In a recent article in Barrons “What To Do With Excess Cash” Abby Schultz points out there is an interesting trend among high net worth investors to hold a high percentage of their investable assets in cash or cash equivalents:
“According to Federal Reserve figures, retail investors had about 18% of their assets in money market funds and in U.S. bank deposits, considered cash alternatives, at the height of the financial crisis in 2009. But today, they still have a high percentage in cash—around 14%.
Citi Private Bank’s clients, who have at least US$25 million in investable wealth, had about 25% of their wealth in cash in 2009, but they still have 22% in cash today, says Bailin, global head of investments at the bank.”
This mindset is hard for the wealth management industry to understand when they have so many products to replace that cash, including relatively high yielding money market funds. There is speculation among wealth managers that cash hoarding might portend a stock market top. Possibly, there is discomfort with the derivative nature of most financial products? I think it is much simpler than that.
Your Childhood Cash Stash
Remember in your childhood when you had your paper route or babysitting money in a hiding place in your room? There was an overwhelming sense of financial freedom in holding cash. You could buy Turkish Taffy or baseball cards without parental approval. However, with time and the growth of your cash hoard, your mother or father insisted you open a bank account. The trick was they had to co-sign any withdrawals. You quickly found out that your money was not really yours until you turned 18 and, even after that, mom or dad seemed to know what you were doing with your cash- no electric guitars, drums, mini-bikes or record clubs. The intellectual satisfaction of earning interest on your deposits was nothing compared to the financial freedom of cash in hand.
The current fascination with cash might be channeling a familiar urge for financial freedom where you don’t rely on a third party or a product for a portion of your wealth. Without knowing it for sure, I also speculate that the biggest hoarders may be entrepreneurs, small business owners and self-made wealthy, especially those who have sold their source of livelihood. The cash may replace the security of their role as owners and founders?
Design Your Own
The good news for this group is you can manage cash yourself without paying fees thanks to an inverting yield curve where short term duration government bonds are yielding almost the same as long term bonds.
If you have an account at Fidelity or Schwab you can create your own short duration ladder. Simply look for “Trade Fixed Income”, select the range of treasury maturities, and place orders. There is no commission or markup. An example of $1,000,000 spread over the next 12 months might be as follows:
| Treasury Bill or Bond Maturity | Amount Invested | Appx Yield |
| September 2018 | $250,000 | 1.94% |
| December 2018 | $250,000 | 2.08% |
| March 2019 | $250,000 | 2.22% |
| June 2019 | $250,000 | 2.42% |
Significant Tax Advantages
Treasury Bills and Notes are also exempt from state and local income tax so the fully taxable yield equivalent for bank deposits and money market funds would be the approximate yield shown above divided by your state and local income tax rate. For Cleveland, Ohio the combined rate is 7.5%. The tax exemption is a meaningful differentiation in a low return environment.
A short duration treasury ladder also makes sense to me at an interest rate inflexion point like we are seeing right now. Rates may be going up for now, but for how long and how much is completely uncertain. They may also reverse if Fed thinks a recession is imminent or if inflation is tamed. If you look around the world, many developed economies have negative yields. The US is an outlier with a central bank that is raising rates and shrinking its balance sheet. Luckily the almost inverted US yield curve is accommodating short term government investing. You are paid almost as much on a two year T-Note (2.63%) as you are for a 10 Year T-Bond (2.95%)
Managing a short duration treasury program does not require parental supervision of the wealth management industry or the associated fees. It may be as rewarding as your childhood cash hoard and you are free to buy toys without approval.
