Ally Demand Notes - "is it safe"?

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katnrica
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Ally Demand Notes - "is it safe"?

Post by katnrica » Sun Dec 04, 2011 2:07 am

We have some money in Ally Bank's 'demand notes'. They yield about 2-2.1% (rate changes weekly).
To paraphrase the "dentist" in the movie 'Marathon Man' - is it safe?? We understand that these notes may "drop in value", as Ally Bank's site says.
Also, they are *not* FDIC insured. But, no other liquid money-market-like fund we know of is yielding anywhere close to 2%. (in comparison, GE InterestPlus pays only 1.2%)

So we have the following questions:

a) are we better off pulling out this money and buying an ETF like Pimco's MINT? (more diversified, but has a 0.3% exp ratio)
b) should we add to our holdings in Vanguard's Calif Limited term Taxfree fund (current yield 1.06%) rather than add to our Ally demand notes?
c) we also hold shares in VFSTX (yields about 1.8%). Is it better to add to this holding instead?

We have reached what we think is a 'max' of comfort level with our holdings in Calif Int term Tax-exempt (both Federal and Calif tax free), as well as the Intermediate-term-tax-exempt, so we are not too keen on adding to holdings in 'intermediate term' bond funds.

Any other suggestions on where we could park money we need in 2 years time (college tuition) would be much appreciated!

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BigD53
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Re: Ally Demand Notes - "is it safe"?

Post by BigD53 » Sun Dec 04, 2011 2:31 am

should we add to our holdings in Vanguard's Calif Limited term Taxfree fund (current yield 1.06%)
Just to clarify, do you mean the Vanguard Limited Term Tax-Exempt Fund (VMLTX) ?

I am not aware of a Vanguard California Limited Term muni fund. (only Intermediate and Long Term).

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CaliJim
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Re: Ally Demand Notes - "is it safe"?

Post by CaliJim » Sun Dec 04, 2011 3:53 am

I'm not familiar w/ this Ally product - but any time you see instruments yielding higher than treasuries of an equivalent maturity - you are stepping away from safety.

For money you need in 2 years - think cd's and treasuries.

supersharpie
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Re: Ally Demand Notes - "is it safe"?

Post by supersharpie » Sun Dec 04, 2011 5:31 am

Wow...what a coincidence...I just finished watching The Marathon Man for the first time about 30 minutes ago!

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wintermute
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Re: Ally Demand Notes - "is it safe"?

Post by wintermute » Sun Dec 04, 2011 10:45 am

Not FDIC - dump them. You get can get a 5 year 2.25% NCUA insured CD from Penfed or a 1.8% FDIC insured from Ally. (Compare the early withdrawl penalties, they're different.)

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Grandpaboys
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Re: Ally Demand Notes - "is it safe"?

Post by Grandpaboys » Sun Dec 04, 2011 11:17 am

Vanguard Limited Term Tax Exempt has a distribution yield of 2.17%. That is where my new money is going.
Good Day | GP

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katnrica
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Re: Ally Demand Notes - "is it safe"?

Post by katnrica » Sun Dec 04, 2011 1:14 pm

BigD53 -- yes I meant VMLTX; thanks for catching that!

Grandpaboys --I don't understand what 'distribution yield' is. From where I sit, I can clearly see that VMLTX yields 1.06%. Where do you see a 2.17% yield published?

thanks to everyone for their suggestions - we do appreciate it.
We purchased a few K dollars worth of 5-year Ally CDs back when the yield was about 2.4%. Of course we're now kicking ourselves for not buying more when we could have had that yield.
C'est la vie.

One other idea did occur to me after I posted the questions. There's still time left in the year to buy paper I-bonds. $5K each for me and the wife. That's one obvious instrument where we can hopefully continue to get better yields than the riskier Ally demand notes. (we also bought I-bonds on treasury direct earlier this summer).

FB01
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Re: Ally Demand Notes - "is it safe"?

Post by FB01 » Sun Dec 04, 2011 3:42 pm

Grandpaboys wrote:Vanguard Limited Term Tax Exempt has a distribution yield of 2.17%. That is where my new money is going.
Hey Grandpaboys...

Do you reinvest your dividend ? Also, is this in your taxable or non taxable account

FB
Thanks, | JR

patrick
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Re: Ally Demand Notes - "is it safe"?

Post by patrick » Sun Dec 04, 2011 4:04 pm

Probably a bad idea due to credit risk -- unlike with a corporate bond fund the risk is completely undiversified if you buy these.

dbr
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Re: Ally Demand Notes - "is it safe"?

Post by dbr » Sun Dec 04, 2011 4:12 pm

Distribution yield is the rate of past distributions. SEC yield is an estimate of the immediate future. The difference is that 2%+ for the one and about 1% for the other. If making a buying decision based on yield (a subject for a different discussion), 1% would be a better number to use for expectation.

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White Coat Investor
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Re: Ally Demand Notes - "is it safe"?

Post by White Coat Investor » Sun Dec 04, 2011 11:17 pm

2% is now reaching for yield. What is the world coming to?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

lazyday
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Re: Ally Demand Notes - "is it safe"?

Post by lazyday » Mon Dec 05, 2011 12:57 am

katnrica wrote:One other idea did occur to me after I posted the questions. There's still time left in the year to buy paper I-bonds. $5K each for me and the wife. That's one obvious instrument where we can hopefully continue to get better yields than the riskier Ally demand notes. (we also bought I-bonds on treasury direct earlier this summer).
Absolutely I think ibonds are superior. No credit risk, with higher expected total return. Flexibility and tax advantages.

Keep in mind you can't redeem new ibonds the first year after purchase, but no problem if you have enough other funds.

The 2 to 2.1 yield not FDIC insured, vs 1 to 2% with FDIC/NCUA insurance doesn't make sense to me.

One way I sometimes look at this: What are the odds that Ally will go bankrupt in the next 10 years? Maybe 10% or 20%? Dividing this out, and assuming this product recovers 75% in bankruptcy, seems not worth it compared to alternatives, especially if the money usually sits. (If those #s and method make any sense, .4% loss/year from bankruptcy risk)

Also may be placing too much risk in one institution--Another way to view, is what's the worst likely to happen? Ally goes south, and your money is on hold for who knows how long. You might recover most of it, or might not, depending on your place in line with other creditors, and how much money they have available.

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cheese_breath
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Re: Ally Demand Notes - "is it safe"?

Post by cheese_breath » Mon Dec 05, 2011 1:24 am

First you need to understand that Ally Bank does not offer demand notes. Ally Bank is a subsidiary of Ally Financial. Ally Financial offers the demand notes but not through the bank, which explains why they are not FDIC insured.

Second I don’t believe demand notes drop in value, at least not like a bond if that’s what you’re thinking. Could you point us to where it says this on the Ally website? Unless something has changed since I had them they operate similar to an unsecured bank account or money market fund with checking privileges. The demand notes prospectus says
“The principal amount of your Demand Notes is equal to the total amount of your investments plus accrued and reinvested interest, less fees, if any, and your redemptions.”
So the only things which would cause them to “drop in value” would be withdrawals or service fees. With respect to possible fees the prospectus says
“Service fees may be assessed for checks written by you for insufficient funds or in amounts of less than the $250 minimum, for stop payments requested by you, for bank checks requested by you and issued by The Bank of New York Mellon, and for statement processing or other administrative matters.”
Third I hope you already know Ally Financial used to be GMAC one of the companies assisted by the government TARP program. I used to have demand notes until GMAC’s future became shaky. Then I moved the funds into GMAC Bank (now Ally Bank) for safety. Since then I have seen various opinions on the Internet regarding demand notes safety so I have hesitated to go back into them yet

Bottom line is demand notes are unsecured loans from you to Ally Financial. Thye pay over twice the interest rate of an Ally Bank account to compensate for the greater risk of no FDIC insurance.
The surest way to know the future is when it becomes the past.

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cheese_breath
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Re: Ally Demand Notes - "is it safe"?

Post by cheese_breath » Mon Dec 05, 2011 1:27 am

lazyday wrote:Also may be placing too much risk in one institution--Another way to view, is what's the worst likely to happen? Ally goes south, and your money is on hold for who knows how long. You might recover most of it, or might not, depending on your place in line with other creditors, and how much money they have available.
Since demand notes are unsecured loans count on being at the end of the line.
The surest way to know the future is when it becomes the past.

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katnrica
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Re: Ally Demand Notes - "is it safe"?

Post by katnrica » Mon Dec 05, 2011 1:45 am

All,

Thank you for the responses and suggestions! You folks are a great source of advice.
(thanks also to lazyday and cheesebreath for the very detailed responses)

The site that says these demand notes "may lose value" is here:
http://www.ally.com/about/investor/dema ... index.html
(see the table at the bottom of the page. Also says "are not bank guaranteed" .

Yes, I agree that if we don't incur any 'service fees' we should not expect our account to 'lose value', IF Ally financial stays afloat and doesn't flounder ;-)
To be honest though, I think I've developed a healthy case of cold feet after reading some of the responses, so I won't add any more to our demand notes account. I can't seem to find a rating (Moody's/S&P/Fitch) for Ally Financial. If it is in the vicinity of BBB, I might consider leaving the funds there for a while - at least until the rating drops a notch or two.

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cheese_breath
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Re: Ally Demand Notes - "is it safe"?

Post by cheese_breath » Mon Dec 05, 2011 2:00 am

katnrica wrote:All,
The site that says these demand notes "may lose value" is here:
http://www.ally.com/about/investor/dema ... index.html
(see the table at the bottom of the page. Also says "are not bank guaranteed"
Thanks, I hadn't noticed that.
katnrica wrote:All,
Yes, I agree that if we don't incur any 'service fees' we should not expect our account to 'lose value', IF Ally financial stays afloat and doesn't flounder ;-)
I tend to agree. Considering the prospectus it seems the only way they would 'lose value' would be if Ally was unable to pay it's obligations.
The surest way to know the future is when it becomes the past.

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Grandpaboys
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Re: Ally Demand Notes - "is it safe"?

Post by Grandpaboys » Mon Dec 05, 2011 8:36 am

Vanguard Limited Term Tax Exempt

https://personal.vanguard.com/us/funds/ ... st=tab%3A4

Have had this fund couple of years, has always paid around 2%.
When comparing funds for yield I always use Distribution Yield. It is better than the SEC yield, which is some contrived formula. Some here will disagree, but to me it more represents the actual dollars received.

I do not reinvest the dividends, and this is in a taxable account.

Take any Vanguard Fund, click on it, and you will bring up the distribution yield and other info as noted across the top.
Good Day | GP

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Re: Ally Demand Notes - "is it safe"?

Post by Grt2bOutdoors » Mon Dec 05, 2011 8:53 am

Get out - NOW!!
You are holding unsecured notes to a holding company, you will be last in line to collect should bankruptcy befall this company.
2% is not enough compensation to be last in line, and I would not bank my child's college tuition on an auto financing company.
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Easy Rhino
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Re: Ally Demand Notes - "is it safe"?

Post by Easy Rhino » Tue Dec 06, 2011 4:53 am

According to wikipedia, one year ago Ally financial was 73% owned by the federal government. They've already been bailed out so don't have much of a track record.

Then again, if they're majority owned by uncle sam, I'm not sure if that means the default risk is less? :peace

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kenyan
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Re: Ally Demand Notes - "is it safe"?

Post by kenyan » Tue Dec 06, 2011 10:30 am

Easy Rhino wrote:According to wikipedia, one year ago Ally financial was 73% owned by the federal government. They've already been bailed out so don't have much of a track record.

Then again, if they're majority owned by uncle sam, I'm not sure if that means the default risk is less? :peace
Yeah, though I use and love Ally Bank, I don't think I'd want anything there that wasn't FDIC insured and would be at risk if it were unable to pay its obligations. Already been bailed out once.
Retirement investing is a marathon.

Alan S.
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Re: Ally Demand Notes - "is it safe"?

Post by Alan S. » Tue Dec 06, 2011 12:47 pm

And still owe the Treasury 14-17 billion of TARP money last time I looked.

"May lose value" would also describe a total default on the notes.

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