As the economy continues to show sparks of recovery, many investors are revisiting the idea of moving some of their assets into cash accounts. There are many good reasons for considering this, along with several options for where to put cash.
Now, you might think that putting money into cash accounts would be poor timing considering the recent positive market trends. After all, as of the writing of this blog, the S&P 500 is actually up for one-day, five-day, one-month, and six-month periods.1 But that’s what “timing the market” thinking would suggest, and we don’t think like that. Instead, we continue to recommend that having sufficient cash available makes for level-headed decisions when the inevitable selloffs occur. That’s what this piece is all about.
Treasury Bills
One of the U.S. governments primary means of raising funds is through borrowing in the form of bond or Treasury Bills, also known as T-bills. While they are not as liquid as money market funds or savings accounts, they are available for terms as short as one month.
What we’re dealing with now T-bills is an inverted yield curve: shorter-term rates are higher than longer-term rates. The reasons and implications of this are beyond the scope of this blog. For now, let’s just compare today’s rates to those from a year ago. 2 3 4
3-month T-bill:
1/23/23: 4.641%
1/23/22: 0.198%
6-month T-bill:
1/23/23: 4.861%
1/23/22: 0.432%
1 Year T-bill:
1/23/23: 4.744%
1/23/22: 0.743%
So, the good news is that investors can now consider T-bills as one viable option for parking their cash for the short term and still getting something resembling a return. The bad news is that the U.S. government is now paying a higher rate to borrow money. For individual investors, though, it simply means that T-bills are, for now, anyway, back on the table.
Money Market Funds
Cash placed into money market funds is considered to be more liquid than T-bills or CDs, but often with comparable rates. There is often a minimum amount required for these funds. As an example of current rates (as of 1/26/23),5 taxable prime money funds from Schwab include the following:
Schwab Value Advantage Money Fund® - Investor Shares:
7-Day Effective Yield: 4.37%
Current 7-Day Yield: 4.27%
Government and Treasury Money Funds, also taxable, were as follows on 1/26/23:
7-Day Effective Yield: 4.01%
Current 7-Day Yield: 3.94%
See below for explanations of "7-Day Effective Yield" and "Current 7-Day Yield."
Certificates of Deposit (CDs)
Like a savings or money market account, a Certificate of Deposit (CD) provides a way to put money away for a specific period of time while earning a pre-determined return.6 While considered low risk—they are FDIC-insured up to $250,000—owning a CD essentially means that you shouldn’t access the money in it until that time period has passed. CDs can be a good choice when the investor is looking for a low-risk place to park money for a while (shielded from market volatility, for instance), especially when the money in the CD is earmarked for a particular event or purpose. There are ways to own multiple CDs with a total in excess of the $250,000 FDIC insurance. This is a good topic to talk to your advisor about if you interested.
Savings Accounts
Savings banks—and savings accounts along with them—originated in Switzerland in the 18th century and began in the U.S. in 1860.7 While savings accounts haven’t grabbed headlines in a long time, they are still viable options for placing cash under certain circumstances. Savings accounts today offer essentially the same liquidity and conveniences as checking accounts, with the added benefit of a small amount of interest. As with CDs they are FDIC-insured and, as such, are considered very low risk.
A Sort of Cash Discount
By the way, in response to the relatively low interests rates that have been paid on money market and other cash accounts until recently, some financial advisors started waiving their fees for managing them.8 Despite recent increases in rates for these and other cash accounts, some advisors are maintaining their “cash stays for free” policy. (JL Bainbridge continues to exclude its clients’ cash account balances when calculating its management fee, for example.)
The Takeaway
As family wealth advisors, we are constantly looking at the big picture for our core investment portfolio and our clients in particular. We wanted to take a look at cash accounts today as one important component in financial planning, as the situation with rates has suggested a change in thinking from the past couple of years. It’s always advisable to speak with your financial advisor and tax professional to ensure that any shorter-term decisions align with your longer-term financial and retirement plans.
Explanation of Terms:
Effective Yield is a measure of a fund's yield that assumes that all dividends were reinvested in additional fund shares instead of being paid in cash. The yield presented reflects the effect of all applicable waivers. Absent such waivers, the fund's yield would have been lower. Please see the prospectus for more details. The effective yield shown above is net of waiver.
The Current 7-Day Yield is the average income paid out over the previous seven days assuming interest income is not reinvested and it reflects the effect of all applicable waivers. Absent such waivers, the fund's yield would have been lower. The 7-Day Yield (without waivers) is the yield without the effect of all applicable waivers. The 7-day yield shown above is net of waiver.
Sources:
[1] https://www.google.com/finance/quote/.INX:INDEXSP
[2] U.S. 3 Month Treasury Bill (history)
https://www.marketwatch.com/investing/bond/tmubmusd03m?mod=mw_quote_switch&countrycode=bx
[3] U.S. 6 Month Treasury Bill (history)
https://www.marketwatch.com/investing/bond/tmubmusd06m?mod=mw_quote_switch&countrycode=bx
[4] U.S. 1 Year Treasury Bill (history)
https://www.marketwatch.com/investing/bond/tmubmusd01y?countrycode=bx
[5] Schwab Funds (https://www.schwabassetmanagement.com/) (subscription required for access)
[6] What is a Certificate of Deposit (CD) and What Can It Do for You?
https://www.investopedia.com/terms/c/certificateofdeposit.asp
[7] https://en.wikipedia.org/wiki/Savings_bank
[8] “The return of cash”: money market fund sector perks up on rising rates https://www.ft.com/content/7195fd47-b843-4025-9a5b-100b44f79b06
Disclosure: This information is for educational and informative purposes and shall not be considered a specific recommendation. Readers are advised to speak with their advisor at JL Bainbridge to determine their specific recommendations that meet their investment objectives and to review their portfolios. The material being provided is thought to be accurate. However, the information is compiled from multiple resources and may become outdated or otherwise rendered incorrect by new research or corrections without notice. J.L. Bainbridge & Co., Inc., is not a broker dealer and does not offer tax or legal advice. Please consult your tax or legal advisor for assistance regarding your individual situation. It should neither be assumed that future results will be as profitable or that a loss could not be incurred. For more information related to our firm, please see our disclosure brochures at jlbainbridge.com and https://adviserinfo.sec.gov/firm/summary/108058.
