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, 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: 

Short Term Bond Fund Comparison (as of 2/22/2016):
Ticker/Portfolio Name Expense YTD
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. 


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. 

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