Should I keep money in a high yield savings account until it is to be invested?
I have a financial planner who charges .70 percent for fees. I keep a cash balance on hand for investments pending his guidance. Sometimes large amounts sit there for months while we work on a strategy. Should I move this cash out to a high yield savings account until it is to be invested? Or does this passive cash part of an actively managed portfolio help motivate my planner?
I see no reason not to hold these funds in an FDIC-insured, on-line bank until you're ready to invest. With rates slowly rising, you can earn close to 2% on the funds, with no advisor fees! While you won't earn a lot, every dollar helps!
Thanks for your question and best of luck to you.
You can invest without using a planner who charges you 0.70%. I recommend you invest (and you can use the cash you're holding to invest also) in passively managed mutual funds (index funds).
The best place to invest is in index funds because over the long haul actively managed funds can't beat passively managed (index) funds. Part of the reason is the very low costs that index funds take from your return. They just follow the market as opposed to trying to beat the market, which costs more money.
Vanguard started the first index fund and is the place to contact. Subtract your age decade from 120, 110, or 100 and the answer is the percentage of your invested money to have in stocks. The rest goes into bonds. I recommend using Vanguard's Total US Stock Market Index Fund for your stock percentage and their Total Bond Market Index Fundfor you bond investment.
Each time you reach a new age decade it's time to put 10% more in the bond fund and 10% less in the stock fund so your investments get more conservative as you age. The only other time you touch this money is to re-balance when you get more than 5% out-of-balance. I check every 3 months, because that is when I get a statement from Vanguard. You can re-balance once per year if you like, but you do need to re-balance.
Vanguard will try to talk you into an International Fund, but you don't need it. For one thing the international market used to go in the opposite direction to the US market, but it now tends to go in the same direction. Also the largest US companies (which you'll own in your stock fund) have exposure overseas. Jack Bogle who started Vanguard and index funds and is now 88 and a Vanguard Chaiman Emeritus agrees with me, though those currently at Vanguard may not be trained that way.
There are a few questions I would ask.
First, does your financial advisor charge the fee on the value of your account or on the market value of the invested assets? Unless the advisor specifically excludes cash balances, you are being charged on the total value of the account, including the cash.
Some investment managers consider cash an asset class and will devote a certain percentage of a portfolio to that class. Others do not. You should ask your advisor. Whether cash “motivates” your manager depends on the answers to the previous questions. It your planner keeps large amounts of cash on the sidelines because he doesn’t have any good ideas and does not view it as an asset class that’s part of his strategy, you should look for a new advisor.
I'd say I strategy should be in place for the cash beforehand so it can get invested when it's contributed. Whether you have a dollar-cost averaging strategy by making contributions every month, quarterly, or randomly, the funds if under my oversight would be invested immediately. Timing the market is near impossible to do.
Maybe you're collaborating in stock picks with your planner? If so, consider having them "picked" prior to putting more cash in. Or have the cash traded into your current asset allocation. In my opinion, it'd come down to just having a plan in place prior to funding the account. This shouldn't be a reason to "motivate" your planner, they should be proactive.
Hope that helps.
I understand that you are paying .70 percent in fees (aka 70bps). I would be interested to know what type of yield you are currently earning on your cash.
You would probably benefit from moving your cash to a high yield savings account. You could start earning about 1.7% and you would not be paying .70% in fees. This could be a significant savings depending on your average daily cash balance. The downside of a savings account is that you are limited to a certain number of transactions per month.