One silver lining of this current market cycle is the increasing relevance of bond yields. For years yields have inexorably marched downward, which has resulted in generally favorable total returns for bonds but not a lot of income. Now that bond prices have fallen somewhat, yields are much more attractive than at any time in recent history.
As a consequence, yields on things like CDs and high yield savings accounts have risen sharply, and the relentless pursuit of the best rates has turned into the equivalent of a grail quest for many investors with cash on the sidelines. To save you time and trouble, I am happy to present the best, most dominant solution for your cash today. You can get two point nobody cares percent by opening an account at your local It Does not Matter bank!
I am intentionally being provocative, but I think for good reason, so please hear me out. Now, I am an optimizer, and I fully understand that if you have a need to have cash around, it makes sense to get the best possible rate. However, there comes a point where the effort it takes to find the best yield can take away from focus on the big picture, or even be counterproductive- for example, too many credit pulls from new bank accounts could reduce your credit score and make the mortgage you are saving a down payment for much more expensive down the road.
I would go as far as to argue that the pursuit of the highest yields on cash is always irrelevant. If the time horizon is short, the slight delta in yield from one account or money market fund to another does not matter much at all. If the timeline is long (or undefined), you should think about not being in cash at all and putting your money somewhere with a better chance of not just keeping up but beating inflation in the long run.
There’s one good reason to keep a lot of cash around: you have a definite or likely need to spend money on specific large expenditures soon. There are many reasons to keep a lot of cash around which in our opinion are not so valid:
- Some people do not like to be invested when the market does not “feel right” (hint- it never feels right).
- Some people want to wait to invest until there is some certainty- but by the time you digest any good news, the market will have already reacted.
- Some people just want the safety and security of cash, but even the highest yielding cash accounts mean that any kind of inflation is going to rapidly erode your savings.
Any amount of time or effort you spend to achieve an extra 0.2% per year on cash would almost certainly be better spent focusing on what really matters. Indeed, the real grail quest we should pursue as investors is how to cultivate a meaningful long-term real return, represented by attractive total returns from yields, interest, dividends and price appreciation after considering inflation. There’s little evidence that any sort of cash or cash equivalent will help you do that in the long run.
If you need to hold a large amount of cash, we do have an array of solutions here at Telarray. Our default choice is a brokered money market fund at Schwab that holds nothing but extremely short term US Treasury instruments. From there, we have a few more options with more risk/return all the way up to an ultra short-duration bond ETF that can hold a wide variety of securities but can (and does) fluctuate down in price if market conditions deteriorate. We can also buy brokered CDs and even Treasury Bills depending on the situation, but usually we don’t see a reason to take additional risk or complexity beyond our standard Treasury-based money market fund for cash holdings.
We don’t spend a lot of time talking about the options listed above, because we don’t want to take your focus off allocation to your well-diversified portfolio at Telarray. Your managed portfolio includes an allocation to short and intermediate-term bonds which provide some security and a source of cash in bad stock markets with no need to chase returns on cash. We cannot guarantee anything specific about your portfolio, but as the months turn into years and years turn into decades, a well-diversified portfolio of stocks and bonds is very likely to outperform even the best high yield savings account in the world.
