NEW YORK (Money) -- I've beefed up my emergency fund to $30,000 over the last several years and currently keep it in a money-market fund earning 0.07%. Should I move it to a high-interest savings account with an online bank that averages around 1.15%? I don't want to turn into a yield chaser. -- Eric, Olney, Maryland
With short-term interest rates barely in positive territory, a lot of people are turning into yield chasers these days.
But is that so bad? I'd say it depends on how you go about it. Or, to put it another way, you can be a "good" yield chaser or a "bad" yield chaser.
What's the difference? I don't see a problem if by chasing yield you mean going to a site like Bankrate.com, Mint.com or BillShrink to find a savings account, short-term CD or some other vehicle that offers true security of principal with above-average rates. You're just being a "good" yield chaser.
So if the online bank you're dealing with is an FDIC-insured institution (which you can tell by clicking here); and your account qualifies for FDIC insurance (to determine that, click here); and you don't have to put up with a lot of hassles to get that attractive rate (like meeting a stiff minimum deposit requirement or performing a certain number of transactions, or tying up your money too long, etc.), go for it, man.
After all, on thirty grand, the annual difference between earning 1.15% and 0.07% is $324. Not a fortune. But even if checking out the online bank, opening the account and moving the money takes several hours, you're still earning a pretty good effective hourly rate for your time.
You'll want to keep your eye on that interest rate spread, though, to make sure it stays in your favor. Once rates start to rise, it could narrow or even disappear. (Poll: How much have your food bills gone up this year?)
Similarly, if you start to venture out further in CD maturities to snag higher yields, you'll want to be careful about locking in a rate that may be lofty today but could seem puny if rates start to climb later (although even then it's possible that you could still be better off by bailing out of the CD if the extra yield is high enough and the early withdrawal penalty isn't too punitive).
But then there's "bad" yield chasing that can get you in trouble. Here I'm talking about people who are so eager to get more than 0.07% that they take on significantly more risk.
Some yield chasers do this on their own, others on the advice of people who have an interest in selling the higher-yielding investments. These are the people who in the past have gotten burned in auction rate securities, foreign CDs and even short-term bond funds.
I'd also put into this group people who have gravitated to annuities that offer enticing payouts but have strings attached such as onerous surrender charges that can range as high as 20% or other potential downsides.
Investments that are attracting yield seekers' attention today are bank loan or floating-rate funds, which, according to Morningstar stats, have been attracting moulah at a faster pace than any other fund category.
Besides their loftier yields, the attraction of these funds is that their variable rates will protect their net asset values should interest rates rise.
The rub, though, is that these funds can still carry considerable "credit risk" -- or the risk that companies may have trouble repaying their debt -- especially since many of these funds own loans of highly leveraged companies with low credit ratings.
And, indeed, concerns about companies' ability to repay what they borrowed so hammered the market value of such loans during the financial crisis that the bank loan category suffered a loss of 30% in 2008.
A new generation of funds and ETFs is emerging that focus on short-term variable-rate bonds with higher quality or investment grade ratings.
That difference should certainly mitigate, though not eliminate, credit risk.
But while I think one can make a case for including bank loan and/or variable rate investment-grade bond funds within a diversified bond portfolio, these alternatives are still a rung or two up the risk ladder from FDIC-insured accounts and money market funds.
So I'd caution against using them for your emergency stash or, for that matter, for any money that you absolutely positively need to have available at full value even if the markets and the economy go south.
To sum up, I wouldn't worry about yield chasing as long as you're not compromising the security of your money and your access to it. But you want to be careful about pursuing extra yield if it means putting your "must have" money in jeopardy.
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|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||4.28%||4.37%|
|15 yr fixed||3.32%||3.40%|
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|15 yr refi||3.31%||3.39%|
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