Optimizing Your Savings - Part II
Oct 11th, 2007 by Wealth Builder [This post is written and copyrighted by Wealth Building Lessons (http://www.wealthbuildinglessons.com).]
In Part I, I discussed the various options available to stash my savings to get the maximum rate of return, while preserving liquidity.
I decided to split my savings into 3. The first half while be kept with Bank of America in their flexible 5 month CD currently paying 5.1%. After 7 days, I can withdraw the money without penalty. Not a bad option, since it balances liquidity with return.
However, one of my main concerns is the devaluing of the US Dollar. Its currently lower than its ever been in history. No one knows where the bottom is, and because Ben Bernanke has hinted that he’s going to continue to lower the interest rates, I feel the bottom is still far away.
So in order to protect my money against devaluation, I’ll be moving a third of it out of the US Dollar and into a currency that has the potential for strengthening. The Australian Dollar fits this criteria quite nicely. And by buying Australian Currencyshares Trust (FXA) ETF, I get a 5.2% yield with total liquidity.
The only downside is if the US Dollar would strengthen against the Australian Dollar, and though it might be very volatile, I doubt the US Dollar will appreciate against any major currency over the next 12 months.
Additionally, there is historic precendent of the Aussie Dollar being worth $1.50 USD and I don’t think a 20% move is far fetched over the next 18 months.
Its ok that we’ve gotten some currency hedging, but we’re still not getting a lot of return on our money. Sure 5% sure beats the quarter percent return I get in my account with Bank of America, but it really isn’t that good.
In order to achieve a slightly higher yield with not too much risk, I’m putting the remaining third into Van Kampen Senior Fund (VVR). Like FXA, VVR is also an ETF. Here’s some info about it from yahoo finance:
It invests primarily in a portfolio of interests in floating or variable rate senior loans to corporations, partnerships, and other entities, which operate in various industries. The company’s investment portfolio primarily includes investments in companies operating in consumer discretionary, consumer staples, energy, financials, healthcare, information technology, industrials, materials, telecom services, and utilities sectors.
With the global liquidity scare and resulting market correction in July, all senior loan funds took a 10% hit. Before July they were all trading at a 5-10% premium to their underlying assets (also called net asset value or NAV). Everyday, the assets are marketed-to-market to calculate the NAV. The people calculated this NAV have decided to be a little more conservative and are discounting them by 4-5%. On top of that, the market is discounting the ETF price to 5% of the NAV.
So we can currently buy ETFs like VVR for nearly a 10% discount to the actual underlying asset. Plus, it pays out 9.2% annual yield. If the market values the ETFs as it did 6 months ago, we’ll see a nice 10% pop in the price, in addition to whatever dividend we collect.
Both FXA and VVR paying out monthly, so with a Dividend Reinvestment Plan (or DRIP), the rate of return will be slightly higher than projected.
Note, these strategies are not suitable for everyone so please don’t blindly follow them.
Does anyone have any other ideas they’d like to share?
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7 Responses to “Optimizing Your Savings - Part II”
A pretty good option is 5.05% for a savings account at
http://www.fnbodirect.com
Hey WB, you give the fairly standard disclaimer at the end “Note, these strategies are not suitable for everyone so please don’t blindly follow them.” Would you also touch on on reasons you, personally, would consider dangers in making these moves. I’m sure you thought of a few?
Here are some points that I guess I should have clarified:
1. if you don’t already have an emergency fund, do that first.
2. if extreme volatility causes you to panic and you usually end up selling at the worst possible time, this strategy is not for you.
3. if you need the money before the 12 month period is up, you may face a loss of principle. (AUD may go up or down versus USD, but in 12 months it should be higher).
I have a bit invested in the Merk Hard Currency Fund in my Roth IRA but in general, I don’t like playing the currency markets. The problem is every country has an incentive to devalue their currencies in pace with the USD because having a strong currency hurts their export industries. So, although some currencies like the Euro may appear strong now, you can bet that those countries won’t allow their currencies to strengthen too much.
So instead, I have precious metals and a basket of foreign mining and energy stocks.
Those are some interesting strategies for one’s savings. I think the most important thing is to *have* savings. I constantly read advice to keep 3-6 months of savings on hand at least.
Just to clarify: these ideas are not places to stash the emergency fund, correct?
What about oil & commodity plays? I’m into the peak oil theory myself so I believe oil will only be going up from here (there may be some periods of time when it will move lower, but over the medium to longrun the trend is up). I’ve done well with PBW (an alternative energy ETF) over the last few months. Have been thinking about getting USO (US Oil fund) or perhaps OIL (Oil ETN - but I’m wary about an ETN vs an ETF).
I also think that clean water will be the next “oil”, so I’ve got some PHO - Powershares Water Resources - an ETF that invests in companies that make water purification and distribution equipment. Global warming will lead to water displacement - some places that traditionally had enough water will not (think Atlanta).
No, your emergency fund (6 months living expenses) should be in a CD ladder or cash.
I like to have a bit more cash liquid though, so these are strategies for that holy-cow-my-house-burnt-down-I-lost-my-job-and-I-got-kidnapped-and-need-ransom-money fund.
I agree with peak oil theory & commodities too. All the people who are against peak oil haven’t seen the growth in India & China.
I also agree that water is the next oil [geez, its like I’m talking to a twin! - would you like to write a guest post by any chance?].
I haven’t gotten around to buying any PHO yet, but it definitely makes sense. I had bought WLT which split into MWA (Mueller Water) but I sold both before they tanked in July.