By Shane Cummings, CFP®, AIF®, Wealth Advisor & Director of Technology/Cybersecurity
Many investors are assessing their investment opportunities in light of the recent stock market run-up and impressive current yields on cash deposits. It has been a long time since we’ve seen high-yield savings accounts offering yields of 4 or 5% like they are today. Given the extremely large universe of investments available to investors today, you may be wondering if you are better off putting your investment capital into cash savings or investing it.
What is a High-Yield Savings Account?
High-yield savings accounts, offered by banks or credit unions, provide a stated yield on deposited funds. While some banks have simple rates without strings attached, other banks may offer teasers or promo rates that pay attractive yields for a limited time or only if a minimum balance is maintained.
How Do High-Yield Savings Accounts Work?
The landscape of high-yield savings has transformed with the rise of online banks, reshaping how individuals approach saving. Freed from the overhead costs of physical branches, online banks can offer more competitive yields, currently in the high 4% to low 5% range, as observed in April 2024. This digital evolution not only contrasts starkly with the modest 1% yields of the past but also underscores technology’s pivotal role in providing consumers with more saving options.
Are High-Yield Savings Accounts Safe?
One difference between investing and placing your cash savings at a bank or in a high-yield savings account is that the savings account is usually FDIC insured up to $250,000 or $500,000 for a joint account. This means the government, in effect, insures your bank deposits up to that amount in the unlikely event that the bank holding your deposit fails. While such occurrences are rare, they’re not unheard of. As recently as March 2023, Silicon Valley Bank famously failed due to a combination of realized losses on their bond collateral and a run on bank deposits. A few other regional banks failed around the same time, but the banking system quickly stabilized. As a result, authorities and market watchers are paying more attention to the health of regional banks, as the turbulence in the bond market in 2022 stress tested the balance sheets of many banks.
This is not to say that having your cash invested in high-yield savings accounts is risky, but there can be a small level of risk if you have cash at a bank that exceeds the FDIC-insured amount. At the very least, cash above the FDIC limits would be best spread across multiple banking institutions to expand your coverage.
Saving vs. Investing in Other Assets
Compared to high-yield cash savings, investing in financial markets can result in a much wider range of outcomes. While cash accounts generally accrue income every month and compound accordingly, market investments can yield varying results, influenced by factors such as the performance of underlying stocks, sectors, or countries in which they are invested in. Money invested in bonds or bond funds will typically pay monthly income, while stocks may pay dividends on a schedule, although some stocks do not pay dividends at all. If you were to open an account with an online brokerage firm, you typically have thousands of investment options at your fingertips – stocks, bonds, ETFs, and mutual funds, amongst other vehicles.
If an investor has extra capital available, it is advisable to make sure you have established a suitable cash cushion or an emergency fund for yourself. A general guideline is to have cash to cover several months of required expenses should an emergency occur, such as a job loss. That could be three months, or more conservatively six to nine months’ worth of cash. Once this target has been achieved, investing excess in the capital markets may be a prudent next step.
One thing to be aware of is investing diligently requires more research and discipline than opening a high-yield bank account. If you’re managing your investments without a financial advisor, it entails thoroughly researching the companies or funds you want to invest in before placing any trades. By comparison, choosing a high-yield savings account typically requires you to choose a bank and ensure that the stated yield on the account is reasonably competitive and that you stay on track after the deposit is made.
If you are investing in stocks, volatility is a fact of life. Stock prices can and will move quite a bit each day the market is open, typically more so if a company reports earnings or issues a press release with news that impacts their business prospects (good or bad). Significant news regarding a company could sometimes make its stock fall or rise by double-digit percentages within a few minutes. Given how much information is available online and in computerized trading, market prices change rapidly – faster than a person can typically react to them.
Changes in Financial Markets Dictate Yields and Returns
It is important to remember that the financial conditions you see today are not permanent. While 5% yields on cash savings can be beneficial, it’s important to remember that rates might fluctuate over time. The reason we are seeing rates as high as they are is because the Federal Reserve dramatically increased interest rates to fight inflation. You can think of it as a silver lining to the inflation crisis; however, once the Fed moves forward to cut interest rates, high-yield cash savings rates will generally decline accordingly. At the beginning of 2024, the market anticipated many rate cuts; however, recent futures suggest fewer rate cuts are now expected.
Investing in the markets, however, generally has the potential to generate higher long-term total returns. The long-term annualized return from 1928 through December 2023 is 9.90%. Some portion of total stock performance is related to the yield on the underlying securities; however, most return comes from capital appreciation. Historically, stocks have generally been considered a good long-term investment and may potentially act as a hedge against inflation. While cash yields currently stand around 5% over the past few years, they may still have been beaten by inflation and have real (inflation-adjusted) negative returns.
It’s important to understand your time horizon as an investor. In other words, how long will your capital be invested. If you can stay invested for a period of three to five years or more, the potential for making profits can be relatively higher. Over a short time frame, between 12 to 24 months, market volatility can be much more of a variable, and there is a higher probability that you could lose money in the market during that timeframe.
Therefore, it’s generally prudent to allocate capital that could be needed in the near future to cash savings and funds you don’t need for a long time to invest. Allocating capital elsewhere will help control the overall risk to your total portfolio while giving you flexibility and liquidity tailored to your personal time horizon.
Seeking Professional Guidance to Decide Between Saving vs. Investing
Investors also need to assess their risk tolerance. If the market makes you uneasy and negative financial developments tend to induce stress and anxiety; you may not want to allocate all your investments to stocks or growth assets. This can be a good case for hiring an advisor to customize an investment allocation that is diversified across different asset classes and structures specifically for you.
An advisor can help you avoid excessively risky or speculative assets that aren’t suitable, given each investor’s risk tolerance or financial goals. There are investment strategies that seek long-term growth while attempting to mitigate market downside risk. A good advisory team will generally help blend cash and investing strategies tailored for you, and provide other wealth advisory services.
Disclaimer:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. There is no guarantee any forward-looking statement will come to pass. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index.
