As interest rates on bank products have continued to fall, it has become increasingly tempting for investors to cut the cash portion of their portfolio. But an article from Morningstar provides a reason why such a move would be a mistake. The article, entitled A Market Lacking Diversification, explains how nine of eleven asset indexes analyzed by the author Abraham Bailin have become increasingly correlated from 2002 to today. The two outliers that didn't show increasing correlation were weighted heavily with Treasury bonds.

What does this mean?

For an investor, it means that diversifying a portfolio has gotten harder than ever. Diversifying means allocating money so that if one asset falls, the other goes up - or at least doesn't fall. The idea is not to have all of your eggs in one basket. Correlation measures how closely different assets move in relation to one another. So, if the S&P 500 drops, a closely correlated index would also drop by a similar amount. To diversity a portfolio, you want correlations that are as low as possible or negative. Otherwise, when one market goes down, all of your other investments will also drop with it.

Note: A correlation number of 1 means that something perfectly mimicks the indicator it is being compared to. The closer to 1, the stronger the correlation.

Putting money into Real Estate Investment Trusts (REITs) or commodities used to be one way to diversity. Today, REITS have a .91 correlation to the S&P 500 while commodities have a .46 correlation, up from 0 ten years ago.

Why is Correlation Increasing?

Mr. Bailin hypothesizes that correlations have increased because of the growing importance of the risk on/risk off sentiment. Since the crash in 2008, investors view the market through a risk prism. When risk is perceived as low, they buy up assets that are considered more speculative. When risk is high, money flows out of these assets and into less speculative investments. Less speculative investments, like Treasuries happen to have a negative correlation to more risk based assets in the other indexes.

He also believes that correlation is increasing because more markets and indexes are being made in different asset classes. Ten years ago, trading in commodities was tiny. As more investors have piled in, the commodity index has come to reflect the sentiments of the general market.

The Growing Importance of Cash

Because cash is FDIC insured, it is the least risky of all asset classes. It also has a correlation of 0 to all other assets. Its value does not move in relation to any investment index. Therefore, if the rest of an investor's portfolio is getting increasingly correlated, it makes sense to hold cash, or to even increase the amount of money deposited into the bank. This is a phenomon we notice on BestCashCow. When there is a particularly bad day in the market, we see spikes in traffic as more investors look to protect their cash in insured banks and credit unions. As correlation has increased, it becomes even more important to place money in non-correlated holdings. An investor could put cash into Treasuries as another way to diversity their portfolio, but there is great risk in this. With interest rates so low, rates will eventually go up. When they go, Treasuries will lose value (Treasury prices move inversely to yield). It can be argued that at that point, Treasuries and the stock market will become more tightly correlated since rising rates will hurt Treasury prices as well as stock prices.

The Impact of Correlation on Your Interest Rate

Many investors already intuitively know this. Banks now hold record amounts of cash in the form of savings, CDs, and checking account. Even with the low rates, investors are parking a significant amount of money in cash. The irony is that the flight to safety has helped to bring down savings rates and CD rates. Many investors though, view banks as a safe place to park the safer portion of their portfolio until the world economy stabilizes. Any return is a bonus.

BestCashCow has often featured articles on rewards you can get from your personal bank account. However, if you also happen to have a small business, there's absolutely no reason why you shouldn't get rewards from your small business bank account as well. The Capital One Small Business Rewards Checking account could be a good choice for you for several reasons.

First, this Capital One account allows you to combine rewards between your personal and business Capital One accounts, including credit cards. As we all try to save money and spend less in this economy, this feature becomes even more pertinent because it will take less time to achieve rewards levels through combined account spending. While Capital One does have the disclaimer that it limits one Rewards checking account per customer, you can link personal and business Capital One credit cards for combined rewards.

The Small Business Checking rewards work like this: you'll earn 20 miles for each non-PIN-based transaction, and 10 miles for every debit/PIN purchase. Additionally, you'll earn 20 miles for every online Bill Payment and other pre-authorized reoccurring payment (up to 10 transactions per month), as well as 10 miles for all other customer-initiated withdrawal transactions.

You will also earn a bonus of 1,000 miles when the account is opened and the first transaction is posted to your account, you'll earn another bonus of 1,000 miles after you make your first debit card purchase, and you’ll earn an additional 1,000 miles on your membership anniversary. All bonus miles will be posted to your account within 60 days of the qualifying event.

However, the reward structure is a little tricky if you want to redeem your miles for airline tickets. You'll be able to redeem 15,000 miles for tickets costing up to $150.00; 35,000 miles for tickets costing $150.01 - $350.00; and 60,000 miles for tickets costing $350.01 - $600.00. For tickets costing over $600.00, the required number of miles will be determined by the cost of the ticket times 100. For example, a $768 ticket will cost 76,800 miles. Because of the way this structure works, you would be better off saving your miles for higher-priced tickets (or for tickets that cost very close to the limit for that reward level). For instance, if a ticket only cost $160, you would be better off saving the 35,000 required points until you needed them for a ticket costing $345.

If you prefer not to get airline tickets as your reward, you can redeem your miles for non-travel related merchandise or cash. The number of miles required for non-travel related items varies by item and can change at any time without notice.

In addition to regular reward miles, you can earn either a $100 or a $300 bonus if you open your account before February 29, 2012. To qualify, one online Bill Payment must post to your account by February 29^th. You will receive $100 if your balance is at least $500 after 30 days, or $300 if your balance is at least $3,000 after 30 days. The bonus credit will appear in your account 6-8 weeks after 2/29/2012.

As with many bank products, this isn't a one-size-fits-all solution for everyone. However, if you already have other Capital One products, you travel a lot, and you're in the market for a new Small Business Checking Account, this could be a good match for you.

For the best information on checking accounts, click here.

If one of your New Year’s Resolutions was to ditch a bad bank account and switch to a more favorable bank, you’re not alone. Many long-time banking customers are suddenly seeing an increase in fees as banks scramble to recoup lost revenue. If you’re unhappy with your current banking situation, it can make sense to switch accounts. Sometimes, however, it can be hard to get enough motivation to act. As previously reported on BestCashCow.com, people in Briton are more likely to get divorced, even when they are highly dissatisfied with their bank’s service. If you’re one of those people who want to switch banks but haven’t yet made the jump, here are five steps to follow that will make your transition as easy and painless as possible.

Step 1: Choose the funding amount for the new account.

After you consider your individual needs and choose a new bank that benefits you best, the first step is to consider how much initial funding you want to put into your new account. It’s prudent to start with a modest initial deposit, while still keeping funds available in your old account. It can take some time to receive your checks, new bank card, and change over direct deposits and reoccurring payments, so you want to keep both accounts active during this transition period.

Step 2: Order checks and a get a temporary debit card.

Once your new bank account is open and adequately funded, order new checks and debit cards. Most banks will provide you with a temporary debit card (and some can even provide temporary checks) while the permanent ones are being manufactured and mailed.

Step 3: Move your automatic payments

Next, make a list of all of your automatic bill payments, automatic debits, and direct deposits. In this list, include the dates for the next anticipated billing/deposit for each item, so you’ll know when to watch for it to hit on your new account.

Then, one-by-one, start changing over the bill payments, debits and direct deposits to your new bank account. If your paycheck is direct deposited, you will likely need to contact your employer’s Payroll office or Human Resources office to fill out a form to authorize them to deposit your paycheck into your new account. You should now stop using your old account, but still keep it open.

Make sure you have enough money in your new account to cover the bill payments and debits. As each payment hits your account, check it off the list you previously created.

Step 5: Close your old account.

After you have confirmed that all outstanding checks cleared your old account, all automatic debits and bill payments are clearing your new account, your direct deposits are all going to your new account, and you’ve received your permanent checks and debit card, you can then close your old account.

The last step is to celebrate! You’ve just made an important move to help ensure you have a sound financial portfolio.

Find a local bank close to you.