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Hottest investment could cost you money

By  Carter E. Anthony, CFA

 

How many of you have heard investors say, “I’m getting out of this market. The president and the Fed Chairman have no idea what they are doing.

The Democrats (or the Republicans) are running this country into the ground”. And “Cash is King!”

According to the WSJ article published on Halloween Day, money-market funds paying upwards of 5% have garnered a near-record $5.6 trillion. Both individuals and institutions have piled in.

State Street data indicates asset managers have approximately one-fifth of their portfolios in money-market funds.

Low interest rates driven by the Fed made “cash trash” for years with .5% returns on money market funds.

Bond investments were little better causing a friend on Wall Street to coin the phrase, “There is no alternative (TINA)” to equity investments.

Today, investors love the returns 10 times those previous returns, fear the volatility of the stock market and a bond market crash.

Considered to be the safest of all investments, money market funds are not the same as T-Bills and bank CDs.

During the Financial Crisis, shares of one money market fund “broke the buck”, i.e., fell below $1 per share, requiring federal regulators to step in.

After the purchase of Union Planters (UP) by Regions, we found that a UP trust money market fund was 30% invested in the commercial paper of a Hawaiian bank that was in trouble.

A Memphis, Tenn. bank investing in the paper of a Hawaiian bank, how stupid can you be?

I quickly sold the fund to Federated where the Hawaiian bank paper became a miniscule percentage of a much larger MM fund.

Investors should carefully consider how much of their assets they want dedicated to cash or money market funds.

Since its inception in 1981, the Vanguard MM fund has returned an average of 3.9% per year or 400% cumulatively.

In that same period-of-time, the Bloomberg U. S.  Aggregate bond index has returned 6.8% annually, 1,500% cumulatively.

The S & P 500 rose 8.6% annually and 3,200% cumulatively. This is in line with returns going back as far as 1926.

There is an opportunity cost as well.

  1. P. Morgan’s (JPM) asset management group has developed a table to show the opportunity cost of being out of the market on the best days.

An investment of $10,000 in the S & P 500 on Jan. 3, 2000, grew to $32,400 in 20 years.

Had you been out of the market for the 10 best days of the 20 years, the investment would have grown to only $16,200.

Missing the 20 best days resulted in $10,200. It pays to have an experienced investment advisor to keep you in the market with your assets dedicated to the stock market.

Will we have a Santa Claus rally in the stock market? Wall Street wizards seem to be about evenly split.

When the Fed paused rate increases at its last meeting, markets rallied thinking the Fed might be finished destroying the economy.

The rally soon played out when Chairman Powell announced the Fed was not near its target of 2% inflation. The latest CPI came in at 3.9% annual.

As we rush into the last two months of the year, it is time to review prospective tax losses that might save you money on your tax return.

Tax loss selling is heaviest during the first two weeks of December.  Get ahead of it.  If you have to take a Required Minimum Distribution from your IRA, make sure it will be distributed before Dec. 31, 2023.

Hope you had a Happy Thanksgiving!  Give thanks for all that you have, your health and your happiness, your family and your friends.

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