for a stock trade was considered innovative. But the most recent Schwab website changes I experienced, maybe a year ago before I switched everything over, were a step backward.
I have the Fidelity 2% card and it's great.
I would have stayed with Vanguard forever if their website didn't suck and their brokerage services didn't also suck. They really were a leader for a while.
One feature I found rather unique at Fidelity (I too have recently migrated there as my "one stop shop") was free outgoing domestic wires ($100 minimum). Being able to "teleport" money within an hour to another pre-registered account (before 3PM ET on biz days, in my experience) facilitated switching to Fidelity while still keeping old bank/CU accounts minimally active without having to engage in a lot of thinking ahead about balances (and worrying about EFT/ACH hold times) at those now peripheral accounts.
The only reason I currently have a Fidelity account alongside my Vanguard account is Fidelity also offers a 2% across-the-board cashback credit card that auto-redeems points straight into my money-market account (albeit at $50 intervals).
if savings rates in the UK were as bad as they seem to be in the US then I admit I would be tempted.
However, a shock at the wrong time can cause those "safe" T-bills to suddenly be much less than what was paid for them. Something similar happened to Silicon Valley bank - it wouldn't have been a problem if their depositors hadn't all demanded their money at once, but these are the scenarios that banks are regulated to avoid.
You've a mis-understanding of how funds like FDLXX are managed. In a T-BILL only fund even a decrease in past asset value doesn't matter because they are by law managed to 1$ of net asset value. That is they most hold 1$ of _current_ asset value for every 1$ deposited _at all times_.
The only situation where the value of the fund can be less than what you put in is the collapse of US currency, which savings account insurance can not protect against either.
> The only situation where the value of the fund can be less than what you put in is the collapse of US currency, which savings account insurance can not protect against either.
I don't think so: suppose the company offering the fund was mismanaged and failed to comply with the regulations. Maybe not likely, but definitely more likely than the "collapse of US currency."
that phrasing is a stupid and annoying passive agressive way of calling someone out, but it's when the person saying it gets it wrong, it's really embarrassing for them.
Specifically, Wells Fargo, Chase, and Bank of America still offer "savings" accounts with APYs of around than 0.05% APY as in way less than 1 percent.
The criteria is and I quote: "none of the major banks in the US pay 4% or anywhere near".
US Bank is the 5th biggest and 2nd oldest bank[1] in the US and currently has a money market savings account with 4.25% APY[2][3] for balances over $25,000 depending on your location, if they are not major then neither are any of the others.
If you don't know US Bank, as was the case with another commenter, that is not my problem.
But if your claim is that the other commentor doesn't actually live in America, based on the evidence of them not knowing about US bank (or any of the many other places that offer a HYSA), you'd have to give evidence that all Americans have heard of US bank's HYSA. Instead of doing that, you're trying to make it seem like I've never heard of US bank (I have, thank you), (or any other place's) HYSA, which doesn't address the question, which is: does someone not knowing about HYSAs expose them as being non-American? Now, I bank at a place with an HYSA, so I'm aware of them, but if you talk to people in America, you'd be surprised how many of them don't have an HYSAs or even know they exist, because I named the pathetically low APYs at the 4 largest banks. What makes them large is the number of Americans who bank with them and their assets. So we can safely assume that, of banks, the sum of the number of Americans banking with the first four is larger than, by your comment, the fifth largest bank. Thus, it seems like most Americans probably actually don't know about US bank's HYSA, because otherwise they wouldn't be the fifth largest bank, but instead be any rank higher.
By the by, for those who don't have $25k in cash to sit around (which is a whole other conversation), if you look around, there are places with HYSAs that don't have that minimum, so I'd suggest putting your money elsewhere.
But let's pretend you're right and that I hadn't heard of US bank's HYSA. Instead of claiming that not knowing about that must also make me not a person of the USA, but also that it is my problem, which is a very American way to respond to something, so bravo there if you wanted to give the impression that you were), you shifted the conversation away from your earlier claim that not knowing about US Bank's HYSA made them not American and instead goaded me by trying to make projected ignorance of their offering my problem, and not a trait inherent to non-Americans. Good luck with that.
No, it's a fact that Chase, one of the major banks, offers nowhere near 4% interest. The GP made a snarky reply that "US bank" offers 4% interest, without even naming the bank.
That depends on whether you need to sell the bond before its maturity date. Supposing it is a 1 year bond, if you hold it for the full year you get your £100 back. If you need to sell early, then you might get less back if rates have risen.
A money market fund operates differently from holding individual bonds and aims to provide you with the ability to sell at any time without a loss --- but the monthly interest paid out will fluctuate according to market rates.
The whole idea of the yield curve is that you (generally) get compensated for that risk with higher rates. That is why (outside of crises) the yield curve is upward sloping. It follows that if you buy shorter dated T-bills or bonds, the liquidation loss risk you mention is low, and you’ll still usually make out better than with the bank because you’re not paying any middleman.
The distinction to make isn't between CDs and bonds. They're actually just-about identical instruments. The key issue is the duration of the bond or CD. Longer duration bonds (and CDs!) expose you to more interest rate risk. If you buy and then rates go up, then nobody will want to accept your bond/CD on the secondary market at the old face value; you'll need to sell it for less, so the rate they get from it is on par with the new prevailing one.
With CDs some of these dynamics are more hidden, because most people cannot access a secondary market for their CDs and do not see what they are worth on a given day. They just hold to maturity. But --
-- you can also just hold a bond to maturity, and
-- if you buy your bank CD through a brokerage account (e.g. Fidelity, Schwab), then you can sell it early on the secondary market, for whatever a buyer will accept.
So there's less difference between bonds and CDs than people suppose.
(There is also the issue of default risk when the issuer of the bond is a private company or untrustworthy government. But I would say that US Treasuries and FDIC-backed CDs have similar low default risk, and you can make an argument that the T-bill is actually safer.)
One difference between CDs and US Treasury bonds is that interest on US Treasury bonds/notes/bills is exempt from state income tax. So if you live in a high income tax state, you need to account for taxes when comparing yields.
Governments have a lot of vested interest in preventing that from happening, but it's not a guarantee on the level of FDIC.
EDIT: Just realized I misread the article, and they are talking about money market funds, not money market accounts, which are different things. I did not realize brokerages allow money market fund assets to be treated essentially as cash balances, which is basically what a money market account does.
If you prefer to buy something FDIC insured, you can buy CD’s through your brokerage. You can pick them from whichever banks pay the most interest and you can also sell them early on the secondary market rather than paying an early withdrawal penalty.
I haven’t done it, but here is what Schwab has in their FAQ [1]:
> While we can't guarantee there will be a market for it, we'll help you sell the CD at the current market rate by requesting bids on your CD and contacting you with the highest one. If you decide to sell, you'll receive the bid price plus any accrued interest. There are no guarantees that you'll get what you originally paid for the CD.
If you have £100k then it is worth 'spreading' it in various assets, including what the article talks about.
There is also a 'recognised practice' that slowly/over time you move some of your stocks/indexes/etc. positions into bonds as you grow older/getting close to pension. Unless you got enough ££££ in the bank and you plan to leave your portfolio as inheritance, in which case leave it where it is.
Also a UK consideration which may apply in the US: in the UK, you really want to have all your savings in an ISA wrapper, because then you don't have to pay income tax on the interest.
If inflation is rising along with interest rates, treasury inflation protected securities will drop a lot less on rising rates than just plain treasuries.
Money market funds and short term t-bills are basically always liquid at face value, unlike longer term bonds. They fall below investment value maybe once per 50 years and that usually lasts a couple days.
US money market funds fall under strict regulations (including around liquidity and redemption) post global financial crisis to preserve their net asset value at $1 (to prevent “breaking the buck” or losing value). Can you be more specific as to what mismanagement looks like?
Depends on the money market fund. There are US treasury only funds like FDLXX, basically the only situation it would become unable to meet it's cash flow obligations is if there where no buyers for US treasuries at face value.
And frankly if that's the case I wouldn't be betting on FDIC or equivalent insurance actually working anyways.
But even "less" secure ones are heavily regulated to be kept at 1$ of NAV and SPIC backed.
Just buy the short term T-bills directly and hold them. They're as liquid and you don't have to worry about any risk besides US government default. Why pay a fund even 5 basis points simply to build a ladder that you can build yourself?
If I put £100 in a savings account with 4% interest, I can withdraw that £100 (plus interest) at any time.
If I buy put £100 into government bonds with 4% yield and I check back in a year's time, if bond yields have increased (say, due to increased base rate) then the "balance" I can withdraw is _less_ than £100, since the underlying bond is less valuable!
Putting money in bonds exposes you to market volatility, which banks shield you from (which is why they get to take a cut)
Edit: a money market fund appears to absorb this volatility for you by balancing their bond portfolio, but ultimately you are still relying on the fund being well managed. The failure mode here isn't the govt not paying the coupon on the bond - it's the fund not having the liquidity to pay you if you withdraw. I don't understand enough how money markets are regulated to understand the risk, whereas banks are required to have deposit insurance in UK & US.