Different Types of Taxable Bonds: Long-Term Performance and Returns Comparison

August 22, 2023 By Jonathan Ping 1 Comment
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As part of its “Portfolio Basics” series, Morningstar has an educational article on taxable bonds, including corporate bonds, US government bonds, and foreign government bonds, along with their different credit grades and maturity lengths.

Over the last 20 years, things have played out pretty much as the traditional theory would have predicted. The higher the “risk”, the higher the return. High-yield “junk”-rated corporate bonds have had the highest return, but also the bumpiest ride due to their higher credit risk and higher interest rate risk (they are usually of longer maturity). Short-term US Treasury bills (“cash”) has had the lowest return but the lowest credit risk and lowest interest rate risk. Personally, I see this chart and am satisfied with my holdings of intermediate-term US Treasury bonds (green line) that keeps the highest credit risk but with effectively a ladder out to a longer average maturity.

But hey, those high-yield bonds still returned a lot more money over the last 20 years instead. Why not just hold those instead? First, don’t forget to step back and look at the bigger picture:

If you’re going to accept big swings, you might prefer one of the highest returning assets in the top-right corner. (I have no idea which one will be the absolute highest in the next 20 years, but I don’t think it’s an accident that all the stocks are grouped together in that top-right corner.) If you can hold on through the scary periods, the gap between stocks and bonds over the long run (~100 years below) is huge:

This is why many will advise you to own more stocks if you want an overall higher risk/potentially higher return profile, as opposed to riskier bonds. But before you get carried away, read this book excerpt Courage Required from William Bernstein. Bleak times will come again. Safe things have value beyond the rate of return.

Filed Under: Investing, Retirement
Last updated: August 22, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Big List of Anti-Lists: Asset Classes NOT Owned By Some Experienced Investors

August 20, 2023 By Jonathan Ping 5 Comments
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Every asset class has its energetic supporters, from rental properties to altcoins to gold. Listening to each group, you may feel that you need to own every asset class in order to be “diversified”. However, sometimes less is more, and it can be useful to read about why many seasoned veterans consciously avoid certain corners of the investment world. I find it a refreshingly different perspective, even if I may or may not agree. Everyone’s needs are different, and I own several of the things below myself. Here are a few lists along with supporting arguments.

William Bernstein – MD, author and wealth manager. I compiled this list while listening to the linked interview.

  • Commodities Futures
  • Individual Stocks
  • Corporate bonds
  • Long-term bonds
  • Fixed annuities

Jonathan Clements – financial author and long-time WSJ columnist

  • Savings bonds.
  • Long-term bonds.
  • High-yield “junk” bonds.
  • Municipal bonds.
  • International bonds.
  • Individual stocks.
  • Immediate fixed annuities (but he does plan to buy some eventually).
  • Deferred income annuities.
  • Gold
  • Commodities
  • Real Estate Investment Trusts (REITs)
  • Rental properties.
  • Long-term-care insurance.
  • Life insurance.
  • Disability insurance.
  • Flood insurance.

Amy Arnott – CFA, portfolio strategist for Morningstar Research

  • Actively Managed Funds
  • Real Estate Investment Trusts (REITs)
  • Sector Funds
  • Alternative Investments
  • I Bonds
  • High-Yield Bonds
  • Gold

Let me know if you come across any other “What I Don’t Own” lists.

[Image credit: Amazon]

Filed Under: Investing, Retirement
Last updated: August 21, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Fidelity Bloom App: Fintech Nudges, Traditional Broker ($100 New User Bonus + $30 Savings Match)

August 17, 2023 By Jonathan Ping 14 Comments
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New user bonus increased to $100 for a limited-time. Fidelity Bloom is a new(er) app from Fidelity Investments targeted at helping young adults become more financially aware and develop better savings habits. iOS and Android. Fidelity has included many “behavioral psychology” features from other fintech startup apps like a match on savings transfers, debit card cash back rewards, rounding up purchases and saving the difference, and shopping portal cashback. The highlights:

  • $50 $100 new Bloom app user bonus. Open a new Bloom account via app and fund it with $50 and get $100 into your Bloom Save account. Valid for both new and existing Fidelity brokerage customers.
  • Annual savings match. For a limited-time, customers will receive an introductory 10% match on the first $300 saved into their Bloom Save account ($30 max). Standard annual match is 5% on first $300 saved.
  • 10 cents from Fidelity with every debit card purchase. Fidelity will automatically deposit 10 cents into the Fidelity Bloom Save account every time customers use the Fidelity Bloom debit card. Reminds me of the Citi Rewards+ credit card.
  • Automatically round up purchases into savings. Customers can automatically round up5 purchases to the nearest dollar and have the difference moved to savings from their Fidelity Bloom Spend to their Fidelity Bloom Save account.
  • Up to 25% cashback through shopping portal. Receive up to 25% cash back into your Fidelity Bloom Save account when you shop in-app with 1,100+ participating retailers.

Interest rate? Is it a bank account? Is it a brokerage account? It’s a SIPC-insured brokerage account:

The Fidelity Bloom App is designed to help with your saving and spending behaviors through your Save and Spend accounts, which are brokerage accounts covered by SIPC insurance. They are not bank accounts and therefore are not covered by FDIC insurance.

You do get a routing number and account number for your two accounts, but the cash is held like their other non-retirement accounts. During the sign-up process, you can pick between one of three options for your core position:

  • Fidelity® Interest-Bearing Option (FCASH)
  • Fidelity Government Money Market Fund (SPAXX)
  • Fidelity Treasury Money Market Fund (FZFXX)

Although I have confidence in Fidelity’s long-term experience and conservatism in running these money market mutual funds, the lack of FDIC coverage is something to note. The rates may change daily. View current rates here.

After you open via app, you can see the account balances at Fidelity.com but you’ll still need the app to change any settings. Here’s a screenshot from my app.

Fidelity recently shut down another of its experimental apps called “Fidelity Spire”, so we’ll see if this one catches on a bit better.

Terms & conditions for the $100 limited-time offer:

This offer is valid for new or existing Fidelity Brokerage Services LLC (“Fidelity”) customers who make an initial total deposit of at least $50 (“Qualifying Deposit”) into their Fidelity Bloom Spend account or Fidelity Bloom Save account on or after August 13, 2023 through the Fidelity Bloom app. This offer is limited to one cash award per individual. For clarity, existing Bloom clients who have not yet made any deposits into either of their Fidelity Bloom Spend or Fidelity Bloom Save accounts can participate in this offer by making a Qualifying Deposit by August 27, 2023. Existing Fidelity customers who have previously made deposits into their Fidelity Bloom Spend or Save accounts, including individuals who have already participated in the Bloom $50 offer, are not eligible for this offer.

Filed Under: Banking, Deals & Offers, Investing
Last updated: August 17, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

TIPS Real Yields ~2% Across All Maturities; 4.4% Guaranteed 30-Year Withdrawal Rate

August 15, 2023 By Jonathan Ping 5 Comments
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One of my regular bookmarks is the TIPS real yield page (along with the regular Treasury yields). I noticed that the real yield on the 30-year TIPS has nudged above the 2% mark:

At the same time, the 30-year regular Treasury is at 4.3%, making the break-even annual inflation rate about 2.3%. Over the next 30 years, I’d take the over on that, or at least take some insurance out on the possibility of high inflation.

In addition, as David Enna of Tipswatch points out, this is the first time in a long while that all the various maturities (5/10/30 year shown below) are all around 2%.

If you wanted to, you can again construct a ladder of TIPS that will provide you a guaranteed inflation-protected income over the next 30 years (including spending down your principal) of over 4% above inflation (~4.4% as of this writing, as rates are higher today that at the time of writing for that post).

That means if you put $1,000,000 into a 30-year TIPS ladder right now, you can create ~$44,000 income for year 1 and then another ~$44,000 adjusted for inflation (CPI-U) annually for the next 29 years. All fully backed by the US government. No stock market volatility. No chance of annuity insurance company failure. Check out TipsLadder.com and Eyebonds.info if you are ready to get deep into the details.

While I am not looking into investing a lump sum into a TIPS ladder, I do own both regular US Treasuries and TIPS to provide the stable, guaranteed growth portion of my portfolio. (I’m roughly 70% stocks and 30% bonds.) If I’m getting guaranteed 5% growth from US Treasuries and guaranteed 2% + inflation from TIPS, I’m pretty happy with that for the safe part of my portfolio.

I am taking this opportunity rebalance my existing bond holdings and free cash to create an overall longer duration for my TIPS. I want to lock in that 2% real yield across longer maturities while it is available. Real yields might go even higher, but I’m more worried about it going lower than higher.

Filed Under: Investing, Retirement
Last updated: August 15, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Best Interest Rates on Cash – August 2023

August 7, 2023 By Jonathan Ping 1 Comment
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Here’s my monthly roundup of the best interest rates on cash as of August 2023, roughly sorted from shortest to longest maturities. There are often lesser-known opportunities available to individual investors. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you could earn from switching. Rates listed are available to everyone nationwide. Rates checked as of 8/7/2023.

TL;DR: 5%+ APY available on liquid savings. 5% APY+ available on multiple short-term CDs. Compare against Treasury bills and bonds at every maturity.

Fintech accounts
Available only to individual investors, fintech companies often pay higher-than-market rates in order to achieve fast short-term growth (often using venture capital). “Fintech” is usually a software layer on top of a partner bank’s FDIC insurance.

  • 5.25% APY ($1 minimum). SaveBetter lets you switch between different FDIC-insured banks and NCUA-insured credit unions easily without opening a new account every time, and their liquid savings rates currently top out at 5.25% APY from multiple banks. See my SaveBetter review for details. SaveBetter does not charge a fee to switch between banks.
  • 5.20% APY (before fees). MaxMyInterest is another service that allows you to access and switch between different FDIC-insured banks. You can view their current banks and APYs here. As of 8/7/23, the highest rate is from Customers Bank at 5.20% APY. However, note that they charge a membership fee of 0.04% per quarter, or 0.16% per year (subject to $20 minimum per quarter, or $80 per year). That means if you have a $10,000 balance, then $80 a year = 0.80% per year. This service is meant for those with larger balances. You are allowed to cancel the service and keep the bank accounts, but then you may lose their specially-negotiated rates and cannot switch between banks anymore.

High-yield savings accounts
Since the huge megabanks STILL pay essentially no interest, everyone should have a separate, no-fee online savings account to piggy-back onto your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • The leapfrogging to be the temporary “top” rate continues. Milli.bank (app-only) at 5.25% APY. CIT Platinum Savings at 5.05% APY with $5,000+ balance.
  • SoFi Bank is now up to 4.50% APY + up to $275 new account bonus with direct deposit. You must maintain a direct deposit of any amount each month for the higher APY. SoFi has their own bank charter now so no longer a fintech by my definition. See details at $25 + $250 SoFi Money new account and deposit bonus.
  • There are several other established high-yield savings accounts at 4.25%+ APY that aren’t the absolute top rate, but historically do keep it relatively competitive for those that don’t want to keep switching banks.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (plan to buy a house soon, just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. CIT Bank has a 11-month No Penalty CD at 4.90% APY with a $1,000 minimum deposit. Ally Bank has a 11-month No Penalty CD at 4.55% APY for all balance tiers. Marcus has a 13-month No Penalty CD at 4.50% APY with a $500 minimum deposit. Consider opening multiple CDs in smaller increments for more flexibility.
  • Blue FCU via SaveBetter has a 9-month No Penalty CD at 5.25% APY. Minimum opening deposit is $1. No early withdrawal penalty. Withdrawals may be made 30 days after opening.
  • Northern Bank Direct has a 11-month certificate at 5.60% APY. $500 minimum. Early withdrawal penalty is all the interest earned.

Money market mutual funds + Ultra-short bond ETFs*
Many brokerage firms that pay out very little interest on their default cash sweep funds (and keep the difference for themselves). * Money market mutual funds are regulated, but ultimately not FDIC-insured, so I would still stick with highly reputable firms. I am including a few ultra-short bond ETFs as they may be your best cash alternative in a brokerage account, but they may experience losses.

  • Vanguard Federal Money Market Fund is the default sweep option for Vanguard brokerage accounts, which has an SEC yield of 5.24%. Odds are this is much higher than your own broker’s default cash sweep interest rate.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 5.47% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 5.52% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks and are fully backed by the US government. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes.

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 8/4/23, a new 4-week T-Bill had the equivalent of 5.38% annualized interest and a 52-week T-Bill had the equivalent of 5.36% annualized interest.
  • The iShares 0-3 Month Treasury Bond ETF (SGOV) has a 5.29% SEC yield and effective duration of 0.10 years. SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 5.10% SEC yield and effective duration of 0.08 years.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit for electronic I bonds is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between May 2023 and October 2023 will earn a 4.30% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More on Savings Bonds here.
  • In mid-October 2023, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops which usually involve 10+ debit card purchases each cycle, a certain number of ACH/direct deposits, and/or a certain number of logins per month. If you make a mistake (or they judge that you did) you risk earning zero interest for that month. Some folks don’t mind the extra work and attention required, while others would rather not bother. Rates can also drop suddenly, leaving a “bait-and-switch” feeling.

  • Genisys Credit Union pays 5.25% APY on up to $7,500 if you make 10 debit card purchases of $5+ each, and opt into receive only online statements. Anyone can join this credit union via $5 membership fee to join partner organization.
  • Pelican State Credit Union pays 5.50% APY on up to $10,000 if you make 15 debit card purchases, opt into online statements, and make at least 1 direct deposit, online bill payment, or automatic payment (ACH) per statement cycle. Anyone can join this credit union via partner organization membership.
  • The Bank of Denver pays 5.00% APY on up to $25,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. Thanks to reader Bill for the updated info.
  • All America/Redneck Bank pays 5.30% APY on up to $15,000 if you make 10 debit card purchases each monthly cycle with online statements.
  • Presidential Bank pays 4.62% APY on balances between $500 and up to $25,000 (3.625% APY above that) if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • Dept of Commerce FCU has a 60-month CD at 4.67% APY $500 minimum. The early withdrawal penalty is 180 days of interest. Anyone can join this credit union via partner organization.
  • Lafayette Federal Credit Union has a 5-year certificate at 4.42 APY ($500 min), 4-year at 4.68% APY, 3-year at 4.84% APY, 2-year at 5.09% APY, and 1-year at 5.20% APY. They also have jumbo certificates with $100,000 minimums at slightly higher rates. The early withdrawal penalty for the 5-year is very high at 600 days of interest. Anyone can join this credit union via partner organization ($10 one-time fee).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I see a 5-year non-callable CD at 4.55% APY (callable: no, call protection: yes). Be warned that both Vanguard and Fidelity will list higher rates from callable CDs, which importantly means they can call back your CD if rates drop later.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CDs at (none available, non-callable) vs. 4.08% for a 10-year Treasury. Watch out for higher rates from callable CDs where they can call your CD back if interest rates drop.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate, currently 2.50% for EE bonds issued from May 2023 to October 2023. As of 8/4/23, the 20-year Treasury Bond rate was 4.36%.

All rates were checked as of 8/7/2023.

Filed Under: Banking, Deals & Offers, Investing
Last updated: August 7, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

William Bernstein Interview #2: No Individual Stocks, Improved Safe Withdrawal Rate Outlook

July 30, 2023 By Jonathan Ping Leave a Comment
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Dr. William Bernstein is continuing his press tour for the second edition of his classic investing book The Four Pillars of Investing, and I found myself listening/reading to another podcast from The Meb Faber Show: Bill Bernstein on Financial History, Star Managers & The 4 Pillars of Investing.

There was some overlap between his discussion points here and the Morningstar podcast, but it was definitely worth the time spent to get a few more interesting discoveries.

He owns zero individuals stocks. I’m pretty impressed by the discipline level of this. No vestigial stock shares from his youth, no sentimental holdings, not even a humblebrag holding. (“Well, I do have a few shares of Apple that I picked up during the IPO in 1980…”)

Meb Faber: Does Dr. Bernstein have a play account? Do you allow yourself to have some investments you’ll trade around a little bit or are you too strict for that?

Dr. Bernstein: No. For two reasons, number one is, I learned my lesson early on just like you did. And, number two, I also am a co-principal in an IRA firm, and I just don’t want to be dealing with trading individual stocks.

He thinks that safe withdrawal rates are improving.

I am reasonably optimistic, as optimistic as I’ve actually been in 15 or 20 years about securities returns in about people’s ability to spend. What we told people until relatively recently was if you’re a typical 65-year-old retiree, a 2% burn rate is bulletproof, 3% is probably safe, 4%, you’re probably taking some risk, and at 5% burn rate, you’re taking a real risk. And I think that given the increase in real bond rates and the general decrease in valuations almost everywhere in the world except in the U.S. and especially with U.S. large cap stocks, I think that expected returns have increased to the point that you can increase those burn rates by about a percent. And that may not sound like very much, but going from 2% to 3% gives you 50% more spending power each and every year. So, I’m reasonably optimistic about future security returns, both for people who are going to be putting money away, and people who are going to be spending as well, assuming they didn’t get too badly clobbered in 2022.

Adding in that additional percentage point would change the quote to “if you’re a typical 65-year-old retiree, a 3% burn rate is bulletproof, 4% is probably safe, 5%, you’re probably taking some risk, and at 6% burn rate, you’re taking a real risk.” That is a big change, as he says.

Filed Under: Investing
Last updated: July 30, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Fundrise vs. Vanguard Real Estate ETF REIT Review 2023 (Final Update and Cashout!)

July 26, 2023 By Jonathan Ping 40 Comments
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Final update July 2023, with full cashout. It has now been nearly 6 years for my experiment comparing a Fundrise Real Estate portfolio and the Vanguard Real Estate ETF. In Fundrise, we have a start-up with “crowdfunding” beginnings that offers users a share of a concentrated basket of properties actively chosen from the private market. In Vanguard, we have a one of the largest real estate ETFs in the world – users own a tiny passive slice of ~165 public-traded REITs. I invested $1,000 into both in October 2017 and cashed out in July 2023, for a holding period of 5 years and 9 months.

fundrise_logo

Fundrise Starter Portfolio background. When I bought in, the Fundrise Starter Portfolio was a simple 50/50 mix of two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT*. Since these are finite baskets of entire properties, over time they will close one fund and start another similar basket. What new investors are buying today will be different apartment complexes and office buildings than what I bought in 2017. Here were my holding as of the end of June 2023:

Each private eREIT works within recent crowdfunding legislation that allows all investors to own a basket of individual real estate properties (not just accredited investors with high net worth). The minimum deposit is now just $10. You must buy shares directly from Fundrise, and there are only limited quarterly liquidity windows as this is meant to be a long-term investment. There are also additional options available with higher investments:

Vanguard REIT ETF background. The Vanguard REIT ETF (VNQ) is the ETF share class of a $60+ billion index fund that invests in publicly-traded real estate investment trusts (REITs). You can purchase it via any brokerage account. You have the liquidity of being to sell on any day the stock market is open. A single share currently costs about $100, but many brokers offer fractional dollar-based trades if you want. All shareholders are holding the same ratio of (tens of?) thousands of office buildings, hotels, storage centers, nursing homes, shopping centers, apartment complexes, timber REITs, mortgage REITs, and so on. Here is a recent breakdown:

Expenses. The Fundrise Starter Portfolio has an 0.85% annual asset management fee and a 0.15% annual investment advisory fee (1% “all-in” total). The Vanguard REIT ETF has an expense ratio of 0.12% on top, but each public REIT also has their own internal costs like employee salaries to manage their properties. In each case, investors are paying for real estate management, office space and salaries for those employees, etc. REITs may also use debt to increase their real estate exposure (leverage). Is the technology offered by Fundrise a more efficient way to invest in real estate?

Final performance numbers. Based on an initial $1,000 investment in October 2017 and immediately reinvestment of all dividends, here are the monthly balances of my Fundrise portfolio vs. the Vanguard REIT ETF.

Again, there are quarterly redemption windows, and I initiated my request for a full withdrawal May 26, 2023 in preparation for the end of the second quarter on June 30th. On July 4th, I was notified that my request was approved, and I received the funds into my bank account on July 7th.

While the balances have much closer at times, the final balance was $1,931 (12.2% annualized return) for Fundrise, compared to only $1,272 (4.3% annualized return) for the Vanguard REIT ETF. The final endpoint is probably the widest margin during the entire experiment.

Commentary. One issue with this comparison is that this chart uses two different types of NAVs (net asset values). Vanguard updates the NAV daily based on the combined agreement of millions of investors. Every trading day, there is a price where you can liquidate your VNQ shares. Meanwhile, Fundrise NAVs are only estimates as there is no daily market value available since they hold entire apartment complexes, office buildings, and so on (similar to your house, but with even fewer comps). Your liquidity from Fundrise is limited to quarterly windows that are not guaranteed. That is why I wanted to finish this experiment will a full cash-out, so we can at least somewhat test if the NAVs are realistic. I was honestly a bit skeptical that the Fundrise NAVs could keep going up while the VNQ NAVs were struggling, but they did cash me out at the NAVs they posted. I have to give them credit for that. In the end, perhaps Fundrise is closer to owning a basket of pieces of real apartment complexes and buildings, in that the rising interest rates really didn’t hurt residential housing prices so far either.

The potential drawbacks still remain. In a more stressful bear market, the liquidity is not guaranteed and neither is the NAV if you were forced to liquidate the entire thing as opposed to trading existing shares to new investors. I made my withdrawal request before the sudden PeerStreet bankruptcy filing, but Fundrise is also a young company without a long history of profitability. (Fundrise does benefit from earning ongoing management fees on the assets under management, while PeerStreet earned a cut of the loan proceeds. Without a steady stream of new loans, PeerStreet quickly stopped making as much money.)

Bottom line. I have finally concluded a nearly 6-year experiment (5 years was the initial goal) where I compared investing $1,000 each into real estate via Fundrise direct active investment and the passive REIT index ETF from Vanguard. Based on actual cash-out numbers, Fundrise final balance was $1,931 (12.2% annualized return), while the Vanguard REIT ETF final balance was $1,272 (4.3% annualized return).

You can learn more about all Fundrise Real Estate options here. Anyone can invest with Fundrise; you don’t need to be an accredited investor.

Filed Under: Investing, Real Estate
Last updated: July 26, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

PeerStreet Bankruptcy 2023: News, Questions, and Additional Discussion

July 24, 2023 By Jonathan Ping 10 Comments
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

PeerStreet, a startup that tried to scale up real-estate backed “hard money loans” and was open to “accredited investors”, abruptly filed for Chapter 11 bankruptcy in late June 2023. If you log into your investor account, you’ll see the following notice:

Peer Street, Inc. and its affiliated companies (“PeerStreet”) filed for protection under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware on Monday, June 26, 2023.

Are we creditors? I would point out that there are multiple “investors/customers” in this situation. There are the investors and owners of the company itself, which include big VC names like Andreessen Horowitz, World Innovation Lab, Colchis Capital, and Michael Burry. Then there are vendors and suppliers where PeerStreet owes them money, their employees who are owed paychecks, and finally us customers of PeerStreet that purchased interests in their securitized loans.

This HousingWire article provides some additional context. An interesting paragraph:

According to the court filings, PeerStreet has an estimated 100-199 creditors, and its assets and liabilities are between $50 million and $100 million. However, as of Monday, the group had $4.4 million in cash – in addition to $18.5 million in its mortgage business.

These low numbers may suggest that PeerStreet note-holders are not considered “creditors”, and the notes that we hold are not considered their assets? I’m pretty sure they have way more than 200 accountholders and have originated over a billion dollars of notes since inception. Ideally, the notes that we hold are separate securities, and PeerStreet is just the custodian.

Next steps? First, I would like to stress that I am not a lawyer, and all of the following is just a best guess on my part as a small-time Peerstreet customer who still has fractional ownership of outstanding loans and some uninvested funds. While I have put a decent amount of my “self-directed play money” into PeerStreet in the past, I am relatively fortunate in that currently I only have two outstanding loans with a $1,000 balance each, along with about $100 in interest payments that I did not withdraw in time. The money still in limbo is less than the $5,000+ in interest that I have already earned on the platform. I feel sympathetic to those with six-figure amounts still stuck at PeerStreet.

Critically, I don’t think this money will disappear, but it will take a long time to figure out. That’s really the main lesson of PeerStreet in general, honestly. The headache of illiquidity. Foreclosure proceedings can take forever. I doubt bankruptcy proceeding are much faster.

The borrowers on my loan are certainly benefiting from this fact. The notes are for a tri-plex and a four-plex in Brooklyn NY, and my suspicion is that they are happily collecting rent from their tenants while not paying a single penny toward the mortgage note. These notes matured in 2018 and 2021! The thing is, the property value has gone up, and will eventually still cover the loan balance. But in the meantime, awesome cashflow numbers for them! Not very ethical, but that’s another lesson as well. They have no incentive to hurry things up at all. Who knows when these loans would have been paid back even if PeerStreet stayed in business! As such, it took me a few weeks to get up the energy to read through all these boring bankruptcy documents.

Stretto is the “bankruptcy management solution provider” that is coordinating the process. Here is are pertinent quotes from the Stretto FAQ:

Does this mean Peer Street is going out of business?
While a Chapter 11 case is pending, the debtor may continue to operate its business and remain in possession of its property. Until a sale of its assets, Peer Street will preserve the value of all of its assets for the benefit of its stakeholders, including identifying additional assets that can be monetized. Peer Street’s continued operation after a sale of the business depends on the structure of the sale. While in chapter 11, Peer Street will continue to monitor and service its assets, and customers will continue to have the same access to the Peer Street platform to monitor their investments that they had prior to the Chapter 11 filing. However, withdrawals or returns on investments will be suspended absent further order from the Bankruptcy Court, which would include an order confirming a chapter 11 plan that provides the treatment for all claims against the Peer Street entities.

Have you secured financing during the Chapter 11 cases? How can you be sure you have the financial resources to complete the process successfully?
Peer Street has sufficient cash on hand and from anticipated collection to fund its day-to-day operations during the Chapter 11 process. To support ongoing operations, we have negotiated with our pre-petition secured lenders for the consensual use of cashflows from our business. This will help to ensure we are able to meet our go-forward commitments to employees and vendors.

[Customers] When will I get my investments/money back?
Any investments made through the Peer Street platform, including cash on deposit, funds invested with respect to the ownership of fractional interest in loans, and funds invested in Peer Street’s other investment opportunities, such as Pocket, Portfolio and/or Opportunity Fund, will only be returned pursuant to an appropriate order of the Bankruptcy Court, which may include an order confirming a chapter 11 plan. Peer Street hopes to pursue confirmation of a chapter 11 plan expeditiously.

You will periodically receive notices from the Bankruptcy Court, including emails sent by Stretto, the Court approved noticing agent in the Chapter 11 Cases. It is important that you review and take appropriate action in response to any notice you receive related to the Bankruptcy Cases.

Peer Street and its advisors cannot give you personal legal advice so you may want to consult your own
counsel.

Do I need to file a proof of claim in the bankruptcy to withdraw my investments?
Yes. If you believe you have a claim against Peer Street, please follow the instructions for filing a proof of claim.

Now, you may recall that PeerStreet told us that they would put the loans in a “bankruptcy-remote vehicle”. So we’re good, right?

What investor protections does PeerStreet have in place?
Investments in loans are held in a bankruptcy-remote entity that is separate from our primary corporate entity. In the unlikely event PeerStreet no longer remains in business, a third-party “special member” will step in to manage pending loan investments and ensure that investors continue to receive interest and principal payments. Additionally, from the time funds are received in an investor account until an investment closes (but not while funds are invested), investor funds are held in an Investors Trust Account with Wells Fargo and FDIC insurance of up to $250,000.

Well, the problem is the part where is says “In the unlikely event PeerStreet no longer remains in business”. Technically, PeerStreet is still in business. Therefore, Peerstreet and the lawyers still have control over the loans and any cash payments. These loans are still backed by real-estate, and real-estate prices have still risen significantly in general over the past few years, so I am still hopeful that most of the money will still be returned.

In the meantime, do we file a claim? My take is that it should not hurt to file a claim, and at least do so before any deadline occurs. Here is the link to file a claim. I don’t see any deadline at this time.

I decided to file a claim electronically to the best of my ability now (mostly so I don’t forget about this entire thing). Again, not a lawyer and I’m not going to hire one for this small amount. I downloaded and saved all of the promissory notes and background information for each of my outstanding loans from the PeerStreet website, and attached them to the claim form as supporting documentation. The debtor for my notes was Peer Street Funding, LLC, EIN 47-1789485 (may not be the same as yours).

There is a newly-formed subreddit called r/Peerstreet_Creditors and Bogleheads thread that may offer more useful information (but know that it may be speculative as well). Please let me know if you know of any other active discussion forums on the topic.

Filed Under: Investing, Real Estate
Last updated: July 23, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Why Vanguard Money Market Funds Are Still The Best

July 20, 2023 By Jonathan Ping 20 Comments
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The term “Vanguard effect” was coined due to the observation that after Vanguard enters an asset class with its low expense ratios, competitors are usually forced to follow and lower their expense ratios as well. However, one area where this effect not being seen is money market funds.

Part of the reason is that the megabanks are still paying basically zero, so the 4% from an average money market fund still looks great in comparison. Here’s a chart showing the nearly half-trillion dollars of bank deposits moving over to money market funds over the past year (source).

Let’s compare S&P 500 index funds. The Fidelity 500 Index Fund (FXAIX) has a tiny expense ratio of 0.015%. The Vanguard 500 Index Fund (VFIAX) has an expense ratio of 0.04%. If you assume that Vanguard is operating “at cost”, Fidelity is actually choosing to lose some money to be a little cheaper than Vanguard. If it matched Vanguard’s expense ratio, at the current size it would earn an extra $10 million. There is such a thing as “indexing skill”, but going forward you could honestly see Fidelity 500 outperforming Vanguard 500 by a slim margin.

Now let’s compare money market funds. The Fidelity Government Money Market Fund (SPAXX) has $270 billion in total assets and an expense ratio of 0.42%. This means this fund generates roughly $1+ Billion of revenue for Fidelity every year.

Meanwhile, the Vanguard Federal Money Market Fund (VMFXX) is nearly the same size at $250 billion of total assets, but only a 0.11% expense ratio. That works out to $275 million of revenue. If you assume again that Vanguard is operating “at cost”, that means Fidelity is earning an extra $800 million a year by not lowering its expense ratio to the same level.

Money market mutual funds are regulated so tightly now, especially those with “government” or “treasury” in their name, that they can pretty much only invest in the same things and thus earn the same yield. The only way that the customer earns more interest is if the mutual fund provider charges less in fees. It’s pretty much a zero-sum game.

Fidelity Government Money Market Fund (SPAXX) pays you 4.73% and pays itself 0.42%. The total yield is 5.15%.

Vanguard Federal Money Market Fund (VMFXX) pays you 5.06% and pays itself 0.11%. The total yield is 5.17%.

The pie is required to be nearly the same for both funds (same ingredients in nearly the same proportions), but with Vanguard the customer gets a much bigger slice. There is nearly zero chance that over time, Fidelity will give you a higher return on Vanguard here.

Now, there are institutional class funds with $50 million minimums that also have low expense ratios, but these are funds that Vanguard uses as their default cash sweep! I could have $100 with Vanguard and get access. The moment any capital gains, dividends, or interest payments are distributed, they are earning a competitive interest rate without any work on my part. You know what Merrill Edge pays me on my default cash sweep? 0.01%.

Vanguard published an interview with their head of taxable money market funds that covers a lot of interesting background details about money market funds: Vanguard’s Nafis Smith on the enduring advantage of low-fee money market funds. (Well, interesting to me.) Here are my highlights:

There are technically four types of money market funds (Treasury, government, municipal, and prime) and each are regulated very tightly by SEC Rule 2a-7, and even more so after the 2008 Financial Crisis.

The primary mandate of any money market fund is to seek both stability and provide current income. In a rising interest rate environment, any of these four types of money market funds—U.S. Treasury, government, municipal, and prime funds—should meet that decree. They all hold high-quality assets, are very liquid, and are subject to the same SEC regulation, Rule 2a-7, which is very prescriptive in terms of how much duration risk a fund can take on and how much liquidity must be maintained.

For example, all “government money market funds” must invest at least 99.5% of their assets in cash, U.S. Government Securities, and/or repurchase agreements that are collateralized solely by U.S, Government Securities or cash.

In terms of duration and liquidity, all taxable funds must hold at least 10% of their assets in investments that can be converted into cash within one day. At least 30% of assets must be able to be converted into cash within five business days. Finally, no more than 5% of assets can take more than a week to convert into cash.

Money market funds have only “broken the buck” (paid out less than the $1 NAV) twice, the worst case for 96 cents on the dollar.

Since their introduction in 1971, money market funds have broken the buck just two times. The first was in 1994, when a fund was liquidated at 96 cents per share because of large losses in derivatives.3 The second was during the financial crisis of 2008, because of assets held with the then recently bankrupt Lehman Brothers.4

In response to the 2008 event, the Securities and Exchange Commission amended Rule 2a-7,5 which increased the resilience of money market portfolios and made them much safer than they used to be. Since then, we’ve seen several additional rounds of reform. In short, breaking the buck was a rare event before, but since the regulations have changed, it’s even less likely to occur.

More detail on repurchase agreements and why they are more popular right now (to reduce interest rate volatility).

Fed repurchase agreements are very common in the money market space. It’s an overnight lending arrangement between us, in this instance, and the Federal Reserve, which is one of the world’s highest-quality organizations in terms of credit risk. We’re lending cash and receiving U.S. Treasuries, which are extremely high-quality securities held on the Federal Reserve’s balance sheet. The Fed buys back the U.S. Treasuries the next day at a higher price based on Fed target rates, which provides income to money markets.

In a rising interest rate environment like the one we’re experiencing, any repurchase agreements are very good at dampening market volatility because they allow us to increase stability by reducing interest rate risk. Repurchase agreements also allow us to pass along the higher interest rate to investors much more quickly.

Vanguard’s low expense ratios allows their customers to get both the highest yield AND the safest assets with a very low minimum balance requirement. This makes them the best money market funds.

Our greatest advantage is our low expense ratio, which allows us to do things differently than some of our competitors. We don’t have to take on unnecessary risk to reach for yield, and we can manage our portfolios with much shorter durations, maintain higher credit standards, and enforce stricter underwriting standards for our repurchase agreements while still offering a competitive return.

Filed Under: Banking, Investing
Last updated: July 20, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Bill Bernstein Interview: New Edition of The Four Pillars of Investing Book

July 18, 2023 By Jonathan Ping Leave a Comment
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

“The Long View” by Mornginstar is an excellent podcast for DIY investors with a long-term perspective. Their recent episode Bill Bernstein: Revisiting ‘The Four Pillars of Investing’ had on Dr. Bernstein to help promote his newly-updated The Four Pillars of Investing, Second Edition*. I haven’t read the new edition yet, but the podcast alone was full of useful evidence and unique nuggets.

(* I found it amusing that Amazon was advertising a book titled “Learn Proven Day Trading Strategies” on the same page. What an oxymoron! I seriously worry about new investors finding the good stuff amongst all this noise.)

I recommend listening or reading the handy podcast transcript, but here are my top takeaways and highlights.

Don’t interrupt compounding. Have enough safe assets to make it through the next crisis, which will inevitably arrive sooner or later.

[…] yes, compounding is magic, but you have to observe Charlie Munger’s prime directive of compounding, which is never to interrupt it. So, you have to design your portfolio not with the normal 98% of the world and 90% of the time in mind. You have to design your portfolio with the worst 2% of the time in mind so that you don’t interrupt compounding, which basically translated into plain English means that you probably should have more safe assets than you think you should have. In other words, a suboptimal portfolio that you can execute is better than a stock-heavy optimal one that you cannot execute.

Why you may prefer to own Treasury bonds over Corporate bonds, even if the latter has a slightly higher average return.

[…] it’s not just that you have the risk of bad returns, it’s bad returns in bad times. And that’s the problem with corporate bonds, is when corporate bonds do poorly, they do poorly at the worst possible time.

[… the] 0.8% or 0.6% returns premium you get over Treasuries from high-grade corporate bonds just isn’t worth it.

Have realistic expectations if you tilt to factors like size, value, quality, and so forth.

I think that in finance, even the best bets you make are at best 60/40, most of the time they’re closer to 51/49. So, you just have to resign yourself to the fact that you’re going to be wrong a large part of the time in exchange for being right most of the time. And even then, the margin isn’t going to be that much.

How to protect your portfolio against inflation.

Well, for starters, you keep your bond duration short so that when rates rise, you can roll them over at the higher rate. And stocks, although stocks don’t do well initially with inflation, what you see is that over the very, very, long term, they do.

The hazards of backtesting. Whatever has performed well mostly recently will overwhelm the results.

What happened back in the 1970s and ‘80s and ‘90s is people fell in love with mean-variance optimization, the Markowitz algorithm. It looked like all you had to do was collect asset-class returns and standard deviations and the correlation grid, which is the inputs to the Markowitz algorithm. And you could predict the future-efficient frontier, that is the allocation that gave you the most amount of return for a given degree of risk or for a given degree of return that stopped you with the lowest degree of volatility. And it turns out that the inputs to that produce enormous changes in the outputs and that the algorithm, if you’re going to use historical returns, then favors the asset classes with the highest returns.

Why not 100% stocks for young folks?

There is a wonderful quote from Fred Schwed’s marvelous book, Where Are the Customers’ Yachts?

“There are certain things that cannot be adequately explained to a virgin, either by words or pictures, nor can any description I might offer here even approximate what it feels like to lose a real chunk of money that you used to own. If you’re a young investor, you’re an investment virgin, you’ve never lost a real chunk of money, and you have no idea how you’re actually going to respond to stocks falling by 30% or 50%.”

Asset allocation for early retirees:

Someone who is a FIRE person—financial independence, retire early—and wants to retire at age 40, better have a fairly aggressive allocation with a very low burn rate.

Not a fan of lifetime income via annuities. First, they are greatly exposed to inflation risk. Second, they are exposed to credit risk (insurance company failure). He is skeptical about the state guaranty system.

These are all commercial products and people are very fond of pointing out, yes, these products have state guarantees, but of course, they’re funded by the insurance industry. There is nothing magic about a state guarantee. Most states have fairly low caps on the amount that is protected. And then, finally, even those guarantees can fail. And if you don’t think that that can happen, you should go Google “Executive Life Insurance.”

Filed Under: Investing
Last updated: July 18, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Money Market Mutual Funds, Repurchase Agreements, and State/Local Tax Exemptions

July 13, 2023 By Jonathan Ping 3 Comments
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If you live in a state that taxes interest income, you may know that can significantly alter the net after-tax yield on your investments. This is because direct U.S. government obligations like Treasury bills and bonds are generally exempt from taxation in most states. For example, if a Treasury bill is yielding 5% but is exempt from a 8% state income tax, that would make it the equivalent after-tax yield of a bank CD at 5.65% APY (assuming 22% federal tax rate). That’s a pretty big difference! See Treasury Bond vs. Bank CD Rates: Adjusting For State and Local Income Taxes for details.

Money market mutual funds (available in most brokerage accounts) usually hold part of their portfolio in securities that count as US government obligations (USGO). (See Vanguard Federal Money Market Fund: How to Claim Your State Income Tax Exemption.)

For the 2022 tax year, Vanguard Federal Money Market Fund (VMFXX) had about 38% in USGOs, but the Vanguard Treasury Money Market Fund (VUSXX) had 100% in USGOs (source). As long as the yields were pretty close, your after-tax yield would be much higher with the Treasury Money Market fund if you were in a high state/local tax bracket. (VMFXX is the default sweep though, so you’d have to manually purchase VUSXX.)

However, these USGO percentages can change from year to year, and it is happening in 2023. A quick rewind – here is a list of what is and is not exempt from state and local taxes.

*Investments in U.S. government obligations may include the following: Federal Farm Credit Banks, Federal Home Loan Banks, the Student Loan Marketing Association, the Tennessee Valley Authority, the U.S. Treasury Department (bonds, notes, bills, certificates, and savings bonds), and certain other U.S. government obligations. GNMA, FNMA, Freddie Mac, repurchase agreements, and certain other securities are generally subject to state and local taxes.

In particular, even though the Vanguard Treasury Money Market Fund has “Treasury” in its name, it doesn’t only hold Treasury Bonds. It can also hold something called repurchase agreements (“repos”). These are often sold on a very short-term basis (overnight or less than 48 hours). While a repo is considered a very, very safe loan backed by government securities, it is not itself a government security, which means the income it creates is taxable at the state and income level.

As of July 2023, here is the percentage of repurchase agreements held by these two example money market funds: 58% for VMFXX and 34% for VUSXX. This would suggest that the USGO number for VUSXX will be significantly less than 100% for 2023, although VUSXX still holds less repos than VMFXX.

For an in-depth comparison, “retiringwhen” of the Bogleheads forum has created a detailed Google Spreadsheet that tracks and calculates the after-tax yields for several different money market funds from Vanguard and Fidelity. I would point out that the low expense ratio of Vanguard funds makes their money market funds consistently better than Fidelity money market funds across the board.

I also hold some Treasury bonds directly and while laddering isn’t that much hassle, recently I have been considering simplifying to VMFXX and VUSXX as the go-to place for my liquid cash savings account. For now, the tax-equivalent yield is higher than nearly all other savings accounts due to my high state-tax situation. I am also looking at ETFs that hold mostly T-bills like SGOV and BIL.

Bottom line. If you want to be precise, the full-geek DIY investor with state/local income taxes has to take into account the percentage of repos in their money market fund portfolios in order to calculate the true tax-equivalent yield to compare against other cash alternatives.

[Top image credit – Wikipedia]

Filed Under: Banking, Investing, Taxes
Last updated: July 13, 2023
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Best Interest Rates on Cash – July 2023

July 9, 2023 By Jonathan Ping 5 Comments
My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

Here’s my monthly roundup of the best interest rates on cash as of July 2023, roughly sorted from shortest to longest maturities. There are often lesser-known opportunities available to individual investors. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you could earn from switching. Rates listed are available to everyone nationwide. Rates checked as of 7/8/2023.

TL;DR: 5% APY available on liquid savings. 5% APY available on multiple short-term CDs. Compare against Treasury bills and bonds at every maturity.

Fintech accounts
Available only to individual investors, fintech companies often pay higher-than-market rates in order to achieve fast short-term growth (often using venture capital). “Fintech” is usually a software layer on top of a partner bank’s FDIC insurance.

  • 5.15% APY ($1 minimum). SaveBetter lets you switch between different FDIC-insured banks and NCUA-insured credit unions easily without opening a new account every time, and their liquid savings rates currently top out at 5.15% APY from multiple banks. See my SaveBetter review for details. SaveBetter does not charge a fee to switch between banks.
  • 5.20% APY (before fees). MaxMyInterest is another service that allows you to access and switch between different FDIC-insured banks. You can view their current banks and APYs here. As of 7/8/23, the highest rate is from Customers Bank at 5.20% APY. However, note that they charge a membership fee of 0.04% per quarter, or 0.16% per year (subject to $20 minimum per quarter, or $80 per year). That means if you have a $10,000 balance, then $80 a year = 0.80% per year. This service is meant for those with larger balances. You are allowed to cancel the service and keep the bank accounts, but then you may lose their specially-negotiated rates and cannot switch between banks anymore.

High-yield savings accounts
Since the huge megabanks STILL pay essentially no interest, everyone should have a separate, no-fee online savings account to piggy-back onto your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • The leapfrogging to be the temporary “top” rate continues. CFG Bank at 5.17% APY. CIT Platinum Savings at 4.95% APY with $5,000+ balance.
  • SoFi Bank is now up to 4.30% APY + up to $275 new account bonus with direct deposit. You must maintain a direct deposit of any amount each month for the higher APY. SoFi has their own bank charter now so no longer a fintech by my definition. See details at $25 + $250 SoFi Money new account and deposit bonus.
  • There are several other established high-yield savings accounts at 4.00%+ APY that aren’t the absolute top rate, but historically do keep it relatively competitive for those that don’t want to keep switching banks.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (plan to buy a house soon, just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. CIT Bank has a 11-month No Penalty CD at 4.90% APY with a $1,000 minimum deposit. Ally Bank has a 11-month No Penalty CD at 4.25% APY for all balance tiers. Marcus has a 13-month No Penalty CD at 4.35% APY with a $500 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Blue FCU via SaveBetter has a 9-month No Penalty CD at 5.00% APY. Minimum opening deposit is $1. No early withdrawal penalty. Withdrawals may be made 30 days after opening.
  • First Internet Bank has a 12-month certificate at 5.48% APY. $1,000 minimum. Early withdrawal penalty is 180 days of interest.

Money market mutual funds + Ultra-short bond ETFs*
Many brokerage firms that pay out very little interest on their default cash sweep funds (and keep the difference for themselves). * Money market mutual funds are regulated, but ultimately not FDIC-insured, so I would still stick with highly reputable firms. I am including a few ultra-short bond ETFs as they may be your best cash alternative in a brokerage account, but they may experience losses.

  • Vanguard Federal Money Market Fund is the default sweep option for Vanguard brokerage accounts, which has an SEC yield of 5.04%. Odds are this is much higher than your own broker’s default cash sweep interest rate.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 5.43% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 5.47% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks and are fully backed by the US government. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes.

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 7/7/23, a new 4-week T-Bill had the equivalent of 5.27% annualized interest and a 52-week T-Bill had the equivalent of 5.43% annualized interest.
  • The iShares 0-3 Month Treasury Bond ETF (SGOV) has a 5.12% SEC yield and effective duration of 0.10 years. SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 4.98% SEC yield and effective duration of 0.08 years.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit for electronic I bonds is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between May 2023 and October 2023 will earn a 4.30% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More on Savings Bonds here.
  • In mid-October 2023, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See below about EE Bonds as a potential long-term bond alternative.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops which usually involve 10+ debit card purchases each cycle, a certain number of ACH/direct deposits, and/or a certain number of logins per month. If you make a mistake (or they judge that you did) you risk earning zero interest for that month. Some folks don’t mind the extra work and attention required, while others would rather not bother. Rates can also drop suddenly, leaving a “bait-and-switch” feeling.

  • Genisys Credit Union pays 5.25% APY on up to $7,500 if you make 10 debit card purchases of $5+ each, and opt into receive only online statements. Anyone can join this credit union via $5 membership fee to join partner organization.
  • Pelican State Credit Union pays 5.50% APY on up to $10,000 if you make 15 debit card purchases, opt into online statements, and make at least 1 direct deposit, online bill payment, or automatic payment (ACH) per statement cycle. Anyone can join this credit union via partner organization membership.
  • The Bank of Denver pays 5.00% APY on up to $25,000 if you make 12 debit card purchases of $5+ each, receive only online statements, and make at least 1 ACH credit or debit transaction per statement cycle. Thanks to reader Bill for the updated info.
  • All America/Redneck Bank pays 5.30% APY on up to $15,000 if you make 10 debit card purchases each monthly cycle with online statements.
  • Presidential Bank pays 4.62% APY on balances between $500 and up to $25,000 (3.625% APY above that) if you maintain a $500+ direct deposit and at least 7 electronic withdrawals per month (ATM, POS, ACH and Billpay counts).
  • Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • NASA FCU has special 49-month CD at 4.85% APY and 15-month CD at 5.45% APY and 9-month at 5.65% APY. $10,000 minimum of new money. The early withdrawal penalty for the 5-year is 365 days of interest. Anyone can join this credit union via partner organization.
  • Lafayette Federal Credit Union has a 5-year certificate at 4.68% APY ($500 min), 4-year at 4.73% APY, 3-year at 4.84% APY, 2-year at 4.89% APY, and 1-year at 4.99% APY. They also have jumbo certificates with $100,000 minimums at even higher rates. The early withdrawal penalty for the 5-year is very high at 600 days of interest. Anyone can join this credit union via partner organization ($10 one-time fee).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Right now, I see a 5-year non-callable CD at 4.50% APY (callable: no, call protection: yes). Be warned that both Vanguard and Fidelity will list higher rates from callable CDs, which importantly means they can call back your CD if rates drop later.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. You might find something that pays more than your other brokerage cash and Treasury options. Right now, I see a 10-year CDs at (none available, non-callable) vs. 4.06% for a 10-year Treasury. Watch out for higher rates from callable CDs where they can call your CD back if interest rates drop.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate, currently 2.50% for EE bonds issued from May 2023 to October 2023. As of 7/7/23, the 20-year Treasury Bond rate was 4.27%.

All rates were checked as of 7/8/2023.

Filed Under: Banking, Deals & Offers, Investing
Last updated: July 10, 2023
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