Is There a Mythical Place to Get a Return on Cash?

"Hey Nik, I have a chunk of cash. I need the cash at the end of the year. My bank isn't paying squat. Is there a place to earn a reasonable return without taking any risk?"


While I would love to provide a solution, the short answer is no. There is not a safe place to provide a reasonable return for cash.


Here are some of the traditional places we might go to park our short-term funds...


Savings Accounts


Source: Bankrate.com


The above graph shows current savings account rates for two large financial institutions. The stated rates assume the funds are invested for a full year.


Short-term Corporate Bonds


Source: Koyfin


The above graph shows the dividend yield for the Schwab Short-term Corporate Bond ETF (ticker SCHJ as of 8/25/21). If an investor is willing to take some credit risk and potentially lose principal, short-term corporate bonds might be worth a look.


Money Market Funds


Source: Charles Schwab


The above graphic shows two of Schwab's prime money market fund offerings. Once a popular place holder for cash, money market yields offer next to nothing. (Net OER = net operating expense ratio).


Cash Management (sweep)


Source: Charles Schwab


The above graphic shows cash management yields (also referred to as "sweep"). This applies to the cash held in your investment management account. You'll find similar cash yields at most of the major custodians i.e. Fidelity, TD Ameritrade, etc.


Short-term U.S. Government Bonds


Source: Koyfin


The above graph shows the dividend yield for the iShares 1-3 year Treasury Bond ETF (ticker SHY, as of 8/25/21). We strip out credit risk as these bonds are backed by the full faith and credit of the U.S. government. However, an investor could be subjected to principal loss if short-term yields ticked higher.


CDs


Source: Charles Schwab


The above graph shows certificate of deposit (CDs) yields for various maturities. If you're willing to lock up your money for one year, you could achieve 0.15%!


But wait, it gets better. Consider...


You'll pay taxes on every dollar of investment income received. You could counter this by investing in tax-exempt municipal securities, but the yields are still paltry.


If you're working with an advisor on cash management strategies, you have to account for their fee (more on this later).


If you're using mutual funds or ETFs, you must account for the embedded expense ratios.


The above can make an already meager rate environment worse.


Here's an example:


Big Bert invests $100,000 in the TransAmerica Short-Term Bond Fund (ticker: ITAAX).


Big Bert needs the original $100,000 in one-year and he's hoping to generate some sort of return on his funds.


ITAAX internal expense ratio is 0.72%.


The advisor Big Bert is working with charges 0.90%.


ITAAX yield is ~1.69%.


Big Bert is left with virtually nothing for his efforts. Meanwhile, his broker has made off nicely for doing minimal work.


Low yields don't leave much wiggle room for clumsy arrangements.


What should you do with cash that you're not willing to take risk with?


Nothing.


We encourage people to keep the money in their bank account. It makes little sense to pay an advisor fee + internal expense ratios + taxes on the investment income.


If you're open to taking some risk, understand what you're getting into. See "Finding Investment Income in a 0% World."


If you're clipping a ~>3% return in a short-term fixed vehicle, know where the embedded risk is...


Credit Risk - investing in lower quality companies, often referred to as high-yield bonds.


Interest Rate (duration) Risk - the longer the maturity of the bond, the more sensitive to increases in interest rates.


Liquidity Risk - the inability to access your money, especially during times of economic or market stress.


People get burned when they fall for "5% guaranteed return stream with no risk" lines. That doesn't exist and is a recipe for disaster. If it's too good to be true, it probably is. If you watch the CNBC series, American Greed, 99% of the investment scams start with promises of outsized, guaranteed returns with no risk.


Low interest rates are great for borrowers. Higher interest rates are great for savers. Right now, we're in a borrower's paradise. There's no mythical place to safely generate a reasonable return on cash.

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