San Francisco Chronicle - (Sunday)
These are the best places to stash your cash
Surviving a panic like the one that started 10 years ago — when Lehman Bros. went under and nearly took the financial system with it — requires courage, patience, and a comfortable cushion of cash.
“Having that cash cushion allows you to ride out a financial storm, like having a few days of canned goods helps you live out a physical storm,” said Peter Crane of Crane Data, which tracks money market funds.
With the stock market hitting record highs, readers have been asking about the best places to stash their cash. The good news is that after hovering near zero for the better part of a decade, yields on short-term securities are now in the 2 percent range, if you know where to look.
A rule of thumb calls for having six months of living expenses in cash, in case you lose your job. Having cash also lets you weather the market’s ups and downs, and pick up stocks on the cheap when others are panic selling. Berkshire Hathaway CEO Warren Buffett is renowned for building up a cash stockpile, and deploying it when there’s “blood in the streets,” Crane said.
In the weeks after Lehman filed for bankruptcy on Sept. 15, 2008, Berkshire bought $5 billion and $3 billion worth of stock in Goldman Sachs and General Electric, respectively, at very favorable terms when those companies were reeling from turmoil in the financial markets. Those investments paid off handsomely.
Cash is shorthand for safe, liquid assets such as checking and savings accounts and money market funds. Some would include certificates of deposit and Treasury bills maturing in one year or less. If you’re worried about a potential catastrophe, actual currency “may be something to consider,” Crane said.
On the two days after Lehman failed, Mohamed ElErian — who at the time was CEO of investment giant Pimco — asked his wife to take as much cash as she could out of the ATM because there was a chance the banks wouldn’t open.
The trouble with currency is finding a safe place to store it and earning exactly zero. Here are some other options for your cash:
Savings and money market deposit accounts. These are insured accounts at banks and credit unions. The accounts are very similar, except money market accounts may offer limited check-writing. But neither should be used as a checking account. You can be penalized if you make more than six withdrawals or payments a month by check, debit card, draft, or electronic transfer. Withdrawals or payments by ATM, mail or in person don’t count toward the six-a-month limit.
These accounts provide quick, easy access to your cash and are insured by the Federal Deposit Insurance Corp. or National Credit Union Administration for up to $250,000 per depositor, per institution, for each account ownership category. (A single, joint and Individual Retirement Account are each separate categories).
The major banks are still paying almost nothing on these accounts, but dozens of institutions — mainly online banks — are offering 1.8 to 2.25 percent. You can find high-yielding accounts at sites such as www.bankrate.com, www.depositaccounts. com and www.gobank ingrates.com.
Online banks generally have no tellers or branches, although some offer ATM access. Some won’t open smallbusiness or trust accounts. You can usually link an online savings account to a checking account at an online or brick-and-mortar bank.
The downside: These yields are not guaranteed for any amount of time. Often, smaller banks desperate for deposits will offer the highest yields, but slash them as soon as they get the money they need.
If you want more than a fleeting relationship with your online bank, go with a larger one that consistently offers high, but not the highest yields. “The big four are Marcus by Goldman Sachs, Synchrony, Ally and U.S. Barclays,” said Nick Clements, co-founder of MagnifyMoney.com, a financial education and price comparison website.
Many online banks grew out of companies that had trouble accessing the capital markets after Lehman fell and wanted a more stable source of funding. “Why did Goldman Sachs become a bank? It wanted to get access to consumer deposits,” Clements said. “The biggest enemy of us (as consumers) making money is inertia. That inertia is the best friend of banks during a crisis.”
Money market mutual funds. These are run by mutual fund companies and invest in lowrisk, short-term debt securities. They are not guaranteed by the government. Their yields tend to follow the federal funds rate — now at 1.75 to 2 percent. If the Federal Reserve, as expected, raises the fed funds rate twice this year and two more times next year, your yield should follow shortly.
The highest yielding money market funds are a little over 2 percent, according to Crane Data.
These funds are often linked to a brokerage or mutual fund account. In the past, when you received dividends or proceeds from a stock sale, it was “swept” into a money market fund. Today, almost all brokerage firms are sweeping these funds into a low-yielding, albeit insured bank account. This makes more money for the firm, and less for the customer. You can always move cash from your bank sweep account to a higher-yielding money fund. Money market funds got a bad name during the financial crisis, when the Reserve Primary Fund became the second one in history to “break the buck,” or trade below $1 per share. “During the crisis, it froze up, and was priced at 97 cents,” Crane said. If you sold at that price, you would have lost 3 cents on the dollar. This contributed to chaos in the financial markets. In the end, investors ended up getting 99 cents on the dollar. “When all was said and done, the loss was minuscule.” Certificates of deposit. CDs are insured savings accounts offered by banks that mature in a certain number of months or years. (Credit unions call them share certificates.) If you cash in a CD before maturity, you’ll pay a penalty, usually some months worth of interest.
Normally, the longer the maturity the higher the yield. This relationship is called the yield curve. Today the yield curve is almost flat, meaning that short-term securities are yielding almost as much as longterm ones. For example, a two-year Treasury is yielding about 2.75 percent compared to 3 percent for the 10-year. CDs tend to follow Treasury yields, but vary by bank depending on its funding needs.
A flattening yield curve worries some economists because it sometimes precedes a recession.
When CDs mature, most banks and credit unions automatically renew them, unless you tell them not to, typically within 10 or so days. They will renew at the same maturity, but the rate will be different and switching banks can be a hassle.
An easier way is to buy bank CDs in a brokerage account. Many firms charge no fees on newly issued CDs. When they mature, they won’t renew automatically, but you can easily switch to whatever bank is offering the best yield.
Treasurys. Treasury securities are fully backed by the U.S. government, and there is no cap on how many you can buy. Another benefit: Treasury interest is exempt from state, but not federal, tax.
Saving accounts and CDs are fully taxable. Normally, Treasurys pay a bit less than the topyielding CDs, because of their tax break, but today their rates are nearly equal at the shorter maturities.
You can buy Treasurys directly from Uncle Sam by opening an account at www. treasurydirect.gov. This is not the easiest system to navigate, and it won’t let you open an IRA. It might be easier to buy Treasurys through a brokerage account. Most charge no fee on newly issued Treasurys purchased “at auction.”
Warning: If you need to redeem a Treasury before it matures, you could get back less than you paid if interest rates have gone up since you bought it, or more if rates have come down.
Ladders. Not sure when you’ll need cash? Considering setting up a “ladder” of CDs or Treasurys maturing at various intervals. If you have $100,000 you might need within the next year, invest $25,000 each in a three-month, sixmonth, nine-month and one-year CD or Treasury. You will benefit from the higher yields on the longer maturities, but always have one coming due within three months. If you don’t need the money when it matures, reinvest in the longest maturity.
“A ladder can be very powerful, once it’s rolling through,” said Richard Carter, a vice president in fixed income with Fidelity Investments.
Rob Williams, managing director of financial planning with Charles Schwab, said savers should not focus on getting the highest rate possible, but finding the product that best suits their needs, whether that’s safety, liquidity, check-writing or yield.
Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender @sfchronicle.com Twitter: @kathpender