1st Quarter 2025 Commentary
Filling Our Short-Term Bucket
In January’s commentary (“Uncertainty is the Only Certainty”) we outlined our firm’s “Future Planned Income” strategy. This was not something new that we just implemented, but rather a reminder of our firm’s long-standing strategy of using a “Bucket Strategy” approach to provide a ‘bucket’ of stable holdings for near-term needs (in the next 1-2 years) and a ‘bucket’ of bond holdings for intermediate-term needs (3-5 years). Happily, this also allows us to invest everything else in the ownership of companies through a ‘bucket’ of stocks for long-term gain.
The short-term buckets reduce the likelihood that we will be forced to sell from the stock bucket while the market is down.
This quarter we would like to address a logical follow-up question that we often get: What investments, exactly, should be in this short-term bucket? Especially, what should be in the ‘very short term’ bucket for needs in the next 12-24 months?
I’d like to walk you through the options we typically use or recommend for the short-term bucket. I’ll start with the most liquid and safest options. Note that the first three options (Checking, Savings/Money Market and CD’s) are purchased directly from banks. The latter options (Money Market Mutual Funds and Fixed Annuities) are options that we can help you with at our office.
1) Checking accounts
Checking is extremely liquid such that you can use it at any time, rarely with any exceptions. It is FDIC insured. However, because they are so safe and so liquid, these accounts rarely pay any interest to speak of. For this reason, while some money needs to be in checking, we generally recommend keeping it fairly limited. If you have a month’s worth of your normal expenses in checking, that is probably adequate. This makes sure your utilities payments don’t bounce, but also doesn’t commit too much money to an account with no interest.
2) Savings or Money Market accounts
Usually, but not always, savings or money market accounts will add some amount of restrictions as compared to checking. This could be as small as that you can’t actually make payments out of the account (meaning you have to move funds between savings and checking) or it could be restrictions about a minimum or maximum number of monthly transactions. We are seeing rates as high as 3.5% to 4%1 on these accounts. These accounts are FDIC insured. It is notable that the interest on these accounts will generally adjust quickly if the overall interest rate environment changes (for example, if the Fed raises or lowers rates, I would expect your Savings or Money Market to adjust their interest accordingly within a few days or weeks). These accounts are a good place for your ‘3 to 6 months of emergency funds’ as well as for other large, near-term purchases like saving up for a car or home in the next year or so.
I will also mention another type of account that I would categorize under “Savings accounts”. This is one that you would access through our firm. If you have bank holdings that exceed the FDIC limits, we can access additional FDIC coverage through a company called StoneCastle. StoneCastle is not a bank. They take your deposits and spread them out over multiple banks, which allows them to provide FDIC insurance up to $100 million without having to open multiple accounts. They are currently paying a rate of 4%. Their initial balance to open an account is $100,000.
3) Certificates of Deposit
CD’s are still FDIC insured, but these come with a commitment to a certain ‘term’ or ‘length’ (ie – ‘6 months’ or ‘3 years’). The best rates we are seeing on these right now are in the 6-18 month range where banks are paying in the 4.0% to 4.5% range. While CD’s do tie up your money, they also provide a locked-in rate for the duration of the term. Unlike in a savings account, you would miss out on increases if rates rise but you would not have to worry about decreases if rates drop. These can be a good option for anticipated expenses in the next 12-24 months. Before buying a CD it is worth asking the bank what the penalties would be if you did have to withdraw the funds early.
4) Money Market Mutual Funds
Most mutual fund companies have a “Money Market” option. These are very liquid, and we generally expect them to be very stable as they invest in things like short-term US treasury bills. But they are not FDIC insured. We are currently seeing these paying in the 3.5% to 4.5% range. This can be a good option if you want to hold your cash in the same account where you hold your investments (instead of opening another account at a bank) and don’t mind giving up the FDIC insurance.
5) Fixed Annuities
As a CD alternative, you could consider buying a Fixed Annuity from an insurance company. Like a CD, you would select a length of term (usually 3 to 7 years) and simply earn the stated interest over that period. Depending on length of term, these are currently paying 4.5% to 5.5%. In general, you are restricted to taking only the interest during the term, though you can also choose to have it reinvested to compound tax-deferred. It is very important to note that these are not FDIC insured the way a CD would be. Rather, they are guaranteed by the insurance company that offers them. It is also noteworthy that there may be tax penalties for those under age 59.5, making them more attractive for those age 60 and up.
Fixed Indexed Annuities – A variant on Fixed Annuities, Fixed Indexed Annuities are purchased through an insurance company for a stated term. However, rather than paying a stated interest rate, they pay an interest rate that is tied to the performance of an index (like the S&P 500, though there are often many options to choose from). While they all have their own twist on this idea, the general concept is that your return for a year would be 0% if that index is negative while you would get a portion of that return if the index is positive.
These sorts of investments are not the ones that get the flashy headlines.
However, it is by doing our homework to adequately fill these short- and intermediate- term buckets that we can create a good buffer to avoid having to sell stocks in down markets. Please don’t hesitate to reach out to us if you have questions or if you want to explore any of the above options further.
Have a wonderful spring!
EDIT:
The market declines that have occurred since the original writing of this commentary present us with an additional option for cash holdings: you might want to consider adding extra cash into your investment accounts to purchase stocks while they are down. Just like everyone else, we have no way of knowing when the current market decline will end, but history suggests that declines like this one can be good times to buy stocks. We would emphasize that it is important to not jeopardize your short term goals, and we would not recommend using your ’emergency fund’ to purchase stocks, even when they are cheap. But if you have extra cash beyond that, this could be a good time to consider investing that cash.
1 All cited interest rate ranges are approximate and are current as of the end of March, 2025. Actual rates available may change based on amount invested, length of investment term, the company providing the investment or changes in relevant economic factors since the writing of this commentary.
Please Note
When it comes to how frequently you should monitor your investments, there are two unhealthy extremes, with ‘never looking’ at one end of the spectrum and ‘obsessively looking’ at the other end. May we suggest using our quarterly commentary as a prompt to review your accounts, helping you avoid both extremes? You can review your current accounts by logging into www.cirstatements.com. If you have never logged into that site, please call our office and we will be happy to help you register.