3 Things 9-8-25

 Thing One

Just .5%More

The following is an excerpt from a marketwatch.com article written 12 years ago about the impact that earning .5% more on your investment portfolio over the long term. It is as relevant today as it was then...

"(Let's consider) the lifetime impact of gaining an extra 0.5% of annual investment return. . . .

The key here is to think about the long term. Many investors habitually think in terms of what we gain or lose in a short period: a month, a quarter, a year, a decade — or even all the years until we will retire. The accumulation phase of investing, in other words.

But the advantages of an extra 0.5% in return don't stop when you retire because your portfolio will continue working for you as long as you live. . . .

The long-term difference between earning a lifetime portfolio return of 8% and earning 8.5% . . . (is) a modest increase of about 6% in return in a single year.

But would you believe that seemingly small difference could boost your nest egg at retirement by 16%? Would you believe it could boost your retirement income by 24%? Would you believe it could boost the money you leave to your heirs by 31%? In each case, you should believe that.

Let's look at some numbers:

If you save $5,000 a year for 40 years and make only 8% (the "small" mistake), you'll retire with about $1.46 million. But if you earn 8.5% instead, you'll retire with nearly $1.7 million. The additional $230,000 or so may not seem like enough to change your life, but that additional portfolio value is worth more than all of the money you invested over the years. Result: You retire with 16% more.

Your gains don’t stop there. Assume you continue earning either 8% or 8.5% while you withdraw 4% of your portfolio each year and that you live for 25 years after retirement. If your lifetime return is 8%, your total retirement withdrawals are just shy of $2.5 million. If your lifetime return is 8.5% instead, you withdraw about $3.1 million. That's an extra $600,000 for your "golden years," a bonus of three times the total dollars you originally saved.

Your heirs will also have plenty of reasons to be grateful for your 0.5% boost in return. If your lifetime return was 8%, your estate will be worth about $3.9 million. If you earned 8.5% instead, your estate is worth more than $5.1 million.

To sum this up, at 8% your initial savings (totaling $200,000) turn into $6,447,194 — the sum of what you take out in retirement and what you leave in your estate. At 8.5%, the comparable number is $8,283,312.

That difference, about $1.8 million, came only from the extra half-percentage-point of return.

(There are) . . . places you are likely to find such a deal.

The most obvious place . . . is to invest in funds with lower expense ratios. A typical actively managed equity fund charges expenses of more than 1%. A typical index fund charges less than half as much. Bingo, you've got it done. . . .

A second place you are likely to find an extra 0.5% is to bump up your equity allocation by 10 percentage points. For example, you would have achieved that from 1970 through 2013 by investing 60% in equities instead of only 50%.

A third source of higher returns that is extremely obvious to me: Adding equity asset classes that have long histories of outperforming the S&P 500 Index . . . .

This is known as diversification, and it's one of the smartest things investors can do. . . .

There are plenty of other smart moves that investors can make to boost their lifetime returns, but if you act on one or more of these three suggestions, you'll likely add more than a half percentage point to your return."

As always, please pass it on. 

Thing Two  

Is Your Money Hot Or Cold?

In his musical hit from 1960, Smokey Robinson explained to us that he was told by his mama that he “better shop around”. While nobody is compelled by law (or their mama) to do so, it makes financial sense to shop around in almost every relationship you have where you are a customer. A case in point is your savings account. While its main purpose certainly isn’t producing investment income, given current interest rates, it is still likely worth your time to consider how much your current bank is paying you to use your money.

While the Federal Reserve has raised interest rates to levels not seen since the financial crisis of 2008, the five biggest banks, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., U.S. Bancorp and Wells Fargo & Co. paid an average of 0.05% interest on deposits in the 3rd quarter of 2024. During that same time period, high yield savings accounts paid an average of 4.45%. Comparatively, today’s high yield savings rates range from 4.50% to 5.45%.

Still, the big, traditional banks hold about half of all deposits. The reasons boil down to convenience and habit according to Nathan Stovall, a principal analyst for financial sector data at S&P Global Market Intelligence who said, “People are willing to pay for convenience and simplicity…If you can retain customers without having to pay for them, that’s the name of the game. You want to attract as many low-cost, stable customers as possible.”

Those low-cost, stable customers occupy the end of the spectrum known as “cold money” in the banking industry. Once you get them, you’ve likely got them for the long haul. At the other end of the spectrum are what bankers refer to as “hot money”, which describes those customers who shop around for higher rates. On that note, see a recently published list of the top-ranking high yield savings accounts below:

UFB Secure Savings: 5.45% APY

LendingClub High-Yield Savings: 5.30% APY

SoFi Checking and Savings: 4.80% APY

Citizens Access Savings: 4.75% APY

Marcus by Goldman Sachs Online Savings Account: 4.60% APY

Discover Bank Online Savings: 4.55% APY

American Express® High Yield Savings Account: 4.50% APY

Citi® Accelerate Savings: 4.45% APY

Incidentally, high-yield savings accounts at banks and credit unions are federally insured up to $250,000 per depositor, and many non-bank providers partner with banks for insurance. Accounts at banks are backed by the Federal Deposit Insurance Corp., while credit union accounts are backed by the National Credit Union Administration. This means that even if the financial institution fails, the government makes sure your money is safe and accessible.

So what are you, hot money or cold? Either is fine but you may as well declare a side and force yourself to rationalize it. 

Thing Three

Just A Thought  

"The first step towards getting somewhere is to decide you’re not going to stay where you are.”— J.P. Morgan