We don’t have to give up yield to keep liquid assets
Since early last year, I have been recommending we build our cash positions for future investment opportunities. Although I doubt there will be any sizable economic or general market collapses, there will always be cyclical booms and busts in just about every sector.
Last year alone, we had significant crashes in the crypto and oil spheres. If I were an investment expert with the oil drillers, last year’s bust should have been seen as providing tremendous opportunity – as long as I had the liquidity and was not overly exposed to the sector in the first place.
With this in mind, I received an email from a listener asking me to comment on where to park our cash.
If you have time please comment on the Saturday Wall Street Journal article on page B1, The Intelligent Investor by Jason Zweig.
The article “Raise Your Own Rates Even if the Fed Won’t” discusses online banking.
This Wall Street Journal article is behind a paywall, but I provide a link to a copy of the article for your reference.
The nearly $8 trillion of cash in savings deposits at commercial banks is earning interest at an average rate of 0.09%. The more than $1 trillion of cash at brokerage firms is paying investors just under 0.3% on average, estimates Peter Crane, president and publisher of Crane Data, a firm that monitors cash and other short-term investments.
Meanwhile, savings accounts at online banks and short-term U.S. Treasury securities are yielding 2% to 2.5%. Savings accounts are federally insured against loss, generally up to $250,000; U.S. Treasurys are considered risk free.
The Wall Street Journal – Raise Your Own Rates Even if the Fed Won’t (February 1st online)
Based on many of the emails I receive from listeners and readers, there are many here who have a sizable balance sheet and ample cash on hand. While many may not have a large amount of liquidity sitting around, I think that the majority of us can take advantage of the interest rate differentials between what the local bank down the street offers and what an online bank will provide depositors.
If you read the WSJ article, you can clearly see the advantages of having money deposited with an online savings bank. Someone with $100,000 wishing to park it for the next investment opportunity can lose over $2,000 a year in lost interest by keeping at the local bank.
While I understand that many, including myself, are reluctant to transfer our banking services to an online bank, we do not have to close out our existing bank accounts to take advantage of these higher yields. We can park our extra cash in money market funds with our mutual fund or brokerage accounts.
Here is an example. According the Vanguard.com, the Vanguard Prime Money Market Fund is currently yielding 2.51%. Keep in mind that this fund maintains a stable $1.00 NAV and has never “broken the buck.” Moreover you can link this money with your current checking account to gain access within a short amount of time.
Keep just enough cash on hand in your existing checking accounts to transact normally and for piece of mind, and transfer your other liquid assets to your brokerage account or mutual fund company and park the funds in some no-load money market funds.
All this money should be government insured (FDIC or SIPC), and if you purchase money market funds that invest in government paper, those assets are considered “risk-free.”