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objective is to have some safe, liquid money available to us, then Vanguard’s funds are the ultimate cash-holding vehicle. n

ment. Vanguard is probably the best hardware store in town. Though it is frustrating to be earning next to noth- ing on our money funds, as long as the

annually or are executing a gradual shift in your portfolio’s allocation. A fourth and final reason to hold a money market fund is that cash is a shock-absorber, taking the edge off of the volatility in your portfolio. I have often allocated a percentage of my private clients’ accounts to a money market or slightly higher-yielding alter- native like Short-Term Investment- Grade . Your money market fund or short-term bond fund isn’t going to make you rich on its own, but it should help keep your portfolio above water when the storm hits while putting you in a position to buy when everyone else is rushing for the exits. What Is an Investor to Do? Yes, yields are at rock bottom right now, and as much as anyone else, I would like to earn more on my cash, if only to help offset the impact of infla- tion. But as I said, my primary concern with my cash holdings is the return of my capital, not the return on my capital. Usually, this is where I provide some advice to taxable investors about the advantages of a tax-exempt money fund. But right now, with the yields on all of Vanguard’s funds essentially pinned at zero, there isn’t much income to worry about. At some point that will change, and tax-conscious investors will need to pay attention to the differ- ence between taxable and tax-exempt money fund yields. Today, the differ- ences are almost rounding errors. Of course, for some investors, the added value of the U.S. Treasury’s full faith and credit may allow them to sleep better at night, even if the yield is next to nothing, hence the appeal of Vanguard’s Treasury or Federal funds. For me, though, the high credit qual- ity of all of Vanguard’s money market funds and the research skills employed by Vanguard’s money market team give me enough confidence to predict that none of Vanguard’s money funds are going to “break the buck.” And, as I said, Vanguard is currently waiving some expenses in order to keep its yields in the black and prices at $1.00. I’ll say it one more time: Cash is a money management tool, not an invest-

A Non-Fund Option? THOSE ADS PROMISING HIGH YIELDS on your cash are everywhere. I get it. Earning essentially zero on our money funds isn’t fun. And some non-mutual-fund companies are trying to come to the rescue. If you are looking for a place to stash cash that offers some yield and is still safe, you may want to consider a high-yield savings account. As I write this, a quick internet search readily reveals a number of saving accounts offering yields well above those found on Vanguard’s money market funds. The table below lists a hand- ful of options. (Please do not consider this a recommendation or endorsement of these banks or accounts. I am merely showing them for illustrative purposes.) Let’s put some numbers on how much

A Sample of Higher Yields Out There

more you can earn with a high-yield savings account versus a Vanguard money market fund today. A yield of 0.95% on $10,000 generates $95 dollars in income. That won’t make you rich, but it’s far better than the $1 of income you’ll get from a 0.01% yield on $10,000. Many of these accounts are FDIC-insured— so there is a high level of safety to go with the yield. What’s not to like? First, note that many high-yield saving accounts are offered by online banks. Having

8/29 APY

Bank

Account Name

GE Capital Bank Online Savings Synchrony Bank Optimizer Plus High Yield Savings

0.95% 0.95%

CIT Bank Ally Bank

CIT Bank Savings 0.95%

Online Savings

0.87% 0.80% 0.75%

American Express Personal Savings Capital One 360 360 Savings

lower costs and few brick-and-mortar locations is one way these banks are able to offer even lower expenses than Vanguard’s, with higher yields to boot. There is nothing inherently “wrong” with an online bank (Jeff DeMaso uses one), but recognize that all of the customer service is provided over the internet, phone or your mobile device. The bank may not offer all the same services, or they may just take longer to execute a transaction compared to a physi- cal bank. This will work for some, and not others. Other things to keep in mind are each bank’s monthly fees and account minimums. Importantly, savings accounts are not as flexible as a money market fund. You are limited to six withdrawals a month in a savings account. If you want to spend the money in this type of account, you may have to transfer the assets to your checking account or another bank. In short, utilizing a savings account may take a little more planning on your behalf. If you are going to explore a high-yield savings account, you should be aware that the rate you see isn’t exactly the same thing as the yield reported for money market funds. Money market funds typically report an SEC yield, which looks at the interest paid less any expenses over the past seven days, and assumes that level of interest continues over the rest of the year. Notably, this does not take compounding into account. The annual percentage yield (APY) com- monly reported on savings accounts does factor in compounding. To compare apples to apples, you need to look for a money market fund’s “compound” (or effective) yield. Vanguard reports both the SEC and compound yields for its money market funds in the individual fund profiles on its website. The difference between a fund’s SEC yield and its compound yield typically isn’t great—and at today’s rock bottom yields there is no appreciable difference—but it is something to be aware of if you are comparison shopping. Wrapping this all together suggests that if you are looking for a safe place with a little yield to stash your emergency fund, a high-yield savings account may be worth considering. The savings account won’t work as well for handling distributions from your stock and bond funds or offer the same flexibility for near-term purchases, but those are separate issues from maintaining a rainy day fund. Keep in mind that there is no guarantee your account will always be “high” yielding, and Vanguard’s money markets won’t yield one basis point forever, either.

The Independent Adviser for Vanguard Investors • September 2014 • 7

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