>> Eric Schurenberg: Hello, I'm Eric Schurenberg, Moneywatch.com editor in chief, and I'm joined here by Jill Schlesinger, Moneywatch.com's editor at large, and special contributor, Ray Martin. On today's Reality Check, the topic is cash is trash -- or is it not?
MUSIC Alright, today let's talk about an investment that holds nearly four trillion dollars and probably doesn't deserve to. Money market funds are yielding fractions of a percentage point, and yet, a lot of people have their money parked there and are looking for better places to put it. What should people be doing, Ray?
>> Ray Martin: Well, I think first, if you have a lot of money in cash and obviously the, given the money market fund levels -- 3 and a half trillion to 4 trillion dollars or so -- many individual investors do -? you should go to your brokerage fund's online screen, look at their money fund rate board, for example, for Fidelity or Schwab, and look at the money fund that you're in, look up a ticker symbol in the actual fund you're in now, and look at the seven-day yield on your money fund. You're probably going to find that you're earning close to zero. In other words, one hundredth of one percentage point on that ?- virtually no interest at all. That's the first thing to do, is assess that, and then look at your other money fund options in your, that are available in your brokerage account, for example. But you're going to find that they're all at such incredibly low rates because we're at a zero-interest rate policy here in the U.S. It's not a fault of your brokerage firm; it's just the underlying investment vehicles they buy are yielding very low rates here, and there are fixed costs to running money market fund. Most companies are subsidizing those funds, and you're getting nothing to be there -? nothing. And now you have to ask yourself the question: is getting nothing in this fund -- which is not likely to ever lose money, but it's not guaranteed that it won't -? is that the best investment option for this cash for me at this time, given my goals and objectives? That's the first place you start.
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Schurenberg: OK, good. Jill, so ?- but people need liquidity, want to be safe. What's the alternative?
>> Jill Schlesinger: The difference here is making a differentiation between your emergency reserve fund ?- the money you must keep liquid, your six- to twelve- to eighteen-month to two-year ?- whatever you need to have in your safe money account ?- and whether your cash position as part of your overall asset allocation could be doing something better. So if we look at all those trillions of dollars that are in money market funds, we have to make a distinction between those two. If you are just looking for your sleep-at-night money, I would suggest that, yeah, you know, go get a CD and ladder some CDs and maybe get an insured money market or see what you can do out there, but don't drive yourself crazy either. This is not a lot of money for most people, and that's a good thing to have liquidity. You're not supposed to get paid a lot to have access to your money. If you are now looking at this other money that's sitting in cash because you are a freaked-out investor, that's a totally different story, because as you know, you can make a little bit more in your cash reserve fund by taking on some more risk. Whether you want to take that risk on is up to you as an investor.
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Schurenberg: Alright, so, what can you get for taking on a little bit more risk, Ray?
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Martin: Well, you have to think about it in the context, and this is what Jill and I were talking about earlier, and I said that, on your emergency fund, no, I don't think you should accept zero as an interest rate for that liquidity because you are taking on risk in a money market fund, and you can take less risk ?- you can actually get an FDIC-insured money market account through a bank and maybe earn an extra point one to point three percentage points on your cash. FDIC-insured money market account, which is not a money market mutual fund, it's a very different legal entity; you're getting exposure to the bank's balance sheet and FDIC insurance wrapper around that, which still exists for accounts per person up to 250 thousand dollars. So there you can get an improvement there. Or, you know, your emergency fund -- it's not likely that you'll need to use it all on day one when you have an emergency fund, when you have an emergency, rather. You might need to use some of it in six months after the emergency fund, in twelve months after the emergency, or eighteen months after the emergency, and there you might be able to go out with this, Jill suggested, a laddered portfolio of CDs, and earn one to two to two and a half percentage, full percentage points. That's a big difference. That can be, on a 30,000-dollar emergency fund, you could earn an extra six or seven hundred dollars per year. And you know, to me, that's not petty cash; matter of fact, with me, there is nothing petty about cash at all. So if you can earn a few hundred extra dollars, that could pay your annual auto insurance or your homeowner's insurance. You'd have to kind of look at it as an accumulation of advantages. And I know they're little things, and they take effort and time to do that. The bigger question, if you have, you know, twenty-five or thirty percent of your portfolio in cash because you just don't know that to do; you don't trust the fact that the market's run up fifty percent, and from here all the easy money's been made, and it won't be made again going forward, and it's riskier out there, you do have to look longer term. And folks that say, "Well, I'm not touching that; that's not my emergency fund, and I won't touch that money for five years or so" -- you know, high net-worth, high-tax, taxable investors -- should still look at municipal bonds issued by their various states or even branching out of their states to states with stronger financial positions, like Alaska and Texas, for example ?- relatively stronger, you know, for example, for a New York investor. You can earn three percentage points if you go out five or six years on the maturity curves.
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Schlesinger: But Ray, you know what? To quote that great congressman the other night --
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Martin: And that's tax-free, by the way, three percent tax-free.
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Schlesinger: -- "Those people lie." And we know it, because they say --
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Martin: Talking about the ratings.
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Schlesinger: No, I'm not talking about the ratings; I'm talking about investors, because they lie to themselves. They say, "Oh yes, I'm going to keep my money in there for three to five years, and everything's going to be fine, and I won't touch it." And then all of a sudden the stock market starts to go up, and all of a sudden interest rates move against them. And what is that natural inclination as human beings? What is it? They look, and they say, "Uh, those bonds killed me, and I could have been in the stock market."
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Martin: But here's to the point on that. That's if you just took what I said as I told somebody to be a hundred percent in one bond maturing in five years, and I didn't say that. What I am saying is it's part of a portfolio construct. Your portfolio would have some cash, it would have some bonds, and it would already have some stocks in it, and in that construct --
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Schlesinger: But Ray, you know that they, that most people have, don't have that kind of discipline, which is why they hire people like advisors ?-
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Martin: Which is why they hire an advisor ?-
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Schlesinger: -- exactly.
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Martin: -- and an advisor puts them in a disciplined place. People like you and me help people get there, and then when they call it, freaking out with, "Hey, look at stocks; should I sell my bonds?" you say, "You already own stocks in your portfolio in an appropriate percentage, and let's focus on that, and that's okay. And you own these bonds because it generates an income stream for you, which you can use, and you don't have to go selling stocks when they're out of favor in a particular cycle." So that's the construct that you do that in. Now, you know, it all gets winnowed down when you say it on a sound byte on TV. But somebody working with an advisor or very experienced here will actually have that construct put together, and it'll work for them.
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Schlesinger: Eric, how would you see that -- you know -- how can we help our Moneywatch user who's watching this, who doesn't work with an advisor, stay disciplined about that.
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Schurenberg: I think the takeaway is that cash is cash, and an investment that goes farther out the maturity spectrum is not cash. It's the investment where you want to get a little extra yield, and you're willing to take a little extra risk. You have to face that. You can't say, "I want it. I, I want to keep my money totally safe, and I want to get three percent." That option is not available to you right now. There is no free lunch in this business. You have to take risk if you want to get higher returns. And these days, you don't get paid much for being really safe. And that's your Reality Check.
MUSIC
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