In a famous 2018 interview, Ray Dalio, founder of hedge fund giant Bridgewater, coined the phrase “cash is trash.” What he was describing was an investing environment in which interest rates were so low that holding cash, cash equivalents and many types of bonds made little sense because of low interest rates.
His point was that investors were being forced into the stock market in an attempt to create some sort of positive return on their money.
Well, times have changed, and so has Dalio’s take on cash. In October, he declared on Twitter, “I no longer think cash is trash.” This latest declaration is both good and bad news. Those who were forced into stocks and low-yielding bonds have sustained historic drawdowns in 2022.
But for those who suffered ultralow interest rates and earning almost nothing on their cash for years, the current situation might be a golden age of relatively high yields on lower-risk assets.
But if you are one of the lucky/smart ones with cash to invest, choose carefully, as this new regime has not quite found its footing, thus creating opportunity, but also pitfalls in the search for yield.
Your money in the bank is FDIC insured up to $250,000 ($500,000 joint), easily accessible and does pay an interest rate. However, on average, those rates have not kept up with the steep increases we have seen in the federal funds rate. Said another way, banks are taking your deposits, investing them in a yielding asset and passing very little of that benefit on to you.
Don’t let them do that.
Shop around at other banks and credit unions to compare rates – you will probably be surprised by the disparities. Websites such as Bankrate.com can make shopping for rates quick and easy. Currently, you will find that a large institution such as Bank of America offers just .04% on savings compared to north of 3% at multiple smaller banks.
Finally, don’t forget the low-hanging fruit when it comes to managing your cash. If there is a material difference between the interest on your checking and savings accounts, keep more money in the latter and only what you need for paying bills in the former.
Certificates of deposit can be found at most banks. They typically pay more than checking and savings accounts but, in exchange, require your money to be tied up for a certain period of time before you can withdraw it.
The issue here is the same as regular bank accounts – on average, they are not keeping pace in this rising-rate environment. The average one-year CD is yielding well below a one-year Treasury.(1)
So what do banks do with your deposits and CDs? They mostly buy U.S. Treasury bills, notes and bonds, guaranteed by — you guessed it — the U.S. Treasury. Currently, with the flattish and slightly inverted yield curve, they only need to go out a year to maturity to get north of a 4% yield. By funding it with your checking account that yields next to nothing, they’re raking in a lot of free money.
If you’re not happy with your bank rates, consider skipping the middleman and buying the Treasury itself. They are not as liquid as a bank account, but even though they come with a certain maturation date, they can be sold on the secondary market if you change your mind or need to access the money. But understand that, while they will pay par at maturation, their prices can fluctuate up until that point.(2)
“Money market” refers to highly liquid and short-dated debt instruments issued by governments or commercial institutions. Some banks offer money market accounts, but they can also be accessed through mutual funds.
On the yield spectrum, they typically dwell below the fed funds rate but above a regular checking or savings accounts. They are priced in one-dollar increments and have very rarely dipped below due to their credit quality and short maturity. Most, but not all, of the funds are covered by either FDIC or SIPC.
It may take a little work, but seeking a decent yield on your cash is well worth it in this new era of high interest rates. Successful cash management is not as exciting as picking the next hot stock or high-yielding asset, but its effects are material over the long term.
If you care for some homework to illustrate this point, pick an amount you can afford to save and punch that number and 4% into an online calculator such as this one at the SEC’s Investor.gov website. Happy yield hunting!
1) CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.
2) Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
3) An investment in the fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Brian Murphy is a Market Strategist and Investment Manager at Frazier Investment Management in Southern Rhode Island. Before joining the Frazier team, he served in the U.S. Navy for 11 years as a carrier jet pilot. Brian has experience managing several different strategies and products, including equity, fixed income, long/short portfolios and options. He believes that managing risk is the key to successful outcomes and works with clients nationwide to achieve their investing goals.
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