Broker Check

Making Cash Work for You

October 20, 2023

We would like to open this newsletter by acknowledging the tragic events that have occurred in Israel, starting with Hamas’s surprise incursion into southern Israel on October 7th, 2023, the 50th anniversary to the day of the start of the last time Israel was invaded during the 1973 Yom Kippur War. The reports from the region detail a repugnant assault on innocent civilians and we extend our deepest sympathies to the victims of these terrorist attacks.

Markets in Review

While major equity indices are up year-to-date, the third quarter of 2023 saw declines across the board as the markets contemplate the potential for materially higher long-dated interest rates. The large cap S&P 500 was down 3.27%, the tech heavy Nasdaq 100 was down 2.86%, the small cap Russell 2000 was down 5.13%, and the international MSCI ACWI ex USA was down 3.68%. Fixed income also fared poorly against the prospect of higher interest rates last quarter, with the Bloomberg US Aggregate index down 3.23% as markets priced in benchmark 10-year Treasury yields that were up more than 17% from a year ago. Year-over-year CPI inflation for September is unchanged at 3.7%. Interest rates are the main financial story right now and in this edition of the newsletter, we will explore the opportunities for your cash that are now available in this higher rate environment.

We are amid the most aggressive interest rate hike cycle since the Federal Reserve’s efforts to tame inflation in the early 1980s. While the interest rate hikes have made loans much more expensive to consumers and businesses alike, they have also presented an opportunity not seen in years: earning a decent return on cash. With the benchmark federal funds rate currently set between 5.25% and 5.50%, many cash-like investments now have yields that are quite attractive. For instance, the yield on Schwab’s Value Advantage Money Fund is 5.24%, as of October 6th. Contrasting with this is the paltry national average for savings accounts of .58%, according to Bankrate’s October 2nd weekly survey. With such a divergence in cash yields, it is critical to make sure that your money is working for you as

This is as true for families and their savings as it is for business owners and their corporate accounts- in both instances, there may be better cash alternatives beyond the bank.

hard as you worked for it. This is as true for families and their savings as it is for business owners and their corporate accounts- in both instances, there may be better cash alternatives beyond the bank. In this newsletter, we will examine the ways you can make the most of your cash, while also warning of the perils of treating high-yielding cash as a long-term investment rather than as liquid holdings.

The disparity between what cash may earn in a savings account versus what cash-like investments can earn is quite stark, creating opportunities for savvy consumers and business owners to put their liquid savings to work. It is critical at this point, however, to mention one major disclaimer: cash held at a bank or credit union is currently FDIC (or NCUA, in the case of credit unions) insured up to $250,000 per account, per ownership category, per institution. Therefore, money held in bank or credit union deposits are federally backstopped up to the $250,000 limit. If federal guarantees are important to you, then leaving your cash at the bank is likely your best option.

However, for those who do not necessarily need FDIC/NCUA protection or have liquid holdings above the federal deposit insurance limits, there are several cash alternatives with extremely appealing yields. The first option that many have heard of but may not be utilizing are money market mutual funds. These funds invest in short-term, high-quality debt and strive to keep a stable Net Asset Value of $1/share. The Schwab fund mentioned previously is a prime example of this type of cash alternative. These types of funds theoretically can lose value, but this is exceedingly rare, with only four instances of this occurring going back to the introduction of money market mutual funds in the 1970s, per a report published by the SEC. While the risk of losing money in this type of fund is not zero, given the high-quality, short-term assets they own and extensive regulatory oversight, these funds have very low risk. In addition, money market mutual funds come in both taxable and tax-exempt varieties. For high earning individuals, tax-exempt money market mutual funds can have yields that are even more attractive on an after-tax basis.

Another cash-like alternative is Treasury bills, or T-bills. Similar to money market mutual funds in that their yields have benefitted from rising rates; T-bills are short-term US government debt securities that mature between 4 and 52 weeks. T-bills are generally considered among the safest assets because they are backed by the full faith and credit of the United States. However, if T-bills are liquidated before their maturity, there is a chance of loss. For savers with a time horizon beyond the maturity of a particular T-bill, they can simply use the proceeds from a matured T-bill to “roll over” into a new issue. The benchmark 90-day T-bill yields 5.497% as of October 13th, 2023.

For longer-term savers, brokered CDs are an intriguing option as well. Brokered CDs are like the more familiar bank CDS in that they are issued for a fixed term, at a fixed interest rate, and receive FDIC deposit insurance (when under the limit). However, unlike bank CDs, which are purchased directly from your local bank, brokered CDs are sold on a marketplace where banks from around the country compete for savers’ money. Because of this broad marketplace of competing banks, brokered CDs can provide a higher interest rate than what you might get directly at the bank. According to a September 20th, 2023, Bankrate survey, the average interest rate for a 1-year CD is 1.99%. By contrast, Charles Schwab quotes the average interest rate on a new-issue, 1-year brokered CD at 5.462% as of October 13th, 2023. In addition to the compelling yield on brokered CDs, there is the side benefit of being able to put more cash to work in FDIC insured accounts by purchasing CDs at amounts below the FDIC limit from multiple banks on the marketplace, effectively sidestepping the $250,000 insurance cap.

According to a September 20th, 2023, Bankrate survey, the average interest rate for a 1-year CD is 1.99%.
By contrast, Charles Schwab quotes the average interest rate on a new-issue, 1-year brokered CD at 5.462% as of October 13th, 2023.

These cash alternatives with solid yields may sound appealing, but a critical question is how you can take advantage of them. All the previously mentioned ideas require a different approach than simply opening a savings account at your local bank or credit union. Money market mutual funds, T-bills, and brokered CDs can all be purchased through broker-dealers like Charles Schwab. We can collaborate with you to not only help determine your liquid savings needs but also execute the technical aspects of your cash management plan.

 While finally earning a decent yield on your hard-earned cash is a welcome development, we want to temper these exciting opportunities with the point that cash is a liquidity tool, not a long-term investment asset. The rate you currently receive in your savings account or money market mutual fund is not set in stone. CDs and T-bills will eventually mature, presenting re-investment risk if interest rates are lower at maturity than when you initially purchased them. Yields can change at any time, including going down. In addition, there is the very real opportunity cost of investing in cash. A dollar in a cash account is a dollar not invested in more suitable long-term investments like stocks and bonds. We strongly caution our readers not to view today’s attractive cash rates as an excuse to deviate from their investment strategy by moving from investments into cash. When interest rates do peak, history has shown that investment assets will perform much better both in the short and long term. American Funds released an excellent whitepaper on this subject, detailing how stocks, bonds, or a mix of the two have vastly outperformed 3-month T-bills (a proxy for cash) after a rate hike cycle has finished.

We look forward to discussing with each of our clients, both individuals and business owners, how we can get the most yield from your cash while not deviating from your overall investment strategy.




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