Saturday, April 25, 2009

Reminder: Get Out Of Demand Notes

Update: I have attracted some hostile comments. To clarify my position:

No one who has a low tolerance for risk should be in GMAC Demand Notes. If you are using them for long term savings, get out. If you understand that you are chasing returns, and that this is similar to "junk bonds", and you have a diversified portfolio, have at it.

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A friend of mine has some of his money in GMAC Demand Notes. I recently reminded him that this is crazy--they are basically unsecured loans to GMAC.

That's why they pay 4%, compared with FDIC insured rates of 2.25% at GMAC Bank.

With GM looking at a possible bankrupcy, and GMAC shaky due to mortgage exposure, no one should be in GMAC Demand Notes. The 1.75% extra yield is not worth the risk. If you have money that you don't mind investing in "junk" debt, buy a diversified junk bond fund or ETF,which gives you some protection against a single company default.

The same goes for Ford's Interest Advantage.

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