Instead of Chasing Alpha, Here Are 4 Ways to Pick the Low-Hanging Apples

If you want apples, you have to shake the trees. 

Many investors deploy sophisticated strategies (that will likely underperform) while leaving the low-hanging fruit to rot. These investments are simple things that can almost certainly result in higher return without one iota of extra risk. Tactics like moving cash around to higher-yield products, or paying down debt, are simple areas where advisors can provide great advice to clients, who may be missing the investing forest for the proverbial trees. 

Low-Yielding Cash

Having some cash on hand is fine, but it needs to be both safe and working hard. A recent review of a Schwab statement showed its bank sweep account yielded a whopping 0.01% annually. (Indeed, two of my clients had over $5 million each in a money center account earning 0.02%, and way above the FDIC insurance limits, so much was at risk.) Low-yielding cash is how many financial services make money. In short, it’s a not-so-hidden fee since statements typically disclose the yields, though you may have to page through the statements to find those yields.

US Treasury money markets yield as much as 3.62% annually. Vanguard’s sweep money market account, the Vanguard Federal Money Market Fund, yields 3.58% annually as of March and much of it is state tax-exempt. Fidelity allows investors to pick their sweep account that often includes higher-paying money market accounts. So, for example, a $50,000 cash account yielding 0.01% pays out $5 a year versus the Vanguard sweep account paying out $1,790 annually. Schwab does have some high-paying money market accounts, but one must fight inertia and move the funds from its sweep account. 

In the example above, stashing $50,000 in a high-paying money market account (whether at a brokerage firm, bank or credit union) pays out almost $150 monthly with no risk. (Most of my new clients come to me with far more than $50,000 in low-paying cash.)

Paying Down Debt

Explain to clients that debt (including a mortgage) is the inverse of a bond. The mortgage is borrowing money, while buying bonds is lending money. Client often say they get a deduction for the mortgage interest and can earn more with a heavily weighted stock portfolio. 

The two problems with this logic are that they are comparing a risky asset (stocks) to a riskless liability (debt) as well as forgetting the fact that they will pay taxes on their portfolio. One should compare the after tax-cost of the mortgage (or other debt) to the after-tax yield of a very low-risk bond. In almost every case, the tax adjustment favors paying off debt since one must reach the standard deduction before any benefit is realized and much of the debt is not deductible anyway. And the mortgage interest deduction is capped at $750,000 of principal for couples filing jointly. Finally, high-income earners have to pay the net investment income tax on interest earned from bonds, but don’t pay that 3.8% tax on interest not paid to others.

Remember that banks and other financial institutions make money by paying depositors or bond holders less than that for which they lend it out. Disintermediate these financial institutions when you can.  

Stop Investing in High-Cost Index Funds

While the odds are dismal, a high-cost active fund does stand a chance of besting the low-cost index fund in the same asset class. (I’m against high-cost funds, as they aren’t low-hanging fruit by my definition because they’re not guaranteed.) But a high-cost index fund has no chance of besting a low-cost index fund following the same index.

Let’s compare the BNY Mellon S&P 500 Index Fund PEOPX (formerly Dreyfus) to the Vanguard S&P 500 Index Fund (VOO). The former has a 0.50% annual expense ratio while the latter has a 0.03% expense ratio. Did VOO outperform PEOPX by the differential of 0.47 percentage points annually? No. The differential was even larger at 0.55 percentage points annually. For the 10 years ending in 2025, VOO returned 14.79% annually while PEOPX returned 14.24% annually. Low-cost index funds tend to attract more investments and can operate more efficiently. 

If the index fund is in a taxable account, gains must be considered. At the very least, turn off dividend reinvestments so you aren’t buying more. If you are in a more expensive share class of a Vanguard stock index fund, you can do a tax-free conversion from a mutual fund share class to a lower-cost ETF share class, though the funds have to be held by Vanguard.

(Almost) Never Turn Down the Employer 401(k) Match

Imagine an employer offering to give employees each a couple thousand dollars and they say “no, thanks?” Though somewhat dated, the Society for Human Resource Management estimates that 25% of employees who qualify for an employer match miss out on receiving the full amount. 

The “almost never” comes into play because there are legitimate reasons employees might decline to participate such as needing the cash immediately to live on or being virtually certain they will leave that employer before any vesting occurs. But much of it is due to hyperbolic discounting, where people strongly prefer some money today rather than a much larger amount in the future. 

Skip the Lunch Line. They say that diversification is the only free lunch when it comes to investing. But this article offers four additional free lunches. In fact, the example earlier of $50,000 cash that could be earning an extra $1,785 annually could buy a $34 lunch each and every week. 

My advice is to stop thinking up sophisticated strategies to bring quick riches. Instead, see if you have any low-hanging fruit that’s ripe for the picking.