I looked into a lot of these last year and decided not to do one. A lot of those rates are promotional, so after 6 months or whatever you have to shop around again, open a new account and transfer everything over. Totally doable, but more of a pain than I wanted to deal with.
I instead have put most of my cash savings in Vanguard’s VUSXX fund, which invests in US Treasury funds (there are multiple options, I just went with Vanguard). The key is the interest from US Treasury securities is generally exempt from state and local taxes. So while the return may not be as high as a promotional savings account, I still come out ahead after tax time.
Hm. Then it sounds like the best way to proceed is to look them up and see what the best non promotional rates are and compare to my credit union savings account. (Probably not going to min/max; as you said, it sounds like a huge hassle. Just looking for something at least somewhat better than the typical credit union member savings account.) Thanks!
I’m a Fidelity customer. Fidelity offers dozens of CDs, from 90-day to 10-year. The CDs they offer are from banks across the country and sometimes foreign banks as well.
None of these rates are as high as the promotional rates you can find through NerdWallet or similar sites, however.
If you’re investing hundreds of $K, the difference between real and promo rates adds up to enough to bother with. If you’re investing a thousand, the extra $10 income per year per percent delta doesn’t pay for your time and hassle. Especially not after you give $2.50 of the extra $10 to Uncle Sam.
AND all the promo rates from banks that I’ve seen limit the $ amount of the account as well (i.e. 5 % for 6 months, $5000 max). Not worth it unless you get a shiny toaster as well
I would encourage you to consider something like the VUSXX fund - my rate of return is currently at 4.1%, which is far higher than any credit union around my area is offering. It’s almost completely liquid - any time I’ve pulled from it, the funds are in my bank account within a few days.
And again, no state taxes on that interest, which bumps the return higher.
Upthread I mentioned that Fidelity will sometimes ask me if I want to lend my shares to shorts, and that my nervousness was that I couldn’t establish what the risk is- in one sentence they say the loan is fully backstopped by Fidelity, and in the next they say I need to be aware of the risk, which they never bother to explain.
I finally found some info online that basically said the risk arises really only from Fidelity itself defaulting. Which doesn’t worry me too much. Hell, they already hold all my money.
I bring this up because they are offering me 7%, paid monthly, for one of the small biotechs I hold. So I have agreed to lend the stock. I’ll report on my experience if anyone cares.
Fidelity offers shorting to their customers. Which means they have to be able to offer shares to short. They’d much rather borrow shares from other customers of their own than try to get them from elsewhere.
IMO there’s nothing mysterious about that at all. YMMV.
If there’s anything interesting, it’s how much Fidelity’s customers’ collective short positions are rising. Pros use shorts a lot; not as much as longs, but a lot. When Joe & Jane Average start shorting in volume, whether measured by number of people playing the game or by dollars in play, things will get exciting.
I’ve had fully paid lending available for a while now.
Yes, technically, it’s only reliable to the extent that you trust that Fidelity isn’t a giant ponzi scheme, with the financial foundation of a black hole. I don’t believe that it is, so there’s really no reason to not go for it (if you share the belief).
That said, most stocks aren’t borrowed most of the time and rarely for all that long. It also disrupts the visual display of your holdings because (I think) they lose the original cost basis while the shares are out on loan, plus it may divide the symbol into two entries if the person only borrowed a part. Overall, you don’t make a ton. But, hey, dinner money might not be mortgage money but it’s better than zilch. So if the visual display doesn’t bother you then, basically, it’s just some free money every month.
Unexpected, but you also get to see what people are betting against. How much value there is in that, I couldn’t say.
The risk of lending shares is that Fidelity defaults, so that much is true. But you have heightened exposure if you have lent your shares out. If you have fully-paid shares (shares that you haven’t borrowed money against) in your Fidelity account, Fidelity can’t lend out those shares or borrow against them. It has to keep them in a special account for fully-paid securities that is not subject to claims against Fidelity in bankruptcy. If Fidelity goes bankrupt, all the customers should get all of their fully-paid securities without regard to how much in the hole Fidelity is.
If you agree to let them lend your securities, they exchange your fully paid securities for an IOU from Fidelity, which makes you an unsecured creditor of Fidelity in bankruptcy. Those are the people who basically collect last.
There is a waterfall, however, which means you would probably get your money in the end. Brokerage accounts are protected by the Securities Investor Protection Corporation, under the Securities Investor Protection Act. Ignoring a lot of complexity, SIPC protects up to $500,000 of account equity for “evidence of indebtedness” held in the account. So, if Fidelity goes bankrupt, you should get all of your fully-paid securities without a problem, and up to $500,000 of account equity under SIPC. And that account limit is per account type, so you get separate $500k of protection for each of your individual account, joint account, IRA, Roth IRA, 401(k), revocable trust, and each irrevocable trust for a different beneficiary. It’s possible to lose money from a brokerage bankruptcy but for more Americans, that’s a high class problem to have.
Fidelity isn’t necessarily lending those shares to its customers. Anyone could be borrowing them. There’s a whole sub-industry devoted to matching borrowers with people who need to locate shares.
Not really. If you place an order to sell the shares, Fidelity has to deliver them. Your economic exposure to the shares has ended and Fidelity it on the hook to find shares to replace them if they still need them.
Lending shares can makes taxes a bit more complicated. It’s both a new source of income and while dividends from companies are given preferential tax treatment, while you are lending your shares out, you don’t actually collect dividends. You collect an amount equal to the dividend usually called a “payment in lieu of a dividend,” which is treated differently in the US for income tax purposes. Fortunately, most of the stocks that people are shorting most aggressively (and which are thus in most demand to borrow) don’t pay dividends, so this particular issue is largely academic.
The classic way to value stocks is to take the present discounted value of expected future cash flows. Speculative companies like that have no expected cash flows soon but the expectation is thart they will generate enormous cash flows far in the future. However, that means that they are very sensitive to changes in interest rates. Interest rates are up over the last week so stock prices that depend on getting an uncertain amount of cash flows far in the future are down a lot.
Had my third, and hopefully final meeting with my advisor at Fidelity. Since our last meeting there has been a new war, the price of oil has gone up, and the markets have gone down. This time he barely pushed back on my suggestion that volatility and instability in the markets and governance are too high to go with an aggressive growth strategy.
His suggestion, which I’m leaning towards agreeing with, is to put half my money in a fixed rate annuity, with today’s rate being 4.75% for 4 years (or 4.70% for 3 years), and allocate the other half as aggressive growth. That will make my portfolio:
50%
4.7% annuity
30%
US stock
12%
Foreign stock
7%
Bonds
Relevant information is that I’m probably 5-10 years from retirement, and, unlike 2008, I do not have any confidence that the US will be able to govern its way out of a recession. The US economy is so big that it can take lots of hits, and still be fine, but no matter how many points ahead we are, enough own goals will still lose the game.
I’m personally not a fan of annuities in general (except the one I buy by deferring taking social security until 70) but readily admit that my position is partly based on ignorance about the products?
This is not in your tax-advantaged retirement fund side I assume?
This specific product? If I understand it accumulates tax deferred then can convert to income stream or pay out as lump sum? Or?
I’m looking forward to getting educated by the responses but my concerns would be that if we hit an inflationary period a fixed rate annuity could screw me. Meaningful choices also depend a on where your income is now vs expected to be later? If high marginal tax rate and want low volatility I’d wonder about the place for municipal bonds? Might get a better effective yield?
This is in a Roth IRA, so I’m not paying any taxes on any of it. I may do similar things in my 403b (same as a 401k), in which case I’ll eventually pay income tax on the withdrawals.
The product I’m interested in is called a Market Value Adjustment (MVA) annuity, but it is different from that other kind of annuity that TIAA keeps trying to sell me[1]. This one can be treated as a fancy CD with an early withdrawal penalty (7%) for the first few years, and when it “matures” I can get all my principal, plus the interest out with no penalty.
Any that exist must be rolled into the APY, because the disclosures don’t mention anything.
This is one thing I brought up, in that I expect any big market crash and recession to be paired with inflation (really stagflation). If oil is at $150-200/barrel, expect the price of everything to go up. Dumb tariff games win dumb inflation prizes, and flight from the dollar will cause inflation, and just read Politics & Elections or the BBQ Pit.
I do have some money in an inflation protected bond index, but I don’t really understand how that works, because I don’t really understand how any of my bond funds work. FIPDX shows I’m down 12%, even though the current value is 4% more than what I originally put in. I understand the yield and value of a bond are different.
The Fidelity one can be converted into a lifetime guaranteed income one after 1 year, but there is no requirement to do that. ↩︎
That makes it all worthwhile! Silly me.