Today, let’s talk about two simple things, both of which can be worth money to you if own index funds or have a brokerage account — or the two together.
I’ll show you how if you own an index fund, exercising a little financial discipline will let you make more money (or lose less money) than the index that your fund is based on makes or loses.
I’ll also show you how to avoid being lowballed by profit-hungry brokerage houses on the cash that you have in “sweep accounts.” Those are the accounts where brokerage houses put the proceeds from holdings that you sell or hold cash that you deposit.
Index funds first
The difference between what the index makes or loses and the index’s total return — the index’s performance plus reinvested dividends — makes a serious difference if you hold your fund for the long term. The idea is to let the dividends in your account be reinvested rather than taking them out to get cash.
Rather than just giving you total-return statistics, let me show you real-world examples using Vanguard Admiral shares, the lowest-cost Vanguard shares available to retail investors.
At the end of last year, you would have had $955.72 of S&P 500 Admiral shares for each $1,000 you held on Dec. 31, 2017. That’s nothing to write home about — $955.72 is less than $1,000 — but it’s about 2 percent more than the $937.70 that you would have had without reinvested dividends.
Over five years, an initial $1,000 would have turned into $1,500.65, Vanguard says, of which $142.12 was from reinvested dividends. Over 10 years, it would have become $3,424.72, of which $639.36 was from reinvested dividends. That’s serious money.
Please understand that I’m not here shilling for Vanguard index funds — my point is to show you the difference that personal financial discipline and long-term compounding can make.
(A brief aside: Vanguard, which pioneered and popularized index funds, currently charges a fee of 0.04 of 1 percent — 40 cents per $1,000 — on its S&P Admiral shares. Some of its competitors charge even less. In any event, absent unusual circumstances, if you go the index fund route you should own lower-cost ones, not higher-cost ones.)
On to brokerage accounts and cash
I’m certainly not the first journalist to suggest lately that you move money out of brokerage sweep accounts into money market funds. But it’s something that bears repeating.
I’ve got two motivations here. First, I’ve got an account at Charles Schwab where moving my cash to a money market fund from my sweep account increased my earnings about 500 percent.
Second, I read the January issue of Money Fund Intelligence, published by my friend Peter Crane, and happened upon a table showing what investors were earning on sweep account cash as of Dec. 31 and what the firms’ money market funds were paying.
Sure, I know that brokerage houses are for-profit operations that are in business to make money for their owners, not necessarily for their customers. And I also know — as you should — that deposits in bank sweep accounts are insured by the federal government, and deposits in money market funds aren’t insured.
But the yield difference between sweep account and money funds is preposterous, verging on obscene.
Take Merrill Lynch, whose sweep account was yielding 0.14 percent at year-end, less than one fourteenth of the 1.99 percent the Merrill money fund was yielding. Or take Morgan Stanley (0.14 versus 2.00) or Ameriprise (0.20 versus 2.01) or E-Trade (0.20 versus 1.52) or Schwab (0.33 versus 1.94). That’s not the whole list, but you see the pattern.
The least offensive was Fidelity, whose sweep account paid 0.79 percent compared with 2.09 for its money fund.
Notably missing from the list is Vanguard, whose sweep accounts (including mine) are put into its federal money market fund whose yield when last I looked was 2.30 percent. Vanguard doesn’t go the low-paying bank route because it’s a not-for-profit operation owned by its investors, not by outside shareholders.
The bottom line on both of today’s subjects: Being disciplined and diligent pays off.