Posted by With the way the stock market is lately, I’ve been in a holding pattern making very few trades. My stock trading account is small compared to my retirement account. All of the shares purchased in the last year are down. I still get dividends, which are deposited into my core position. My core currently is about 50% of my stock trading account. I noticed that the core position was invested in an interest-bearing cash option which was paying 2.69% interest. This option is basically like having your money in a bank account at the brokerage firm. They can use this free credit balance in connection with its business, subject to applicable law. When I saw this, I decided to immediately change my core position to a money market mutual fund.
The change took a day to complete because I was moving money into a mutual fund. But the interest rate is now at close to %5 vs. 2.69%. That amounts to an extra $50 per month with just a few mouse clicks. If the Fed increases the interest rate the money market fund will pay even more. Once the Fed starts lowering the rate, the opposite will happen. A lot of cash has been moved into money market funds in the last year. It will be interesting to see how fast things change when the Fed starts lowering the rate. If they hold the rate for longer as they say they will, that will be good for anyone holding cash. I don’t want to be more than 50% cash because at some point the rate will go down and stocks will start going up again. But for now, the best place for cash you are holding is in a money market account.
The Fed funds rate has been above 5% for the last six months. Despite this, banks are still only paying 0.01% on premium checking accounts. A brokerage may offer an FDIC insured sweep account with major banks that pays 2.69%, similar to their interest-bearing cash option. This is still far better than the rates offered by most banks. Local banks are offering 4.5% on 6-month CD’s and 4.0% on 12-month CD’s. This is less than a money market account and you can’t touch your money for the duration of the CD. If you are like me and have lost money in the stock market this year, this is the only safe way to generate some positive cash flow right now.