FOMO on Interest

My four-year-old has a major case of FOMO (Fear Of Missing Out).  I am no doctor, but all the symptoms are there, and I believe this is an accurate diagnosis.

We can be watching a movie that he’s seen ten times before, and he will throw a tantrum if we don’t pause the movie while he goes to the restroom.  He says he doesn’t want to miss it; such is life for a four-year-old, I suppose.

The kid wants a full itinerary of what his younger siblings will be doing while he is at preschool each day.  It’s cute, it’s annoying, it’s a bit much, it’s my little boy, and I love him just the way he is 😊

When it comes to investing, it’s not much different.  Investors want to know the returns their neighbors are getting, and they are obsessive about an investment or opportunity they might miss out on.  FOMO is rampant in our culture, and it can cause people to do wild things.

Today I want to discuss something a lot of investors are indeed missing out on and how they can simply remedy this.

Part of my job as a financial advisor is to help our clients take inventory of their assets and liabilities and create a simple balance sheet.  In this process, you get to see how all the puzzle pieces fit together – the real estate, the investment portfolio, the savings account, the personal property, the mortgages, etc.

As one begins to analyze all these assets and liabilities together, the advice/guidance naturally begins to surface.  An advisor might notice a concentration of risk in one investment or an excessive amount of debt on the balance sheet, or inaccurate titling of a particular asset.  This is the meat and potatoes of financial planning; always looking for improved organization, efficiency, and outcomes.

Over the last handful of years, one of the first places I would go when reviewing a balance sheet was to review the interest rates across all the liabilities.  Why? Because interest rates were trending down to historical lows, this often meant an opportunity to refinance debt and reduce expenses.  As I am sure you are aware, this trend has reversed, and it has done so in a dramatic fashion.  This shift from falling rates to rising rates has me shifting my focus on the balance sheet from the interest expense on debt to the interest earned on cash.

Every investor is going to have a different level of cash they are comfortable having on hand.  Some of this cash is intended to be a rainy-day emergency reserve, some funds are earmarked for a certain expense (taxes, wedding, car, etc.), and still, for other savers, just having a surplus of cash provides them with a certain level of comfort.  One’s cash allocation on their balance is often a very preference-driven reality.  Regardless of the rhyme or reason for having that cash, it is common for these monies to be housed at one’s primary bank.

Something like 70% of all deposits in our country is held by the top ten largest banking institutions.  Imagine if you were on Family Feud and I asked you to name the top three most popular banks in our country, I am pretty confident that you’d be able to name all three.  Here’s where things get interesting (pun intended), most of these large institutions are paying next to nothing in interest on their savings accounts.  According to a recent survey conducted by Bankrate, the average rate on savings accounts right now is less than 0.25%, and the average rate at the three largest institutions is less than 0.10%.

Again, taking you back to my earlier reference, if one is reviewing a balance sheet and seeing a meaningful amount of cash at a traditional bank savings account, this is often low-hanging fruit.  As a comparable reference point, one of the custodians our clients often resource offers a liquid money market account with a 7-day yield of 4.48% and even higher-yielding options when minimum investment thresholds are met.  To really solidify this point, let’s say someone was earning 0.10% on a million dollars, this is $1,000 of interest per year.  If that same saver was earning 4.5%, this would result in $44,000 MORE interest earned on the year.  That translates into $3,750 a month, which could very well be the cost of someone’s mortgage, or it could be a nice little contribution to a little vacation one might want to take.

Furthermore, if a saver wanted to commit their resources for a determined time period, they could potentially purchase a short-term US government treasury.  As of this writing, the interest rate on the 6-month treasury is over 5%.

All of this is to say that many savers have an opportunity to “upgrade” the interest rate on their savings, and I believe the leg work and diligence here are worthwhile.

Now that we have discussed the importance of maximizing the earned interest on savings, I do want to make a slight pivot and reiteration.  I wrote an article recently called Fool’s Gold, and I want to emphasize a point I made there about not confusing the purpose and objectives of your short-term money and your long-term money.  In our discussion today, I was solely focused on increasing the potential interest you earn on your short-term monies.  I made no reference or opinion to how much you should be allocating to this short-term bucket versus the long-term wealth accumulation bucket.  I have an opinion on that, but it would be more appropriate for a one-on-one conversation, not a corporate discussion like we are having today.  I’ve received numerous inquiries about why one wouldn’t just buy a 1-year treasury, take the guaranteed return, and opt out of the volatile stock market for the time being.  As David often jokes, this is like comparing apples to carburetors – these two investment solutions serve two very different purposes in a financial plan.

To really hit home the difference between short-term savings solutions and long-term wealth accumulation, I want you to read this excerpt from Warren Buffett’s recent annual newsletter:

In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.

American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.

These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At yearend, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire’s net worth, akin to its weighting long ago.

Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.

For me, Mr. Buffett’s concluding paragraph juxtaposing a fixed-income investment to the track record of his beloved stock investments really portrays the importance of matching investments to time horizons.  What we learned today is to not leave any money (interest) on the table – all of us are going to have some allocation to cash on our balance sheet (Warren Buffet included), and we should seek to prudently maximize the interest earned on that cash.  There are other pockets of our balance sheet that are segmented and assigned with the task to grow and build long-term wealth, and we need to put on our twenty-year-plus lenses as we watch these investments flourish over time.

We are indeed living in unique times – inflation we haven’t seen in decades, interest rates we haven’t seen in decades, and yet the same fears and anxieties we’ve been battling with since the beginning of time.  I hope today’s discussion will help you and your advisor to go back to the balance sheet drawing board and look to make improvements where needed.  Again, seeking to improve organization, efficiency, and outcomes.

Alright, as for me, back to the family – I think I have a little FOMO, as they seem to grow up so fast, right?

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About the Author

Trevor Cummings

Private Wealth Advisor, Partner

Trevor is a Partner and Director of our Private Wealth Advisor Group.

As the author of TOM [Thoughts On Money], Trevor endeavors to write and speak about financial concepts and principles in a kind of “straight” talk demeanor and posture.

He received his Bachelor’s degree in Organizational Leadership from Biola University and his MBA from California State University, Fullerton.