Improve your portfolio with one tweak
beware of "free"
I look at a lot of portfolios. It’s riveting.1
I’ve written before about how the bank is screwing you (here) by not giving you any interest on your money and keeping them spread.
The same thing can happen in your investment portfolio.
How I noticed
What’s currently happening
Improving other money markets
What to do
More money, more problems
Summary—check that the excess cash in your investment portfolio is in a money market. You want to earn ~5% versus 0% that cash gives you and more than “proprietary” options.
How I noticed
During any engagement with a potential client, I review their investments and other financial aspects.
I continually saw portfolios from Schwab with clients invested in their proprietary money market fund. This is typically fine.2 Most investment portfolios have ~3% of the cash in a money market, so it doesn’t earn 0%.
A money market will invest in US Treasurys and other short-term debt vehicles, returning more than cash sitting in a checking account.
I saw that the money market yield Schwab had was way lower than what a typical money market fund returned out in the market. Also, the amount in the portfolio was higher than a standard portfolio, averaging over 10%.3
People were losing out on higher yields and, in most cases, underinvested and sitting in the cash/money market.4
Other competitors do this all the time. Whenever you see a proprietary (in most cases, the money market fund is named after the company), you will want to check your rate.
The SEC saw this behavior and subsequently sued Schwab, and they paid a $187 million fine.5
What’s currently happening
The Schwab case was egregiously bad.
Now, I see investment money markets 1-2% below where the market is at ~5%. For example, you could buy a US Treasury for 5%. Some money markets do that for you for a nominal fee.
In not-uncommon situations, I see competitors having clients in subpar money market vehicles earning 3-4%.
I’m not sure why firms do this.6 It should be the policy to put clients first, but that would be too easy.
Improving other money markets
I’ve met a slew of people using Capital One, Ally, and Amex money market accounts. They’re, for the most part, yielding ~4.25%. Compared to two years ago, that’s a pretty great yield!
Except they can take any money you give them and invest in US Treasurys over 5%, making a cool 0.75% off your money. I don’t cast blame on those prior firms. People are gladly coming to them for advertised higher yields. There is no assumed inclination in investing that they’re going to do the very best for you.7
Take that same money and go find a better money market yield.8
More money, more problems
You will pay a higher tax percentage if you’re doing well and making great money. Any excess income from money markets will be taxed at your income rate. In some cases, that can be 40%. Ouch.
There are tax-exempt money markets there. They yield a little less, usually ~4%, but if all of the interest is tax-exempt, your tax-adjusted yield is way higher than if you were to get a 5% money market.
For example, if you’re in the highest tax bracket and you put $100k into a 5% money market, you’ll only get $3,000 after taxes ($2,000 goes to the government9 ). You can put that same money into a tax-exempt money market earning 4%, and boom, now you’re making ~$1,000 more.
Also, if you’re looking to invest that money for more, municipal bonds are returning over 5% now. That’s a tax-adjusted yield of over 7% if you’re in the highest tax bracket.
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I love telling my fiancee about proper portfolio management, the efficient frontier, and optimizing investments.
I’m. A. Catch.
Schwab Intelligent Portfolios (“SIP”). Each of SIP’s model portfolios held between 6% and 29.4% of clients’ assets in cash. The amount of cash that each SIP model portfolio contained was pre-set so that Respondents’ affiliate bank would earn at least a minimum amount of revenue from the spread on the cash by loaning out the money. In significant part because of the revenue received from the spread on the SIP cash allocations, Respondents did not charge investors an advisory fee for the SIP service. But Respondents did not disclose that, under market conditions where other assets such as equities outperform cash, the cash allocations in the investors’ portfolios would lower clients’ returns by approximately the same amount as an advisory fee would have.
It’s typically good portfolio management to fully invest and allow time in the market to compound your money.
Well, beyond capitalistic tendencies. But you’d think that firms would put their clients first. Ha Ha Ha. Except, they routinely don’t. My guess is they’re pocketing the spread to the detriment of clients. And they argue, “We are fiduciaries and do the best for clients.” Yawn. Sure, pal.
This gets into the whole suitability vs. fiduciary standard. How much time do you have…
Sorry, I’m not going to tell ya!
Keeping it simple here.