The Best Asset Of 2018? You’ll Never Guess…
This year’s top-performing asset class isn’t stocks, bonds, commodities, or real estate.
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And no, it’s not crypto-currency either.
It is cash.
That’s right. Cash is the top performing asset class year-to-date. Beating out U.S. stocks, global stocks, investment grade bonds, junk bonds, commodities, real estate, you name it…
Cash is king.
Cash is underrated by most investors. Yet it’s the easiest way to reduce risk in your portfolio. It can cushion your portfolio during a market crash, as well as deliver unlimited upside in the form of opportunities that have yet to come.
But I’ve noticed a common problem when investors are holding cash… they don’t know what to do with it.
And to be honest, there are so many options out there between savings accounts, money market accounts, certificates of deposit (CD), mutual funds and ETFs that it can be confusing. It’s easy to see why investors leave their money parked in their brokerage sweep accounts or a savings account at their local bank.
#-ad_banner-#When I first got into investing and folks would talk about cash and the “risk-free rate” of Treasury Bills (T-Bills), I thought the only way to access those T-Bills was through a bank or mutual fund or some other financial institution. But that’s not the case… I’ll tell you exactly where I invest my cash that cuts out the middle-man, like banks, and their fees.
But first, let’s look at the national average of interest earned in savings accounts, money market accounts and 1-year CDs. After all, with the Fed having increased interest rates, you should be getting a better return on that cash parked in your savings account, right?
That doesn’t seem to be the case…
According to the Federal Deposit Insurance Corporation (or FDIC — the entity that insures the money in your bank accounts), the national average interest rate paid on savings accounts is a meager 0.09%. Money markets pay 0.16% while locking up your money for one year in a CD will net you 0.60%.
Meanwhile, the current federal funds rate is 2.25%.
Of course, you’ll see plenty of ads touting savings accounts with annual percentage yields (APY) of 2% or more. But it seems there are always hidden caveats with these accounts, whether it’s an account minimum, or there’s a promotional period, or you have to have a direct deposit or transfer set up. There always seem to be some hoops you have to jump through.
Instead of opening a new online account with a variety of banks to score the best interest, you can buy T-Bills, Notes, and Bonds directly from the government through TreasuryDirect.gov.
TreasuryDirect is the first and only financial services website that allows you to buy and redeem securities directly from the U.S. Department of the Treasury in paperless electronic form.
You do have to set up an account through TreasuryDirect, but you can easily link your current bank account and brokerage account to TreasuryDirect.
One of the beauties of investing in T-Bills is that the interest is exempt from state and local income taxes (it’s still taxable at the federal level).
To be sure, using TreasuryDirect does require a little more work than letting your money sit in your savings account. Since you are participating in auctions there are some things to understand, but I personally believe it’s worth the effort.
The first thing you need to know is that Treasury Bills are purchased at a discount and redeemed at the full par value. So for each $1,000 worth, you’ll pay $990-something (depending on the interest rate) upon issue and receive $1,000 upon maturity.
Rates are set by auction, so you won’t know your exact interest rate before you commit to buy. You can look at historical rates and auctions to give you an idea of what to expect. Here’s a snapshot of recent auctions and their rates:
As you can see, the recent results of the last two 4-week T-Bill auctions provided investors with an investment rate as high as 2.4%.
The 4-week T-Bill auctions are normally held on Tuesdays, and the T-Bills are issued and redeemed on Thursdays. TreasuryDirect also allows you to easily reinvest those funds into the next auction automatically if you would like.
Keep in mind that when you purchase a T-Bill, the money comes out of your account and will be gone during the investment period. So, I wouldn’t recommend purchasing a 4-week T-Bill using all of your funds. Leave a little cash in case you need to access it immediately.
Here’s an example of how I invest my cash personally and squeeze a little more out of my savings…
With about $50,000 sitting in a savings account at the bank, which is currently earning 1%, or $500 a year, I take between $40,000 to $45,000 and purchase 4-week T-Bills through TreasuryDirect. I only purchase 4-week bills at this time because the added interest on 13-week and 26-week Bills isn’t worth it, in my opinion. I like to leave between $5,000 and $10,000 in my savings account in the event of an emergency, or for personal spending.
By investing that $40,000 into T-Bills — and earning an interest rate double what my bank offers — I’m able to turn that $500 of annual interest into $1,000 (free of state and local taxes).
I understand that this might be too much of a hassle for some folks, and if your bank is offering you an interest rate near 2%, it might not be worth it. But as I mentioned, it seems that banks require some hurdles in order for you to get their top rate. With TreasuryDirect, you can purchase a T-Bill with as little as $100. (The purchases are in increments of $100.)
We spent nearly the last decade earning next to nothing on our cash. That no longer has to be the case. Take advantage of the increased interest rates, and safely earn more on your money. Plus, should this market continue to slide, we will likely be reducing our equity allocation and move more toward cash… so you might as well keep earning something while we waiting for better opportunities in the market.
Most investors chase after the latest “hot pick,” expecting triple-digit returns with each and every investment. (This is not even investing, really. It’s speculation.) And often times, when they do happen to invest in a quality name, they end up selling far too quickly.
Instead, you should be patient… Be opportunistic during periods of market volatility (like we’re experiencing now) by selling a few winners, add to your cash pile, and then waiting. Good deals on fantastic companies will present themselves in due time.
Put your money into the world’s greatest businesses — like the ones in this year’s Top 10 Stocks for 2019 report — and let your returns pile up year after year.
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