Real Returns
Returns after tax/inflation are accounted for (real returns) are not likely to be positive in a low interest rate environment like the one we’ve experienced over the past 10+ years. The average real return at a 30% tax rate is about -0.92% from 2000-2019.
| Year | Inflation | Cash Return | Cash Return after 30% tax | Cash Real Return after 30% tax |
|---|---|---|---|---|
2019 |
1.81% |
2.20% |
1.54% |
-0.27% |
2018 |
2.44% |
1.80% |
1.26% |
-1.18% |
2017 |
2.13% |
0.80% |
0.56% |
-1.57% |
2016 |
1.26% |
0.30% |
0.21% |
-1.05% |
2015 |
0.12% |
0.10% |
0.07% |
-0.05% |
2014 |
1.62% |
0.00% |
0.00% |
-1.62% |
2013 |
1.46% |
0.10% |
0.07% |
-1.39% |
2012 |
2.07% |
0.10% |
0.07% |
-2.00% |
2011 |
3.16% |
0.10% |
0.07% |
-3.09% |
2010 |
1.64% |
0.10% |
0.07% |
-1.57% |
2009 |
-0.36% |
0.20% |
0.14% |
0.50% |
2008 |
3.89% |
2.10% |
1.47% |
-2.42% |
2007 |
2.85% |
5.00% |
3.50% |
0.65% |
2006 |
3.23% |
4.90% |
3.43% |
0.20% |
2005 |
3.39% |
3.10% |
2.17% |
-1.22% |
2004 |
2.68% |
1.30% |
0.91% |
-1.77% |
2003 |
2.27% |
1.10% |
0.77% |
-1.50% |
2002 |
1.59% |
1.80% |
1.26% |
-0.33% |
2001 |
2.83% |
4.40% |
3.08% |
0.25% |
2000 |
3.38% |
6.20% |
4.34% |
0.96% |
Cash Return Source: BofA Global Investment Strategy, Datastream
Inflation Source: https://fred.stlouisfed.org/series/FPCPITOTLZGUSA
Options for Storing Cash
The primary things to consider when deciding where to store cash are liquidity, interest, and risk.
| Type | Liquidity | Interest | Risk |
|---|---|---|---|
Physical Cash |
High |
None |
Risk of 100% loss due to theft/fire/natural disaster |
Checking Account |
High - Can be withdrawn/spent using ATM/debit card/ACH |
Low 0 - 1% |
Very Low if FDIC insured |
Savings Account |
Medium - May be restrictions on frequency/amount of withdrawals |
Medium 0 - 3% |
Very Low if FDIC insured |
Certificate of Deposit |
Low - A penalty may be assessed for withdrawing funds prior to the maturity date |
0-2% |
Low |
Short-Term Bond ETF |
Medium - Requires sale of shares during trading hours |
High 0 - 4% |
Loss of some principal is possible over short periods of time |
Physical Cash
Physical cash can be held in a safe for quick access. Due to the risk of theft/fire, it is not recommended to have large amounts of physical cash on hand. Physical cash yields zero interest so the effects of inflation worse when compared to options with interest.
Checking/Savings Accounts
Checking and savings accounts can be used to store cash with a bank. The bank provides access to the cash via ATM’s, debit cards, checks, and ACH transfer’s. Accounts should be FDIC ensured which are federally protected against bank failure or theft. Savings accounts and some checking accounts pay interest on funds held in the account. The interest is taxed as income.
Certificate of Deposit (CD)
Certificates of Deposit (CDs) are short-term investments that pay fixed principal and interest, are insured by the FDIC up to $250,000, and are subject to changing renewal rates and early withdrawal penalties. CD rates are too low to consider CD’s a viable option.
ETF’s
Short term treasury and bond ETF’s can be used to gain exposure to cash-like returns in an investment account while taking on minimal additional risk. They offer a more liquid alternative to CD’s but less liquid than cash in a checking account.
Total returns of ETF’s offering cash-like returns
All of the funds below provided positive annual returns during the period from 2010-2019. However, these funds are not protected against loss of principal the way cash in checking/savings account is. While all of the funds provided better returns than the typical savings account (cash), only BSV actually outperformed inflation on average (before taxes).
The returns from the funds comes from interest paid by the funds in the form of dividends and appreciation of the share price. The interest (dividends) will be taxed as income unless held in a tax-deferred account (401k, IRA, etc). The share price appreciation will be taxed as capital gains if the shares were held longer than a year. Interest may be exempt from state taxes if the source is U.S. treasuries.
| Short-Term Treasuries | Short-Term Bonds | |||||
|---|---|---|---|---|---|---|
Year |
Inflation |
Cash |
SHY |
VGSH |
MINT |
BSV |
2019 |
1.81% |
2.20% |
2.28% |
3.50% |
3.33% |
4.94% |
2018 |
2.44% |
1.80% |
1.44% |
1.55% |
1.72% |
1.35% |
2017 |
2.13% |
0.80% |
0.28% |
0.28% |
1.86% |
1.16% |
2016 |
1.26% |
0.30% |
0.22% |
0.89% |
2.09% |
1.38% |
2015 |
0.12% |
0.10% |
0.45% |
0.45% |
0.43% |
0.91% |
2014 |
1.62% |
0.00% |
0.43% |
0.49% |
0.54% |
1.38% |
2013 |
1.46% |
0.10% |
0.82% |
0.35% |
0.72% |
0.13% |
2012 |
2.07% |
0.10% |
0.26% |
0.38% |
2.42% |
2.04% |
2011 |
3.16% |
0.10% |
1.46% |
1.39% |
0.45% |
2.97% |
2010 |
1.64% |
0.10% |
3.38% |
2.24% |
1.64% |
3.91% |
Average |
1.77% |
0.56% |
1.10% |
1.15% |
1.52% |
2.02% |