As interest rates drop, don’t make this ‘big mistake’ with your cash | Wilnesh News
If you haven’t started withdrawing cash yet, you probably don’t want to wait too long. Yields are falling as the Federal Reserve has begun its rate-cutting cycle, lowering the federal funds rate by half a percentage point on Wednesday. Still, money market accounts, a popular place to park cash and earn yields of more than 5%, are near a record $6.3 trillion, according to the Investment Company Institute. ICI deputy chief economist Shelly Antoniewicz explained that while total money market fund assets fell slightly in the week ended Wednesday, that was due to quarterly corporate tax payments from institutional funds. Retail funding actually increased by about $5 billion. Antonovich said: “The Fed’s interest rate cuts may support the inflow of money market funds next year.” She pointed out that although retail investors may slow down their investment pace, because the yield rate of money market funds lags behind the fund rate, institutional funds Flows tend to increase. “Yields are still pretty high, but holding too much cash can really be a big mistake,” said Chuck Failla, a certified financial planner and founder of Sovereign Financial Group. The 7-day annualized return for the 100 largest taxable money funds in the Crane 100 ranking is 5.06%. The yield is expected to fall next month, reflecting a 50 basis point rate cut by the Federal Reserve. “Your asset allocation should not be driven by yesterday’s news, and it definitely shouldn’t be driven by what you think tomorrow’s news should be,” he said. “You’re setting yourself up for failure.” If you wait until interest rates fall before putting money into bonds, you’ll pay a higher price for those assets, he explained. Bond yields are inversely related to prices. Instead, consider how much you need to save in an emergency fund, which is usually enough to cover six to 12 months of expenses, Failla says. This cash can be left in a money market fund, a high-yield savings account, or a certificate of deposit. If there are any other cash flow needs next year, such as paying for college, that money should also be placed in a cash vehicle, he said. CD interest rates have dropped below 5%. Capital One and Marcus both lowered their annual yields on one-year certificates of deposit this week, according to Wells Fargo’s rate tracker. Bread Financial remains the top, with its one-year CD at 4.9% APY. Kathy Jones, chief fixed income strategist at Charles Schwab Financial Research Center, has advocated extending duration last year. The 10-year Treasury yield, which once hovered around 5%, is now about 3.7%. “If you want to be in a super-safe assignment, it’s still not a terrible place to be,” she points out. That said, she prefers investment-grade bonds because you want to invest your money in the next five to 10 years. For a bond with a maturity of about six years, investors can earn a yield of more than 4%, she said. For wealthy investors, Jones recommends issuing municipal bonds, which are exempt from federal and, in some cases, state taxes. They are of high credit quality and are good for those with longer maturities because the yield curve is somewhat upward sloping, she said. “Unless you think tax rates are going to come down significantly … this is a major component of fixed income portfolios for people in high tax brackets,” Jones noted. Failla always advises clients to invest in their portfolios based on their time horizon and cash flow needs. The funds required for one to two years are mainly high-quality, low-duration corporate bonds. About 15% can be invested in high-quality, value-oriented dividend stocks. About 70% of bonds with maturities of three to five years are fixed income, with a small amount of high-yield bonds with maturities of less than five years added. He will invest more in high-yield bonds and private credit in the six- to 10-year fixed-income category. Over a decade and beyond, the portfolio is more aggressive and tilted heavily toward stocks, although Failla also includes high-yield bonds, unconstrained bond funds and private credit. However, Jones says you can achieve diversification by simply investing in core bond funds. “Trying to build your own portfolio can be challenging,” she said. “You need a fair amount of money to buy enough bonds to get diversification. With funds, every dollar invested can provide a fair amount of diversification in the portfolio.”
