Using investment calculators to compare rates of return

It has been a good few months since I last contributed, but it sure feels great to be back and firing away. Reflecting back on earlier entries, I must admit that my stock investments have not fared as well as I’d hoped when I first set out. Yes, there are a few stocks in my small portfolio which have had tremendous runs over the past few months, while others such as General Mills and most of my energy portfolio have under-performed. Still, even with all the volatility and unpredictability of mid to late 2023, my small micro investments have panned out just the way I planned; uneventful and not exciting. This might be due to the strategy I set out on from the very beginning; only invest in companies which pay a dividend. What was a shock for me is the effect interest rate hikes by the federal reserve had on basic savings and money market deposit accounts. One of those accounts, the Fidelity Government Money Market Fund (SPAXX) completely caught me off guard.

Starting in late January of this year, we made the decision to transfer the majority of our cash from our main bank (USAA) to the high yield savings with Discover Bank. At the time, it seemed almost common sense, as USAA generally takes advantage of its members, and pays little to nothing on deposits (both checking and savings). Little did I know that cash is where I would want to be in 2023. Shortly following this move and in line with the federal reserve’s decision to steadily raise the federal funds rate, Discover began increasing their saving’s interest rate. I would say at least once a month, a notification would come through of yet another rate increase. If you are just catching on, this is excellent for typical households with even reasonable cash holdings.

Sure, the idea and image promoted in movies like Wall Street tend to glamorize investing, and paint it as a sort of hustle, where if you are not in constant motion (trading and making deals), then you are not making money. This is simply wrong and does not fit for the average retail investor. Luckily, I found a relatively popular public figure who shares this approach to investing, and does not promote reckless gambling like behavior, as is the case with talk show hosts like Jim Cramer of Mad Money. Instead Ramit Sethi espouses a different approach to attaining one’s own rich life (https://www.iwillteachyoutoberich.com/), which is far more reasonable and practical for the average American. It was refreshing to watch his Netflix series (How to Get Rich), and identify with many of the strategies he gives to the show’s participants.

Returning back to the point of this entry, the change with which interest rate hikes affected our cash reserves was quite noticeable. At the start of the year, I had tied up some cash in varying certificates of deposit (3-6-9-12 months), in order to achieve a higher yield, when suddenly I was caught off guard by the yield on money market funds. Once I’d noticed how valuable a monthly compounding rate of interest was compared to a fixed term bond/CD or a quarterly stock dividend, I realized this may be something others could benefit from. Another lesson I learned as a young adult and one of the few positive outcomes of the great recession of 2008, is that cash rules in these times. No matter what someone may have in 401k investments, or home equity, there is nothing quite like liquid cash. It lends a certain leverage to your financial decisions and purchases, where you don’t have to ask a bank or any company to loan you money for a purchase, and you can take your business elsewhere. During inflationary periods where money is easy to come by thru debt, companies have the leverage because every John or Jane can simply finance whatever they desire.

We recently deployed a simple investment calculator for readers to do one simply task, compare monies earned (yield) between bonds, CDs and savings or money market accounts. I’ve included a short six or seven minute YouTube video, demonstrating its use (https://youtu.be/n4WSVEFx0Pc?si=11t-eHaHv1VBe-C5). Along with the loan amortization calculator, I hope it will help readers make more informed financial decisions. Often times, I imagine myself returning back in time to consult with my younger early twenties self. Which landmines could I have avoided if this were possible? Nevertheless, as I tell my students in class, everything in life is relative. This includes the definitions of success and failure. Life is about discovery and continuous learning and improvement. Happy Holidays to all!

Written by:

1. Ron Stephenson

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