For the latest entry in our Savings Talk series, we asked him to share how he combines his Ally Bank accounts with other investments to create a sound financial portfolio.
Keep reading for Ken’s thoughts on asset classes, money market fund substitutions and reducing financial risk.
Strategies to Build a Strong Investment Portfolio
A typical investment portfolio will be composed of the three basic asset classes:
- Equities, which include stocks
- Fixed income, which includes bonds
- Cash, which includes savings accounts and money market funds
Equities carry the most risk, but they offer the highest returns over the long-term. The fixed-income part of a portfolio will give you lower long-term returns, but carry less risk. Cash carries the least amount of risk.
Adding CDs and IRA CDs in Fixed-Income Assets
Fixed-income doesn’t have to be limited to bonds and bond funds. For those who prefer even less risk, Ally Bank CDs can be a good replacement for some bonds, given Ally’s competitive rates and features.
Unlike bond funds, there is no risk of Ally CDs going down in value if interest rates rise. Also, unlike bonds and bond funds, Ally CDs are FDIC insured as long as balances are kept below the FDIC coverage limits.
Outside of a retirement account, CD interest is taxed as ordinary income. So if you’re going to hold CDs in a portfolio, it makes sense to hold as many of them as possible in an
Individual Retirement Account (IRA).
With the Ally Bank IRA CDs, you get the same rates and features of the Ally Bank CDs and you also get the tax benefits of an IRA.
Replacing Money Market Funds with Checking and Savings Accounts
The cash portion of a portfolio will often be held in money market funds. Brokerage accounts typically include a money market fund to serve as the core account, which is used for cash transactions and for holding uninvested cash. Money market funds are designed to be very conservative, but they are typically not FDIC insured. Another downside is that in today’s environment, the yields are extremely low. Most have yields under 0.10 percent. In fact, my money market fund has a rock-bottom yield of only 0.01 percent.
Instead of keeping cash in a money market fund, it makes more sense to keep most of this money in bank accounts like the Ally Online Savings Account, Money Market Account and Interest Checking Account. The yields for these Ally accounts are much higher than the yields of any money market fund. In addition, the deposits in the Ally accounts are FDIC insured.
With my brokerage account, I’ve linked my core account to my Ally Interest Checking account. When I want to invest in mutual funds, I first initiate an electronic transfer to pull money from my Ally Interest Checking Account. Once it’s in my brokerage core account, I can purchase mutual funds. This way, I minimize the amount of money sitting in the core account, earning practically no interest.
Taxes and risk can be reduced, and more interest can be earned by building an investment portfolio that uses Ally Bank along with a brokerage firm. Ally Bank CDs and IRA CDs can be useful for a portion of the fixed-income assets. Ally Bank Savings, Money Market and Interest Checking Accounts can be useful for the cash portion of a portfolio.
Ken Tumin is co-founder of DepositAccounts.com, a website that monitors more than 8,000 banks and credit unions, and provides rate surveys and news of the latest banking trends.
How do you use your Ally accounts along with other investments to create a solid financial portfolio? Do you keep your cash in a Money Market, Online Savings, or Online Checking account, or some combination of the three?