I've been using MaxMyInterest since 2015. They list out the highest-interest FDIC-insured savings accounts and make it easy to open them and transfer money between them. They'll also automatically track which of your savings accounts has the highest interest rate (if you have more than one) and move your money there. (Or if you have so much money that you exceed the FDIC limit ... which somehow has never been a problem for me! ... it can split your money into multiple accounts to get around that.) It also links with your low-interest everyday checking account, and will periodically transfer money back and forth to keep the latter balance at whatever amount you tell it. I really like that last feature, it saves me time and mental energy. They charge a fee of (currently) 0.08%/year × however much money you have in the high-interest savings accounts.
Some online reviews say there are delays in withdrawal from high-yield savings accounts from lesser-known online-only banks. Since liquidity is the whole point of having money in savings accounts, do you think it's better to stick with e.g. AmEx and Ally?
This only just occurred to me on reading your comment (and is probably obvious): many savings accounts have some limit of free withdrawals a year. But there are many savings accounts with close to the best rate -- so just by splitting your savings across multiple accounts allows you to have more of your money in higher interest accounts with little cost
Possible places to look for alpha:
Note on 5: Before you try this, make sure you understand what you're getting into and the risks involved. (There are rarely completely riskless arbitrage opportunities, and this isn't one of them.)
I guess this question is really a general question about where you go for information about the market, in a general sense. Is it just reading a lot of "market news" type sites?
Using CDs / Savings Accounts for extra risk-free return
With portfolio margin, you can easily find yourself with more available leverage than you want to use, i.e., in the form of extra "buying power" or "equity". Instead of letting that go to waste, you can withdraw some of your extra equity (and cover that with margin loan or box spread financing) and put that cash into an FDIC-insured savings account or CD, which currently yield 1% higher than the borrowing cost. Here's my explanation of why this "free lunch" is possible:
I've been wondering why some banks (e.g., Goldman Sachs's Marcus, Ally Bank) pay customers 1.5% interest on their savings account, when other interest rates are so much lower. (Withdrawing excess "equity" from my margin account and putting it into such a savings account is another way to make extra risk-free returns, currently 1% per year which seems amazing when you consider that 3-year treasuries are at .25%.) From Goldman Sachs's annual report, "These deposits include savings and time deposits which provide us with a diversified source of funding that reduces our reliance on wholesale funding." From other sources it seems that wholesale funding is less reliable in economic crashes, when wholesale interest rates could spike for banks that are deemed risky by the market, whereas retail customers are more likely to stick with banks they're used to, since their deposits are insured.
So it seems like as long as the federal government continues to subsidize savers and banks (by implicitly backing the FDIC), this extra return should be available.
ETA: See also Are There Ways to Maximize FDIC Insurance Coverage?
I came here to say that I'm surprised this advice isn't on top of every list of personal investment advice. Almost 1% risk-free extra return per year, on top of whatever else you're getting from your investments. Isn't it crazy that this is possible, when 10 year treasuries are yielding only ~0.7%? How is every financial columnist not shouting this from their rooftops?
Then I noticed that it's on the bottom of my own advice list, due to not having received a single up-vote. What gives, LW?
Note that when you do this with CDs, you are borrowing short-term and lending long-term, so you're exposed to interest rate volatility.
You're thinking of borrowing with margin loan, but with box spread financing (see my "answer" on that) you can lock in a borrowing rate for up to 3 years, so if you match that with the CD's maturity you can cancel out the interest rate risk.
Is this really any better than just buying T-Bills? FDIC insurance, sure, but box spreads do have certain risks that the insurance won't cover, and T-Bills are pretty safe.
For people in the US, the best asset class to put in a tax-free or tax-deferred account seems to be closed-end funds (CEF) that invest in REITs. REITs because they pay high dividends, which would usually be taxed as non-qualified dividends, and CEF (instead of ETF or open-end mutual funds) because these funds can use leverage (up to 50%), and it's otherwise hard or impossible to obtain leverage in a tax-free/deferred account (because they usually don't allow margin). (The leverage helps maximize the value of tax-freeness or deferral, but if you don't like the added risk you can compensate by using less leverage or invest in less risky assets in your taxable accounts.)
As an additional bonus, CEFs usually trade at a premium or discount to their net asset value (NAV) and those premiums/discounts show a (EMH-violating) tendency to revert to the mean, so you can obtain alpha by buying CEFs that have higher than historical average discounts and waiting for the mean reversion. There's a downside in that CEFs also tend to have active management fees, but the leverage, discount, and mean reversion should more than make up for that.
it's otherwise hard or impossible to obtain leverage in a tax-free/deferred account (because they usually don't allow margin)
Another way to get leverage in an IRA is to buy long-dated call options (as recommended in Lifecycle Investing). Would you expect CEFs to be superior?
Another way to get leverage in a retirement account is with leveraged ETFs. I am using some of those in my IRA currently. You can get up to 3x for some index ETFs.
I'm still interested in these CEFs for diversification though, how do you find these?
References/tools for portfolio optimization
Both of these references fall under the "mean-variance" paradigm, but according to Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes:
Both academics and practitioners agree that the mean-variance analysis is extremely sensitive to small changes and errors in the assumptions. We therefore take another approach to the asset allocation problem, in which we estimate the weights of the asset classes in the market portfolio. The composition of the observed market portfolio embodies the aggregate return, risk, and correlation e
Use options or futures to avoid realizing capital gains
When you want to reduce exposure to some market but don't want to sell your assets due to tax considerations, you can make a nearly opposite bet with options or futures to neutralize your exposure. "Nearly" is important because the IRS will consider you to have sold your assets if you make an exactly opposite bet, e.g., synthetic short via options with the same underlying asset as what you're holding. See https://www.cmegroup.com/education/whitepapers/hedging-with-e-mini-sp-500-future.html and https://www.optionseducation.org/strategies/all-strategies/synthetic-short-stock.
Or in the UK just spreadbet, which is entirely tax-free. (You can spreadbet futures & options.)
Box spread financing (borrow for 3 years at around 0.55% interest rate currently)
With box spread financing, you can borrow for up to 3 years at a fixed rate about 30bp (.3%) above the corresponding treasury yield. Someone may post a more detailed article about this later, but in the meantime see https://www.reddit.com/r/wallstreetbets/comments/fegqz0/box_spread_financing_for_extremely_cheap_085/ and https://www.theocc.com/components/docs/about/press/white-papers/2016/box-spreads-options-strategies-for-borrowing-or-lending-cash.pdf
Second link broke, I believe it moved here https://www.optionseducation.org/referencelibrary/white-papers/page-assets/listed-options-box-spread-strategies-for-borrowing-or-lending-cash.aspx
Leverage methods and their tax considerations
Portfolio margin
Portfolio margin allows higher leverage and lets you "net" positions against each other for the purposes of determining margin requirements. E.g., you can be 10x long VTI and 10x short SPX via options, and have only a small margin requirement. This allows some of the other tips/tricks to work.
Not all brokerages offer this, but I know E*TRADE, TD Ameritrade, and Interactive Brokers do. And you do have to apply for it and pass a test or interview to show that you understand what you're getting into.
When investing in individual stocks, check its borrow rate for short selling. If it's higher than say 0.5%, that means short sellers are willing to pay a significant amount to borrow the stock in order to short it, so you might want to think twice about buying the stock in case they know something you don't. If you still want to invest in it, consider using a broker that has a fully paid lending program to capture part of the borrow fees from short sellers, or writing in-the-money puts on the stock instead of buying the common shares. (I believe the latter tends to net you more of the borrow fees, in the form of extra extrinsic value on the puts.)
What is it that guarantees that whoever borrows the stock does so in order to short it? Couldn't they just be borrowing it to go further long?
Negotiate with your brokers
A lot of brokerages will pay you cash bonuses to transfer your assets to them (and typically keep them there for a year) and this is another source of extra risk-free return. These public offers are usually capped at $2500 bonus for $1M of assets, but some places will give you $2500 per $1M of assets, plus deep discounts on futures/options commissions and margin rates. (You can PM or email me to get details and contact info of the brokerage representatives I've talked with.)
Reduce exposure/leverage during market volatility
During periods of high market volatility, the expected return of the stock market probably doesn't compensate for the increased risk. See https://www.facebook.com/bshlgrs/posts/10219080184370250?comment_id=10219085165454774 for a discussion of this. (Facebook comment linking seems to be broken at the moment, see discussion under the first comment by Carl Shulman.)
This seems suspect to me; it violates EMH and AFAICT the backtest was only carried out to 2017 (it should be possible to backtest to at least 1993, when VIX started being tracked).
Peer-to-peer loans (e.g. LendingClub). I wouldn't suggest starting with this unless you're already investing in the usual instruments. These are a more exotic investment for extra diversification. These have a high risk of default (don't bet the farm), but also high interest. You get to be the credit card company.
The returns I've seen from ppl who've done this were in line with the stock market so on a risk-adjusted basis it seems like a bad idea.
Bankruptcy risk for a leveraged portfolio
From Brian Tomasik's Should Altruists Leverage Investments?
Also note that this continuous-time model doesn't allow margin accounts to go bankrupt. Because a continuous-time margin account maintains constant leverage, if its assets fall, it rebalances immediately by selling some securities. In the real world, margin accounts can go bankrupt. This could, with low probability, even happen if the account rebalances daily. For instance, a 5X-leveraged margin account that rebalanced once per day might have been wiped out by 1987's Black Monday. By not allowing for bankruptcy (and by ignoring black swans in general), continuous-time equations like those above may slightly overstate the expected value of leverage. In the extreme case, taking t = ∞, a margin investor who doesn't rebalance continuously would go bankrupt with probability 1 (since eventually there would be a huge, near-instantaneous market downturn that destroys the account), while the leveraged mean equation concludes that the margin investor ends up with infinite expected wealth.
One might think that rebalancing more frequently than daily would help (perhaps with the help of an algorithm), but you can't rebalance when markets are closed, e.g., during weekends. I haven't figured out the best way to mitigate this risk yet (which isn't really so much about bankruptcy as being over-leveraged when asset values fall too much before you're able to rebalance), but two ideas are (1) keep some put options in one's portfolio, and (2) have some assets that are protected during bankruptcy (e.g., retirement accounts, spendthrift trusts).
Tax Lien certificates. Basically, you're giving an extension to someone who is delinquent on their property taxes, and ensuring that the local government, who probably very much needs predictable funds, collects them in a timely manner.
Some of these are cheap, in the hundred dollar range, which makes it easier to get started even if you don't have a lot of money to invest. Terms and availability depend on the area you buy them from. Interest rates can be very high, around 20% in some areas. In some cases (likely foreclosures), you can have a good chance of becoming the owner (or part owner) of the property, which can be massively profitable (but also a hassle).
On the other hand, some property is not that valuable, so you need to do some research. The lack of secondary markets for these makes them rather hard to sell early. And if you don't live in an area that offers good terms, you may have to travel to find the good deals, which is an expense. Some counties do offer auctions online, but you'd still need to do some research on the property.
Pay your monthly bills with margin loans
Instead of maintaining a positive balance in a bank checking account that pays virtually no interest and having to worry about overdrafts, switch your bill payment to a brokerage account that offers low margin rates, and pay your bills "on margin". (Interactive Brokers currently offers 1.55% (for loans <$100k), or negotiate with your current broker (I got 0.75% starting at the first dollar)). Once a while, sell some securities, move money back from a high yield savings account or CD, or get cash from box spread financing, to zero out the margin balance.
This can prevent you from being able to deduct the interest as investment interest expense on your taxes due to interest tracing rules (you have to show the loan was not commingled with non-investment funds in an audit), and create a recordkeeping nightmare at tax time.
"Investment is essentially a game of compounding. The first rule is to avoid losses. Identify the world’s top four high-quality assets and diversify your investments among them. Exercise patience and wait for opportunities. Buy during times of market panic and downturns, then patiently wait. Sell when the market reaches a phase of extreme exuberance and bubbles. Longevity is key, as time is the fuel for the compounding game."
If you're investing to donate, consider using a tax-deductible entity
If you ultimately want to give, you can get ~1% extra per year by using a tax-deductible entity.
In the UK, it's a substantial effort to set up a charity, but you have a lot of freedom with respect to how you invest, so you can also implement relatively advanced strategies.
In Switzerland, the effort of setting up a charity is very small, but you do face some limitations on investment options.
I haven't looked into other jurisdictions.
It's worth mentioning that this is generally a bad idea in the US tax regime (despite being trivially easy), because the options for handling capital gains and losses differently mean you can sometimes do better with pre-donation investments than with post-donation investments.
(I'm a finance professional, but no one's tax or investment advisor, much less your tax or investment advisor.)
I kind of miss the days when I believed in the EMH... Denial of EMH, along with realizing that 100% and 0% are not practical upper and lower bounds for exposure to the market (i.e., there are very cheap ways to short and leverage the market), is making me a lot more anxious (and potentially regretful) about not making the best investment choices. Would be interested in coping tips/strategies from people who have been in this position longer.
(It seems that in general, fewer constraints means more room for regret. See https://www.wsj.com/articles/bill-gates-coronavirus-vaccine-covid-19-11589207803 for example.)
I have a general life heuristic that I will only ever try to be in the ballpark of optimal. By analogy, I want to get the Big O right, and not worry about the constants.
A picture I have in my head related to this is the scene at the end of Schindler's List where he's lamenting that he could have saved more people by selling his car, or his jacket, or whatever. But he'd saved hundreds. I decided I didn't want to live thinking that way.
Maybe see also Slack (or Studies on Slack).
Or also consider that if you optimize too hard you might Goodhart.
Some of these answers are still applicable outside the US. Every country has different tax laws though. There are also differences in what kinds of investments are accessible. I've heard that some Europeans aren't allowed to trade American ETFs, for example. I'm not sure of the details though. On the other hand, they can trade CFDs, which are illegal in the US.
I've been optimizing various aspects of my investment setup recently, and will write up some tips and tricks that I've found in the form of "answers" here. Others are welcome to share their own here if they'd like. (Disclaimer: I’m not a lawyer, accountant, or investment advisor, and everything here is for general informational purposes only.)