Tag Archives: Certified Financial Planner

A Silver Lining Within Today’s Interest Rate Environment

A Comparison Between Cash Management Products

3/2023

By Robert Eifert, CFP®

In light of recent events such as the Silicon Valley Bank collapse, many individuals have questions about cash management strategies. As the Federal Reserve has been on a campaign to raise interest rates to combat inflation, the cost to borrow has increased significantly, and the broader markets are exhibiting volatility while investors attempt to interpret what’s next for the economy. On the other side of the coin, rates in short-term cash-like instruments have begun to rise to reflect the current rate environment.

In the midst of a tortuous market cycle, the ears of many investors and financial professionals tend to perk up when they hear there are ways to earn a 3%-5%1 return while taking on very little (or, in some cases, zero) risk.

While the exact path and duration of the Fed’s current monetary policy may be uncertain, we at Cahaba Wealth avoid altering our strategy based on short term predictions or pontifications. We choose to focus on the opportunity to take advantage of these high yielding and highly liquid products when it makes sense for clients.

Every decision we make for client portfolios is based on a comprehensive financial plan and the 3 pillars of investment management:

  • Risk tolerance
  • Time horizon
  • Cash flow needs

Below, we will compare and contrast a few methods of managing cash for clients who have excess savings. An important distinction to make is that the savings vehicles we are comparing here are only one small component of a well-diversified portfolio that is aligned with goals and risk tolerance. Depending on your unique situation, the following vehicles could be preferable to traditional checking accounts that are currently paying little to no interest 1.

High Yield Savings Accounts:

These are traditional deposit accounts at various banking institutions that compete for the highest rate and most account flexibility. There may be limitations on the amount of transfers in or out of these account in any given month, but this still affords very quick access to a linked checking account for any expenditures. As these accounts are offered by banking institutions, depositors receive full FDIC insurance (up to the limit of $250k per account holder). Because of the safety and flexibility of these accounts, rates are generally lower than other products available.

Certificate of Deposit (Brokered):

A CD is a banking product that offers a fixed rate of interest in exchange for holding a deposit with that bank for a pre-determined time period. For our purposes, we will focus on the higher yielding “brokered” CDs that banks offer to depositors through larger brokerage houses like Fidelity, Schwab, Vanguard, etc. These are still bank products and are insured up to the FDIC limit.

The rate on a brokered CD is generally higher than a savings account because purchasers are agreeing to leave their deposits with the bank for anywhere from a few months to a number of years. This can be beneficial because the rate is locked up for that period, despite any interest rate fluctuations.

A brokered CD actually has a secondary trading market where one can sell before the end of the term if funds are needed (CDs obtained directly from a bank lack this feature and charge penalties to do so). The price of these CDs is highly dependent on prevailing interest rates and a number of other factors, so there is still a risk that the purchaser could receive less than the actual value that would be achieved if held to maturity.

Treasury Bills:

A T-Bill is U.S. Government debt that matures in a period of one year or less. These securities are typically sold at a “discount to par value”. This essentially means that the purchase price is less than the stated “par value”, and upon maturity the purchaser is paid that par value. The difference between purchase price and par value represents interest earned (in order to compare with other interest-bearing instruments).

T-Bills are regarded as one of the safest assets in existence, as they are backed by the unlimited taxing authority and borrowing power of the U.S. Government.

As of late, T-bills and Brokered CDs of similar maturities have been trading rank for the highest interest rate1. However, T-bills have the advantage when it comes to liquidity. The secondary market for treasury instruments is very robust which means that they are very easy to liquidate before maturity, should the need arise.

An additional benefit of Treasury instruments is that they are generally exempt from state and local income tax. This can result in significant savings depending on one’s tax situation and the amount invested. 

Money Market Mutual Funds:

These Mutual Funds consist of a mix of very safe, short term assets from the U.S. Government, banks, and high quality corporate issuers. There is a wide offering of Money Market Funds that allow investors to tailor their exposure to various instruments based on desired yield, risk and tax treatment. The rates earned with these funds are variable, but we’ve found that they can be competitive with the other instruments listed even after the fund management fees are considered.

A distinct benefit of a money market fund is the ability to liquidate all or a portion of the investment at the $1.00 “per share” value that the funds maintain. This allows investors to earn and re-invest the interest, all while preserving the ability to utilize the cash in short order.

These products each have different use cases, and are no substitute for a diversified portfolio that is aligned with investment objectives. The financial planning process is a critical piece needed in order to effectively manage a liquidity portfolio. Armed with the knowledge of our clients’ short and intermediate term liquidity needs, we can align our clients’ hard earned savings in the appropriate vehicles. If you have questions regarding your specific situation, please do not hesitate to reach out.

Robert Eifert, CFP®, is an associate advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

1 Based on interest rate environment as of March, 2023.

Source: “Fidelity Money Market Funds.” Money Market Funds | Fidelity Institutional, Fidelity Institutional Asset Management®, 19 July 2022, https://institutional.fidelity.com

Source: Kozlowski, Julian, and Samuel Jordan-Wood. “Where Do You Keep Your Liquid Wealth-Bank Deposits or T-Bills?” Economic Research – Federal Reserve Bank of St. Louis, 16 Dec. 2022, https://research.stlouisfed.org

Source: Leondis, Alexis. “CDS versus T-Bills: For High-Yield Savings, Go with Treasuries.” Bloomberg.com, Bloomberg, https://www.bloomberg.com

Source: “Maintaining the Stable Net Asset Value Feature of Money Market Funds.” GFOA.org, Government Finance Officers Association, https://www.gfoa.org

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Courage

12/2022

By William Jackson, CFP®

When discussing successful wealth management, most will typically include investment management/asset allocation, cash management, risk management, and other predictable factors. What is typically omitted or minimized relates to behavioral psychology.  How one reacts to adversity is arguably more impactful to long-term success than all the other factors combined.  Specifically, having the courage to stay the course during uncertain times is often the greatest determinant of long term success.

Holistic financial planning permits a good advisor to focus every conversation on the client’s long term plan.  This approach enables the advisor to provide a service that truly helps clients lead their lives with greater financial clarity.  The challenge is that we work in an industry that is intentionally opaque.  Having a plan and staying the course is not standard operating procedure for the majority of industry participants.  These firms have a strategy of offering reactionary products to clients that attempt to solve the problem of the day.  They bombard our inboxes with updates to make us aware of solution “de jour”.  Frequently, these products are of a complex nature, and render the buyer feeling underqualified to understand but worried about missing out.  These firms are well aware that when clients are overwhelmed with “over their head” concepts, they might feel hesitant to ask questions. This ultimately results in many clients agreeing to purchase products that are often unnecessary or even inappropriate for their personal plans.  A good advisor who is “fee-only” and focused on financial planning serves as an agent of clarity with the mission of helping clients understand why any products chosen for them are beneficial and necessary.  This might sound simplistic, but the rewards are real.

The foundation of Cahaba Wealth was built on knowing our clients and their financial goals.  We provide comprehensive financial planning in a way that leads clients to have greater understanding of their financial lives.  The financial plan dictates the investment plan. The investment plan and process are intentionally designed to encourage a discipline that has shown to be beneficial to long term wealth creation.  In asking you to trust in the process and have the courage to take a road less traveled, we are demonstrating our commitment to your success. We are aware of the magnitude of this request and are grateful for the faith shown.

Eleanor Roosevelt wrote, “You gain strength, courage and confidence by every experience in which you really stop to look fear in the face. You are able to say to yourself, ‘I have lived through this horror. I can take the next thing that comes along.’ You must do the thing you think you cannot do.”

We are proud to call you clients and thankful for the opportunity to serve.

Seasons Change

9/2022

By Walton Cobb, CFP®

Fall is in the air, and children are back in school for a new year. A sense of optimism usually follows each change of season. However, for investors in 2022, each season has brought the same doom and gloom. The S&P 500 is down over 23% year to date, the Nasdaq Composite is down over 31%, the Russell 2000 (small cap index) is down over 23%, and broad based foreign stocks are down over 27%1. What is most troubling of all? The impact that rising interest rates have had on the bond market. Year-to-date, the 10 Year Treasury is on pace for its worst return on record 2. Wait, we invest in the bond market to reduce risk and be “safe”, right? A new season indeed!

As the sun rose yesterday morning revealing the horrid images of Hurricane Ian’s destruction, we are reminded of how little we control in the short term. Clearly human life is more valuable than any investment portfolio, but there is a parallel here. One does not move to the Florida coast without accepting the risk of Mother Nature’s tropical rage and few permanently flee after a storm recedes. Why? Simply put, there are many more sunny days in Florida than not. Just as every hurricane ends, bear markets do as well. Although every economic recession and bear market is different in how it begins, the results are generally the same. Markets decline, sometimes precipitously, and then the cycle begins anew, eventually to reach new heights. In 2008, the S&P 500 fell by 37%, but bounced back 26.46% and 15.06% in 2009 and 2010, respectively 3. In fact since 1996 the S&P 500 has only had 5 down years, which means during that time period there were many more sunny days than not 3.

At Cahaba, our job is to coach our clients through the good times and the bad by helping you minimize the role emotion plays when making financial decisions. The data overwhelmingly shows that the only way to withstand a bear market is to “control the controllables”. These “controllables” include tax loss harvesting, diversification, rebalancing, cash flow projection revisions, media consumption and most importantly your reactions. What can we not control in the short term? GDP, market performance, inflation, the Federal Reserve, corporate earnings, which party is in control of Congress… you get the idea.

One of the most difficult behaviors that we battle is our own consumption of mass media. Should you find yourself watching too much CNBC or reading too many negative voices on social media, turn the television off and put down the phone. These voices are intentionally appealing only to your fears. No matter how smart the media pundits seem, no one can foresee the future. The timing of economic recessions and market crashes are rarely ever accurately predicted. As we witness daily, when it comes to investment managers there are very few good stories, but thousands of storytellers. Anyone can be right over a 3 year period and completely wrong over the next 3.

As a team, we are committed to a data driven approach to portfolio management. We will not pretend to know what the near term will bring us. However what we do know is that the water will recede and most importantly, we know you. Throughout the financial planning process, we learn your investment objectives, risk tolerance, time horizon, current/future tax brackets, future expected expenses, insurance needs, and what to expect for your family long after you are gone. With the markets down, it is also a great time to “stress test” your long term cash flow projection for any potential long term hiccups.

Human nature tells us to take action and stop the bleeding. During many other crisis situations, that may be an appropriate response. However, when considering long term investment success, we must be in the markets on the very first day of its return to glory, as it will never be available to you again. Since we don’t know exactly when that day will come, we have to weather the storm through its worst days. As a firm, we have witnessed multiple economic recessions coupled with bear markets. In all cases, the thing to do was to remain invested. The odds are overwhelmingly in our favor that history will repeat itself again. In the meantime, we have to “control the controllables”. We remain confident that the changes of season will soon bring more optimism, and we look forward to many more sunny days ahead.

Walton Cobb, CFP®, is a financial advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

1 Source: Stocks. (n.d.). Retrieved September 30, 2022, from https://ycharts.com/stocks

2 Source: Bahceli, Y. (2022, June 30). Bonds in line for worst year in decades. Reuters. Retrieved September 30, 2022, from https://www.reuters.com/markets/rates-bonds/brutal-first-half-puts-bonds-line-worst-year-decades-2022-06-30/

3 Source: S&P 500 total returns by year since 1926. (n.d.). Retrieved September 30, 2022, from https://www.slickcharts.com/sp500/returns

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.