With the stock market off to a violent start to the year, many investors are looking to an asset class that performed better than equities last year: cash.
In 2015, most cash in the bank earned, essentially, zero: the average bank savings account paid depositors about 10 basis points, or 0.10%. But those investors savvy enough to put their money in online-bank savings accounts earned up to 1.05% on FDIC-insured cash.
That’s a healthy return, compared to the equities market. In 2015 the Dow Jones Industrial Average fell 2.2% and the S&P 500 declined by 0.7%, according to the Wall Street Journal. Poor returns are contributing to the growing number of pension funds and other institutional investors who are warehousing cash — as much as 10% to 15% of some portfolios, the newspaper found.
For individuals who also feel they should hold cash on the sidelines — either because they’ve adopted a conservative, capital-preservation stance, or because they want to reserve dry powder for market buying opportunities — the difference between 10 basis points and 100 basis points on cash is significant, particularly when compounded over time. It’s even more material when the stock market itself is in decline.
And rates probably won’t stay this low forever. Now that the Federal Reserve finally has raised interest rates, online banks likely will raise their rates more rapidly than bricks-and-mortar banks, because their cost structures are more flexible. Investors who already have online savings accounts for their cash will benefit from this trend. Those who use Max to optimize their cash will see higher rates automatically, when the banks raise them, since Max automatically helps funds flow to whichever banks are offering the highest yields.
For cash held on the sidelines, it makes sense to earn as much as possible, while protecting principal by ensuring full FDIC coverage. Risk, and the volatility of risky returns, are for other asset classes. Cash is stable, and should churn out a steady yield while staying safe. Learn how Max can help investors earn more on the cash within their portfolios.