Many people are leaving thousands of dollars on the table in 2023.
The biggest change for individual investors over the past 1.5 years involves rising interest rates. Rising rates affect everything. Warren Buffett compares interest rates to how gravity affects all matter. Interest rates affect all financial assets. But specifically, I want to focus on the risk-free rate.
As the name implies, the risk-free rate is “the interest rate an investor can expect to earn on an investment that carries zero risk.” Since the Great Financial Crisis in 2008, the risk-free rate has (mostly) been near zero. Over that period, investors needed to take risks to expect a return. Bonds, money market funds, and bank accounts weren’t appealing investments.
But over the past year, the risk-free rate has risen dramatically. As of this writing, it’s 4.82%. It was 0.32% one year ago. That’s a 15x increase in 12 months. It’s crazy.
This morning, I had breakfast with a friend who asked, “I’ve got about $100,000 in the bank, but I want to buy a house. I can’t really invest the money in stocks. Can I do anything else with it the money in the meantime?”
His bank yield is about 0.1%. He’ll earn $100 on that deposit this year.
I recommended a simple money market fund holding with risk-free U.S. treasury assets. Vanguard’s money market VMFXX is currently yielding 4.77%, or 4.66% after fees. He’ll earn $4600 on his deposit this year, costing him ~15 minutes to implement this change.
$4600 in 15 minutes. That’s a solid return on effort.
Yes – the advice really is as simple as “move your money to a different risk-free asset.” It’s not rocket science or overly complex. But if you’re not taking advantage of it…then this is pretty good advice, no?
The same money market fund was yielding 0.20% last year. For most of you, it wasn’t worth moving the money from a 0.1% bank to a 0.2% money market fund.
Banks need time to raise their savings account rates. They first have to write loans at higher rates. There’s a time delay to get those loans on the books. But money market funds need no such delay, since they rely heavily on government debt (which is already being sold at the higher rates). Money market funds are already fully reflecting the past year’s interest rate craze.
If you have a huge nest egg sitting in cash, consider if a money market fund is a better location for your assets. If you’re unsure, shoot me a message and we can chat.
- 4.6% of $1000 is $46
- 4.6% of $10,000 is $460
- 4.6% of $100,000 is $4600
- 4.6% of $1,000,000 is $46,000
You might be leaving thousands of dollars on the table.
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-Jesse
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If I buy Vanguard’s money market VMFXX, do I actually own US Treasury bonds/notes?
Nope! You own *shares of the fund*, and the fund owns US Treasury debt (bonds, notes, etc).
Just like if you own an index fund, you own the *shares of the fund* and the fund owns the stocks.
Great write-up, but I was wondering how a money market fund is beneficial to a high-yield savings account offering a fairly similar rate of return (somewhere between 4-5% at many banks currently). Also, once your friend goes to liquidate the money market account, are the tax implications the same as someone who transfers money out of a HYSA?
Hey Alex! Yeah, great questions.
1) Yeah, they’re *basically* the same. Some people prefer to have their cash sitting in their brokerage/investing account. Others prefer to have it at a bank/savings account. As long as the interest rates are similar/competitive, there’s very little different to the end user. Potato, po-tah-to.
2) Tax implications are the same. You’re earning interest, which will appear on a 1099-INT tax document and you’ll owe taxes on.
Thanks for writing in!
-Jesse