There are many ways to lose money when investing, from picking the wrong stocks to not adjusting your asset allocation as you approach retirement.
But investors too often overlook a common mistake that robs them of extra cash: Keeping money in a “sweep account” that pays next to nothing.
A sweep account is a place where your cash waits patiently while you decide how to invest it.
For example, you might have $5,000 you plan to invest gradually over the course of the year with a company of your choice — Vanguard, Fidelity, Charles Schwab or any of countless others.
Until you decide where to invest this money — such as in an individual stock or a mutual fund — the cash sits in a sweep account that typically pays some rate of interest.
You can designate where you want to keep the money. But if you do not, many companies automatically “sweep” the money into a money market account or similar vehicle paying a microscopic rate of interest.
Fidelity Investments is turning this reality on its head. The company recently announced that it will automatically direct incoming money from its customers into higher-yielding cash options available for brokerage and retirement accounts.
Fidelity illustrates the advantage of its new policy by comparing what an investor would have earned on his or her money on Aug. 5 in default sweep accounts at four companies. (The default sweep account Fidelity used in its own example was the Government Money Market Fund.)
- Fidelity: 1.91%
- Charles Schwab: 0.18%
- E-Trade: 0.07%
- TD Ameritrade: 0.04%
Fidelity emphasizes that customers still have the ability to hold their cash in the account of their choosing. But it also notes that research indicates that many investors pay little or no attention to the rate paid on cash they are holding. The company continues:
“Fidelity has made it easy for customers by automatically giving them the higher yielding option at account opening, while also providing other investment options for those customers who prefer it.”
Perhaps unsurprisingly, a recent J.D. Power survey found that Fidelity is tops for customer satisfaction among self-directed investors who seek some guidance, as we reported in “Savvy Investors Love This Brokerage Firm Most.”
How to earn more on your cash
The moral of the story for all investors and savers — regardless of whether you have a Fidelity account — is to leave no stone unturned when it comes to earning more on your money.
As Fidelity notes, $10,000 held for a year in an account earning 1.91% will earn $191 annually. That compares to earning just $18 in an account paying 0.18%.
So, get started earning more today. Research the options at the company of your choice to make sure you are parking your cash in the right place.
Once you find a better alternative, read “How to Switch Banks in 5 Steps” for a painless, step-by-step guide to making the switch.
How do you make more on your money? Share your tips in comments below or on our Facebook page.