Putting Your Cash to Work | AWM Insights #162
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Episode Summary
With short-term interest rates currently hovering above 5% and inflation remaining elevated, the proposition of holding too much cash can be a costly one.
Cash gives investors security, immediate accessibility, and certainty as there are FDIC assurances that prevent total losses, but the cost of those elements is missing out on having that money work for you.
Checking accounts still have very low-interest rates relative to what can be realized in the fixed-income markets, and no one gets paid to store cash under their mattress.
Being intentional with cash balances and making sure your money continually works for you is a small way to continue to build and own your wealth.
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Episode Highlights:
0:00 Intro
0:41 The Importance of Cash Management
2:42 The Behavioral element of holding cash and a protective reserve
4:40 Inflation’s Impact on Cash
6:19 Why the current interest rate market is attractive and rewarding investors that hold less cash
7:55 What about CDs?
9:53 Text us!
+ Read the Transcript
Justin Dyer (00:03): All right, we're back. We got a extra special guest today here, Mena Hanna. He's been on the podcast a couple of times before, but welcome. And we'll try to keep this as non-analytical and in the weeds as possible, we've got two CFAs on the podcast today, but welcome back everyone.
(00:23): The topic we're going to go into today is riveting, perfect for us two nerdy CFAs here, is cash management. It's a topic we get quite a bit of questions on. It's not the most interesting, but it's actually pretty important. Everyone has cash laying around, and really how do you optimize it? Some people love it, from a behavioral standpoint, to have probably more than they should, I think that's something we definitely see quite a bit.
(00:47): But we'll keep this as interesting and entertaining as possible, and it is important, not to make it unimportant at all. It's important now, well, because people do carry a lot of cash generally, but inflation, as we know, has had a pretty interesting role, an important role, in the global economy over the last, gosh, 18 months. It's coming down. We've had our lowest inflation number today, when we were recording this, since 2021. We'll talk a little bit about how you should take into account inflation.
(01:19): And related to inflation as well is interest rates. Interest rates, over a very similar period of time, 12 to 18 months, are now actually relevant again. Before that period of time, they were all but zero, and cash wasn't earning anything, or cash-like investments wasn't earning anything. That's all changed, as I think a lot of our clients and listeners know. So it's important, it's an interesting topic. We'll keep it, like I said, as interesting and entertaining as possible.
(01:48): But I've led you, Mena, to the first question here, but just give us a sense of the importance of having a cash management philosophy approach. How do we think about it?
Mena Hanna (02:03): And if you've listened to this podcast before, we are very methodical about everything we do, and the same applies for cash. You want to hold enough cash to take care of everyday needs and your lifestyle, but you don't want to hold too much cash, where your money isn't really working for you. So we guide our clients to hold that minimum amount of cash, and with a protective reserve approach that we take, we're able to actually make that cash work. And especially in an interest rate environment like we have today, we can pick up on five plus percent, and do so in a relatively safe and liquid way.
Justin Dyer (02:46): Yeah, totally. And I mentioned the behavioral aspect of it too, and it's important to even compliment or supplement what, Mena, you just said around, hey, we're going to speak a lot to the optimization of it, from a financial standpoint, where you really shouldn't hold more cash than you need. That's really what you said there. Some people like to just hold more. And you know what? That is okay. We've talked a couple of episodes ago around the behavioral aspect of investing in money, and those are very real forces, and it's okay to have that. You do potentially have to accept the trade-off, so cash and holding more of it than you need is no different. To your point, around the protective reserve approach that we take in building portfolios, that is almost like a cash-like substitute, and so you shouldn't think that, just because something is in your portfolio and not in your checking account, that it doesn't have similar attributes to cash.
(03:43): Going to the inflation topic specifically, because inflation has been so high, you can apply this statement I'm about to make in almost any period of time, but generally speaking, it's very difficult for cash to keep up with inflation. One of the arguments to hold the least amount of cash that you possibly need for day-to-day needs, because your purchasing power, is a term that's used, does not necessarily keep up with inflation. So give us some specifics, how do we make sure that, if you're not keeping up with inflation, you're at least trying to get close to inflation, and where are some of the places that we put cash within our portfolios, within a protective reserve or within a cash management strategy?
Mena Hanna (04:35): And just to start off, the inflation print today came in at 3%. I looked at my checking account the other day to see what I'm being paid for on the cash that's sitting in there, and it was 0.5%.
Justin Dyer (04:47): Yeah. Which, that's a good point. When I say you're not keeping up with inflation, that's the math right there. Inflation's 3%, you're only getting... What'd you say? 0.5%?
Mena Hanna (04:56): I'm getting 0.5%, yeah.
Justin Dyer (04:58): You're not keeping up with inflation, so you're losing purchasing power.
Mena Hanna (05:01): Yeah, so I'll be pulling in my own money to AWM and hopefully getting the 5% number as well. But yeah, pretty much, if you're just sitting in cash, you're not taking advantage of what you can actually pull, and you're actually, just like you said, there's the friction of inflation that's working against you. So you have these two obstacles that are just wearing your money down, and yeah, it's absolutely not what you're supposed to do. So I fall in the habit of just keeping cash in my account as well, but it is something that ideally you'd like to work away from, and just take advantage of the market.
Justin Dyer (05:46): And how do we take advantage of that? What are the vehicles we're using?
Mena Hanna (05:50): So we use short term treasury vehicles, for the most part, between one to two years, and that's also how we position the protective reserve. So currently, that part of the curve is getting 5% to 5.5%. It's attractive, it's low risk, you can pull your money out without any penalties, like a CD. So it is just a superior cash management option to just keeping your money in a checking or savings account.
Justin Dyer (06:23): And it's important to note, that 5%, 5.5%, is what the market is giving now for treasuries, that is not always the case. This is not a constant within the marketplace, this is something that's changing in a dynamic fashion. I'm sure a lot of our clients, the listeners here, have been hearing what's going on with the Fed, the Fed and interest rates that treasuries pay, those two things are very closely related. So as the Fed has increased interest rates, interest rates on treasuries have gone up, which is great.
(06:54): They've been trying to bring inflation under control. And guess what? Today, at least as it stands, you have a positive rate of return, or positive real return, is what we call it within the market, on your cash, or on your treasuries specifically. You're getting 5% roughly on short-term treasuries, inflation is now 3%. You have a positive spread between those two numbers, and that means you are at least staying up to speed, let's call it, with respect to inflation, you're actually outpacing it. Again, these are very dynamic variables, they change all the time, but we always take this into account when we're thinking about building portfolios.
(07:37): So you reference it, and maybe wrap here, is, why shouldn't somebody go buy a CD? Why is that not a great option? Or why shouldn't you go put it in a savings account as well? I think we know the answer to the savings account, and they're similar answers, but give us a sense of why a CD is just not the best option. It's not terrible, why is it not optimal?
Mena Hanna (07:59): So we just launched our venture fund, and obviously we have a bank account for our venture fund, and when we started depositing money in there, our bank approached us, and they said, "Hey, we're going to sell you this great CD. We'll give you 4.5% for a one-year CD." And if you just look at the treasury market, you can buy probably an equivalent CD at 5.3% to 5.5%. So why shouldn't you buy a CD? There is that lockup period, and sometimes more aggressive, I'd say, liquidation information. You're also just paying the bank to do something that's pretty simple for you, and obviously banks love to get paid, so there's friction on that end. Those are the two main things. And then, in terms of just quality, treasuries are what banks typically buy to back their CDs. So you're getting the same quality, you're just eating the whole pie instead of giving a big slice up to someone else.
Justin Dyer (09:08): Now, someone might ask, "Hey, what about FDIC insurance?" Those are questions we'd be happy to even maybe unpack in future episodes, relevant to earlier this year when banks went under. But Mena, as you're alluding to, if you're holding a US treasury, you're actually holding a bond that is backed by, what they say, the full faith and credit of the US government. They're protected or segregated within brokerage accounts, so the protection, if you will, it's not the exact same as FDIC, two different protection mechanisms, but the risk, if you will, the exposure to risk is, I would argue, probably less on the US treasury side, because it's basically just the US government you're dealing with, whereas the bank, there's an intermediary there as well.
(10:01): In any case, hopefully this was pretty informative. As you can tell, there's a lot that goes into just cash and how we think about cash management. I think you could say that with respect to almost any asset class that we're involved with, which is pretty much everything that potentially exists in the marketplace, on public side and private side. So hopefully this was helpful, hopefully gave you a little bit better sense of how you should think about cash.
(10:26): But as you know, please ask us questions. If you have any follow-up or points to clarify, shoot us a text, ask your advisor. The number to text us on, as you guys hopefully know by now, but I'll repeat it here, is (714) 504-7689. We love addressing questions head on. Like we said for this one, we do actually get this specific question around cash quite a bit, so hopefully this was informative. But definitely, definitely feel free to reach out to us. And with that, we'll wrap up. So until next time, own your wealth, make an impact, and always be a pro.