The Worst Investment Ever

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What could be the worst investment ever? What's crazy is the worst investment ever is right under your nose. In fact, many of you may be investors in it and not even be aware, never even have thought of it. So, what is the worst investment ever? It's holding your savings in a bank account. Putting your savings in your bank account. That's it. Now, holding a little bit of savings in a bank account, that's okay. We're going to talk about how holding savings in a bank account can be the worst investment ever.

Why is this? Well, first of all, one thing that most people don't realize is when you go down to the bank, and you let's say you open a checking account, and you open a checking account in the name of John Smith. You think, "Okay, I have my money at the bank and that's my money." It's actually not. When you open a bank account at a bank, you're actually giving your money to the bank and that money that you think is yours. It's actually theirs. So if you are asked the question, when you look at the balance in your checking your savings account, how much of that money actually belongs to you? Zero. Zero belongs to the depositor, the moment you deposit it, it becomes property of the bank. This means that you are actually a creditor of the bank. This means that if you want your money, you have to go chase the bank to get it. That's crazy. Why would anybody do this? There's a couple links here you can check out.

Well, people feel better about it, because there's this concept called FDIC insurance, and this was raised significantly during the great financial crisis in 2008. It used to be $100,000, it was raised to $250,000 and basically what FDIC insurance says is that your money up to $250,000 is insured by the bank. So you've given your money to the bank, but the government is going to make sure that if there's a problem that either the bank or the government will give you up to $250,000 back. Now, if you have a million dollars in there, and a lot of people have large sums of money in the bank, and they don't even think about this. If you have a large sum of money, let's save a million dollars at the bank. Well, only 250,000 of that is insured, the rest of it, you're just a creditor to the bank. You're just a creditor. This is why essentially, you are taking a substantial amount of the risk for a tiny, tiny, tiny interest rate and the ability to transact business. You can transact business outside of a bank you can do to PayPal or someplace like that. Lots of places you can do it. 

To counteract that, there's new programs that are emerging such as the Interactive Brokers. A lot of our students keep their accounts in Interactive Brokers. There's what's called the Bank Deposit Sweep program and you can read about this, but essentially what they do is every night they take your money, and they divide it amongst different banks. Up to 10 separate banks in addition to Interactive Brokers. They'll sweep your money every night into these banks and then they pull it out the next day. If you have 10 banks 250,000 Each, it gives you two and a half million of insurance. Plus, Interactive Brokers is set up as a bank, so you get another 250,000 there. You get $2,750,000 in coverage with the sweep program. There are different variations of this emerging most people don't even know this, so this is one thing you could do. 

So, it's helpful, but I got a better thing to do. Here are the interest rates on the US Treasuries yield curve. This shows the current interest rate for different durations. Right now you hear this term called the inverted yield curve. Inverted yield curve is when shorter term interest rates are paying higher interest than longer term interest rates. In the yield curve, usually the longer term, the longer you go out in time, the higher the interest rate that's paid, because you're assuming more risk for loaning money for a longer period of time. So, you demand a higher return, but when the Federal Reserve is trying to combat inflation, or it's trying to combat an economy that's overheating, it raises short term interest rates, putting them over long-term rates, and what this does is this stops lending. It's no longer profitable for banks to lend. The yield curve has been very steep in the last year. You can look here, a two-month T Bill pays 5.3% interest, the three-month T Bill pays over 5.2%, you go out to six months, six-month T Bill pays like 5.1%. You go out to a year, it's like 4.7%, go out to two years, now it's under 4%. You can see between one and two years, interest really falls off.

In your savings account, you're essentially getting paid this interest rate overnight, you're getting that rate calculated on a daily basis. That rate can float up or down, but it's what that stated interest rate is that the bank is paying you. Well check this out. Right now, the average savings account, this is a savings account and a checking account. The average savings account in the United States pays 0.24% interest, this is as of eight last week APR 26. 0.24%. I could go buy a two-month T Bill and get paid 5.3% or leave it in an account making 0.24%. I had a student I was talking to about this the other day, they had $400,000 in cash sitting in their account, they have a financial advisor who's managing the money and he's got $400,000 sitting there earning 0.2%. Well, he could go out and buy a T Bill that pays 5%, he'd picked up $20,000 in guaranteed interest. $20,000 and he was foregoing that getting 0.2% instead.

T Bills have lots of advantages over a savings account. One, the T Bill typically pays a higher interest rate, like you just saw 5% plus versus 0.24%. Two, T bills or top-quality collateral. It's basically like the best collateral you could have. When you buy a T bill and you own this T bill, you could borrow against it anytime and at really low rates. Because any bank or institution is going to view that as great quality collateral. Three, when you buy a T Bill, you own it. The bank doesn't own it. Like we said, when you put money in the bank, the bank owns your money, not you, but when you buy a T Bill, you own the T bill and it's portable. You could take it anywhere you can transfer it to other banks, you can even get an actual T bill, if you wanted, an actual T bills certificate. This doesn't happen much anymore, but you could do that, but like I said, you could move them from bank to bank and institution. When they sit in a brokerage account and Interactive Brokers or Schwab or whatever they are your property, so they're not subject to a bank run. If there is a bank run, nobody can touch that, that’s your asset. This gives you an incredible amount of safety and last, T bills are the highest quality, and they will be paid first by the United States government, it will be a complete disaster for the government to not pay you interest on a T Bill. 

Now, this is pretty much the case of all bonds, but if a government is going to fail, they're going to fail on a bond that's much longer in duration, like a 30-year bond or 10-year bond way before they'll fail on a T Bill. When you own T Bills, you have all the safety. Just look at this, look at the two sides. You can have a savings account that you give the money over to the bank and if it's over $250,000, you have to fight to get it back. You get paid hardly any interest on it. You could get caught in a bank run where you're not able to get your money. Literally like in a day or an afternoon versus a T Bill which pays a much higher interest rate. It's higher quality collateral because it's backed by the good faith United States government. You can easily borrow against it if you need to. You own it, you can transfer it from bank to bank and if it sits in a brokerage account and there's a run on the brokerage it will not affect you and T bills are the highest quality bond. It's going to get paid first by the United States government.

For some of you, many of you, like the story I just told, many of you are sitting out there with $50,000, $100,000, I've run into students who have 2, 3, 4 million in cash and they're not doing this. This alone can add up to a substantial amount of money and the worst part is, like in the student I had, he's earning 0.2% but then paying the financial advisor 1.5%. Think about it, he's not making 0.2%, he's actually losing 1.3% as he's paying the financial advisor to just have his money sit there. Not good man, not good. 

We have more information on this, and this is something you should look at for yourself. Are you taking advantage of this one simple little thing? I'll see you next Tuesday when I continue to cover additional points like I showed you this week to help you take your trading and your investing to an elite level. Have an awesome week. God bless.