Month: January 2019

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Best Way to Maintain Your Immediate Cash Reserve

Summary: Maintaining your cash reserve, typically six months of income, in an online bank’s savings account will allow you to earn the highest rate of return on those funds while maintaining ready access to the funds without market risk exposure. An account with Treasury Direct is another option for some of the funds that don’t have to be immediately available. End Summary.

A client, a federal government employee, asked for advice on how to maintain her cash reserve and it makes sense to summarize that in a blog post. First, let’s review the basics.

The rule of thumb is to maintain six months worth of income readily available in order to weather things like job losses, vehicle emergencies, and other similar contingencies.  It’s important to do this in order to avoid taking on debt during these situations or to have to liquidate investments during a down market in order to meet these requirements.  Saving in such a fund, even while in debt, is an important component of debt reduction because without it, it can seem impossible to break the debt cycle given life’s financial uncertainties. A good strategy is to contribute an amount to the fund each paycheck while servicing one’s debt or even paying down the principal, albeit at a slower rate given the savings buildup. Okay, that said for context, here’s the main issue.

Most financial institutions are paying less than a half percent interest on deposit balances. Inflation is in the two percent range so that money is actually losing value. The good news is that there are other options. Here comes online banking to the rescue. A quick search on “online banking interest rates” will bring up several quick comparison sites. We, as always, strive to save you time. Our pick:  Goldman Sach’s Online Savings Account.  The account has no minimum balance, can be opened fairly easily online, and is currently paying 2.25 percent APY interest compounding daily. That’s a winner. That said, there are several similar offerings, so feel free to shop around.

Another option for balances that don’t need to be immediately available and yet for which you don’t want market risk exposure, is the U.S. government’s Treasury Direct.  Through an account there you can invest directly in short-term bills and bonds with various time horizons. We use this, as do several clients, and find it an easy way to eak out a bit more interest.

Drop us a line if you have questions or send a message at the firm’s facebook page.

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Robo Advisor versus Full Service Live Advisor

I started an experiment a year ago or so to compare a Robo-Advisor  with traditional brokered investment accounts I’ve had for years and an initial verdict is in: The RA beat the traditional approach including a fund we have that only uses Vanguard ETFs. So, even if you “like” the broker you’ve been dealing with, a person who may have a conflict of interest with you (the better things work for him/her, the worse they work out for you in terms of transaction fees, 12(b)1 kickbacks, risk, and the like), you may want to consider transitioning to a RA.

I shopped around between several offering, including Wealthfront, Betterment, Wealthsimple, and others and settled on Wealthfront based on its balance of assets under management (the viability of this niche industry depends on low client acquisition costs and scale) and its ease of account establishment and low costs for initially small accounts.

All of these firms are built on the theory of modern portfolio theory which is only modern if one thinks of the 1950s as being “modern.” In any case, this approach to investing beats 94% of actively managed approaches and it’s not likely that our “normal folk” clients have access to those insider approaches.

An interesting angle for taxable investments is the tax loss harvesting feature that approaches, but doesn’t technically cross,  the legal proscription against wash sale tax deductions. Wealthsimple’s algorithm (and those of several other RAs) places a buy order for a near peer security (in the age of ETFs, this isn’t hard) whenever it looks like there is a loss that isn’t going to recover timely. You’ll get to deduct the loss without actually leaving the market since the sale and buy take place in accordance with Internal Revenue Code provisions. Neat, huh?

Another feature we really liked was the up-front discussion of risk. These discussions take place in a RA environment with little of the hedging of a live investment manager who may be tempted to steer you toward investments that exceed your risk tolerance. The computer doesn’t have a personal stake in your game.

We’ll keep an eye on the phenomenon so you don’t have to. We intend to grow our personal Robo-Advisor holdings at the expense of traditional, actively managed holdings. At this point, it looks like the best aspects of several strategies and tools, combining the buy and hold strategy of MPF and dollar-cost averaging, with portfolio rebalancing to manage risk and tax-loss harvesting only a computer can achieve at the lowest cost.

We aren’t investment advisors and don’t want to be. That said, part of our game is helping clients to invest the money we save them on their taxes through our low fees and tax code expertise and the RA milieu looks like a winner to us.