For the first time in a long time, you can get a decent return from high-yield savings accounts. But beware of banking products—even those that have adjusted to match the yield environment we’re living in. Whenever someone offers you a guaranteed return, there’s always a catch. But there are various “Cash Alternatives” with similar or higher yields that don’t have the same drawbacks. This quarter, I’ll discuss some of those. If interested, I can build you and manage a segregated, diversified portfolio of these Cash Alternatives in place of part of the cash reserves you hold in the bank.
The Problems With Banking Products
High-Yield Savings Accounts
Yes, you can now get yields of between 4% and 5% with online high-yield savings accounts, which is great. But banks are playing games. I’ve seen banks not automatically adjust the yields on existing accounts along with the market rate when it moves up. If interest rates rise after you open an account, you may have to go through the hassle of opening a new account at the same institution to get the higher rate (or even call them and threaten to move your money). But banks will certainly drop their savings account yields ASAP as soon as rates fall! And unlike many Cash Alternative investments, bank accounts offer no upside when interest rates fall.
I’ve also seen that many banks have set up a tiered rate system ready to go so as soon as they’re no longer desperate to attract deposits they can instantly require larger balances to receive the preferential rates they’re touting.
Certificates of Deposit (CDs)
Short-term CDs are yielding higher than high-yield savings accounts. Still, any CD requires a lock-up period of some duration so you actually don’t have liquidity without a penalty. Not a great option for funds meant to be available for emergencies. And just know this: When a bank CD pays you x%, they turn around and invest your deposits in government-guaranteed T-Bills earning more. They’re just using you to fund a highly profitable and virtually risk-free trade. My argument is why not just invest in the T-Bills or other government bonds directly? And you could access the funds two days after any sell transaction with no penalty!
Consider Professional Cash Management
The simple fact is with Cash Alternatives investments, you may be able to earn a higher yield and even gain the potential for a bit of capital appreciation. Here is what the Cash Alternative landscape looks like today compared to banking products (from a return and risk perspective):
When building a Cash Alternative strategy for you, these are the building blocks available to me as I see it. Some of them take an active approach and so require, in my view, an investment advisor’s analysis. While some have lower yields than cash, those are precisely the investments that offer capital appreciation potential in the case of a recession or a drop in interest rates for some other reason. In small doses, they can play a role even in a “cash-plus” strategy. The art is really in constructing a mix of some of these securities with the goal of generating the highest after-tax total return possible for you personally, but with greater liquidity than income investments with lock-up periods. A traditional advisory fee would eat into this, but I don’t charge on the first $50,000 of assets I manage. So unless you maintain large cash reserves, you can effectively get a professionally managed Cash Alternatives strategy free of charge.
In addition, I’ll determine whether other alternatives (such as municipal bonds) are more appropriate for your situation because they generate tax-free income at the federal level (and possibly at the state level too). And if you’re an impact-oriented or values investor, I may have other Cash Alternative replacements for any funds with exposure to businesses you don’t want to support.
If you have questions about this service or the income options available today, reach out for a conversation.
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