Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.
For regular SAA and TAA portfolios, the next re-balance will be on Monday, March 28, 2016. You can also find the re-balance calendar for 2015 on ‘Dashboard‘ page once you log in.
As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.
Please note that we now list the next re-balance date on every portfolio page.
Be Cash Smart
With the world being under economic slowdown or recession pressure, NIRP (Negative Interest Rate Policy) has been creeping up in many countries. These include Japan, Sweden, Denmark and Switzerland. In the US, being in the current ZIRP (Zero Interest Rate Policy) environment, the Federal Reserve was forced to contemplate with NIRP (Janet Yellen had to answer questions in this regard in a recent congressional hearing) . In these ZIRP or NIRP environments, cash is a hot potato that many are forced to toss away.
However, many investors, (rightly) afraid of current investment environment (stocks are still at a frothy valuation level) or just being lazy, still keep a large chunk of cash. This can be in their brokerage investment accounts or their bank accounts or both. We have written some articles before on cash investments (for example, April 13, 2015: Total Return Bond Funds As Smart Cash). In this newsletter, we would like to discuss this issue in more details.
Banks and brokerages are taking advantage of your cash
Many investors are aware that banks are making money off the difference between the interests they pay to you, depositors and the interests they earn to lend out the money. Many also know that brokerages pay little to the spare cash you have in your account. But many don’t realize that brokerages actually make their most profits from your idle cash sitting in your accounts. In fact, this is perhaps one of the best kept ‘open’ secrets for brokerages. Case in point, if one examines the annual financial reports of Schwab, one of the largest brokerages, one can see that in its ‘Investor Services’ category, it derives close to half of its revenue from ‘net interest revenue’ that mostly comprise of cash interest earned. In 2014, Schwab reported $2 billion ‘net interest revenue’ and $0.7 billion trading revenue, among a total $4.6 billion revenue.
No wonder when Schwab introduced its ‘intelligent portfolio advisor’ — a robot advisor service that claims to be free of charge, it actually requires an account to have some minimum cash maintained, regardless of your risk or investments! To be fair, it states openly in its fine print that it needs to make money from ‘this cash’! Though we understand that Schwab should be compensated with its services, but whether this is a right way to do so is very debatable.
However, it is not prudent to just simply reduce your cash holdings and use them to invest, especially in an environment where stocks are still at a frothy valuation level, while bonds are at their historically low yields. What’a needed is a more systematic method.
What to do
The first thing is to further divide your traditional cash holdings into two parts: absolute short term cash and then cash equivalent. Conventionally, people are told to hold at least half a year to one year cash for their daily and emergency use. However, in the current environment, one can divide such a one year cash into something like 3 month cash and the rest goes to cash equivalent investments.
To facilitate cash usage, one should utilize electronic fund transfer between a bank and a brokerage. Many brokerages and banks offer ACH (Automated Clearing House) electronic fund transfer that is free of charge. Furthermore, many brokerages offer various banking services including bill payment, check writing and even credit cards. Investors can take advantage of these services. Utilizing these services can largely allow you to by pass most of services offered from a traditional bank.
For the cash equivalent, the first one can do is to invest in some high yield CDs or money markets. Based on bankrate.com, currently, the highest 1 year CD offers close to 1% interest return. There is no point to invest in a longer term CD and it not only offers almost the same interest but it will tie up your money too much. Similarly, the highest money market return is also about 1%, offered by Ally Bank.
A better way but a bit more uncertain is to invest the cash equivalent money in a (ultra) short term bond fund. You would want to invest in an extremely low cost bond index fund. Vanguard’s short term bond index fund (VBISX) and short term investment grade corporate bond index fund (VFSIX) are good candidates:
Ticker/Portfolio Name | Expense | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR |
---|---|---|---|---|---|---|
VBISX (Vanguard Short-Term Bond Index Inv) | 0.2% | 1.0% | 1.6% | 1.0% | 1.6% | 3.3% |
VFSIX (Vanguard Short-Term Investment-Grade Ins) | 0.07% | 0.5% | 1.3% | 1.5% | 2.2% | 3.6% |
CASH (CASH) | 0.0% | 0.1% | 0.0% | 0.0% | 0.7% |
Investing in the short term bond index fund can yield 1 to 2 percents more than cash. Something shouldn’t be discarded.
One should be aware that VFSIX had a large drawdown in 2008, making it less ideal to park money that is needed in one year.
Even though the two short term bond funds have some volatility or fluctuation that make it hard to be considered cash like, we believe that if your cash is steady in a long period, investing in such bonds and taking cash out when needed in a long period of time is still a better idea. For example, we did a internal study and assuming an investor always deposits a monthly income to CASH or the short term bond fund VBISX and then spend it at the end of the month, we found that investing in VBISX has actually done better than in CASH. If we take the difference between bank’s paid interest and our CASH which is based on 3 month Treasury bill interest, the difference can be even higher (more than 1% annually at least). By no means that we recommend to forgo the short term cash and just invest in these short term bond funds. However, only keeping 3 month or so in cash is a good way to utilize your money.
For any money needed more than one year later, one should consider investing in a systematic risk managed bond or fixed income portfolio. Our total return bond fund portfolios (see on Brokerage Investors page) are good ones to consider. The portfolios have a built in risk avoidance mechanism to avoid bond funds that have large loss or just simply avoid all of them when fixed income markets are universally bad.
Conclusions
There is really no point to have large amount of cash lying around in a bank or a brokerage. One can invest bulk of them in ultra short or short term bond funds that have extremely low cost. Furthermore, for money that is not needed in a near future, investing in a total return bond fund portfolio can further enhance returns.
Market Overview
Stocks continued to recover strongly. However, even after such a sharp rise, stocks are still in a downtrend. We have no idea whether this is a repeat of 2011, something more serious or just a shallow correction. If fundamentals further weaken, risk assets will have a more serious leg down. However, if fundamentals recover and stabilizes, markets can recover. At the moment, we will stick to our strategies and respond accordingly.
For more detailed asset trend scores, please refer to 360° Market Overview.
We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now. However, recognizing our deficiency to predict the markets, we will stay on course.
We again copy our position statements (from previous newsletters):
Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible.
We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.
Latest Articles
- February 15, 2016: Bond ETF Portfolios
- February 8, 2016: Newsletter Collection Update
- February 1, 2016: Total Return Bond Fund Portfolios In A Volatile Period
- January 25, 2016: Alternative Portfolios Review
- January 18, 2016: Strategic Asset Allocation: A Cautious Outlook
- January 11, 2016: Review Of Trend Following Tactical Asset Allocation
- January 4, 2016: What Worked And Didn’t In 2015
- December 21, 2015: Distressed Assets
- December 14, 2015: High Yield Bonds And Their Correlation With Stocks
- December 7, 2015: Diversification And Global Allocation
- November 30, 2015: Investors and Speculators Combined
- November 23, 2015: Active Stock Fund Performance Consistency
- November 16, 2015: Permanent, Risk Parity And Alternative Portfolios Review
- November 9, 2015: Broad Base Core Mutual Fund Review
- November 2, 2015: Broad Base Index Core ETFs Review
- October 26, 2015: Total Return Bond Fund Review
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- October 5, 2015: Core Satellite Portfolios In A 401k Account
- September 28, 2015: Risk Managed Strategic Asset Allocation Portfolios Revisited
- September 21, 2015: Quest For The Best Investment Strategy
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- August 31, 2015: Review of Asset Allocation Funds and Portfolios
- August 24, 2015: Market Rout And Your Portfolios
- August 17, 2015: ETF or Mutual Fund Based Portfolios
- August 10, 2015: Updated Newsletter Collection
- August 3, 2015: Slippery Asset Trends
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- June 29, 2015: Core ETF Commission Free Portfolios
- June 22, 2015: Secular Asset Trends
- June 15, 2015: Giving Up Bonds?
- June 1, 2015: Summer Blues?
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- May 18, 2015: Portfolio Update
- May 11, 2015: Pain in Fixed Income?
- May 4, 2015: The Balanced Stock and Long Term Treasury Bond Portfolios
- April 27, 2015: Long Term Treasury Bond Behavior
- April 20, 2015: 529 College Savings Plan Rebalance Policy Change
- April 13, 2015: Total Return Bond Funds As Smart Cash
- April 6, 2015: The Low Return Environment
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
- March 23, 2015: Investment Arithmetic for Long Term Investments
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 9, 2015: Newsletter Collection Update
- March 2, 2015: Total Return Bond ETFs
- February 23, 2015: Why Is Global Tactical Asset Allocation Not Popular?
- February 16, 2015: Where Are Permanent Portfolios Going?
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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