Cash is king again.
When short-term S&P 500 returns look bleak And interest rate push savings account returns up to 5%, some investors are wondering if they should completely ditch the erratic equity market for its reliable, if not boring cousin: cash. Cash is a “compelling alternative to the S&P 500”, Bank of America analysts wrote in a research note to clients, predicting disappointing near-term returns for the S&P 500. According to a recent Allianz research report, 62% of Americans surveyed said they would rather keep their money in cash than ride out the market storm. Recent bank failures also have pushed investors to move their money to more conservative, low-risk accounts and funds. In the first quarter of 2023 alone, investors moved $508 billion into money market funds, a high-yielding place to store money, according to Bank of America’s latest global research report.
So the question is: should you move a significant amount, if not the majority, of your cash investments until the stock market storm has passed? The answer is no, according to advisors and investment analysts. “Allocating more funds to high-yield CDs, money market funds or treasury bills may seem prudent; however, it is a form of market timing and should be avoided,” explained Jonathan Shenkman of Shenkman Wealth Management. “Long term, cash is not without risk,” explained Marc N. Balcer, financial adviser and chief investment officer at Girard, a wealth division of Univest. He explained that the risk of your cash flow being overtaken by inflation is significant, as is the risk of reinvesting at the wrong time. “Investors say, ‘I’m going to put money into this high yield money market while things are scary, and then when things calm down I’ll put it back in the market,’ and the problem with that is that by the time things calm down, the market will have already moved,” Balcer said.
Bank of America still forecasts a 7% annual return for the S&P 500 over the next decade. When designing a strategy to get the most out of your money, it’s important to consider your time horizon and long-term financial goals. “Don’t just chase rates, follow your plan,” said Brent Weiss, financial adviser at Facet Wealth. “Over the long term, stocks will outpace bonds and bonds will outpace cash,” Shenkman added.
However, if you have money you’ll need to spend in the short term, or just want to put some of your savings into something safe, here are some strategies endorsed by personal finance experts.
Search for high yields
Advisors have pointed out that one of the easiest and most effective ways to take advantage of high interest rates is to make sure your emergency fund is in a high yield savings account. “The accordion has certainly widened the difference between what a lot of banks pay and what the big banks pay, and as a saver you can use that to your advantage,” said Greg McBride, financial adviser at Bankrate. While many large traditional financial institutions still offer savers APYs of around 1%, some online banks offer returns of up to 4% for their high yield accounts. Weiss explained that some online brokerages, such as Ally Bank and UFB Bank, offer the most competitive APYs. To see more accurate comparisons between financial institutions, Fortune Recommend Rated Top High Yield Savings accounts.
If you’re feeling anxious about recent bank failures, know that as long as you’re at a federally insured bank, your money is safe up to $250,000. If you have more than this amount in a bank account, advisors recommend opening accounts at different banks to stay under the limit or opening accounts under different ownership categories at the same bank. Weiss also explained that he generally recommends customers have accounts at at least two different banks, especially if they’re saving more than the FDIC-insured $250,000. “If one bank is in trouble, you have another bank with cash available,” Weiss explained.
Consider building a CD ladder
Certificates of deposit (CD) are fixed deposits that earn interest over a fixed period. A The CD ladder is a savings strategy in which you stack multiple certificates of deposit (CDs) that all mature at different times to create a “ladder” of laddered returns.
“CDs are a great option if you have a specific need for cash at some known time in the future,” McBride explained. “[They work best] whether you are looking to generate a predictable stream of interest income or are looking to diversify your portfolio’s cash allocation to achieve the best return without taking on risk,” McBride. CD ladders can be ideal for those who want a steady income during retirement. If you know you’re going to have a fixed expense in the future, like a tuition payment or buying a car, CD scales can help you get the most out of rates. Similar to high yield savings accounts, different financial institutions offer different rates and you can compare to find the best one for you.
To build your own CD ladder, you can buy a series of CDs that all expire at different times, but successively. If you have $2,500 to invest, you could invest in five CDs ranging from one year to five years. When the first CD matures, you can cash it out and reinvest the money in a new CD that matures in the years you want to continue the ladder.
Money market funds are a popular option
Money market mutual funds are another option that has received a lot of attention from investors. These mutual funds are unique in that they invest in short-term liquid assets, including cash, and debt securities with short maturities. According Investment Company Institute datatotal money market fund assets increased by $40.07 billion for the week of April 5, bringing the new total to $5.25 trillion in money market fund assets.
“These funds typically earn a higher interest rate than a checking or savings account,” Shenkman explained. “Although many money market funds are not FDIC insured, the risk of investors losing money is minimal because they are investing in the highest quality bonds with an extremely short duration,” he said. -he adds.
McBride explained that he advises clients to use these funds for money you may be considering investing. “Money market funds are a great option for your brokerage account and the money you want to be able to invest at any time, using the money market fund as your temporary parking spot between selling an investment and buying a another,” McBride said.
Invest in short duration bond funds
Short-term bond funds are relatively low-risk investment options for those seeking higher returns. Short-term bond funds invest primarily in corporate bonds and other investment-grade securities. “For investors who have a slightly longer time horizon and are willing to endure slight swings in their holdings, short-duration bond funds are a great option,” Shenkman explained.
However, even relatively low-risk investments carry more risk than having your money in cash accounts. Investors should not put any cash they may need in any type of stock or bond fund. “While these funds still provide security, it is important to keep in mind that they do not replace money market accounts since the value of cash fluctuates, especially when interest rates rise,” added Shenkman.
Higher risk comes with higher returns
It’s important to keep in mind that while being savvy with your money can get you high returns given the current market environment, these accounts still don’t outpace inflation. You should never substitute a cash account for an investment strategy, especially for long-term goals such as retirement.
“Some people get nervous and say, ‘You know what, maybe I’ll wait to invest’, so I want to reiterate that point: What CD ladder [or another cash account] should not be is an alternative to a long-term investment or wealth-building strategy,” Weiss explained. “So if you’re nervous about investing, be sure to invest money that you don’t need to touch for the next five to 10 years.”
While the stock market is choppy right now, the wisdom of seasoned investors holds true: don’t let turbulent market conditions scare you away from seeing long-term returns.