Money market funds yielding more than 5% won’t last long.Where to put idle cash | Wilnesh News
The siren song for money market funds is getting louder: Cash yields remain high amid uncertainty over the timing of a rate cut by the Federal Reserve. Wall Street’s expectations for the number of rate cuts expected in 2024 vary widely, from as few as one to as many as four, after central bank policymakers last week stressed the “lack of further progress” in curbing inflation. It also means that, at least in the short term, investors holding cash will be rewarded handsomely: As of May 8, the Crane 100 Money Fund Index’s seven-day current annualized return was 5.13%, while Bread Financial’s one-year The annual interest rate for certificates of deposit is 5.25%. But once the Fed starts lowering interest rates, those who keep too much money in those cash deposits risk missing out on expected increases in bond prices. “As soon as the Fed cuts interest rates, yields on money market accounts will decline rapidly,” said Rob Williams, managing director of financial planning at Charles Schwab. Here’s how to decide when and where to reallocate some of your idle cash into fixed income. A general rule of thumb for gut-check financial planning is to have at least enough cash for a year’s expenses, but specifying any amount over that will require you to review your goals and your portfolio’s asset allocation. “Deciding where to put your first dollar depends on what the individual is willing to achieve,” says Ashton Lawrence, a certified financial planner and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina. “No matter where people invest, What people might want to consider is how sensitive the next dollar is to interest rates.” Key factors to weigh when deciding where to move some cash include interest rate sensitivity, credit risk and liquidity, he said. Duration—a bond’s sensitivity to changes in interest rates—is also a focus. Bonds with longer maturities tend to have longer durations than shorter-term bonds, but they can also experience the most dramatic price swings when interest rates fluctuate. Diversity is also important. “Diversify your fixed income investments into various areas such as government, corporate and municipal bonds and bonds of different maturities,” Lawrence said. Taxes are also a key consideration when you set up a fixed income hedge. The interest you earn from corporate bonds, certificates of deposit, and money market funds is subject to ordinary income tax, which can be as high as 37% depending on your tax bracket. Meanwhile, interest income on Treasury bonds is subject to federal income tax but is exempt from state and local taxes. Municipal bonds provide tax-free income at the federal level and are exempt from state taxes if the investor resides in the issuing state. The savings are especially important for high-income investors in high-tax states like New York, New Jersey and California. The tax treatment of fixed income investments also factors into the account that ultimately holds these assets. For example, corporate bonds and the funds that hold them may be strong contenders for tax-deferred accounts, but municipal bonds are better suited for taxable brokerage accounts because there is no need to shelter them from taxes. “For investors in higher tax brackets, we like higher-rated, shorter-term municipal bonds in taxable brokerage,” Williams said. Gradating into fixed income You don’t have to build a fixed-income allocation in one day. Williams said that for investors who are new to the idea of increasing duration, laddered certificates of deposit or Treasury bills may be a good first step. These ladders involve buying a portfolio of fixed income investments of varying maturities, and then as these assets mature, you can reinvest the proceeds into longer-maturity instruments. You can also convert cost averaging into fixed income and build these positions over time. “That might include saying, ‘Every month, every quarter, every year, I put this much money into a growing allocation to bonds,'” Williams said. Dollar-cost averaging of diversified mutual funds or ETFs also allows Investors can easily earn fixed income rather than buying individual bonds. Lawrence likes the idea of using individual bonds to build a fixed-income portfolio – because investors who hold them to maturity don’t have to worry as much about price fluctuations in the interim. But for those leaning toward bond funds, he prefers active management to passive management. “Mutual funds can be an effective way to achieve diversification, but I prefer active management,” he said. “Active managers can take out the ugly parts of an index and outperform the market on that front.”
