The Fed is lowering rates: Here is what to do next with your cash holdings.

The Federal reserve is currently projected to lower rates. Here is how that should change your investment strategy. 

If you haven’t read the news, the current worldwide macro-economic outlook isn’t so fantastic. Banks worldwide are plunging their interest on bonds into the negative in an attempt to stimulate their economies. As I write this post there is 17 trillion negative-yielding bonds, over half of which were issued between 2018-2019:

Image result for 17 trillion negative bonds

The Federal Reserve is projected to cut rates at the next FOMC meeting (the Federal Open market committee). This is where they determine the interest rate to charge commerical banks to borrow from the Fed. Given how things looking at the moment relating the slowing job growth, the trade war, and the cut they just did a few months ago, we can be nearly certain the fed will be cutting rates at their next meeting.

Image result for federal reserve interest rates over time

How will this affect you?

If you have a lot of cash holdings, now is the time to move your money into fixed interest-bearing assets like CDs and Treasury bonds to lock-in the current rates. Sallie mae has some CDs with yields of 2.45%. they aren’t the absoute best out there, but they connect to my personal capital account and are pretty well known. I went with them for part of my cash portfolio:

Another risk-free (in my mind at least) investment is I-Bonds. You can buy I-Bonds from Treasury Direct.

If you don’t know what I-bonds are, they are an excellent form of not-as-well-known investment for Cash holdings, or an emergency fund. They are guaranteed to never lose money because they have a fixed rate + a coupon rate that is constantly adjusted for inflation. This means an I-bond will always pay out enough to make sure your investment never loses anything to inflation, plus a fixed interest rate. They are also exempt from state income taxes so if you live in a high-tax state, these can be a great add-on to your cash portfolio. 

Treasurydirect hosts a tiny impossible to read rate chart that shows how the interest on I-bonds has changed over time.

LFor those of you still holding onto your 3.5% bonds from 1998 with a risk-free return of ~4.5-5% in today’s markets, you are a lucky bastard and I envy you. Because the most we can get today is 0.5%, and in today’s markets that is considered good.

There is a catch with I-bonds though: You can only buy them online from Treasurydirect (which is a government run website and looks like it’s straight out of 2004). They also cannot be redeemed for a full year, and redeeming them between 1 and 5 years will result in a 3-month interest penalty. After 5 years, they can be redeemed penalty free and after 30 years, they will stop paying interest. And because this is such a sweet investment, you cannot buy more than 10K per year per SSN. But you can buy an additional 5K per year with your tax refund, bringing the maximum possible total up to 15K per year. If you can lock up cash for 1+ years, they can be a great way to hedge against changing interest rates and inflation.

If you want to park some cash but may need access to the funds in under a year, some banks have recently created “no penalty CD” products, meaning you will pay no early-withdrawl or interest penalty for redeeming your CD early. What I really don’t understand about these products is why wouldn’t you just jump for the highest interest rate CD, even if it happens to have the longest duration? After all, you can just cash out the CD and roll it into a higher interest one if the need arises In fact, Marcus even actively encourages this on their website. But due to the inversion of the yield curve, short-term CDs at some banks are paying more than long-term ones, so just go with the short term no-penalty CDs and pick fixed CDs like the sallie mae one above for better yields:

A 7-month CD looks to be the best choice. If you need a CD longer than 7-months, shop around for a 9-12 month fixed rate CD for better rates.

 given that I am a college student and have a bunch of cash I may need access to in the near-future, here is my next investment move:

I have a bunch of cash from running CircleTech accumulated from 2017-the present. It turns out it’s really easy to save money when Mommy and Daddy are paying all your living expenses and you save every penny. I am not ignoring the huge privilege I have of someone else paying for my college degree, but I am also not going to be an idiot and squander the funds I do make on stupid things like liabilities (new tech, cars, basically anything for consumption). 

Now i’m not about to go dump this money in the stock market since I may need it when I graduate college. I could put a down paymewnt on a house, or just buy a new car (which judging by my spending habits, it would be very unlikely of me to do). The stock market is really where one puts “long term” funds that you plan to do something with in 20-40 years, say retire. Not where you need to put funds you may need access to as early as spring of 2022 (my graduation date). In fact, 25% of these funds I will need as early as April as 2020 to make a Roth IRA contribution.

Here is the strategy I used for my cash portfolio:

25% of the cash in a marcus 7-month no-penalty CD: 

This is money that I will be using for my roth IRA contribution in April of 2019. I contribute the full amount all at once during tax year, so this will sit there until ~April of 2019. I have already paid taxes on this amount using a credit card with a signup bonus and a 0% APR rate until 2020, so the real amount is really 20% of my cash and the rest is leveraged debt. At least I was prepared this year and have quickbooks to come to my rescue unlike my tax story from 2017, but that is for another day. (In fact according to quickbooks I have so many deductions this year I could theoretically pay zero in taxes. I would also like to make a retirement contribution and in the long term it makes a ton of sense because my investments will easily outgrow the taxes I pay in just a few years. The IRS will be happy to take more money than they expected.)

37.5% of the cash in a sallie-mae 2.45% 12-month CD:

Given that 2.45% is one of the highest rates I have found so far, Sallie mae seems like a good place to park my cash for the short-term. I will almost definitely not need this cash in the next year, but I may need it in 2021 if CircleTech ever get’s anywhere here in southern Illinois, (hint, it’s doubtful).

37.5% of the cash into a Treasurydirect I-bond:

37.5% will go into an I-bond at TreasuryDirect and may serve as my future “emergency fund”. A fixed rate on I-bonds of 0.5% is something we haven’t seen since 2008, so now is a great time to pile cash into these instruments. Since the bond in the fund currently pay a 0.5% fixed interest rate, my hope is that I will never have to redeem the bond unless I really and truly need it, like a medical emergency. In a perfect world, I would graduate with this bond and never actually use it, but we will see if this comes to fruition.

All signs say interest rates are projected to go down both soon and fast. what will your next move be?

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