EAs and EA Orgs Should Move Cash from Low-Interest to High-Interest Optionspost by Brendon_Wong · 2019-02-23T12:24:02.970Z · score: 46 (21 votes) · EA · GW · 12 comments
Summary Overview Bank Recommendations Bank Account Background Recommendation for Balances Above $250,000 Savings Account and CD Recommendations for Organizations Savings Account and CD Recommendations for Individuals Investment Recommendations Brokerage Account Background Investment Fund Background Money Market Funds Ultra-Short-Term Bonds Conclusion Appendix A: Back-Of-The-Envelope Risk Analysis of Bank Accounts and Money Market Funds Appendix B: Recommendations for Higher EV Investment Options Assessment of Robo-Advisors DIY Investing Advanced Investing None 12 comments
- We believe the EA community is missing out on hundreds of thousands to millions of dollars in charitable funding every year by keeping cash in low-interest accounts instead of equally safe high-interest options
- We have identified three alternatives to low-interest accounts for EA organizations and individual EAs:
- High-interest bank accounts which currently yield 2%-2.4%
- Prime money market funds which currently yield 2.5%
- Ultra-short-term bonds which currently yield 2.9%
- This article evaluates high-interest options and provides guidance on how people and organizations can access them with approximately 1–10 hours of setup time
Antigravity Investments is an EA social enterprise with the mission of leveraging investing to increase funding for EA charities. Last year, we advised EA organizations to move an estimated $5 million in low-interest bank accounts to higher-interest alternatives which is expected to increase charitable funding by $125,000 per year at current interest rates. We believe there is an opportunity to drive millions of additional dollars to EA causes by providing this recommendation to the entire EA community.
Our initial outreach to several global health and poverty charities combined with a preliminary analysis of government-mandated financial disclosures (IRS Form 990) and financial statements of a broader set of organizations in this space suggest that tens of millions of dollars are being kept in low-interest bank accounts in excess of standard operating reserves. If accurate, this reduces funding for poverty alleviation and global health interventions by over $1 million per year.
We recommend moving cash in low-interest accounts to safe and higher-interest alternatives like high-yield savings accounts, money market funds, and ultra-short-term bonds. Most options take no more than several hours to set up and do not require investing experience. With the exception of our recommended cash management solution for deposits over $250,000, which is open to people and organizations in most countries, our exact recommendations in this article pertain to U.S. residents and organizations. Our general recommendation to place cash in high-interest options applies in all countries.
We believe Antigravity Investments and EA community members can create a high impact by advising EA organizations with a lot of cash in non-interest-bearing and low-interest bank accounts to move their cash to high-interest options that are within each organization’s respective risk parameters.
We have also included recommendations for individual EAs in this article. EAs will be able to gain more spending and donation power by following these recommendations. Cullen O'Keefe recommended investing donations planned for later in the year in his article EAs Should Invest All Year, then Give only on Giving Tuesday [EA · GW]. Our recommendations in this article are suitable for donors that do not want the value of their intended donations to significantly fluctuate during the year or drop below their pre-investment value.
While we have spent many hours evaluating cash management options, there may be even better options out there. Please comment on this article if you find a potentially better recommendation!
Bank Account Background
Checking accounts are bank accounts designed for frequent financial transactions. Savings accounts are bank accounts designed for saving money. Most savings accounts pay an annual rate of interest on account balances; in the U.S., the national average is currently 0.09%.
A high-yield savings account is a normal savings account that appeals to consumers by paying a much higher rate of interest than the national average for savings accounts. Good high-yield savings accounts currently yield between 2%–2.5%. High-yield savings accounts are usually offered by online banks because online banks operate with lower overhead than banks with physical branches.
High-yield savings accounts have the same risk as standard checking and savings accounts. All bank accounts are insured by an independent U.S. government agency called the FDIC, which insures up to $250,000 per person/organization per bank.
High yield savings accounts can be opened online or in person at a bank’s local branch. There are many online high yield savings accounts with competitive rates and features. The account opening process should be fast and straightforward. All of the savings accounts mentioned in this article can be opened online.
Banks also offer certificates of deposit (CDs). CDs require that depositors leave a set amount of money at a bank for a specified period of time without withdrawing it in exchange for a higher interest rate. Cash in CDs can be withdrawn, but there is typically a minor penalty.
Recommendation for Balances Above $250,000
We have evaluated a wide range of bank-provided cash management solutions and identified what we currently see as the optimal solution for balances above $250,000.
Our recommended solution is StoneCastle’s AAA-rated Federally Insured Cash Account (FICA). FICA works by continually analyzing yields at hundreds of U.S. banks and automatically storing cash at each high-yield bank up to the $250,000 FDIC insurance limit. The total cash stored with this solution is insured by the FDIC up to $25 million, making it safer than cash stored above the FDIC insurance limit at an individual bank. This option yields ~2.4%, has an initial deposit minimum of $250,000 (the account value can dip below this limit after account creation with no penalty), supports next-day withdrawals, and is open to individuals and organizations located in most countries around the world. All deposits and withdrawals must be in U.S. dollars.
StoneCastle typically does not sell directly to individuals and organizations. We have partnered with StoneCastle to deliver their services to any interested EAs and EA organizations, and we recommend contacting us to get started with FICA. We are working with StoneCastle to introduce open online registration for FICA accounts in the near future. This option is our general recommendation for organizational cash management due to its safety, simplicity, and speed of implementation.
Savings Account and CD Recommendations for Organizations
StoneCastle has a higher yield and much higher FDIC insurance than all business savings accounts we’ve seen. For organizations that cannot meet the minimum or want to use another alternative, we recommend finding the highest-yield business savings account. Organizations can open up high-yield accounts at multiple banks if they want FDIC coverage above $250,000, although the added risk of holding cash at a large and well-managed bank above the FDIC coverage threshold is not considered very high. See Appendix A for a more thorough bank risk analysis.
Comparison websites like DepositAccounts offer ranked lists of business savings accounts. First Internet Bank offers a competitive ~1.8% yield which increases to ~2% for balances above the $250,000 FDIC insurance maximum.
We could not find a ranked list of business CDs. Out of the top 10 CD rates posted on DepositAccounts, only Live Oak Bank offered business CDs with online account opening. We believe finding business CDs through high-yield online banks that support businesses is a good way to discover the best options. First Internet Bank has excellent business CD rates in addition to its excellent savings rates.
First Internet Bank is a smaller institution, unlike other recommendations in this article. It has the highest savings yield for businesses that we’ve found; however, we currently do not have case studies from organizations that have tried to open a First Internet Bank account. First Internet Bank has decent reviews, although some reviewers mention frictions with account creation and account transfers.
Savings Account and CD Recommendations for Individuals
Savings accounts for individuals are more competitive and have higher yields than business savings accounts.
Comparison websites like DepositAccounts offer ranked lists of personal savings accounts. An example of an established bank with competitive interest rates is Goldman Sachs’ Marcus account. Marcus has a savings option that yields 2.25% with a $1 minimum and $1,000,000 maximum. Some online banks list rates up to 2.45%, but be aware many of these offers may be from very new banks or existing banks that temporarily boost rates in an effort to attract new customers. See Appendix A for a risk analysis of storing money at banks above and below FDIC insurance limits.
DepositAccounts has ranked lists of CDs as well. Some of these CDs have restrictions, like requiring a branch visit to open. We recommend using a high-yield online bank like Marcus or Ally as a CD provider.
Brokerage Account Background
A brokerage account is like a bank account that allows the account holder to buy and sell investments, most commonly stocks and investment funds. Moving money into and out of our recommended investments typically requires a brokerage account.
We recommend Vanguard as a brokerage provider for individuals. Vanguard is an industry leader that is essentially a not-for-profit, customer-owned company. As such, it has excellent products and services with extremely low fees. Vanguard has an online account application for individuals.
Vanguard is also an excellent brokerage firm for organizations. Unfortunately, unlike its policy for individual accounts, Vanguard requires organizations to mail in their account application. The account opening process has taken up to several months from start to finish with our clients. For organizations that would prefer a faster and easier start, TD Ameritrade seems to have a purely online corporate account application. We currently do not have case studies from organizations that have tried to open a TD Ameritrade account. Interactive Brokers has a slightly more complicated online corporate account application which our clients have used successfully. Nonprofits and businesses should choose the “small business” account option.
For EAs and EA organizations that would like our assistance with managing investments in brokerage accounts, we can be easily linked and unlinked from Interactive Brokers and Vanguard accounts.
Investment Fund Background
An investment fund collects money from a group of investors and invests the money with a specific strategy. Investment funds are widely used by large and small investors alike to be able to follow investing strategies that can be impractical to individually implement. For example, the S&P 500 is a group of 500 major U.S. stocks that is selected and revised by a committee. One investment fund can hold all 500 stocks at once, making it easy to invest in and withdraw money from the S&P 500.
There are two main types of investment funds used by investors: mutual funds and exchange-traded funds (ETFs). Mutual funds were the first modern day collective investment option, and they remain popular to this day. They are beginning to decline in popularity due to the introduction of ETFs in 1993. Unlike mutual funds, ETFs do not have any investment minimums. They have significantly lower investment fees than mutual funds on average. ETFs also have much higher tax efficiency, which is helpful for individuals investing in taxable non-retirement brokerage accounts, which are also known as taxable brokerage accounts. Retirement accounts and nonprofit accounts are not taxed on investment gains and thus do not get any benefit from higher tax efficiency.
Once cash is moved into a brokerage account, it can be used to buy mutual funds and ETFs. Funds are identified by a unique series of letters known as a “ticker symbol.” For example, the largest ETF in the world tracks the S&P 500 stock index and has the ticker symbol SPY.
Moving money in and out of a fund involves buying or selling one or more “shares” of a fund. As with stocks, one share of a fund represents a fractional piece of ownership of that fund. Each share has a certain dollar value which represents the amount that is being added or removed from the fund for each share that is bought or sold.
Once shares are sold, the cash value of those shares is transferred into the brokerage account’s cash balance. Funds can be easily electronically transferred from a brokerage account to a bank account. The process of selling a fund and transferring money from a brokerage account to a bank account takes approximately 2–4 business days from start to finish. There is no upper limit on the number of withdrawals or the dollar amount of any withdrawal.
The following two investment recommendations are listed in order of increasing risk. All recommendations are much safer than traditional investments like stocks and bonds.
Money Market Funds
Money market funds are a type of mutual fund that invest in investments that are so safe they are known as cash equivalents. Money market funds have special rules and regulations that enable them to maintain a constant share price of $1 except in extremely rare circumstances when the underlying cash equivalents change substantially in value.
There are two types of money market funds: money market funds that only invest in U.S. government debt (known as government, federal, or treasury funds), and money market funds that can invest in different types of cash equivalents including very safe bank and corporate debt (known as prime funds).
All U.S. government money market funds maintain a $1 share price and are considered as safe as cash. Recent regulations that came into effect in 2016 split prime money market funds into “retail” and “institutional” funds. Retail prime money market funds maintain a $1 share price like U.S. government money market funds while institutional prime money market funds must have their share price vary according to the exact value of their underlying cash equivalents. Although this change had little effect on the underlying risk of prime money market funds, organizations withdrew over $1 trillion out of the total $1.4 trillion in cash held in prime money market funds in 2016. See Appendix A for a comparison of the risk of bank accounts and money market funds.
For individuals, we recommend the Vanguard Prime Money Market Fund (VMMXX is the $3,000 minimum version and VMRXX is the $5 million minimum version) due to its ~2.5% yield, low expense ratio, and excellent management record.
For organizations that want a higher yield and are willing to accept the generally unnoticeable fluctuations in account value that are characteristic of institutional prime money market funds, we recommend the Invesco Liquid Assets Portfolio (LAPXX) which has a ~2.5% yield, low expense ratio, and incredibly low $1,000 minimum. Individual EAs that want to gain a potentially marginally higher yield than the Vanguard Prime Money Market Fund can also invest in this option.
Ultra-short-term bonds represent the next level of risk above money market funds. They have higher yields and higher downward fluctuations in value which are unlikely to exceed 1%–2% from peak to trough.
We recommend the JPMorgan Ultra-Short Income ETF (JPST) due to its ~2.9% yield, superior performance compared to peers like MINT (the industry leader and another strong option), and low expense ratio.
Moving cash that is not planned to be spent in the next X weeks from a low-interest account to a high-yield alternative is an optimal decision in nearly all circumstances. Higher-yielding alternatives like a high-yield savings account or StoneCastle’s FDIC-insured cash management solution have equivalent or superior safety compared to a standard bank account. People and organizations should transfer their low-interest funds to the highest-yielding alternative that is at or below their desired risk level.
Generally, the longer the period cash will be held, the higher the likelihood higher-EV (expected value) options with higher risk like ultra-short-term bonds will end the period with positive returns. We recommend higher EV investment options for savings where significant fluctuations in value are acceptable, such as savings intended to be spent years into the future. We have included suggestions for how to implement investment options that have higher expected returns than the low-risk options mentioned in this article in Appendix B.
Antigravity Investments is a social impact–focused organization. We do not generate any revenue from recommending any of the higher yielding cash alternatives in this article, including StoneCastle’s. We provide all advising to EAs for free. We typically charge a (below-market) rate for providing asset management services due to the time and cost associated with doing so.
We track the impact of our recommendations to improve our impact—if you have implemented a change based on this article please email us at email@example.com. Thanks!
Appendix A: Back-Of-The-Envelope Risk Analysis of Bank Accounts and Money Market Funds
According to the FDIC, from October 2000 to February 2019, 555 banks failed. In Q1 2000 there were 8,177 banks in the U.S. and in Q3 2018 there were 4,746 banks according to the Federal Reserve Bank of St. Louis. Assuming an average of 6461 banks during this period, the annual risk of a randomly selected bank failing is roughly (555/6461) * (1/18) = ~0.48% which is around 1 in 200. Of course, major banks are less likely to fail than average, so we'd expect their yearly odds of failure to be less than 1 in 200. The FDIC-insured portion of funds held at failed banks did not experience any losses. Since 2008, the FDIC has protected non-insured deposits in 94.1% of cases. Using that protection rate, the annual risk of losing money at a randomly selected bank is (555/6461) * (1/18) * (6/100) = ~0.028% which is around 1 in 3500.
Depending on the definition of a money market fund, over the last 48 years there have only been 1–3 cases in which a money market fund has dropped below a $1 share price, with no drop exceeding 6%. Assuming an average of 400 money market funds over the last 48 years (this figure is based on recent counts because SEC statistics on the number of money market funds do not appear to go further back than 2014), the annual risk of a randomly selected money market fund dropping in value is (3/400) * (1/48) = ~0.0156% which is around 1 in 6400. Like with banks, large, well-managed money market funds seem less susceptible to losses.
More money market funds may have historically experienced losses if their parent organizations or the U.S. government did not step in. New SEC regulations came into effect in 2016 with the aim of preventing issues that caused previous money market fund losses or near losses. Similarly, banks may have also experienced higher failure rates without U.S. government measures in the 2008 financial crisis, and post-2008 legislation also aims to reduce risks in the banking system.
Historically, only prime money market funds have experienced problems because they hold marginally riskier assets than U.S. government bonds to secure a higher yield. Because of this, we view U.S. government money market funds as equivalent to cash, and generally recommend them over savings accounts if their yield is higher. We view prime money market funds as close to cash with a minute possibility of loss and any losses being so limited in size that they are very unlikely to significantly impact an individual or organization. Institutional money market funds experience minute fluctuations in value and new regulations permit temporary withdrawal limits to ensure liquidity. We believe these aspects of institutional funds are also unlikely to impact organizational operations. We are neutral on holding institutional prime money market funds and higher-yielding, higher-risk options like ultra-short-term bonds; such investment decisions depend on the risk tolerance of the investor.
Appendix B: Recommendations for Higher EV Investment Options
This article went to great lengths to cover brokerage accounts and investment funds. It felt incomplete to include this comprehensive background information and not include information on how to use brokerage accounts and investment funds to select investments with higher expected returns.
Assessment of Robo-Advisors
Online investment advisors have boomed in popularity. Robo-advisors are essentially brokerage accounts that automatically choose investment funds for investors. They enable people to invest effectively without needing to have any prior knowledge or spend any time managing investments.
Robo-advisors are particularly suitable for individual investors because they perform optimizations that many individual investors do not perform like tax-loss harvesting, asset location, and rebalancing. Unfortunately for individual EAs, robo-advisors only seem to have limited support for donating investment funds that have gone up in value, which is one of the best ways to donate because of the substantial tax savings of this approach. Betterment has a low 0.25% fee and supports donations to the Against Malaria Foundation and GiveWell. Betterment did not respond to an inquiry regarding how easy it is to request new charities by the time of this article’s publication. WealthSimple has a higher 0.5% fee and supports donations to any U.S. charity with a more manual process.
There are no robo-advisors for nonprofits we are aware of. Our firm could be classified as a robo-advisor for nonprofits because we operate digitally and charge very low fees, although to date we have always directly communicated with clients instead of using a website as the sole means of client communication.
For individuals, we expect the DIY investment approach we cover next to outperform robo-advisors due to annual fee savings. We recommend using a robo-advisor over not investing or delaying the decision to begin investing for a significant period of time. Funds can be transferred out of a robo-advisor to a self-managed brokerage account at any time.
All a robo-advisor is doing is selecting investment funds and allocating money between them, a process that only takes several hours a year once someone is familiar with how investing works.
For individual EAs that are not familiar with investing, for retirement accounts, we recommend selecting an appropriate Vanguard Target Retirement Fund or Vanguard LifeStrategy Fund. Target Retirement funds change their holdings to suit various retirement dates, and LifeStrategy funds hold investments that match various risk levels. These Vanguard funds have a 0% management fee (any stated fees for these funds represent the fees of the underlying funds).
Vanguard Target Retirement and LifeStrategy funds can also be used in non-retirement (taxable) accounts, although they may result in higher taxes on investment gains due to the lack of tax-loss harvesting. We recommend using a simple diversified portfolio with low-cost ETFs and mutual funds at least for taxable accounts. Individuals can select an asset allocation that corresponds with their performance objectives and risk tolerance and should utilize the techniques of donating appreciated securities, tax-loss harvesting, asset location, and rebalancing. We have linked to the Bogleheads wiki which is a reputable source of information on low-cost DIY investing.
Nonprofits can invest without taxes. As such, donating appreciated securities, tax-loss harvesting, and asset location do not apply, and the Vanguard funds mentioned above automatically rebalance their underlying funds. Since organizations typically invest according to a certain level of desired risk and returns, Vanguard LifeStrategy Funds are quite suitable for charities.
The 80,000’s Hours article titled Common investing mistakes in the effective altruism community references several evidence-based investing techniques including factor investing and rules-based active asset allocation. We believe there are evidence-based investing techniques like the ones referenced in the article that may be able to increase investment returns beyond a standard approach. These techniques sometimes have barriers to entry, for instance requiring continual monitoring of the market, access to financial data, and even coding to run mathematical calculations to determine what investment decisions to make. They can also work poorly for individuals because some techniques involve incurring a lot of taxes which can reduce after-tax returns below the returns of a standard approach.
One of the benefits of nonprofit investing we exploit is that nonprofits do not incur taxes when investing, enabling advanced investing strategies to work more effectively. We believe there is the potential for error when attempting to independently pursue more advanced approaches without a high level of investment expertise. Interested readers are welcome to read Common investing mistakes in the effective altruism community as a jumping-off point to explore more advanced investment approaches.
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