Money Markets, CDs, Bonds Have Risks Along With Stock Market
The Savvy Consumer

By Teresa McUsic

Fort Worth and some surrounding cities may now be home to one of the best money market account rates in the country.

Legend Bank recently launched a no-fee savings account called Saver that pays 1.25 percent average percentage yield (APY) on balances from one penny to $15,000, according to Mike Monroe, president of the Fort Worth branch at 3001 Western Center Blvd.

The average money market rate for the nation is .7 percent APY with an average minimum deposit of $1,970, according to Bankrate. Locally rates are lower, averaging .27 percent, with Chase at the lowest rate of .01 percent for its money market account.

The new Legend product does have some strings, but one of them may be more attractive than the savings account. To get the new account, customers must sign up for Ultimate Checking, a no-cost checking account that currently pays 3.75 percent APY on balances up to $15,000.

. To get the top APY, account holders must use their debit card 12 times a month, have at least one direct deposit into the account and accept only online statements to qualify. The bank also says it will refund any ATM feeds as long as the account holder fulfills the debit card and direct deposit requirements.

Such bank products may be a partial answer to investors weary of the stock market.

Investors hoping to squeeze more out of their CDs will see only a slight increase in rates this year, said Greg McBride, CFA, senior financial analyst at Bankrate, which has released its 2011 interest rate forecast.

“CDs will see some market improvement in 2011,” he said. “It will be a much better year than ’09 or ’10, but 2011 will still be a year of low returns on CDs.”

Money markets on average will see even less of a rise than CDs, McBride said.

“Until the Federal Reserve Bank increases its rate—and the Fed is in no hurry to raise its rates—we won’t see improvements in money market accounts,” he said. “At best they won’t get worse, which will be an improvement.”

Those who invested heavily in bond funds after the stock market downturn in 2008 may actually see their returns shrink, however, the Bankrate forecast predicts.

“A lot of investors strongly vested in bonds with the 2008 financial crisis and have done very well with over the last few years,” McBride said. “But 2011 very well may be the year bond investors get a lesson in interest rate risk.”

Bonds are generally considered a safe haven for investors because of their set rates and government guarantees, but if interest rates start to climb, bond funds can actually lose value, he said.

Short-term bonds aren’t as much of an interest rate risk, however, says one local financial planner. Real estate investment trusts (REITS) are another alternative asset class apart from stocks and bonds for small pieces of your portfolio.

But stocks historically will give you the best returns.

At the same time, a diversified portfolio that is rebalanced according to age of the investor and market conditions generally leads to good returns, advisors said.

“Whether they are 25 or 85 years old, investors should have a well-diversified portfolio of cash and bonds, but also stocks and REITs,” McBride said. “A well-diversified portfolio is going to produce income from its performance.”