Financial Opportunities Uncovered: A Keeler & Nadler Family Wealth Podcast

Got some short-term cash to save?  Don't go stocks.  Go here.

• Andy Keeler

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So let's say you and your spouse are saving for a nice vacation that's still 18 months away.  We're talking Europe!  Or, a new model luxury SUV that just came out but you want to wait a year and let that new car depreciation decrease just a bit. (smart move!)  Either way, you want to save thousands of dollars over a 12 to 18-month period but you don't want it to just sit in a traditional savings account earning a whopping .10%.  That's not 10%, it's one tenth of 1%!   There's another 'but' here too.  But you don't want to invest in something too risky either because you're 100% going to Europe or buying that SUV!  Your host, Andy Keeler, has good news.  You have options to make it happen.   He and Keeler & Nadler's Investment Committee Leader, Mark Beaver, breakdown the whole world of money markets, CD's, bonds and even U.S. Treasury bills.   As Mark put it, these are short term, 'cash reserve vehicles' where your money can work for you while still minimizing risk.   And maybe you're asking, 'Wait, why not just put this cash with my stocks and mutual funds?'   They explain that scenario too.    So, listen to this episode first, make an informed, short-term plan for your cash and then start learning that foreign language for your trip or pick the color you want in that SUV.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations.

It is only intended to provide education about finance, tax, retirement and related planning topics. To determine which investments or strategies may be appropriate for you, consult your financial, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results.

Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Keeler & Nadler Family Wealth is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Keeler & Nadler Family Wealth and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Keeler & Nadler Family Wealth unless a client service agreement is in place.


SPEAKER_01:

Do you know what that bank savings or money market is currently paying you? I stress the word currently because interest rates are falling. In fact, the Fed cut rates three times last year, and yields on savings accounts, money markets, and certificates of deposits are falling along with it. Today, on episode 18 of Financial Opportunities Uncovered, we welcome back Mark Beaver, who heads our investment committee, to talk through strategies for chasing yield in a falling rate environment. Mark, welcome back. Thanks for having me back. So you may or may not know that money market yields peaked several months ago, with some money markets paying around 5.3% at that time. Money markets are like bank savings accounts from the standpoint that they are liquid and typically offer higher interest rates than checking accounts. But money markets are not FDIC insured. Mark, can you explain that important distinction?

SPEAKER_00:

Yeah, money markets are almost like a little bit of a blend between a mutual fund that you would invest in stocks and bonds in and something like a CD or savings account. So they're um really overnight loans between financial institutions, very, very, very short loans, um, but they typically have a little bit higher yield than you might find in a savings account situation. So while the short-term nature of all those little loans, um, probably not little loans, but all of those loans that are are short in nature um is low, low risk. You know, there's not a lot of risk there. You can't say that it's risk-free, you know, that the FDIC isn't insuring it. So sometimes people are are not comfortable with that.

SPEAKER_01:

I remember there was a period where there was a headline, I think it was, it might have been 2013, they were talking about money market funds breaking the buck. And the idea there is that these are mutual funds and they have a share price, and that share price is one dollar. And the concern was that if there were situations where the underlying investments fell in value and people needed to take their money out, that investors wouldn't get a dollar per share. They might get, say, 90 cents. Um what we saw last year, or maybe it was the year before, when Silicon Valley Bank basically went bankrupt. They were FDIC insured, but other financial institutions came to their rescue. And why would why would JP Morgan do that? They don't want to see banks fail because banks failing leads to concerns that JP Morgan isn't safe and people, everybody, everybody everywhere wants to pull money out of the bank. So there's a uh an interest for the other institutions to kind of help prop up that, I guess you could say, industry. And it would be similar with money market funds, where uh if there was a concern, um, while it isn't FDIC insured, I think it might be SIPC insured.

SPEAKER_00:

Yeah, there's some different types of backing to different financial instruments that have similarities to them, even if they're not the same. But yeah, like you said, there's there's going to be some industry support. Um it's like insurance companies. You know, if an insurance company goes up, someone else comes in, swoops up all those policies, make sure they they remain solid. So either industry support or even government support, if necessary. Uh, they want to have um the public have faith in the the financial system, of course. You know, so they would want something like that to to be okay.

SPEAKER_01:

Right. And I guess, you know, suffice it to say that depending on one's theories of impending doom, one could say that any investment has risk, some more than others, but money market funds we believe are on par with FDIC insured bank accounts, absent the eight-point font and legal disclosures to the contrary.

SPEAKER_00:

Yeah, I we think they're they're a really useful uh vehicle for uh alternative to savings accounts, especially if you're at a large bank and you've got significant amount of cash paying you 0.05%. Uh even with rates coming down, yeah. I know uh in the environment we're in now, you're still seeing plus or minus about 4% uh from money markets at a lot of places. So that means something. You know, when you've got$100,000, that's$4,000 roughly in interest versus basically zero in interest. So uh of course we want to be aware of uh any kind of risks going into something like that, but we feel like those risks are are fairly minimal. Uh obviously we'll we'll keep monitoring that and and conditions can change, but we we think that they're really good cash reserve vehicles.

SPEAKER_01:

So Mark and I are sitting across from each other at a table, and he I think he was uh reading my notes because the figures you just you just spit out were more or less identical to the ones that I was going to use in my example. I remember probably six months ago, a client came into the office and they had a bank statement. Uh it was a savings account statement, and it showed that they were earning actually to be on to be fair, it didn't show the interest rate. It showed the amount of interest that they earned in that period.

SPEAKER_00:

Okay.

SPEAKER_01:

And by showing that, you could back into the annual percentage rate. It turns out it was 0.1. Okay. And so in Mark's example, he he used$100,000. This particular client earning.1 would have earned$100 in a full year. The rates right now are say uh 4.4. The interest on$100,000 at 4.44 percent would be$4,440. That's a that's 44 times what they're earning now. So, you know, the the theme of this of this episode is really for you to understand what you're getting now and what's out there. So with the Fed lowering rates three times last year, uh, money market yields went from um, say, 5.3% to where they are now, 4.4%. They're continually uh falling as the Fed continues to lower rates. Where do they stand right now?

SPEAKER_00:

It really depends on where you're looking. You know, sometimes you go and you get some offers from the local bank for money markets, and they're good or not so good. You know, so it that it varies a lot when you're looking at bank offerings. Um, when you look to most of the major investment firms, Charles Schwab, we see them constantly. So um we know Schwab pretty well, but any anyone like that, Fidelity, so on, um, they tend to be pretty competitive with their money market rates. So um, you know, as we're recording this, uh Schwab's money market's a little over four percent. Um, that might tick a little bit lower as you know, they digest things from the last Fed meeting. Um, but I would say you know, you you're probably looking at around 4% on a lot of the bigger money market funds that are out there relative to what you would see in a lot of big bank savings accounts next to zero, like you said. Uh, and even at the money markets, those are going to be lower oftentimes.

SPEAKER_01:

A little lower. So without getting too far into the weeds, can you explain what factors influence money market yields?

SPEAKER_00:

So I I kind of think of interest rates and yields uh as like a building block situation. And and you sort of build on those building blocks based on the timing of the investment uh and the riskiness of the investment. So you this could be things like bank accounts, CDs, uh all the way through to bonds, and are these investment grade bonds or not so investment grade bonds? Is it you know government bonds? Um, and so when you look at some of these different investment opportunities for income like this, they could be money markets, but are basically just daily. You know, there's no real time factor to that.

SPEAKER_02:

Right.

SPEAKER_00:

You could sell it any day, it doesn't really make a difference. Completely liquid. Yep, in and out versus buying a 30-year treasury bond that you could still sell it, but that the the contract of that bond is a 30-year time frame. So there's a risk factor to that, uh, because a lot can happen in 30 years. So depending on the time element and the the risk element, you might demand more yield from that investment, you know, in in theory, at least. So if you had a one-day bond versus a 10-year bond, you'd hope the 10-year one pays you more in interest than the one-day one does. That doesn't always work out that way. We're we're kind of coming out of a weird inverse uh situation of that, but uh historically, usually you see that relationship. So um that's where you when you see the Fed lowering interest rates, they're kind of starting the base of that building block by saying, here's the Fed funds rate. This is the overnight borrowing rate that that people are gonna operate from. So that's sort of the bottom of the blocks, and then everything kind of builds off of that. So if that um Fed funds rate is say 4%, then if something's a little riskier than that, you hope it's a little bit more than 4%. Right. And then if something's riskier than that, you hope it's a little bit more yet. Uh so them moving that starting point up or down cascades or has a ripple effect across the rest of the fixed income investment universe from bank instruments to bonds, basically. Um, it might take some time for that ripple to you know make its impact. Um, but eventually it will.

SPEAKER_01:

When the Fed lowers interest rates, it's not a direct correlation to money market yields, CD yields, especially not immediately, but even say a month or two following that, you you wouldn't necessarily expect the decrease in the Fed funds rate or the rate cut, let's say it's one quarter of 1%, to equal the decrease in the money market yields. Is that fair to say?

SPEAKER_00:

Yeah. And I'd say the closest each of those investments are to that kind of base point, the more connected it's gonna be to those moves. So money markets would be fairly correlated to Fed, the direction the Fed uh rate cuts or hikes go. Um, but again, then you start going further out and you're looking at you know a 10-year bond, it's not gonna move the next day necessarily um uh step for step with it. So I'd say the closer you are to center kind of on that, uh, the more it's gonna move along with it. So that you would see a fairly close connection to something like uh a money market, um, even uh three-month you know, treasury yields are are pretty close. You know, there's sort some connection there. Um CDs kind of CDs are a little bit weird sometimes because it's sort of how much uh is the bank trying to entice new money into the bank also, so that can keep you know its distance sometimes.

SPEAKER_01:

I guess where the rubber meets the road is really our strategy to deal with rates as they decrease. It's a well-known fact that the Fed plans to continue to cut interest rates. Obviously, it's data dependent, but the general trend, they raised rates dramatically. Now they're cutting rates. Um, we don't know exactly when or by how much, but that's the intent. So for those that want to keep some dry powder for emergencies, a large purchase, uh European vacation, whatever it is, what are some strategies we use here at Keeler and Nadler to maximize the return on our clients' shorter-term buckets while also keeping risk to a minimum?

SPEAKER_00:

Yeah, we like to say if if you know you're gonna use the money in less than 12 to 18 months, that's that's not something you invest. You know, you don't put that in the stock market uh as much as we love the stock market.

SPEAKER_01:

You don't put it in Bitcoin?

SPEAKER_00:

Yeah. Maybe maybe we didn't make a good enough case in the last couple of episodes. I don't know. But um, even even bonds, while bonds obviously have much less volatility, that's not really where we would park you know short-term money. Um, so you we'd be looking at things like the money market, uh, high yield savings, you know. So you have to get a little bit more creative with your savings versus a lot of the brick and mortars paying nothing. Uh, some of the online-based ones, if you're comfortable with something like that, might be closer to the money market. Usually they're a little below, but it's closer. Um, so I I kind of think of it as there's a floor on cash that I want to earn at least this much. You know, so in today's environment, it's probably three to four percent. And if I'm not getting three to four percent on a significant amount of cash, I that's a wasted opportunity to earn thousands of dollars, like in your example. Um, you know, so I think that's where you really want to shoot for. Eventually, if it's okay, I can get four percent here versus four point zero five over there, you know, right? That's not really moving the needle so much. But going from zero to three and a half, four, you know, that's that's where you want to be looking at.

SPEAKER_01:

So I guess what I'm interested in is let's say, for example, I have a hundred thousand dollars, I'm earning four point four percent. I'm okay with that now. But the the writing is on the wall that that four point four percent is gonna drift lower in one year, maybe that's I don't know, 3.8. What are some strategies that folks can use to more or less lock in that higher, say 4% or 4.25? Yeah. Where are we gonna find that?

SPEAKER_00:

Some of the positives, you know, of the the money market, like we said before, daily, in and out, nice and easy, that's a that's a nice feature to them. If you're trying to lock in on an interest rate because you think the rates are gonna get lower, that's not gonna really deliver that so much. There might be some lag, but it's gonna kind of keep going with things. So uh if you you really believe that rates are gonna go lower, that's when you want to start buying things that do have some time or some term to them. Um, you could buy a 12-month CD, you could buy um treasury bills that are six months, nine months, 10 months, you know, you can you can really time it out that way, and you know what the yield is when you buy it, you know. So you know what that yield is. If rates go down, you might actually make a little bit more because someone wants that higher yield that they can't get anymore. Um, the risk there is you're wrong and rates actually don't go down, they go up, and the opposite could happen, you know. So I would say if it's something like vacation money set aside or something I know I'm gonna use in the real short term, oftentimes, or at least right now, the yields are close enough on those things. I probably wouldn't play the what direction to rates go.

SPEAKER_02:

Right.

SPEAKER_00:

Because that's pretty challenging to do. We've seen some major uh bank CEOs try to guess that that are way smarter than we'll ever be, and they don't get it right either. You know, so I think uh short-term money, get the get the right yield that we want, you know, so we're in that range and don't try to outsmart it too much after that.

SPEAKER_01:

If we start to dip our toe into bonds, whether they're super short-term bonds, high yield bonds, floating rate bonds, where it's uh, let's say an ATF or a mutual fund where they've essentially put together a basket of loans to lower tier credit companies like probably shouldn't name names, but companies that sell merchandise for under a dollar. That would be an example. They're not general electric um or ATT or Amazon. So they're not going to get the same terms in in terms of a loan that those bigger companies would. You can actually invest in those. And the yields might be pretty high, but there's some risk to that company defaulting on that loan. So you reminded me a time or two that no two yields carry the same risks. I mentioned chasing yield earlier, and we use that term for folks that, you know, their ambition is to find investments that have the highest yield or higher yields. And, you know, kind of the moral of the story of this episode is if we think that money market yields are going to continue to decline, where where can we find yield? Um, but if you look at different kinds of investments, different kinds of bonds, they each carry different risks. So can you kind of take me through that yield risk continuum?

SPEAKER_00:

Yeah, a phrase that I know I've I've said uh a lot of times investing, there's no free lunch. And um so if you're getting a higher yield out of bond A than bond B, there's a reason for that. There's a risk involved with that. They're not just gonna pay a higher rate just for fun. You know, there's a there's a reason that because they can't get a loan for less. You know, that's the reason. So just like if you went to the bank and said, hey, I need a$100,000 loan, they're gonna see how likely you are to pay them back. And if they don't feel great about it, then you're gonna pay them a higher rate. You know, you got a lower credit score, higher interest rate. Same thing's happening when you're investing in bonds. The ones that are paying a higher rate, there's a reason for it. And, you know, so it's not just see the high interest rate, go for the high interest rate. It's it's it's it's kind of attractive to do that. Um, I think the idea of collecting income off of an investment is a attractive concept. Uh, and we like that too. You know, income is certainly a component of an investment return that we we consider, but it has to be justified, you know, income that we feel like um, you know, fairly safe in, especially just given the timing of what are we trying to do here. Again, back to the examples we were describing of this is my vacation money I'm setting aside for six months from now, you know, I don't want any risk to that. Certainly. If it's money I'm using a few years from now, that's a little bit different. Uh, you know, so that's probably where we're talking about different areas of bonds, like you said. So this could be corporate bonds, which are just loans to corporations, just like it sounds. Um, are these triple A rated companies? Are they not rated companies? You know, and if I'm going down the quality scale to companies that aren't so good on the balance sheet, then they better be paying me a lot to justify that risk. Um, and right now in today's environment, there's not a huge difference there. So in in investment world, they call that the spread. So if you had two otherwise similar bonds and company A, you know, super company, tons of cash, low amount of debt, they could pay this thing off, you know, five times over, no big deal. Um, you know, say they're paying you 5% right now. And company B, I don't know, they're looking a little iffy. So their ratings are a lot lower. They're paying seven, seven and a half. That's the the spread, the the seven and a half minus the five. They're paying an extra two and a half percent. So that sounds great, but the likelihood of them defaulting on that payment and not giving you your money back is higher, you know. So that's the risk that you're you're trying to navigate. Um, so we look at that sometimes historically and say, how big is that gap? And if if it's a tight gap, you're not getting paid enough to take that risk. And so it's pretty tight right now, historically. Um, so sometimes we we're willing to take that risk a little more when we see a larger gap between the high quality stuff and the less quality stuff.

SPEAKER_01:

Mark, thanks for uh helping us understand this complicated subject and uh chasing yield. Uh, we're out of time. Thanks for joining us. And as always, we thank our listeners. I'm Andy Keeler, and this is Financial Opportunities Uncovered, brought to you by Keeler and Anather Family Wealth. If you have questions on anything you heard in this episode, find out more on our website, KeelerNather.com. And if you have an idea for a future episode or questions about what you've heard, connect with us on LinkedIn.

SPEAKER_00:

The opinions expressed in this program are for general information purposes only and are not intended to provide specific advice or recommendations. It is only intended to provide education about finance, tax, retirement, and related planning topics. To determine which investment strategies are appropriate for you, consult your finance, tax, or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember investing involves risk and possible loss of principal. Please seek advice from a licensed professional. Keeler and Adler Family Wealth is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Keeler and Nadler Family Wealth and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Keeler and Adler Family Wealth unless a client service agreement is in place.