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Cash Cash

Questions You Were Afraid to Ask #11

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

The only bad question is the one left unasked. That’s the premise behind many of our recent letters. Each covers a different investment-related question that many people have but are afraid to ask.  In the next few messages of the series, we want to address some questions we’ve been hearing lately about recent investing trends.  We’ll start with…

Questions You Were Afraid to Ask #11:
What does it mean to invest in cash? 

Sometimes, an investor will see a headline that mentions the word “cash.”  Here are some examples just from the last year or so:

“Cash is king again.”

“Warren Buffett sits tight on cash.”

“No more ‘cash is trash’ billionaire hedge fund manager says.” 

“How much of an investment portfolio should be in cash?”

Headlines like these often bewilder new investors.  But even experienced investors sometimes wonder: “What does it mean to invest in cash?”  After all, we don’t usually think of the word “cash” in relation to investing.  For most people, cash is the stuff you keep in your wallet.  So, what gives? 

This is a textbook example of an intelligent question people are often afraid to ask. 

Fortunately, “investing in cash” is a fairly simple concept.  It means to invest in a type of short-term security for a set period of time in exchange for one or more interest-rate payments. 

Certificates of deposit (CDs), money market accounts, and treasury bills are three examples.  These securities are known as “cash equivalent” investments, but the word “cash” alone is often used as an umbrella term to cover all the various types.  That’s because these types of investments are very liquid.  That means the funds inside them can be converted to actual cash – money you can spend at a moment’s notice – quickly and easily compared to stocks, bonds, or investment accounts like a 401(k) or IRA.  (Stocks and bonds aren’t always easy to sell, and depending on the timing, you may sell for a lower amount than what you paid for.  Meanwhile, withdrawing the money from an IRA or 401(k) before you retire can trigger financial penalties from the government.) 

That’s why these types of securities are referred to as “investing in cash.”  They still provide a return – hence the investing part – but also a level of liquidity close to actual, physical currency. 

Cash investments are handy if you have money that you:

  1. Want to keep safe.  Money markets and certificates of deposit are historically stable investments and are often insured up to a certain point by the federal government.
  2. Want to earn a return on. In the form of interest rate payments, which are generally higher than with a basic savings account.
  3. Want easy access to within a relatively short period of time.  Most money markets have a maturity of six months or less.  Treasury bills mature within one year or less.  CDs, meanwhile, usually have a maturity of 6 months to a few years.

That said, there are some downsides to investing in cash.  For one thing, if your focus is on growing your money, there are usually much better options.  That’s why many investors often shun putting too much money into cash. They feel there are more productive ways to invest.  And while they are very liquid compared to other securities, there are still penalties if you withdraw the money from a CD before maturity.  (Money markets don’t have an early withdrawal penalty, but many banks and credit unions will charge monthly fees if the balance falls below a certain minimum.) 

With all this in mind, why have we seen so many headlines about “cash” in recent years?  It all has to do with interest rates.  As you probably know, the Federal Reserve has been gradually hiking rates for much of the past two years to bring down inflation.  When the Fed raises rates, banks and credit unions usually follow suit.  As a result, some cash investments have been paying higher interest rates than normal.  This, coupled with a volatile stock market, has caused cash to gain in popularity with some investors.

How long this trend continues is impossible to know.  And it’s worth emphasizing that cash, like all securities, is an investment that is sometimes right for some people in some situations…not always right for all people all the time.  So, if you’re interested in cash investments, be sure to talk about it with a qualified financial professional first to make sure it’s right for you. 

In the meantime, now you know what it means to “invest in cash.”  In our next post, we’ll discuss another recent investing trend.  Have a great month! 

Tools for investing

Questions You Were Afraid to Ask #10

Written by Minich MacGregor Wealth Management on . Posted in Featured, News, Posts, Uncategorized.

The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investment-related question that many people have but are afraid to ask.  So far, we’ve discussed the essentials of how the markets work, the differences between various types of investment funds, and the ins and outs of stocks and bonds. 

A few months ago, however, an acquaintance of ours asked us a question not about investments but investing.  Specifically, she wanted to know our thoughts on the modern trend of using mobile investing platforms — aka “investing apps.” 

It’s a terrific question, because the use of such apps — and the number of apps available — has exploded in the past few years.  So, in this message, we’d like to continue our series by answering:

Questions You Were Afraid to Ask #10:
What are the pros and cons of investing apps? 

Mobile investing apps enable people to buy and sell certain types of securities right from their phone.  They have provided investors with a quick and easy way to access the markets.  For new investors who are just getting started, these apps have made the act of investing more accessible than ever before. 

That’s a good thing!  Even today, many people only invest through an employer-sponsored retirement account, like a 401(k).  That’s because they may lack the resources, confidence, or ability to invest in any other way.  But not everyone has access to a 401(k).  And while 401(k)s are a great way to save for retirement, many people have other financial goals they want to invest for, too.  Mobile apps provide a handy, ready-made way to do just that. 

Continuing with the accessibility theme, many apps enable you to invest right from your phone, anytime, anywhere.  In addition, many apps don’t require a minimum deposit, so you can start investing with just a few dollars.  Finally, the most popular apps often charge extremely low fees – or even no fees at all – to buy or sell stocks and ETFs. 

Many apps also come with features beyond just trading.  Some apps will help you invest any spare change or extra money, rather than let it simply lie around in a bank account.  Others enable you to invest automatically – daily, weekly, bi-weekly, monthly, etc.  That’s neat because investing regularly is a key part of building a nest egg. 

It’s no surprise, then, that these apps have skyrocketed in popularity.  In fact, app usage increased from 28.9 million in 2016 to more than 137 million in 2021.1  Part of this surge was undoubtedly due to the pandemic.  With social distancing, many used the time to try new activities and learn new skills from the safety of their own home…investing included. 

But before you whip out your phone and start trading, there are some important things to know, first.  Investment apps come with definite advantages…but also some unquestionable downsides.  When you think about it, an app is essentially a tool.  Like any tool, there are things it does well…and things it can’t do at all.  And, like any tool, it can even be dangerous if misused. 

The first issue: the very accessibility that makes these apps so popular is also what makes them so risky.  When you have a tool that provides easy, no-cost trading, it can be extremely tempting to overuse it.  Researchers have found that this temptation can lead to overly risky and emotional decision-making, as investors try to chase the latest hot stock or constantly guess what tomorrow will bring.2  The result: Pennies saved on fees; fortunes potentially lost on speculation. 

The second and biggest issue is that while these apps make it easy to invest, they provide no help with reaching your financial goals.  No app, no matter how sophisticated, can answer your questions.  Especially when you don’t even know the questions to ask.  No app can hold your hand and help you judge between emotion-driving headlines and events that necessitate changes to a portfolio.  No app can help you determine which investments are right for your situation.  Just as you can’t hammer nails with a saw, or tighten a bolt with a screwdriver, no app can help you plan for where you want to go and what you need to get there. 

Take a moment to think about the goals you have in your life.  They could be anything.  For instance, here are a few our clients have expressed to me over the years: Start a new business.  Visit the country of their ancestors.  Support local charities and causes.  Design and build their own house.  Play as much golf as possible.  Volunteer.  Visit every MLB stadium.  Send their kids to college.  Read more books on the beach.  Tour national parks in a motorhome.  Spend time with family.

Achieving these goals often requires investing.  But there is more to investing than just buying and selling stocks.  More to investing than simply trading.  Investing, when you get down to it, is the process of determining what you want, what kind of return you need to get it, and where to place your money for the long term to maximize your chance of earning that return.  It’s a process.  A process that should start now, and last for the rest of your life.  A process that an app alone cannot handle – just as you can’t build a house with only a saw. 

So, our thoughts on mobile investing apps?  They are a tool, and for some people, a very useful one.  But they should never be the only one in your toolbox. 

In our next post, we’ll look at two other modern investing trends. 

1 “Investing App Usage Statistics,” Business of Apps, January 9, 2023.  https://www.businessofapps.com/data/stock-trading-app-market/

2 “Gamified apps push traders to make riskier investments,” The Star, January 18, 2022.  https://www.thestar.com/business/2022/01/18/gamified-apps-push-diy-traders-to-make-riskier-investments-study.html

Things Most Advisors Don’t Tell you #5

Written by Minich MacGregor Wealth Management on . Posted in Minich MacGregor Missive, News.

Recently, we decided to share some non-financial lessons we’ve learned in a series of articles called, “Things Most Advisors Don’t Tell You.”  There are many habits and behaviors that, while not directly related to finance, can spell the difference between reaching your goals or not.  But in our experience, people rarely hear about these things from their financial advisor.    

This month, let’s look at:

Things Most Advisors Don’t Tell You #5:
The importance of asking questions

You’re driving on one of those remote, dusty highways where it seems like there are more buzzards than other cars.  It’s been hours since the last town of any size, which is concerning because according to your carefully laid plans, you should have reached your destination by now.  There’s no internet, and you swear the GPS on your phone is down.  You check your roadmap, but you have a sneaking suspicion you took a wrong turn sixty miles back.  Meanwhile, the other people in the car are drumming their fingers and asking questions like, “Are you sure this is the way?”  

Then, a lifeline!  You see a small town up ahead.  The sign says, Welcome to Backwater, Population 76.  

Now, you have a choice.  Do you keep going, trusting in your own navigational skills…or do you stop and ask for directions?  

Here’s another scenario.  You’re shopping for a new car at the local dealership.  As soon as you hit the lot, a salesman comes out.  “I know just what you need,” he says, and steers you by the shoulders to a car.  “This model has been specifically built for your exact gender, age, family situation, political party, and favorite breakfast cereal.  You could spend months looking at other options and not find anything better.  Here’s a pen.”

Do you sign the lease…or do you ask questions?  

These are two – admittedly extreme – examples of a dilemma people face on the road to their financial goals.  To ask questions…or not?  In our experience, many people fall into one of two potholes.  

The Do-It-Yourselfer.  Most of the time, independence and self-reliance are great virtues.  But for the DIY crowd, it’s easy to take them too far.  Refusing to ask for directions is the classic example, but it can be even more damaging when applied to your finances.    

The fact of the matter is, no one knows everything there is to know about finance. Unless you want to devote thousands of hours of your life to monitoring your investments, researching the tax code, familiarizing yourself with the ins-and-outs of estate law, or constructing a painstakingly thorough plan for reaching your goals, doing everything yourself isn’t an option. There are so many options to choose, potential roadblocks to avoid, and possible shortcuts to use, that it makes more sense to stop and ask for directions.

You see, we all have different life experiences, which means we all have different areas of expertise. Those who take advantage of this fact are often the ones who go further, faster. Now, sometimes this means consulting with professionals like tax planners, estate planners, and investment advisors.  But it can also mean having the humility to ask your friends, family, and neighbors for advice. If someone you know did a great job paying off their student loans and getting out of debt, ask them how! If someone you know got a killer deal on their mortgage, ask them how! Leaning on others for the occasional tip or insight isn’t weak or shameful. It’s smart.

The overly credulous.  While thinking you know everything is dangerous, equally dangerous is believing everything you hear without question. When it comes to reaching your goals, there is never a one-size-fits-all approach.  There is no philosophy, strategy, or school of thought that works for everyone.  And just as everyone has their own skills, everyone also has their own biases and blind spots. 

What does this mean?  It means that when someone gives you advice, whether they’re a professional or not, take time to ask questions. Questions like:

  • How did you come up with this idea?
  • What makes you think this is right for me?  
  • Why this and not that?
  • Are there any alternatives for me to consider?
  • What happens if this doesn’t work?
  • What are the downsides?  
  • What are the risks?

Remember, being careful is not the same as being cynical.  Just as you would never buy the first car a salesman tries to push on you without doing a little digging, never blindly accept financial advice without asking questions first. 

There’s an old proverb that says, “He who asks a question is ignorant for a minute.  He who does not remains ignorant forever.”  We think there’s so much truth to that saying!  So, as you travel along the highway of life, remember: Never stop asking questions.

It’s the surest way to complete your journey.