Schwab was screwing me over; 2% of stocks account for 91% of wealth creation; Mortgage rates that are too good to give up

1) Here's a follow-up today to Tuesday's e-mail, in which I wrote:

One of the quickest ways you can earn free money – don't let your cash sit in a savings account earning the national average of a scandalously low 0.47% when you can earn close to 5%.

I'm sitting on a significant amount of cash through various retirement accounts at Charles Schwab.

I had always assumed that I was earning a market interest rate because these are brokerage accounts... But yesterday, the thought occurred to me, "I wonder if Schwab is screwing me over in the same way banks are screwing their customers who are holding cash in their savings accounts?"

So I went to Schwab's website and searched for the answer.

I couldn't find it under Frequently Asked Questions, so I typed "What interest rate am I earning on my cash?" in the search bar. Nothing came up.

So I tried Google – no luck there either. Finally, I called Schwab's 800 number and got an answer from a customer-service representative: I was earning a piddly 0.5% interest!

The rep showed me how, in a few quick steps on Schwab's app or website, I could transfer the cash to a range of options: U.S. Treasurys, munis, certificates of deposit, corporate bonds, and money-market funds, all of which were yielding around 5% – or 10 times what I was earning! So I immediately did so.

Don't make the same mistake I did.

This is absolutely free money – and it's significant.

Let's say you have $10,000 in cash – the difference between 0.5% and 5% interest in a year is $450!

2) I want to share two examples of things I knew, but didn't fully appreciate how extreme they are...

Of course, I knew that a small number of stocks account for an outsized share of total market gains over any given time period. But I would have guessed that the 80/20 rule would apply: 20% of stocks account for 80% of gains.

So I was shocked to read this tidbit that a friend sent me from my old friend Michael Mauboussin, who splits his time between doing research at Morgan Stanley and teaching at Columbia Business School:

Almost 60% of all public companies since 1920 have failed to earn Treasury bill returns, and they destroyed an aggregate of $9 trillion of wealth. The other 40% have created $64 trillion of wealth, so the aggregate wealth creation was $55 trillion and the top 2% of that created $50 trillion of the $55 trillion.

In other words, over the past century, 2% of stocks account for 91% of wealth creation!

This goes a long way to explain why index funds beat nearly all active managers: a) They own all of the 2% big winners... and b) they don't get stupid at any point and sell them. It's a good lesson to keep in mind...

3) The other example of a big extreme is the situation in the home-mortgage market.

Of course, I know (and have written about many times) that many homeowners are reluctant to sell because they have a fixed-rate mortgage well below the current rate above 7%.

However, I hadn't realized how extreme and unprecedented things are until I read this recent New York Times article: A Huge Number of Homeowners Have Mortgage Rates Too Good to Give Up. Excerpt:

Something deeply unusual has happened in the American housing market over the last two years, as mortgage rates have risen to around 7 percent.

Rates that high are not, by themselves, historically remarkable. The trouble is that the average American household with a mortgage is sitting on a fixed rate that's a whopping three points lower.

The gap that has jumped open between these two lines has created a nationwide lock-in effect – paralyzing people in homes they may wish to leave – on a scale not seen in decades.

Here's another way to think about it (with another cool graphic) from the article:

Between 1998 and 2020, there was never a time when more than 40 percent of American mortgage holders had locked-in rates more than one percentage point below market conditions.

By the end of 2023, as the chart below shows, about 70 percent of all mortgage holders had rates more than three percentage points below what the market would offer them if they tried to take out a new loan.

American homeowners are being perfectly rational, as a low-interest fixed-rate mortgage is an incredibly valuable asset. As the NYT article continues:

"You could think of your locked-in rate as an asset that you own," said Julia Fonseca, a professor at the University of Illinois at Urbana-Champaign...

Professor Fonseca estimates that locked-in rates are worth about $50,000 to the average mortgage holder. That's roughly the additional amount people would have to spend if they swapped the existing payments left on their current mortgages for higher payments at today's rates.

Put another way, the F.H.F.A. [Federal Housing Finance Agency] researchers estimate that this difference was worth about $511 a month to the average mortgage holder by the end of 2023. That's enough to influence the decisions households make and cause shock waves in the housing market.

If you're fortunate enough to have a low-rate mortgage, do your best to hang onto it!

If you need to move, instead of selling, consider finding long-term renters – there are a lot of them because buying is totally unaffordable to more and more people these days.

4) Ben Carlson on his A Wealth of Common Sense blog has the data on this...

As he notes, because millions of homeowners are unwilling to give up their low-rate mortgages, the reduction in inventory is keeping home prices high which, combined with high mortgage rates today, has led to the "median payment for a new purchase [to double] since 2021."

Take a look at this Redfin chart he included in his recent post:

However, the market hasn't frozen up completely. Both existing- and new-home sales have picked up in recent months because, as Carlson notes:

This data tells us there have been a little more than 5 million houses sold in the past 12 months. That's down from around 6 million at the end of 2019. So there has been a decrease in housing activity but people are still moving...

There are five Ds of real estate – divorce, downsizing, diapers, diamonds, and death – which drive people to buy and sell. Add in new jobs and that covers most of the reasons. Eventually people have to move because life intervenes.

People change jobs. They move to a new city. They get married. They start a family. They get divorced. Someone dies. Life goes on and people make it work, high mortgage rates and all.

My advice to folks who don't own a home is that if you can hold off on buying, do so.

Last summer, my sister moved from Kenya to take a new job in the Washington, D.C. area. Her instinct was to buy, but I persuaded her otherwise... And she found a lovely little home in nearby Takoma Park, Maryland for a very reasonable rental price. Here's a picture of us:

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.