It has been many years since I co-founded BestCashCow, and I have heard just about every excuse possible for keeping your cash in low interest earning savings and money market accounts, checking accounts and CDs.
However, there is a new refrain that I am hearing and it is actually really irking me. It goes something like this.
“Well, I have been meaning to move my cash out of Wells Fargo but I haven’t gotten around to it and I am sure that if rates are going up, they will have to become competitive soon so I am just going to leave it there.”
The only part of this quote that is even remotely correct is that rates are, in fact, going up. The reality is that the large money center banks are currently flush with cash from other funding operations, and from others taking the same wait-and-see approach. Today, the big banks are able to raise more money than ever before through capital markets to fund their lending operations, and they now have more money in deposits than they have ever had before.
These banks are counting on being able to successfully sell the pitch that they are delivering a better service and therefore customers should be willing to continue to accept zero interest rates for the service. My personal view is that this pitch may continue to be compelling for depositors of small amounts. For those holding $15,000 in a deposit account at Chase you gain access to their ATM network, their branch network, notaries and maybe safe deposit boxes, and even then you really need to require these services to justify forgoing over $400 in interest annually.
But, anyone holding over the bare minimum for the services that they need from a money center bank is not adopting best practices in relation to their finances.
There are banks and credit unions where you live and online banks that compete for your savings. In fact, there are local banks, credit unions, online banks that are competing for your checking by offering far better rates and often times the same services. Seek them out now.
Jack Bogle pioneered the investing world and the mutual fund industry. He taught the world that they should not be paying fees for performance, and that seeking to be average will outperform over the medium-term and the long-term. He was correct that the extraordinary performance of a single manager is seldom, if ever, sustainable and that their fees will exact major damage for the investor.
I have been amazed that the best business schools in the country – Columbia, Harvard and Stanford – are still full of aspiring analysts and money managers in the post-Vanguard era. all still seeking to open their own funds. More amazing is that many of these folks are still successful in raising capital (many aren’t).
Ever since I co-founded BestCashCow, I have frequently been asked if it is my view that people should avoid the stock market. That has never been my view. Over the long-term, investing in a broad and diversified stock market portfolio, and only just matching the stock market is the single best way to build wealth. My view is that you should never be 100% in the stock market and that you will never know when you will require liquidity. I’ve now lived long enough to know that many who were overinvested and forced to sell in October 1987, early 2001 or early 2009 were, without exaggeration, slaughtered.
So, while you should never be 100% in the market, you should be in the market in some form. And, for those who don’t know how to build their own portfolio through an online broker, an extremely low fee fund like the Vanguard S&P 500 Index is a much better way than to pay fees upon fees upon fees to invest with someone who has put together a couple of good years at the track. And, running parallel with forays into the market, of course, must be the wisdom to keep resources out of the market and in savings and CDs. It’s that dual strategy that will always be a winning strategy.
Occasionally, financial planners reach out to me and want to connect on LinkedIn and social media. While I do not hold financial planners in very high esteem since, they are always selling their latest product. I occasionally connect in order to further the reach of BestCashCow.
I do not often engage in debate with these folks, but sometimes I see information shared that is so dangerous to investors and their retirement planning that I need to say something.
As dangerous as individual bonds may be, they are in principle much less dangerous than owning a bond fund, even a high quality bond fund, since you can always just hold a bond until maturity without having your proceeds drained by a manager in a down environment. At maturity, you get out at par, whereas you may never get out of a bond fund at par.
The 10-year US Treasury went to 3.20% last year. As interest rates rose, bond prices fell. Market turmoil over the last 2 months has lead people to seek safe haven in bonds and that has brought US Treasury rates back to 2.60%. But, this is a blip. It is a fleeting moment where you should be selling bonds and bond funds. It isn’t a time to buy. The Federal Reserve is still normalizing interest rates and in that environment the 10-year is still going up.
These two graphs from the St. Louis Fed are the best warning I can give. The first, that dates back to 1960, shows how abnormally compressed the 10-year Treasury is by any long-term measure. The second, dating back only 10 years, shows how quickly 10-year US Treasury rates can reverse and rise (even in an environment where interest rates are low).
The “buy bond funds” crowd came out of the woodwork in dramatic fashion in mid-2010 as the 10-year fell from 4.00% to 2.50%. Those who followed this advice saw their funds collapse when interest rates reversed and were in a world of pain in January 2011. While those folks found some opportunities to get out later, opportunities which buyers today may not get.
