Bank Certificates and Tax-Exempt Money-Market Funds

Bank Certificates and Tax-Exempt Money-Market Funds

Bank Certificates

Banks also offer certificates of deposit with a variety of periods to maturity. Yield on these instruments are typically higher than those on either money-market deposit accounts or money funds. These certificates are government insured up to $100,000 per buyer (double with your spouse). Thus, the certificates are even safer than the money funds and are an excellent medium for investors who can tie up their liquid funds for at least six months.

The certificates do have a number of disadvantages, however. First, you need to have a substantial nest egg – usually $10,000 – before you can buy. Second, you can't write checks against the certificates as you can with shares in the money funds. Most important, as in other aspects  of life there is a substantial penalty for premature withdrawal. If you redeem your certificate prior to maturity, federal regulations stipulate a minimum penalty of the loss of one month's interest. Some banks impose even greater penalties. Fourth, the yield on bank certificates is subject to state and local taxes (Treasury bills, also obtainable for $10,000, are exempt from these).

The two steps in any action – finding your risk level and identifying your tax bracket and income needs – seem obvious. But it is incredible how many people go astray by mismatching the types of securities they buy with their risk tolerance and their income and tax needs. The confusion of priorites so often displayed by investors is not unlike that exhibited by young people who are often torn by a confusion of priorities. You can't seek safety of principal and then take a plunge with investment into the riskiest of common stocks. You can't shelter your income from high marginal tax rates and then lock in returns of 10 percent from taxable corporate bonds or certificates, no matter how attractive these may be. Yet, the annals of investment counselors are replete with stories of investors whose security holdings are inconsistent with their investment goals.

Financial Jungle. Photo by Elena.

Tax-Exempt Money-Market Funds

This instrument may be useful for some investors, particularly those who pay taxes at the top marginal rate and who live in states with high income-tax rates. A disadvantage of all the vehicles is that the interest is fully taxable. Investors in very high brackets will find that, after taxes even the highest of the yields offered will not compensate for inflation. This situation led to the establishment of the first tax-exempt money-market fund, the Vanguard Municipal Bond Fund short-term portfolio.

Vanguard invests in a portfolio of short-term, high-quality, tax-exempt issues. It thus produces daily tax-exempt income. Like the regular money-market funds, it provides instant liquidity and free checking for large bills, with rather high minimum investment. There are now several tax-exempt money funds. The yields on tax-exempt funds are considerably lower than those on taxable funds. Nevertheless, individuals in the highest tax brackets will find the earnings from this investment more attractive than the after-tax yield of the regular money funds.

If you live in a state which has high income-tax rates, you may want to consider a fund that only holds securities issued by entities within your home state. Tax-exempt bonds issued, for example, by New York municipalities are taxable in other states. Thus, the only way for, say, a Californian to avoid both federal and state taxes is to buy a fund that holds only California securities. Fortunatley, there are now tax-exempt money funds (as well as bond funds) available that invest in the securities of a single state. There are not available for all states. You should call one of the mutual-fund complexes such as Fidelity or Vanguard to check on the availability of a fund that invests in securities of the state in which you pay taxes.

Money-Market Deposit Account

Money-Market Deposit Account

The money funds became so popular that hundreds of billions of dollars were drained out of bank deposits into these higher-yielding mutual funds. Needless to say, the banks sought ways to compete. And so, in another example of how deregulation benefits the consumer, the banks were allowed to offer money-market deposit accounts to individuals. At the out-set banks offered promotional rates that were well above the yields offered by the money funds. Indeed, initially some money-market deposit accounts had a yield advantage of 2 percentage points. Savvy consumers, chasing the pettiest rate in the market, deserted the money funds in droves.

In the mid-1980s, however, the money funds enjoyed renaissance. The banks, having reestablished themselves, quietly reduced the rates they were offering so that the money funds then had a ½ to 1 percentage point advantage over the deposit accounts. Money began to return to the funds and now both types of investments have hundreds of billions of consumers' dollars.

How should you decide between the two? Each has its own advantages. The banks enjoy important attractions. First, like other bank deposits, money-market deposit accounts are insured by an agency of the federal government. Thus, they score at the top of the scale for worried insomniacs. In addition, it's convenient to invest in money-market deposit accounts, since banks have branches, while money funds only have post office boxes and toll-free telephone numbers. But the money funds have their own advantages. Their yields tend to be a good deal higher than the bank accounts, as noted above. Indeed, during periods when interest rates have been rising, the differential in favor of the money funds has tended to widen as the banks have been slow in raising posted rates.

In addition, the money funds allow an unlimited number of checks to be written against balances (although each check must be written for a determined sum as a minimum, depending on the fund). The deposit accounts allow only three checks per month (for any amount. Bank do offer so-called Super NOW deposit accounts that allow unlimited checking and these accounts can be very useful for investors who can meet the minimum deposit requirements. The interest rates on Super NOWs are, however substantially below the returns on money-market deposit accounts).

Money funds also offer wire transfer facilities that permit money to be moved around overnight. Moreover, since money funds are typically part of a large mutual fund or brokerage complex, they are an ideal place to “park” cash at high earning rates awaiting movement into more permanent investments. Finally, it is possible to find that invest only in tax-exempt securities so that high-bracket investors can earn considerably higher after-tax yields.

One of the best ways to obtain extra investment funds is to avoid taxes legally. Photo by Elena.

Yellowstone National Park

Yellowstone National Park

3 million visitors per year – 3,472 square miles – the largest concentration of geysers and hot springs in the world. Yellowstone National Park, WY.

The center of what is now Yellowstone Park erupted 600,000 years ago, obliterating all life and scattering ash for thousands of miles around. The explosion left behind a 28-by-47 mile crater that contained the world's greatest concentration of geothermal phenomena, including hot springs,, fumaroles, steam vents, mud pots and over 300 geysers. Among the geysers is Steam Boat, which shoots columns of water a record 350 feet high.

Yellowstone is the second largest park in the lower 48 states, encompassing an area larger than the states of Delaware and Rhode Island combined. It is also the oldest park in the country, established in 1872. It has the largest mountain lake (Yellowstone Lake, with 110 miles of shoreline); the biggest elk population in America (100,000 strong); and is the last place in the country where there is a free-ranging herd of bison (4,000 of the woolly beasts).

Peak season tips: This is one of the coldest parks in the continental United States. Be prepared for winter weather at any time of the year. The park receives half its visitors in July and August, overcrowding the roads and limited visitor facilities. The solution: head for the backcountry. Most visitors never venture far from their cars.

Camping: The campgrounds are available on a first-come, first-served basis, except for Bridge Bay, where reservations can be made through Mistix. They often fill early in late summer. Winter camping is available only at Mammoth Campground.

Best one-day trip: From the West entrance, drive along Grand Loop Road to the mile-long Upper Basin Geyser, where boardwalks and trails run among the most outstanding geothermal phenomena in the world. Continue on to Yellowstone Lake.

Water in the park. Yellowstone is one of the few national parks where snowmobiles are permitted. In addition, snow coaches - winter buses on skis - provide a unique way to travel. Photo by Elena.

Chinatown in New York, Manhattan

Chinatown, Manhattan

Manhattan's Chinatown, home to the highest concentration of Chinese people in the Western Hemisphere, is the oldest of at least 9 Chinatowns in the New York metropolitan area.

Manhattan's Chinatown is a neighborhood in Lower Manhattan, New York City, bordering the Lower East Side to its east, Little Italy to its north, Civic Center to its south, and Tribeca to its west. Chinatown is home to the highest concentration of Chinese people in the Western Hemisphere With an estimated population of 90,000 to 100,000 people, Manhattan's Chinatown is also one of the oldest Chinese ethnic enclaves. The Manhattan Chinatown is one of nine Chinatown neighborhoods in New York City, as well as one of twelve in the New York metropolitan area, which contains the largest ethnic Chinese population outside of Asia, comprising an estimated 819,527 uniracial individuals as of 2014.

All the pictures have been taken by Elena.

Historically, Chinatown was primarily populated by Cantonese speakers. 

Chinatown, Broome street.

In the 1980s and 1990s, large numbers of Fuzhounese-speaking immigrants also arrived and formed a sub-neighborhood annexed to the eastern portion of Chinatown, which has become known as Little Fuzhou.

Flags of the U.S. France and Chinatown.

 As many Fuzhounese and Cantonese speakers now speak Mandarin—the official language in China and Taiwan—in addition to their native languages, this made it more important for Chinatown residents to learn and speak Mandarin. 

Although now overtaken in size by the rapidly growing Flushing Chinatown, located in the nearby borough of Queens – also within New York City – the Manhattan Chinatown remains a dominant cultural force for the Chinese diaspora.

The neighborhood is also home to the Museum of Chinese in America and as the headquarters of numerous publications based both in the U.S. and China that are geared to overseas Chinese.

The Manhattan Chinatown is one of nine Chinatown neighborhoods in New York City, as well as one of twelve in the New York metropolitan area

Monument to Lin Ze Nu (1785-1850). In memory of the Americans of Chinese Ancestry who lost their lives in defense of freedom and democracy

Kathay Bank. Here live the largest ethnic Chinese population outside of Asia, enumerating an estimated 800,000 individuals. 

Mosco and Mulberry corner. The remaining Chinatowns are located in the boroughs of Queens (up to four, depending upon definition) and Brooklyn (three) and in Nassau County, all on Long Island in New York State.

There are also Chinatowns in in Edison and Parsippany-Troy Hills in New Jersey.

Mulberry street.Manhattan's Little Fuzhou an enclave populated primarily by more recent Chinese immigrants from the Fujian Province of China

Manhattan's Chinatown Pagoda.

Some boroughs are technically considered a part of Manhattan's Chinatown, albeit now developing a separate identity of its own.

Pell street.  new and rapidly growing Chinese community is now forming in East Harlem, Uptown Manhattan, nearly tripling in population between the years 2000 and 2010.

Place of Freedom.

The city of New York has the nation's largest Chinese American population by a wide margin.

This area is the primary destination for new Chinese immigrants. 

 After the City of New York itself, the boroughs of Queens and Brooklyn encompass the largest Chinese populations, respectively, of all municipalities in the United States.

Financial Paradox

Financial Paradox - Some Reflections

Today, closed-end funds are no longer an especially attractive investment opportunity. They illustrate however an important paradox about investment advice, as well as the maxim that true values do eventually prevail in the market. There is a fundamental paradox about the usefulness of investment advice concerning specific securities. If the advice reaches enough people and they act on it, knowledge of the advice destroys its usefulness. If everyone knows about a "good buy" and they rush in to buy, the price of the "good buy" will rise until it is no longer particularly attractive for investment. Indeed, there will be pressure on the price to rise as long as it is still a good buy.

This is the main logical pillar on which the efficient-market theory rests. If the spread of news is unimpeded, prices will react quickly so that they reflect all that is known about the particular situation. This led us to predict that such favorable discounts would not always be available, and we would be very surprised to see the levels of discounts perpetuate themselves indefinitely. For the same reason we are skeptical that very simple currently popular rules such as "buy low P/E stocks" or "buy small company stocks" will perpetually produce unusually high risk-adjusted returns.

There is a well-known academic story about the random walk of a finance professor and two of his students. The finance professor, a proponent of the strongest form of the random-walk theory, was convinced that markets were always perfectly efficient. When he and the students spotted a $10 bill lying on the street, he told them to ignore it. "If it was really a $10 bill," he reasoned out loud, "someone would have already picked it up." Fortunately, the students were skeptical, not only of Wall Street professionals, but also of learned professors, and so they picked up the money.

Montreal, Old Port, random-walkers... Photo by Elena.

Clearly, there is considerable logic to the finance professor's position. In markets where intelligent people are searching for value, it is unlikely that people will perpetually leave $10 bills around ready for the taking. But history tells us that unexploited opportunities do exist from time to time, as do periods of speculative excess pricing. We know of Dutchmen paying astronomical prices for tulip bulbs, of Englishmen splurging on the most improbable bubbles, and of modern institutional fund managers who convinced themselves that some stocks were so "nifty" that any price was reasonable. And while investors were building castles in the air, real fundamental investment opportunities such as closed-end funds were passed by.

Yet eventually excessive valuations were corrected and eventually investors did snatch up the bargain closed-end funds. Perhaps the finance professor's advice should have been, "You had better pick the $10 bill up quickly because if it's really there, someone else will surely take it." It is in this sense that we must consider ourselves random walkers. We are convinced that true value will out, but from time to time it doesn't surprise that anomalies do exist. There may be some $10 bills around at times and we should certainly interrupt our random walk to purposefully stoop and pick them up.

It is clear that the ability to beat the average consistently is very rare. Neither fundamental analysis of a stock's firm foundation of value not technical analysis of the market's propensity for building castles in the air can produce reliable superior results. Even the pros must hide their heads in shame when they compare their results with those obtained by the dart-board method of picking stocks. The only way to achieve above-average returns in an efficient market is to assume greater risk. But risk is far from a simple concept and neither beta no any other single risk measure is likely to be adequate.

Sensible investment policies for individuals must then be developed in two steps. First, it is crucially important to understand the risk-return trade-offs that are available and to tailor your choice of securities to your temperament and requirements. Most investors will not be convinced however, that the random-walk theory is valid. Telling an investor that there is no hope of beating the averages is like telling a six-year-old there is no Santa Claus. It takes the zing out of life.

High Park's blues sakura flowers. Photo by Elena.

For those incurably smitten with the speculative bug, who insist on picking individual stocks in an attempt to beat the market, we can offer some rules. The odds are really stacked against you, but you may just get lucky and win big. We also suggest that you might want to place your bets on the few rare investment managers who, at least in the past, have shown some talent for finding those rare $10 bills lying around in the marketplace.

Investing is a bit like lovemaking. Ultimately it is really an art requiring a certain talent and the presence of a mysterious force called luck. Indeed, luck may by 99 percent responsible for the success of the very few people who have beaten the averages. "Although men flatter themselves with their great actions," La Rochefoucauld wrote, "they are not so often the result of great design as of chance."

The game of investing is like lovemaking in another important respect, too. It's much too much fun to give up. If you have the talent to recognize stocks that have good value, and the art to recognize a story that will catch the fancy of others, it's a great feeling to see the market vindicate you. Even if you are not so lucky, strict rules will help you limit your risks and avoid much of the pain that is sometimes involved in the playing. If you know you will either win or at least not lose too much, you will be able to play the game with more satisfaction. At the very least, we hope these recommendations make the game all the more enjoyable.