With interest rates expected to be higher for longer, what to do with cash | Wilnesh News
Americans sitting on cash just got some good news from the latest inflation report. With consumer prices rising faster than expected, the chances of the Fed cutting interest rates soon appear slim. In fact, traders have pushed back expectations of a rate cut by the Federal Reserve until September, according to the CME FedWatch tool. At one point they expected production cuts to begin in June. They also lowered the number of cuts expected this year. That means those who keep cash in money market funds and Treasury bills can expect interest rates to remain higher for longer. The seven-day annualized return for the 100 largest taxable money funds on the Crane 100 list is currently 5.13%. “Money fund yields are probably not going to fall below 5% right now, and they won’t fall until the Fed takes action,” said Peter Crane, founder of Crane Data, a company that tracks money markets. Interest in money market funds has jumped from record highs to This is evident from the capital inflow into these products. Balances in money market funds were $6.11 trillion last week, up from $5.87 trillion in mid-December, according to the Investment Company Institute. “With short-term interest rates still at very attractive levels, I expect money market fund inflows to resume after tax season ends,” said Shelly Antoniewicz, deputy chief economist at ICI. CEO of Blue Ocean Global Wealth, Certified Financial Planner Coin market funds and high-yield savings accounts are great places to stash money for emergencies and other immediate spending needs because they are liquid, says Margarita Cheng. If you’ve set aside six to 12 months of living expenses and have cash left over, you might consider buying some certificates of deposit, she says. Note that if you withdraw your CD before its maturity date, you will be subject to a penalty. Ladder financing typically involves spreading funds across several CDs of varying maturities. However, you can also buy a short-term CD every few weeks, said Cheng, a member of CNBC’s financial advisory board. She does not recommend withdrawing for more than 18 months because short-term interest rates are higher than long-term interest rates. For those who already have their savings needs met, Cheng recommends putting excess cash into retirement accounts. She particularly likes Roth IRAs, which have income limits. Cash in Your Portfolio Barry Glassman, CFP, founder and president of Glassman Wealth Services, likes cash because of its many uses. “It’s for an emergency fund. It’s for expenses so if the market goes down, you don’t have to sell stocks at a low price,” he said. “But the added benefit today is that the risk/reward is attractive and it’s a diversification tool.” He prefers Treasury bills, which range in maturity from four weeks to 52 weeks. “At current interest rates, short-term investing is no longer just a safe place but a sub-asset class,” said Glassman, another member of CNBC’s financial advisory board. He considers Treasury bills to be part of an investor’s overall bond portfolio. . For his more conservative clients, he builds fairly short-term portfolios. For more aggressive investors, there are fewer Treasuries. This is consistent with a recent report from Vanguard Group, which found that the level of cash in a portfolio depends on the investor’s risk tolerance, investment horizon and financing levels. Roger Aliaga-Diaz, global head of portfolio construction at Vanguard Group, said that for those with lower risk tolerance who may not invest and save, owning 10% to 15% cash will do. “It’s important that you keep saving and investing to achieve your goals,” he said. “I’d rather give you a more conservative portfolio to sleep with at night.” Cash also makes sense for those who are getting closer to their goals, whether it’s paying for college or withdrawing from retirement savings. Aliaga-Diaz points out that for these investors, 20% to 30% is a good allocation, or even a little more if you’re really close to your goals. “If you feel that funding levels are at the right level for what you need, you don’t want to take that risk in the market,” he said. He said there are also moderate-risk investors with longer investment horizons, and Vanguard Group’s survey shows that such investors make up the majority. Their optimal cash allocation is zero, he said. For one, cash has barely kept pace with inflation. Vanguard’s analysis shows that cash has an annualized real return of 0.7% from 1960 to 2022. Stocks, on the other hand, have an annualized real return of 6.3%, while bonds have an annualized real return of 2%, net of inflation. The asset manager also analyzed portfolios targeting retirement and college savings and found that as much as 50% came from market returns. “Putting money into low-return assets like cash does reduce wealth accumulation,” Arriaga-Diaz said. For those who want to set aside cash to take advantage of market declines, he warns against doing so. In fact, research from Vanguard Group shows that if investors miss a few weeks of the recovery, they underperform—it’s better to ride the market down before rising again, he said. “If you can time the market perfectly, cash will work,” he said. “The problem is it’s hard to get out and back at the right time.”
