The Independent Adviser for Vanguard Investors
•
September 2014
•
7
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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-
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
objective is to have some safe, liquid
money available to us, then Vanguard’s
funds are the ultimate cash-holding
vehicle.
n
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
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
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.
A Sample of Higher
Yields Out There
Bank
Account Name
8/29
APY
GE Capital Bank Online Savings
0.95%
Synchrony Bank Optimizer Plus High
Yield Savings
0.95%
CIT Bank
CIT Bank Savings 0.95%
Ally Bank
Online Savings
0.87%
American Express Personal Savings
0.80%
Capital One 360 360 Savings
0.75%
