In Investing, Don’t Sweat the Small Stuff

It isn’t worth agonizing over financial decisions that don’t matter.

That’s obvious, I know. But it took me a long time to get there.

First, I spent an interminable time on a hopeless task: figuring out how to get the best possible return on my cash holdings at today’s minuscule interest rates.

Let me describe what I went through, so you don’t have to.

As part of my twice yearly examination of my investment portfolio, I rebalanced my stock and bond mutual fund holdings. The S&P 500 has climbed about 14 percent since Jan. 1, leaving me with more money in stocks than I prefer.

This financial chore was worth the effort. How you divide your money among stocks, bonds and cash is one of the biggest investment decisions you can make. You are calculating how to get the maximum return with the least amount of risk.

Investors’ asset allocations can be as unique as they are. My risk tolerance is probably slightly higher than average for someone my age (66). I like having about two-thirds of my assets in stocks, but the recent run-up in the market put me beyond my comfort level.

So I moved some of my stock fund gains to bond funds. That enabled me to get my investment mix back to 65 percent in stocks and 30 percent in bonds, the configuration I believe is right for me.

Determining the best way to get back to that allocation took me less than an hour.

All I had left to do was deal with the 5 percent of my money that I keep in cash — really, risk-free, interest-bearing accounts of one kind or another. Even though this was a tiny part of my portfolio, I wanted to figure out how to get the highest return possible. How hard could that be?

Extremely, as it turned out.

Here’s what happened.

I went in thinking I would put the cash in a tax-free money-market fund. It would be safe and instantly accessible, which was important to me, since the cash component of my portfolio doubles as my emergency fund. I knew I wouldn’t earn much in interest, but I thought I could live with that.

It turns out I couldn’t.

For the last 12 months, the highest yielding tax-free money-market fund I have found paid 0.15 percent. OK, fine, I sighed. But agreeing to that tiny amount in the abstract is one thing. Seeing what it meant in reality was something else.

Say you have $50,000 in cash earning 0.15 percent. Your annual yield will be $75, or $6.25 a month. That return was just too small for me to accept.

I searched (and searched and searched) for alternatives. Taxable money-market funds yielded about the same, after tax, as interest-free municipal money funds: 0.15 percent for the past year. Certificates of deposits that paid more would tie up my money for more than a year, so they were out. To be a true emergency fund, the money needs to be immediately accessible.

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I would have to take more risk to get a higher yield.

Mortgage-backed securities, which are composed of home loans bought from the banks that issued them, make me nervous because the ones filled with subprime loans were at the heart of the 2007-8 financial crisis. I worry that banks will loosen their mortgage standards again and resume making risky loans, hurting investors.So funds containing mortgage-backed securities were out, too.

I-bonds, a government security, were appealing. They offer two kinds of dividends, a fixed rate for the 30-year life of the bond, plus an adjustment to offset inflation. But I didn’t like the restrictions: You have to hold them for at least a year or pay a penalty.

I even thought of taking my cash and paying down the mortgage on our home, figuring that would save me the equivalent of 2.875 percent a year — our current mortgage rate — but that didn’t seem to make much sense, given how low our rate is. Plus, it would eliminate my emergency fund.

Here’s where I finally ended up.

I decided to put half my cash in a taxable ultrashort bond fund, which invests in bonds with very short-term maturities.

The yields on the ultrashort bond funds from Fidelity, JP Morgan and Vanguard — three of the ones I examined — ranged from 1.42 percent to 1.62 percent over the past year. I bought Vanguard’s, which invests in securities that mature in less than a year and had an after-tax yield higher than that of the relatively few tax-free short-term bond funds I found.

No, it was not really cash in the way money-market funds are — the underlying securities fluctuate in value — but it was close and would increase the yield a little.

I put the other half in a low yielding tax-free money-market fund. You can find such funds at just about every major brokerage house.

Proud of my decision, which took a full day to achieve — a day when I could have done some work, called my kids, gone for a long walk and sneaked in a nap — I examined how much I would gain from all my effort.

The answer was not much.

Here’s what the numbers looked like, based on an investment of $50,000. (I’m using that number for simplicity’s sake.)

Half the money went into the ultrashort bond fund, which returned 1.56 percent over the last year. The yield on that $25,000 invested at 1.56 percent is $390. The other $25,000, in the money market fund paying 0.15 percent, generated just $37.50.

When I added it up, I found that the total yield on $50,000 would be $427.50.

Even that was generous. My calculations were based on the average over the last 12 months, but the situation has gotten worse recently. The municipal money-market fund yield today is exactly zero, and the ultrashort bond fund pays 0.28 percent. So, more realistically, my total return is 0.14 percent, or only $70. That’s 90 percent less than it would have been a year ago. It’s just plain awful.

All my effort resulted in virtually no potential gain.

My unhappy takeaway is that trying to bolster the yield on savings, given today’s interest rates, doesn’t pay off. Some things really matter. But in this case, the adage is really true: Don’t sweat the small stuff. You have better ways to spend a day.

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