November 2022
Currently, the money market offers a 3% rate, and a six-month Treasury Bill is close to 4.5%, so there is a decently high return on a relatively short-term investment. Bryce encourages listeners to consider the risk associated with the length of an investment, otherwise known as duration risk, because there are situations where shorter investments maybe appropriate. Bryce discusses a great example where a one-year Treasury with a 4% return rate may be less risky than a two-year CD because you can sell without being locked into a bank’s terms, which can make your money inaccessible for a long period of time.
For those curious about shorter-term investment options, Bryce encourages investors to consider some of the options discussed in this episode because a return in 6 to 12 months might be a better option than letting money sit in the bank and getting nothing in return.
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Check out past episodes of The Financial Commute below:
Ep. 9 The Downfall of FTX: Why FOMO Hurts Investors
Ep. 10 Why is the Used Car Bubble Bursting?
Hello, everybody, and thank you for joining us for another episode of The Financial Commute. I'm Chris Galeski, your host, joined by Bryce Snell, Wealth Advisor at Morton Wealth, Bryce, how you doing today?
I'm good, Chris. Thanks for having me.
Yeah. You know, this year has been so fascinating from a number of perspectives. We've talked a lot about interest rates and inflation and stock market volatility even recently, the fall of FTX, one of the crypto brokerage firms. But as we're heading towards the end of the year, you know, there's a lot on people's plate in terms of getting organized with finances or reevaluating life decisions and different things that they'd like to do.
I was also reflecting back on the Federal Reserve and how much they've raised interest rates this year. So if you go back to the beginning of the year, interest rates were close to zero. They've raised rates a number of times by three quarters of a percent, I think four times in a row. So the target rate right now is between 3.75 to4%. As we are nearing December, there's talk of the Fed continuing to raise rates by another half a percent or three quarters of a percent. But now that rates have come up, what type of opportunities has that given clients now that they probably haven't had in like 15 or 16 years?
Yeah, that's a good question. I mean, rates have come up a lot, but we're starting to see the Fed really just trying to answer towards inflation and trying to combat inflation. And so what people are seeing is that the market gets really volatile, when the Fed is increasing interest rates. And so there's opportunities there that we see for a lot of our clients, especially in the short term, if they need someplace to stash money, we kind of see cash and cash equivalents as a really good place to get some of that return that is coming off of what the Fed is doing with the interest rates.
Yeah, it's amazing, right? I mean, cash for so long has been earning zero. I mean, you and I have been working together for about five years now. And the number of conversations we've had over the years in terms of, you know, what's your cash or what's your money market earning? And, you know, we've had to reply, I don't know, half a percent if you're lucky.
Now, clients can get, what, close to 3% in money market? I think a three month Treasury bill is a little over 4%, a six month Treasury bill is like close to 4.5%. Yeah. So if clients have money in cash, they can really earn a decent return now, right?
Yeah. There's a lot of education around cash now. I'm sure you're familiar with those clients who just kind of stash their money under the mattress. Right. So they're putting money into their savings accounts, making about 1% or less than 1% or whatever the case may be, and not really understanding where the other opportunities are. Now they're starting to learn, especially with things like TreasuryDirect.com and opportunities where you can actually invest yourself into Treasury bonds.
People are learning that there are a lot of ways to get that higher return. And one of the things that we talk to clients about is what do you need in the short term versus what you need in the long term? And if you're needing some type of cash in the short term and there's a way that you can put that away and still get a higher return on that.
It's great to be able to plan for something in the next 3 to 6 or even 12 months and not have to take on the risk that you'll find in the stock market.
Yeah. So when you think short term, you think of it as less than 12 months or less than two years. What do you think of short term?
Yeah, so I think of short term as just one year or less. So less than 12 months is usually the aim for short term. And when we're looking at short term costs, you're looking at things like maybe you have to buy a new car in the next 12 months or maybe some home improvements need to be done, right?
So home improvements, new car, some of those life expenses that you just know are going to happen in the next 6 to 12 months. Yeah, it's amazing how much, you know, people can actually earn on cash now compared to compared to what they've been able to do. Some of the misconceptions, though, automatically, when clients think of safety, they tend to think about CDs or certificates of deposit.
And I jokingly said I look at them as certificates of depreciation because, you know, buying a CD and being locked up in that vehicle for six months, 12 months or two years or whatever it is, it doesn't allow for much flexibility, whereas you've got some great alternatives now that that aren't, as you know, taking on that illiquidity risk.
Yeah, yeah. That's a great point you make. I think we talk about risk a lot here at Morton. And you're aware of that because we think of risk from inflation, right? And if cash isn't earning you anything, it's going to be a risk to hold something in a savings account because inflation is going to eat away at your purchasing power.
We look at risk in the terms of illiquidity. And so if you're going to have something locked up, for example, in a CD, if it's going to be locked up for two years, are you actually getting paid for that risk? Not being able to access that money when you need it the most is going to be a risk for you.
So 4% on a two year CD doesn't feel like enough return for that lack of liquidity.
Correct. Especially when you're seeing a 4% return on maybe a one year Treasury and a Treasury, something that you can actually sell out of at some point versus a CD. You're kind of locked into that with the bank terms.
Yeah. Now, that's at hat's a good point. You know, obviously, inflation's a big topic. It's still relatively high. It's come down a little bit over the past couple of months. No real sign in terms of how low it's going to go or the Fed still needs to keep a big focus. Right. I mean, inflation's come down from the 8%, the target that it was.
So obviously, if somebody is taking dollars, short term money and they're investing in, call it a three month Treasury and earning 4%, they're not keeping up with inflation. But that's okay, right?
Yeah, that is okay. I mean, everything that we look at as far as returns is sort of on a relative basis and so in that case of the three month Treasury, you're still getting some type of yield. And that's important for you when you're not able to get that type of yield in your savings account or even when you're investing in the stock market and you see the stock market down 15%.
Right. That's not something that's going to make you comfortable in a year that's really volatile. You want to have a little stability, especially in the short term investments with your cash.
You know, I feel like when you're talking with clients, you really like to talk to them in terms of buckets like, you know, your best clients. You always tell me this. Your best clients kind of know what they're going to spend over the next 12 months. They have a budget or a spending plan. We're going away...
We’re going away with the term budget. Right. But a spending plan like this is the life I want to live. This is what it costs. And you help them make sure that you know those dollars are held aside in that short term bucket. Right? Right. So this is your life for the next 12 months. And then because you've done that, you can then go out in that middle bucket for that medium term, call it next 5 to 10 years.
And you can invest those dollars in a way to help keep up or beat inflation, because those are their needs beyond more than a year. And then you can also go in that third bucket, say, hey, this is your growth bucket, right? This is the bucket to really beat inflation long term. This is where we can invest in stocks and real estate and other things.
But, you know, right now you're having a lot of conversations around that short term bucket and helping clients?
Exactly right. So with clients, the conversations vary for every single client. Everyone has specific needs and us as advisors, we have to speak to that. Right. But I would say about every six months or every 12 months, we really have that conversation that you're referring to, where we need to make a roadmap of what the next 12 months looks like for you and your family, being really confident that you have the needs to cover your taxes, you have the needs to cover your basic household needs, and if you have children and you're planning for all the expenses that come up with them, right?
And so we look at those buckets in the sense of, okay, are we confident that we can, one, take care of your retirement? That's what this nest egg that you've worked so hard for over your lifetime, that's really what you're saving up for. But then before that, you have a lot of checkpoints along the way. So depending on your time horizon, the age that you're expecting to have things done, like when you want to retire, when you expect to have your kids through college, those types of things.
We want to put them in buckets so that we can take on the level of risk in your portfolio that we need to make sure you're getting the returns for those different check points in your life to make sure that that money has grown and gotten to the size that you need it to be at that time when it's time to pay for those life events.
Yeah, that's a good point. I mean, there's a lot of talk or negativity around inflation and rising interest rates because, you know, to some extent it costs more to borrow money. Right. And it doesn't feel that good. But there is a positive side to it. As we've been discussing today. Now that rates have gone up so much, people actually have really good options to earn a good return on short term investments.
I think a three or a six month Treasury bill right now is one of the best options for optionality. Right. If you buy a three month Treasury bill today that's earning 4% and the Fed goes and raises rates in the next couple of months, by the time that Treasury bill comes due, you're going to be able to reinvest it at a higher rate.
You have that flexibility or a money market, for example, which is a heck of a lot better than buying a two year CD. And you're just you're stuck for that two years.
Right? Right, right. And I think we talked about this before, too, where there's a lot of research that goes into investing. A lot of clients are just not as sophisticated as some people might be. And for us, I mean, we love looking into this and really digging in. But when you're able to not have to do that much research and know that there's an opportunity to make a return, where you simply get to put your money away into the safe bucket, know that you can come back to it in six months or a year, and it has done exactly what it's supposed to do.
Right. Really no surprises as far as the return that you're going to get and then being able to redeploy that into some other investment that maybe takes on more risk or you're actually just able to take that out of the market and spend it the way that you want. It really does provide the optionality that you're talking about.
Yeah, I think cash management is something that has been sort of put aside for the last 15 years since rates have been earning close to zero. Yeah, but it's something that people should actually be looking into right now. How can I make better decisions with the cash or the safe money I have sitting around because right now odds are pretty good.
If it's still sitting in your checking or savings account in the bank, you're lucky to get 1.5% to 2%.So you actually have to take an action to move that into your brokerage account and buy a money market fund that's earning close to three or working with your financial professional to buy a three or six month treasury, you actually have to take action, right?
True. You do have to take action. You have to move money from one place to another. But there's a way to simplify that for yourself as well, right. One, working with an advisor, getting that advice on where is the best place to hold those cash and cash equivalents. We also make sure that you want to report that information really easily to say your custodians like your bank, you're working with or your brokerage account.
Those statements really clearly lay out what are your cash equivalents and what they're earning for you. And if it's not getting the desirable amount like you would hope for from a Treasury bill, go ahead and work with someone to actually get a Treasury bill through the website Treasury Direct and just find a better opportunity that way.
Well, you heard it here, folks. I mean, cash management, don't miss out on free money, if you've got money or cash sitting aside and it's likely not earning close to 2%. There are some simple solutions that you can do to at least get that cash earning 3% to 4% or even close to 4.5% for you.
Thanks a lot, Bryce.
Yeah, thank you, Chris.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.
