I get asked frequently "how can I find a better yield on my cash deposits?"
The answer - "that one is a hard one! How much risk are you willing to take to get higher yields?"
Their response is usually "no more than I am taking now at my local bank."
The problem is that the Federal Reserve (the "Fed") has those seeking yield in between the proverbial rock and a hard place. The Fed policies of buying outstanding debt (i.e., quantitative easing) to keep rates on treasuries low and, thereby stimulate economic growth, have really hurt savers.
They have also forced investors to take greater risk to earn higher investment returns so they at least keep up with inflation. This in turn has created bubbles in many asset classes that have significantly stretched historical valuations and investment risk metrics.
So what is a yield starved investor to do?
Today we will explore a handful of options. However, I don't think any of these options is a singular answer. Instead a diversified approach may be your best option in this challenging environment!
1. Crypto Stable Coins
I mentioned crypto stable coins like Tether, USDC and UST in a recent post called Miscellany. For instance, I converted U.S. dollars into USDC stable coin and then put it on deposit at several crypto banks and now earn north of 8% on those funds.
The downside? Crypto is lightly regulated and the SEC is now stepping up it's reviews of stable coin providers and their underlying reserves.
In my personal case, I didn't put more than I could afford to lose in stable coin and I split it up amongst several U.S. based crypto banks. You can find out more about this option in an article entitled What are Stablecoins and Why Invest in Them?
2. High Dividend Stocks
There are high dividend stocks and stock funds such as Amplify's High Income ETF(symbol YYY) which currently yields 9.04%, according to ETF database.
The problem with high dividend stocks are 1) they have high dividends usually due to a price decline or a high degree of investment risk and 2) if markets go down, the yield will rise but any gains here will be offset by unrealized losses in the underlying stock or ETF.
Take a look here at YYY (red line) vs. the S&P 500 ETF (SPY) (blue line).
Wouldn't you rather have had the return of the S&P 500 when it appears you are taking a lot of risk in the Amplify High Income ETF based purely on comparing the periods of market decline for both securities?
A solution here might be to actively trade or apply a trading methodology to ETF, but even so you could do that to the S&P 500 as well and earn a higher overall return.
3. Total Return Strategies
With total return strategies, you are not looking for yield, but a greater overall portfolio return. Instead of distributing income to support your lifestyle, you periodically raise some cash and make distributions from principal.
We recently released a total return strategy for enhancing cash returns. It allocates between 65-80% of the portfolio assets to fixed income ETFs that are chosen based on their yield adjusted duration. The idea here is to get as much yield per unit of duration (e.g. a measure of a bond's or fixed income portfolio's price sensitivity to interest rate changes) as possible.
It pairs that with a diversified portfolio of buffered ETFs where each position has both a known floor (loss) and capped upside. Essentially giving up some potential upside for a lower downside.
Disclosure, these results above are ALL back tested using the CBOE S&P 500 Buffer Protect Index Balanced Series plus the Barclay's Aggregate Bond Index. This former index may not exactly match the diversified index of buffered ETFs. Past performance is not indicative of future performance.
Now that we have that out of the way, you can see that based on this historical data since 2006, we where able to enhance overall total returns with less risk (i.e., standard deviation) at least in back-testing.
4. High Yield Teaser Rates
The final area where you can get enhanced yields in from internet firms offering teaser rates for new customers. Bankrate.com has a whole list of such firms, mainly internet banks offering yields of around 50 basis points at present. The difficulty we have found with such rates are they are only available to individuals, not businesses and each has minimum deposit amounts and restrictions.
5. A Diversified Bond Portfolio
One final option might be just a plain old fixed income portfolio. With the right allocation, you can get yields north of 2.5%+ and durations as low as 3.08. We do this for clients and also change positioning from time to time to minimize downside when rates escalate as they have been recently or capture more gain when rates decline.
One of the frustrations for yield oriented investors is there is no one place you can put your hard earned capital and earn high yields and have FDIC protection.
However, I think it is also clear that there are a number of options that when mixed and matched could provide you with the overall yield you desire and enough diversity to potentially minimize losses if equity or bond markets decide to sell off.
Let us know if we can help.
Right or wrong, depending on your view of the world, we are losing more and more rights everyday in a move towards bigger government in the United States and ultimately the bill for what that entails. The left calls this justice, the right socialism, but the fact is that the current progression will affect you in one way or another in the future no matter your income level.
We cannot continue to print money to hand out for entitlements and not have repercussions somewhere! The entitlements we do have, like Social Security, are already in trouble. Adding even more entitlements, such as Universal Basic Income (UBI), as so many want, will surely win votes, but will ultimately bankrupt our fine country.
The greatest example of this slipper slope, we now find ourselves on as a country, is the Social Security Trust Fund, which is projected to be depleted by 2034. If you are like me, and getting older every day, those are funds you have factored into your retirement plans. What will we do if we no longer have a surplus from which to pay such payments to our nations retired?
The answer is one of three not very palatable choices: 1) cut Social Security benefits by up to 25%, 2) raise taxes, or 3) inflate away the entitlement debt and the value of the Social Security you do get. My guess is that they will do all three when their backs are against the wall!
How about the current proposed $3.5 trillion Infrastructure package? The Biden Administration has promised that this yet to be approved bill will have “zero cost.” The fact of the matter is it will have a cost. Nothing has a “zero cost” but instead taxes will have to be raised to offset or zero out these costs.
Right on que, the House Ways and Means committee just that last week announced their plan to pay for the Infrastructure Bill. Here is their official list of possible tax increases on the table.
What they plan is to tax the rich and effectively close some loopholes in the tax code to pay for most of this bill. Notice I said “most.” They could not even figure out how to get the entire $3.5 million needed without moving to on to the Average American for the rest of the dollars. They instead conveniently pretend the math will somehow work out!
Higher Taxes for Everyone
Let me tell you where this is going. The House Ways and Means Committee list of tax increases gives us a big hint. There is a tax that currently applies to net investment income (NIIT) under section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have adjusted gross income above $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers.
Now this tax initially was only on net investment income such as interest, dividends, royalty income, non-qualified annuities distributed earnings, and income from businesses trading financial instruments or commodities that are passive to the shareholder. It also includes capital gains such as the gain from the sales of stocks, mutual funds and bonds, distributions from mutual funds, the gain on the sale of investment real estate and also on the gain on the sale of partnership or corporate interests. The tax is fairly narrow and applies mostly to investment incomes.
However, the House Ways and Means Committee is suggesting this tax be applied to all types of income for those about the income thresholds mentioned above.
Do you see what just happened? They got us used to the tax and then expanded it.
What happens next year or the year after when they are forced to deal with the Social Security Trust fund depletion? Will this tax, as an example, now apply to all income levels?
The Time to Plan is Now
So why do I mention this? Is it to get embroiled in a political discussion? Heck no!
It’s to impress upon all our loyal readers and clients the urgency with which tax planning must now be part of your annual process if it is not already. Whether you are for the change or against it, someone has to pay for it!
Margaret Thatcher famously said, “the problem with Socialism is that you eventually run out of other people’s money.” You may not agree that we are headed towards Socialism, but no one can deny that there is no such thing as a “zero cost” program. Someone must pay and that is going to be those with the ability to do so, no matter their income level ultimately!
It will start with the rich, but believe me, it’s coming your way too.
The solution is to be tax aware and to spend more time in the future arranging your affairs to minimize it’s drag on you and your family. This is not un-American; this is just smart planning!
Some Ideas to Take Away
As a start I want to give you three simple ideas that anyone can use to lower their tax burden:
Let me give you an example: In the past I had a client who sold out of his technical school for many millions of dollars. He contracted with an insurance company to purchase a private placement variable life solution and then used those dollars to pay a series of premiums to the insurer that included most of his funds from the sale.
What he got for this was tax free account build up, the ability to borrow his funds back and the funds automatically pass to the next generation when he passed. The only thing missing in his planning was it was a part of his estate for estate tax purposes, at least the portion I managed as investment advisor. However, he would not have been able to borrow against the policy had he moved it out of his estate.
So, this client, used this policy as his piggy bank. He borrowed from it when he needed funds and repaid policy loans when he had an excess of funds. Because all his money was in this policy, he had limited income annually and therefore paid little in taxes (and he lived in a very high tax state). He mitigated the single insurer risk by having more than one carrier underwrite the risk (it was shared).
I could see more of this happening in the future as loopholes close and rates start to rise.
The Bottom Line
I believe taxes in this country are going to go up substantially in the years to come. This post is obviously not about tax evasion. Everyone should pay their fair share!
However, there is also nothing wrong with arranging your affairs in such a way as to minimize what your fair share is and that is the point of this post. It is time to start thinking about it as I believe the forces of taxes, inflation and more will make it harder and harder for average Americans to make ends meet!
This post is for educational purposes only. Please consult your tax professional before using any of the ideas presenting in this post.