How Savers Can Maximize Cash

HUDSON:  If you have cash in the bank, earning interest, you are lucky to be getting $0.25 for every $100 on deposit.  That`s the impact of these record low-interest rates for savers.

Larry Swedroe is the director of research at Buckingham Asset Management, and he`s with us again.

Larry, it`s nice to see you.


HUDSON:  So how can savers maximize their cash in this era of low- interest rates for the next couple of years?

SWESROE:  That`s a really important question.  One of the ones I am getting asked the most.  As soon as I hear that, my first response, Tom, is– well, you are telling me you need more risk in your portfolio, saying, no, I want more yield.

HUDSON:  I want more reward, Larry, not risk.

SWEDROE:  And it`s really the same thing generally.  And we think it`s much better to take the risk on the equity side where you can diversify more effectively and you get the higher returns in a tax-efficient way.

On the bond side, you want to keep them safe.  We don`t want to be taking lots of risk because the risk in things like junk bonds or other things like preferred stocks that brokers tout, they can — the risk can show up at the wrong time like in `08.

So, with the banks now, what do we do with our money?

HUDSON:  With the cash.

SWEDROE:  With the cash.

So the first thing I tell people is you need to keep disciplined both from the credit side.  You don`t want to be taking the risk because if we get another recession, those assets could get hit hard and you need this to be safe money.

HUDSON:  Right.

SWEDROE:  Second thing is you have to keep discipline in keeping, say, your average maturity at five years.  And that means not keeping everything short.

People listen to Bill Gross, for example, and said, get short, rates can only go up, have suffered, missed out on that opportunity.

HUDSON:  Yes.  So when we`re talking about cash and you`ve got a certificate of deposit coming due, for instance, is it essentially you`re just going have to deal with the low-interest rates but go out maybe five years to try to get a little bit better bang.

SWEDROE:  Right, and I would say five years is a good average maturity.  It balances the reinvestment risk if rates fall.  You still keep some of that yield and you don`t take too much inflation risk on the other hand.

HUDSON:  Always go with FDIC insured?

SWEDROE:  One hundred percent of the time, go shop online, find the bank that happens to be paying a bit more.  We work with a couple of banks now.  About a half to three quarters of 1 percent.

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