Cash and money market funds pay next to nothing but then again you aren’t taking on much risk. If you’re exploring what to do with cash but not ready to go in stocks just yet, the next logical step is to look into short term strategies. A little extra risk for a little extra potential reward.
Chart from PIMCO
Contact us today if you’re interested in making your cash work harder.
Cash in a portfolio should have a specific role in a portfolio. We see cash as fitting in one of these three categories:
How much cash in each category depends on your expense pattern, your goals and risk tolerance.
Contact us today if you’re interested in making your cash work harder.
Investors have been keeping record high levels of cash in their investment accounts and savings accounts. It’s a logical place to park money for a while. It’s relatively safe, readily accessible and a very common practice. Unfortunately, many investors are moving to cash without a strategy guiding them. So what’s the problem with having a high level of cash?
1) Your cash is earning next to nothing. The government is discouraging savings by keeping interest rates low. They are doing this to push investors into the market and to invest in stocks and bonds.
2) Low interest rates will likely continue. Janet Yellen, the incoming Fed Chair has signaled her intentions to maintain similar policies as her predecessor. These poor savings rates could continue for the next few years.
3) Inflation will slowly eat away at your purchasing power. This slow, ever-present issue catches many investors off guard.
4) In addition to inflation risk, you also face opportunity risk. Many investors sat in cash during the last few years, while the markets hit all time highs. That’s a missed opportunity.
Bottom line: The government is punishing you for saving, and rewarding you for investing.
You need to develop a strategy for your cash. It’s important to treat cash as an asset class. It needs to serve a specific role in the portfolio.
Contact us today if you’re interested in making your cash work harder.
In a recent newsletter by the Association Retired Employees of Northeast Utilities (ARENU) , we wrote about the popular Fixed Account in their 401(k) plan at Fidelity that many NU retirees use. After the article went to press, a major development occurred: The interest rate on the fixed account decreased from 3.5% to 2.75%. That decline is steep – well over a 20% reduction, and it raises a lot of flags for us:
If you’re concerned about how this change will affect you, please contact us for a meeting. We can work with you to identify a strategy to meet your needs or fill the gap that this rate change caused.
This past summer, we may have seen the warning we needed when it comes to the portion of your portfolio in bonds. Interest rates can’t go down any more, they can only go up. This could result in the value of your current bond holdings going down. This is discussed as “The Great Rotation”. Investors who flocked to bonds in 2008 and 2009 are now starting to rotate to stocks. On the surface, many investors think it’s time to drop bonds altogether.
And it’s not just investors thinking this way. Many of the top financial institutions agree (great chart on that here)
When the consensus is that bonds will be a weak investment, it’s easy to jump on the band wagon. But markets often do exactly the exactly opposite of what you would think.
Instead of following the heard, perhaps investors should simply review their bond holdings and look to upgrade the quality of the funds. Not all bonds or bond funds will be affected by rising interest rates the same way –something the chart and most investors don’t follow.
