Is Your Cash Costing You Money?

Over the past decade, investors in stocks have done quite well for themselves. The long bull run has rewarded those who stuck it out in the market. However, if you were the conservative sort, or someone who was so spooked by the Great Recession that your strategy was to be as low risk as possible, your returns were almost certainly exceptionally poor. Cash, CDs, shorter-term U.S. Treasuries -- these have not been good places to park your funds.

However, as Motley Fool Answers' Robert Brokamp explains to co-host Alison Southwick in the "What's Up, Bro?" segment of this podcast, conditions have changed. And while it's looking like the Federal Reserve is unlikely to do much interest rate boosting in the near term, there are now places where the cautious can earn a reasonable return. You just have to get out there and look.

A full transcript follows the video.

This video was recorded on March 12, 2019.

Alison Southwick: So, Bro, what's up?

Robert Brokamp: Well, Alison, likely these days you've probably seen all kinds of stories about how we've reached the 10-year anniversary of the start of the current bull market which means basically the end of the market dive that happened during the Great Recession. The market bottomed at the beginning of March of 2009. It reached 10 years. It's been a fabulous time to be a stock investor. The S&P 500 averaged around 17% a year. Fantastic!

Unfortunately, it's not going to...

Southwick: Here comes the "awfulizer"! Here he is!

Brokamp: No, it's not! This isn't awful. I'm just saying unfortunately over the last decade...

Southwick: OK! OK!

Brokamp: ... it hasn't been such a great time to be a "cash" investor because they drastically lowered interest rates as a remedy to the Great Recession. Back in March of 2009, looking at the one-month Treasury [which is kind of a proxy for cash], it was paying 0.1%. Now starting in 2015 the Fed started raising interest rates. There were four hikes last year, so as of now you can get 2.5% on a one-month Treasury. I bring this up for two reasons. No. 1, the Fed is likely to pause at this point. Even toward the end of last year the Fed was suggesting that there were going to be two hikes this year.

A lot of that has changed. A couple of weeks ago, Chairman Jerome Powell [chairman of the Fed] told Congress that at this point they're going to take a wait-and-see approach to rates, partially because of what happened in the stock market toward of the end of [last] year, but also because growth around the globe is slowing, particularly in Europe and China.

[In addition], inflation has been really low. When you talk about inflation, most people think of the Consumer Price Index. What the Fed pays attention to is something else. It's called the Personal Consumption Expenditures Index. They look at the core [which takes out food and energy]. The most recent reading is 1.9% -- down from about 2.5% as of somewhere in the middle of last year -- so inflation is actually going down.

At this point, if you look at what the market is predicting about interest rates from the Fed, there's a greater chance that rates are going to get cut again this year than they're going to be raised. Most people expect that they're going to stay the same.

What does that mean?

That means right now you actually can get some decent rates from things like Treasuries [short-term Treasuries, one-year CDs, two-year CDs, three-year CDs]. People have been putting off locking their money up that way because they figure rates are going to keep going up. Now might be a time to consider grabbing some of those rates while they're still at this level.

That brings me to my second point and that is most people are not doing it. The vast majority of cash in this country is still sitting in checking accounts, savings accounts, sweep accounts [and I'll describe what those are in a second] that are paying 0.1%, 0.2%, 0.3% when you could be earning much more. In fact, banks and brokerages are making millions off of people who are sitting there in low yield and cash. Jason Zweig at The Wall Street Journal has covered this a couple of times over the past year.

In August, Jason wrote this article where he pointed out [something] brokerages have been doing. Let's say you sell a stock and you have that cash in your account. Often they'll put that in money market funds, which these days are yielding 2.0-2.5%. What a lot of them have been doing is taking the money out of those funds and putting them in a "sweep account," which is more like a bank account, but they don't often hold it. Instead, they farm it out to another bank. The bank pays the brokerage 1.5-2% but you're only getting that 0.1-0.3%. They're pocketing the difference. This is how some of these online brokerages or app-based brokerages that offer free trades make money. It's because that cash sits in your account earning nothing, but they're able to earn a little bit of money on it.

The bottom line here is don't let them do it. There are many ways to earn 2.0-2.5% on your cash. A couple of places to look. Of course, The Ascent, which is a Motley Fool company where you can get various ideas for where you can get good yields on savings accounts, checking accounts, money market accounts. Also reviews on credit cards and mortgages.

[Another place to look] is your local credit union. There are actually many credit unions that will pay you up to 5% on your checking up to a certain amount, like up to your first $2,000 or $2,500, so you want to look at what's in your area. And for your brokerage account, probably the best bet is a money market fund, which is different than a money market account. A money market account is offered by a bank. FDIC insured. Very safe.

A money market fund is a mutual fund of short-term Treasuries and short-term debt. Still historically very safe but not guaranteed, so you're taking a little bit more risk. But if you go to cranedata.com, every day they will list the top five yielding money market funds for taxable accounts and the top five tax-free and top five for institutions.

These days the best rates are coming from Vanguard, Fidelity, and those folks, and you can get 2.5%. Not a whole lot of money, but it's still better than nothing, and if you have a lot of cash sitting around in your emergency fund, why not make that extra $100, $200, or $300?

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