Keeping Cash on the Sidelines
Advisers and analysts alike will extol the importance of keeping cash available to buy investments during market pullbacks.
Heck, even Get Irked follows the Buy on Red Days, Sell on Green mantra.
However, when the market feels like it’s never going to stop climbing higher, looking at a large cash balance earning nothing can be downright painful and often feels like you’d be better off storing it under your mattress.
No matter the time horizon, all investors and traders will want to make sure their cash is always hard at work, even if it’s not currently at work in an investment or trade.
Let’s look at some (virtually) risk-free options to get a little return on your cash while you wait for the right time to pounce on that position you’ve been eyeing.
Option 1: Any Interest in a Savings Account?
With traditional banks paying a pitiful 0.03-0.06% rate on their savings accounts (like Bank of America, at the time of writing), opening a savings account can seem moronic.
And it is.
You’re reading this article on the Internet, right? So, why not bank there?
In recent years, online banks have risen in popularity, and why wouldn’t they?
Most people don’t need a brick-and-mortar solution for a savings account. In many cases, the average account holder rarely – if ever – uses the services a brick-and-mortar bank provides that an online bank does not, even for checking accounts.
However, if you’re like us, you’ll probably still want a relationship with a bank you can physically visit.
That’s fine. Find a bank with a local branch that offers a free checking account and only keep your checking account with them.
Then, open an online savings account and keep the majority of your cash there, transferring funds to your checking account as needed each month. Just like traditional banks, online savings accounts allow up to six (6) funds transfers out of an account each month.
Furthermore, online banks carry all the benefits of traditional banks including FDIC insurance up to $250,000 per account and most online banks carry no maintenance fees.
However, unlike many physical banks, online banks compete for your money, and the way they compete is by offering competitive interest rates.
Where brick-and-mortar banks offer a measly 0.03-0.06% interest rate , online banks like Ally Bank or PNC offer interest rates on their savings accounts of 2.20%-2.32%.
At B of A, a $10,000 balance would only earn $3-$6 a year. Online, you’d earn $220-$232!
Option 2: Get Interest-ed in Your Broker
For most investors and traders, keeping funds in a savings account isn’t the best option, and, in some cases, withdrawing funds from your broker isn’t an option at all.
If you hold a brokerage account and you’re ready to buy stocks but you’re just waiting for the right opportunity, you may not want to have to wait 2-3 days for a funds transfer to clear from your bank account into your brokerage account.
If you’re managing your own Traditional or Roth Investment Retirement Account (IRA), transferring cash out of the account will incur significant fees and penalties that would invalidate any interest you could earn.
So, what can you do to earn interest on uninvested cash in a brokerage account?
Many brokers offer a solution for this in the form of a money market fund. Like savings accounts, money market funds (also called “money funds”) pay investors a competitive interest rate to keep uninvested cash in the fund.
Some brokers, like Vanguard Funds, give investors the option to automatically hold cash in an interest-bearing money fund (Vanguard’s fund is the Vanguard Prime Money Market Fund and currently pays a 2.26% rate). In Vanguard’s case, uninvested cash automatically earns interest whenever it’s not in an investment.
Other brokers, like Charles Schwab, offer fee-free depositing and withdrawal of cash from their interest-bearing fund (Schwab’s is the Value Advantage Money Fund – SWVXX – and currently pays a 2.20% rate). The investor has to actively deposit and withdraw cash to and from SWVXX, but there’s no cost in doing so.
The other downside for brokers like Schwab is there may be a waiting period before your cash clears back into your trading account. In Schwab’s case, it’s worth noting that the waiting period is only one business day.
IMPORTANT: Some brokers, like Robinhood or Ally Bank, don’t offer interest-bearing solutions for uninvested cash. Make sure you research brokers before opening an account if earning interest on your cash is important to you. Also, the FDIC insurance that applies to savings account does not typically apply to money market funds. Do your research so you know for sure if your broker has an interest-earning solution for your cash.
Put Your Money to Work!
There you have it – two decent options for keeping cash on the sidelines, but making sure it still works for you. Do you have questions? Maybe you have other solutions for sidelined cash? Leave ’em in the comments!