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.
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