167: Is Cash the Best Investment Right Now?

Welcome to the Invested Dad’s Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments. Here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, hey, hey, welcome back to Invested Dad’s Podcast. A podcast where we take you on a journey to better your financial future. I am Austin Wilson, research analyst at Hixon Zuercher Capital Management.

Josh Robb:

And I’m Josh Robb, director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with this podcast?

Austin Wilson:

We would love it if you would (a), subscribe. Hit that little plus, follow, subscribe button, whatever it is on your podcast player. That way you get new episodes every single Thursday when they drop. And we would love it if you’d go to our website, check us out, first of all, got a lot of really cool resources out there. Show notes, all the details of all our episodes, as well as the ability to sign up for our weekly newsletter, which we’ll notify you every Thursday when our episode comes out with a little synopsis, little summary on what’s going on.

So please do that as well. So today we’re going to be talking about a different regime that we live in now, than we’ve been in, in a while. So a new world out there. We’re going to be talking about interest rates.

Josh Robb:

Yes. But we’re looking in particular at the savings accounts rates and how much you can earn in interest.

Austin Wilson:

Oh yeah.

Josh Robb:

Yes. And then in the end we’re going to say, well, if that’s true, how much cash do people have?

Austin Wilson:

Absolutely.

 

[1:24] – How Much Are Banks Paying You for Your Savings?

 Josh Robb:

But first, let’s talk about interest rates. And again, we’re referencing the amount that banks are paying you for savings.

Austin Wilson:

Savings account rates, essentially.

Josh Robb:

Yep. There’s CDs, there’s all fun stuff out there. We’re just looking at savings accounts. All right. And so as of the end of January 25th, 2023, the national average for savings accounts in the United States was 0.23% annual percentage yield.

APY is just how they calculate. Now, if you start mid-year, you don’t get that, if you had an annualized rate, that’s the average. And what we do know about averages is there’s-

Austin Wilson:

More and less.

Josh Robb:

…More above and more below that, the average. So you can actually find high yield savings accounts up to 4.15%.

Austin Wilson:

That’s a big difference.

Josh Robb:

And so linked to the show notes is a article from Bank Rate, and they actually list the banks that offer different rates. And so that’s a nice article there to check out. That’s the high end, all the way down from 0.01 all the way up to 4.15. That’s the range, you got the average 0.23% all the way up to over 4%. As a reference, a year ago before we had rising interest rates, and we’ll talk about that last year, the starting point, the average was 0.06%.

Austin Wilson:

So much lower.

Josh Robb:

Much lower. And the top savings rate topped out at 0.55%.

Austin Wilson:

So even more lower.

Josh Robb:

Yes. So we went from 0.06 to 0.23 average in the high end 0.5 to 4.15.

 

[2:48] – Why Did Interest Rates Go Up?

Austin Wilson:

Whoa. Those are some big moves. So the question that makes me think… that I’m going to answer-

Josh Robb:

You’re going to ask it and answer it.

Austin Wilson:

Ask it and answer it. Because that’s what I do. Why the heck did interest rates go up? In savings accounts in particular. So I’m going to start by saying that interest rates on savings accounts are a function, a result of interest rates in the fixed income market. So generally speaking, interest rates on bonds are higher, you’re going to get more interest on your savings. Okay. So that’s kind of at the very highest level. And how we got to be where we are today is that interest rates are much higher in the bond market than they were one year ago, for example.

So why, and I have a couple explanations here. If we think about fixed income, which is what’s driving interest rates, that’s driving your savings account rate, we really have to look at what’s called a yield curve. So that means there is time that you can lend your money out for in the fixed income world. And generally speaking, the shorter the time you lend your money for, the lower interest rate you’re going to get. And the longer, the higher the interest rate.

Josh Robb:

If I’m giving you money and you’re going to hold onto my money for a little bit, I’m going to want some sort of compensation for that. And if you’re going to keep it for a week-

Austin Wilson:

Not much.

Josh Robb:

…But the longer you have my money, the less I can do with it, the longer I have to wait to do something with it, the more I’m going to want in compensation. That makes sense. Gotcha.

Austin Wilson:

Yep. So we’re thinking about the yield curve and really your savings accounts are going to be not necessarily pointed to any specific point on the curve, but rather a function of the entire interest rate curve that we’re talking about. But if we think about what happened for interest rates, a couple things happened. On the short end. The very low duration, really short maturity end of the yield curve, really short bonds we’re talking about here, that piece has been impacted by the Federal Reserve. So we do have to mention the Federal Reserve. We’re not talking about their interest rate increases as it relates directly to yours, but they played a big role in the overall interest rate environment. So they in response to something we’re going to talk about in a second, inflation, have been trying to slow down the economy to reign any inflation, to really bring that into check more towards their targets.

And how they do this, one of their monetary policy tools is through interest rate increases. And we’ve gotten a cubic crap ton-

Josh Robb:

That’s a lot. Yes.

Austin Wilson:

That’s a lot. I mean we’ve had a lot of interest rate increases in a very fast short amount of time. Really since March of 2022, all the way through where we are now, at the beginning of 2023, lots of interest rate increases as the Feds trying to slow down what was rather high inflation. 40 year highs, right?

Josh Robb:

Yes.

Austin Wilson:

The short end of the yield curve had to reflect what the Fed’s going to do essentially. So that’s what we’ve been at-

Josh Robb:

They’re quicker to adapt or adjust to those decisions or the anticipation of future decisions.

Austin Wilson:

Absolutely.

Josh Robb:

That’s where you see the reaction the fastest. Okay.

Austin Wilson:

So that’s like the shorter end of the impact of the curve. And then as the curve got longer, longer term bonds, there’s a lot of moving parts here. Part of that is interest rate risk. So if you think about longer term bonds, it’s more risky to have your money locked up in a longer term vehicle than it is a shorter term vehicle. So that’s why you need to be compensated with more interest rate percentage on a typical basis. But actually when you’re also buying longer term bonds, the value of that bond can be more impacted. So if you buy a fixed income piece, a longer dated bond, and you hold that, it’s fixed. You already own it, but then interest rates move a lot, you are really being impact on the longer end of the curve. That is why people on the longer end, were selling bonds which caused interest rates to go up. Right? So bond pricing and yields is all a function of supply and demand, essentially. Buying and selling of bonds.

So as people find bonds more attractive, they’re buying it, a buying of bonds will send prices up and yields down. Well, as the opposite has happened over the last year or so, bonds have been relatively unattractive and all across the curve really yields have gone up across the curve. And really what that means is that bonds have been unattractive. People were selling bonds, sell, sell, sell bonds because bonds are fixed income.

We’ve talked about this before. Fixed, same payment-

Josh Robb:

The same payment-

Austin Wilson:

You’re getting the same payment every single time. What does a fixed income do in a 8% inflation world that we were just in?

Josh Robb:

It’s not great because your income stays flat, but the cost go up.

Austin Wilson:

So bonds have become unattractive, which means people sell, sell, sell, sell, sell bonds. I mean, it was like the worst year on record for bonds, right?

Josh Robb:

Yes. Oh yeah.

Austin Wilson:

So that is why bonds were sold off, rates went sky-high because of what the Fed is doing and because of a lot of risk in the bond market. And that’s kind of where we got to be to where we are now because there’s a little bit of stabilization going on right now. The Fed is slowing in what they’re doing. The front end of the curve isn’t moving as much. The longer end of the curve is actually being bought. You’re finding some opportunities in longer term bonds. A little bit of the riskiness is out of the way right now, but that’s kind of an overall picture of where we were in terms of how the yield curve impacts the overall bond market and where we got to be today. So does that make any sense, Josh?

Josh Robb:

It does. And then that follows through. So then banks say, “okay, I make money by charging interest.”

Austin Wilson:

True.

Josh Robb:

And so think mortgages, loans, things like that. And if the interest rate is going up, they’re making more money. They also have mandates and rules on how much cash they need to have on hand. And so in order to entice people to leave their money at the bank, they need to offer something. Now, when their costs were low, they couldn’t charge a lot of interest. They kept the interest rates low for savings accounts because they didn’t want to pay out more than they’re bringing in. But now that the interest rates are going up, they can charge more. Mortgage rates went up-

Austin Wilson:

A bunch more.

Josh Robb:

…Above 7% last year. And so they’re getting more income. They think, “well, okay, I have the ability now to increase or motivate people to come to my bank and use us for money.” And they actually make some money on the overnight.

I mean, they’re holding your cash in, they’re doing something with it.

Austin Wilson:

They’re lending it to other people.

Josh Robb:

Yes, they are. Now there’s certain rules of what they have to do, but they’re going to make something on it. And so they can increase the interest rate there. Now it’s not proportionate. You don’t see the same percentage go up. But what you do see is as overall interest rates, like you talked about, is the interest rates are rising in general, you should see your savings rate go up as well. Maybe not to the same extent, but you’re going to see it rise as well. All that. Thank you, there’s so many moving parts. So I appreciate you kind of trying to narrow that in. But then in the end, it comes down to the banks had the ability to offer more because they’re looking to bring in more customers and they have new income coming in from higher interest rates that they can offset that higher cost with.

Austin Wilson:

And if one bank starts increasing interest rates, everyone kind of has to follow, otherwise everyone’s going to go to the other bank. So it’s kind of-

Josh Robb:

If bank A is offering a 4% savings account, bank B at one is going to lose some customers.

Austin Wilson:

Exactly.

Josh Robb:

And so they got to follow suit.

Austin Wilson:

So it’s kind of been a stampede to be increasing your offerings to either maintain or attract clients. So that’s kind of how that works. So Josh?

 

[9:56] – Dad Joke of the Week

 Josh Robb:

Yes.

Austin Wilson:

I have a dad joke of the week.

Josh Robb:

I’m ready.

Austin Wilson:

Okay. So you and I, we’ve golfed together.

Josh Robb:

We have golfed.

Austin Wilson:

I’m not a good golfer. I have fun with you.

Josh Robb:

We have fun. I wouldn’t call myself a good golfer either, so we do well.

Austin Wilson:

So here’s the question. Why do fathers take an extra pair of socks when they go golfing?

Josh Robb:

In case they get a hole in one?

Austin Wilson:

That’s exactly right. You’ve heard that before. Great dad joke.

Josh Robb:

I love it.

Austin Wilson:

I mean, when you get a hole in your sock, you got to have a spare. Got to have a spare.

Josh Robb:

My dress socks get holes in the toe area.

Austin Wilson:

Me too.

Josh Robb:

It’s faster than in any of my other socks.

Austin Wilson:

I agree. It’s thinner material.

Josh Robb:

It is thinner.

Austin Wilson:

And you wear them more hours.

Josh Robb:

You wear more hours.

Austin Wilson:

I don’t know.

Josh Robb:

It just drives me nuts.

Austin Wilson:

I know. And my wife-

Josh Robb:

I keep them.

Austin Wilson:

…Hates holes in my socks and I don’t even know half the time that there’s a hole in the sock of a dress sock because I’m wearing shoes or whatever. And anyway, she sees the socks, you’re like, “you have to throw that away.”

Josh Robb:

Yeah, I know.

Austin Wilson:

But I only have one of that color.

Josh Robb:

You can only throw the one away. So you just have one sock left. You have a bunch of one socks?

 

[11:00] – Is It the Perfect Time to Earn Interest on Your Cash?

 Austin Wilson:

All right, so that’s a dad joke of the week. So that kind of leads us to our discussion today. We’re in a different world than we’ve been in a while. You can actually earn some interest on your cash. We’ve been in this zero or very, very low interest rate world for a couple decades.

Josh Robb:

I mean last year 0.06 as the average. That’s nothing. You’re not getting anything.

Austin Wilson:

Now generations before had great high interest rates.

Josh Robb:

High inflation too.

Austin Wilson:

But that’s not the world we’ve lived in for a while. So now that you can actually earn some interest on your cash, how much should you have in the bank and what should it really be for is kind of a bigger question, I think. So Josh, what are your thoughts on that?

Josh Robb:

Well Austin, I think it really depends.

Austin Wilson:

Oh man, I’ve never heard you say that before.

Josh Robb:

It really comes down to, again, we’ve talked about emergency funds, we’ve kind of had episodes on that where we talk through the basic needs that you have to have set aside to protect yourself. I haven’t changed on my opinion on that. You still need that three to six months of living expenses in savings to protect you from those emergencies. The plus that is now you’re actually going to be seeing income from that money that’s over there for the emergency. When it was 0.01%, couple dollars a year was irrelevant. Now that you can earn a little bit more it’s nice, it helps. But above that, people are asking, “well, last year with the market and everything going on, the stocks were down, bonds were down. It was just a rough year. Maybe I should have more money.”

Hey, I’m guaranteeing 4% here. Maybe I should lock it in. The question comes down to your goals. What am I trying to achieve? If you have short term goals that market volatility would cause you to miss that goal, then cash is actually going to be your best bet. Even when there was no interest rate that answers that question of missing the volatility. If you can’t afford to have the ups and downs or adjust your timing, then the market’s not the place to be. Now that you can earn a little more, it makes it a little easier to give up that potential. And then it comes down to, in my mind also your risk tolerance is what is my overall picture? Maybe a portion of my fixed income now that cash is earning 4%, I could allocate over there. Maybe it doesn’t all have to be in bonds and CDs.

If I can get so sort of interest in something that’s less liquid, but also yielding something. So there’s maybe asset allocation adjustments that you could add a little more of that cash piece to it. And then again, if you have needs for it, that’s why you have cash to begin with.

Austin Wilson:

Absolutely.

Josh Robb:

I think that the temptation when you had a bad year, like last year where the SP was down 18, 19%, stocks down, bonds down to say, “oh, that guaranteed four seems nice.” Hey four is great. But we just talked about inflation was averaging over 6% last year. So you still lost 2% of your purchasing power last year in the safest place you could put your money and you weren’t averaging four the whole year. So don’t think when you see those higher interest rates that historically cash does not keep up with inflation.

So will inflation go down? Yeah, I think it will head down. And we’re seeing that now. It’s still not below 4%.

Austin Wilson:

Correct.

Josh Robb:

And so you’re still losing money to inflation, but it’s definitely closing the gap and providing at least something while you’re waiting to use that cash. That’s my thought.

Austin Wilson:

Good. I like it. Yep.

Josh Robb:

So what do you think, Austin?

Austin Wilson:

Yeah, very similar thoughts. I think a lot of it also depends on time horizon as you are looking at money that you need in the short term. So whether that be one year, a few years, five years, even saving for a house, this is a great time to have some cash, but you were going to be doing that anyway at 0.2% interest or four. So it’s just kind of juicing what you were already probably going to be using your cash for anyway.

I think for specifically younger people with longer term time horizons, as for investing or risk tolerance as it pertains to that, cash is not an attractive thing to have a large portion of your assets in because you’re going to get 4% now, but that rate’s not fixed. And I think interest rates are going to go down. In the medium term I think they’re going to remain a little higher for a little while than we’ve seen, but they’re not going to be where they are now forever. Especially if the economy slows down. The Fed might cut rates in a year. Who knows? If we go into a recession, that gets to the point where interest rates go down. People buy bonds, right? In end times like that. So that means you’re getting 4% now, but you might get 3% next year, you might get 2%…We could end up with-

Josh Robb:

Could go the other way.

Austin Wilson:

…1%, again, who knows? Or less. And so there’s no guarantee where if you’re looking at historical returns for stocks or bonds, we’re saying are assets for investment over long periods, stocks, over the historical long periods have averaged 8% over long periods. Now there’s bumpy road. Last year was bad this year, unknown. It just depends. Bonds kind of the similar way. Last year was bad. Historically speaking. Not a lot of double bad years in the bond market, but no guarantees there. There’s risks, there’s no risks with cash. So your return over long terms is going to be less. And that is what I think you should have the cash you need for what you need it for. Whether that be saving for immediate expenses or middle term expenses, things you need to have on hand just for day-to-day living expenses.

But you should not over cash it up. That’s kind of what I’m saying. So just don’t put all your eggs in the cash basket.

Josh Robb:

Yep. I will say one other piece, and you could talk a little bit about this on the investment side is sometimes when there’s just no good investment opportunities, cash is a great spot to wait. We call it dry powder. The idea that you have something ready to go. Sometimes if you don’t have an immediate, “Hey, this makes a lot of sense,” cash is a good spot to hold it in, especially now that you can at least get something while you’re waiting.

Austin Wilson:

Yeah, that’s actually a really good point. And we’ve done some portfolio moves out of our own over the last handful of months or whatever where we’ve found an opportunity to sell something that we either got a really good price for or we thought the outlook for it was not so great and we did not have a high conviction in something to go right into.

And we were able to say, “okay, well let’s be patient here. Let’s use this cash as maybe an opportunity to buffer some downside if that happens or the cash is right there, when we see a company that we really like at a really great price.” And we just maybe aren’t quite there yet.

Josh Robb:

Good placeholder.

Austin Wilson:

And we’re getting 3.5 or 4% in the meantime while we wait. That is something that it can be used… I would argue and encourage people to say that that is probably more of the role of a money manager rather than the way that someone should handle their own portfolio who’s not trained in that. Because you have to time things multiple times when you do it that way. And it’s really, really hard to do, even for professionals. Admittedly myself, I don’t know exactly which way things are going all the time, but I would say that be careful when you’re doing that. Leave that to the pros if you can.

Josh Robb:

Yeah, those are all great thoughts. I think in general, now that there’s that temptation to kind of lock in that guarantee, just keep in mind the long-term, historically, cash has not beat inflation and it has not kept up well at all in rising or falling. It just doesn’t do well. So cash is great for needs, but it’s not great long-term investment like you talked about.

Austin Wilson:

Stick to the plan.

Josh Robb:

There it is. Stick with a plan. That’s always good. If you need a plan, make sure you talk with a financial advisor about setting that up.

Austin Wilson:

And if you actually don’t have a financial advisor, you can check out our website, look at the ‘Invest With Us’ tab and get ahold of us and we can answer any questions you have and maybe see if you would be a fit to work with us.

So thank you for being here this week. Thanks for listening. And remember, please share this episode. If you had someone saying, “Hey, cash, I got to go have all cash, all cash, all cash.” We’ll send this to them because we’ll hopefully be able to help them out a little bit there. And then as a reminder, we’d love it if you subscribe and if you’d leave us a review on Apple Podcast or Spotify.

Josh Robb:

That’s right.

Austin Wilson:

All right, well, until next Thursday, have a great week.

Josh Robb:

All right. Talk to you later. Bye.

Thank you for listening to the Invested Dads podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to the investeddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe and don’t miss the next episode.

Josh Robb and Austin Wilson Work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.