Blue Haven

What is a Savings+ Portfolio?

By September 20, 2021 No Comments

One of our most popular investment strategies with clients recently has been our “Savings +” portfolio. We’ve heard from many clients who say they have too much cash sitting in their bank account, but they aren’t sure they want to invest it in stocks. Our Savings+ portfolio focuses on lower risk investments that pay steady interest with ample liquidity. Debit cards and check writing can also be added to these accounts to help with any cash flow needs.

Judging risk vs. return

If you think about risk and reward on a sliding scale of zero to ten (o-10), where 0 is no risk and 10 is the most risk, a savings account is a zero on both scales. Our goal with the Savings+ portfolio is to take our risk scale to a 1 or 2, while being able to move our return scale to a 3 or a 4. We aim to accomplish this with a diversified fixed income portfolio that owns a basket of very safe bonds along with high income paying securities, such as preferred stock ETFs.

The Savings+ portfolio we manage has the following characteristics:

  • 3% dividend yield with all interest paid monthly (0.25% per month)
  • Low historical beta to the S&P 500 (low volatility)
  • 70%+ investment grade rated (36% AAA rated bonds, 35% investment grade rated bonds)
  • 4.80 effective duration

We’ve used BlackRock’s proprietary Aladdin software to stress test the portfolio under different scenarios. Here are some of the results (note: the dividend yield is included in the calculations):

While these are only hypothetical projections we do use them with confidence when modeling out our Savings+ portfolio. One of the reasons is we saw how the portfolio performed last March during the Covid Crash, and that may have been the best stress test for all securities since 2008. While there was volatility in the portfolio, it fell roughly 6% compared to a -35% drop for the S&P 500.

So what are the risks?

The most notable risk to our Savings+ portfolio is if interest rates start a sustained rise. While the portfolio can withstand a 1% increase in interest rates, the portfolio would be expected to experiences losses beyond that 1% threshold, particularly if the speed of the rise in interest rates is swift.

Another risk would be an all out melt down in the market similar to March 2020 or the Crash of 2008. Should that happen, the portfolio would not be spared from losing value. However, we would point out that  the potential losses would likely be significantly smaller than those experienced in the stock market. And, all things being equal, that loss mitigation would enable flexibility.

For example, an investor in a Savings+ portfolio during a market melt down could take (relatively) small losses and reallocate the money into the stock market. If the Savings+ portfolio is down 5% over a period in which the S&P 500 falls 25%, the investor could capture a 20% difference by selling out of the Savings+ portfolio to buy stocks. We, of course, take it upon ourselves to engage clients in these types of conversations should the circumstances present itself.

Is a Savings+ account right for you?

In determining if a Savings+ account is right for you the first question to ask is do you have more money in savings than you logically need? Most experts suggest saving between 3-9 months worth of living expenses. Another key is that you should be comfortable with some small fluctuations in your account. Because the money gets invested, albeit safely, the value of the account will still fluctuate on a week-to-week basis. But if you have excess savings, and you’re comfortable with taking some low risk in order to earn an extra 3% on your money, then a Savings+ account could be a good option.

One of the best perks with these accounts is that they can be tied to a debit card and checkbook, essentially functioning as a checking account. That way, if all of a sudden you need to dip into your Savings+ account, you can easily spend money directly from the account instead of having to move money back to your traditional bank account. This adds an increased level of flexibility to the accounts.

Please reach out to us if anything we said in this article about Savings+ accounts caught your eye. They are becoming increasingly popular account types with banks paying next to nothing in interest.

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