IBD on Going to Cash, Sweep Accts
Investor's Business Daily published the article, "Thinking of Going to Cash? Here's How to Shop for Yield." It explains, "The daily ups and downs have left the market down about 10% for the year, going into Friday. Like a pair of tag-team wrestling bad guys, the main culprits are easy to identify: the Federal Reserve and its game plan for interest-rate hikes and Vladimir Putin's invasion of Ukraine. So what should you do with your investments? Time to go to cash? The answer depends on which part of your portfolio you're asking about." The piece asks, "What about the short-term part of your diversified portfolio? That's the part of your portfolio that you plan to use to pay for goals within the next, say, three years. It is earmarked to pay for goals that are fast approaching. And you probably know the exact or approximate dollar size of those upcoming bills. Those funds may be your only way of paying for those goals. If so, you need all of the money. You can't afford to let a market downturn cut the balance to below your targeted spending amount. That's money that you can justify cashing out." IBD says on the "Risks of Shopping for Higher Interest Rates," "So if you do go to cash with a short-term portion of your diversified portfolio, how do you find the best place to park that money? Where does the 'planning' part of retirement planning enter the picture? Almost all brokerages offer a default account called a sweep account. Just as the name suggests, that's an account into which the brokerage sweeps your idle cash. Many brokerages offer alternatives to their one basic default sweep account. Some brokerages offer many choices. In most instances, the basic default sweep account pays next to zero interest. Their main virtue is that generally they won't actually decline in value. And in a few cases, you can shop for alternatives that pay somewhat more." It continues, "[I]f you're willing to move cash from one financial firm to another, you can shop for more bank accounts, money market accounts and certificates of deposit (CDs). But moving money like that can be inconvenient. You may also incur fees. And when you want to put the money back to work in the old investment account, the transfer may not take effect right away. You can lose out on market gains." Finally, they add, "The highest savings account rate from top online banks listed by Bankrate.com on Friday was Comenity Direct High Yield Savings. Its annual percentage yield (APY) was 0.6%. Basically, APY is annual interest rate. Bankrate.com's highest money market account APY was Vio Bank's 0.56%. Bankrate.com's highest three-month CD APY was Bethpage Federal Credit Union's 0.4%. But even those interest rates are not dramatically higher than what you can find in the highest-yield accounts at many brokers.... Take online broker giant Schwab. Its basic default sweep account for money in Schwab brokerage and retirement accounts offers a next-to-nothing annual percentage yield (APY) of 0.01%. But that account is not an FDIC-insured bank account. Schwab's nonsweep account for its Schwab One brokerage customers pays triple that, but it's still a humble 0.03%. You can also get various nonsweep money funds and certificates of deposit. The CDs pay APY ranging from 0.25% up to 1%. A nonsweep account means you have to take a few more steps to set up the account and arrange to use it."
