Confused

Zimmy71 · ‎09-25-2023

I keep getting offers for high yield savings accounts in the mail and I am wondering if that is the best/safest strategy. I currently have a Citi savings account that barely makes anything and a Roth IRA. I have about $25k to $40k to invest with but don't know if I should do a high yield savings account, bonds, or dividend stocks.

Horseshoez · ‎09-25-2023

@Zimmy71 wrote:
I keep getting offers for high yield savings accounts in the mail and I am wondering if that is the best/safest strategy. I currently have a Citi savings account that barely makes anything and a Roth IRA. I have about $25k to $40k to invest with but don't know if I should do a high yield savings account, bonds, or dividend stocks.

My wife and I are planning on buying a house either late this year or early next year so I need to keep our cash readily available. I opted for a 5.25% savings account here: https://www.ufbdirect.com/Savings/ufb-high-yield-savings

I categorically refuse to do AZEO!

Anonymalous · ‎09-26-2023

@Zimmy71 wrote:
I keep getting offers for high yield savings accounts in the mail and I am wondering if that is the best/safest strategy. I currently have a Citi savings account that barely makes anything and a Roth IRA. I have about $25k to $40k to invest with but don't know if I should do a high yield savings account, bonds, or dividend stocks.

Are you investing for retirement, for a short- or mid-term purchase, or do you just have some extra money?

Yes, HYSAs are safe. As long as they're FDIC (or NCUA for credit unions) insured, and under the $250K cap. Short-term treasuries are also safe, and get slightly higher rates (money market funds are a way to buy and forget).

But the HYSAs are just barely beating the nominal (CPI) inflation rate, and the real inflation rate is higher. So even with that, you're not growing your investment by much, if anything. HYSA or treasuries are fine for short or mid-term monies you want to have easy access to, but to grow money over the long term requires investing in equity.

There's a lot of weird mystique about dividend stocks. Stocks can offer returns by giving out dividends, or by increasing in value. And it's the total return that matters, not how much is due to one component (dividends). In fact, dividends are often less valuable, because they're typically taxed as income not capital gains. That said, there's a significant overlap between value stocks and stocks that give out dividends. And value stocks have historically done better than the stock market as a whole over the last century plus, so some so-called dividend funds can be attractive if you want to tilt your portfolio toward the value side. (Though the last decade plus has been really bad for value stocks.)

If you do invest, the best bet is almost always broad-based index funds or ETFs, split between equirty and bonds to match your risk tolerance. The core of the equity side is typically a total domestic stock market or S&P 500 fund or ETF, while the core of the bond side is typically a total bond fund/ETF, or perhaps treasuries. Then add a small percent in a total international market, value, REITs, and so on to taste. A 60/40 equity/bond split is typical (e.g the baseline Boglehead 3-fund portfolio), while more aggressive types may be up to 90/10 (Buffet's instructions for the money he's leaving for his heirs, for instance).

Zimmy71 · ‎09-26-2023

Thank you for your detailed response! I will look into ETFs today as well as bonds. This sounds like a very sound game plan you have.

SouthJamaica · ‎09-26-2023

@Zimmy71 wrote:
I keep getting offers for high yield savings accounts in the mail and I am wondering if that is the best/safest strategy. I currently have a Citi savings account that barely makes anything and a Roth IRA. I have about $25k to $40k to invest with but don't know if I should do a high yield savings account, bonds, or dividend stocks.

Such a personal decision. It depends on one's appetite for risk. A guaranteed 4.5% interest in a HYSA is nothing to sneeze at.