Cash is king again.
When near-term returns for the S&P 500 look bleak and interest rates push yields from savings accounts up to an eye-popping 5%, some investors are asking themselves if they should ditch the erratic equities market altogether 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 weather the market storm. Recent bank failures have also caused 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 cash, according to Bank of America’s most recent global research report.
So the question is: Should you move a significant amount, or the majority, of your investments into cash until the market storm is over? The answer is no, according to advisors and investment analysts. “Allocating more funds to high-yielding CDs, money market funds, or treasuries may seem prudent; however, this is a form of market timing and should be avoided,” explained Jonathan Shenkman of Shenkman Wealth Management. “Long term, cash is not risk-free,” explained Marc N. Balcer, financial advisor and investment director at Girard, a Univest Wealth Division. He explained that the risk of your cash being outpaced by inflation is significant, as is the risk of reinvesting at the wrong time. “Investors say, ‘I’ll put cash into this high-yield money market while things are scary and then when things calm down, I’ll move it back into the market,’ and the problem with that is that by the time things calm down, the market will have already moved,” said Balcer.
Bank of America still predicts a 7% annual return for the S&P 500 over the next decade. When designing a strategy to make the most of your cash, it’s important to take into account your time horizon and long-term financial goals. “Don’t just chase the rates, follow your plan,” explained Brent Weiss, a financial advisor at Facet Wealth. “Over the long term, stocks will outpace bonds and bonds will outpace cash,” added Shenkman.
However, if you have money you’ll need to spend in the near term, or just want to park a portion of your savings in something safe, here are a few strategies that personal finance experts do endorse.
Search for high yields
Advisors emphasized that one of the simplest 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 expanded the difference between what a lot of banks are paying and what the top banks are paying, and as a saver, you can exploit that to your advantage,” said Greg McBride, financial advisor at Bankrate. While many large traditional financial institutions still offer savers APYs of about 1%, some online banks offer yields 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 specific comparisons between financial institutions, Fortune Recommends ranked the top high-yield savings accounts.
If you feel anxious about the recent bank failures, know that as long as you are at a bank that is federally insured, your money is safe up to $250,000. If you have more than that 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 usually recommends clients have accounts with at least two different banks, especially if they are saving more than the FDIC-insured $250,000. “If one bank has some issues, you have another bank with cash available,” Weiss explained.
Consider building a CD ladder
Certificates of deposit (CDs) are fixed deposits that earn interest over a designated period. A 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 staggered returns.
“CDs are a great option if you have a specific cash need at a known point in the future,” explained McBride. “[They work best] if you are looking to generate a predictable stream of interest income or you’re looking to diversify your portfolio positioning cash allocation to get the best return without taking any risk,” McBride. CD ladders can be great 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 car purchase, CD ladders can help you make the most of the rates. Similar to high-yield savings accounts, different financial institutions offer different rates and you can compare to find the one that makes the most sense for you.
To build your own CD ladder, you can buy a string of CDs that all expire at different times, but in succession. If you have $2,500 to invest, you could invest in five CDs that range from one-year to five-year CDs. When the first CD matures, you can cash it out and reinvest the money in a new CD that matures however many years away you want to continue the ladder.
Money market funds are a popular option
Another option that has gotten a lot of attention from investors is money market mutual funds. These mutual funds are unique in that they invest in liquid, short-term assets including cash, and debt-based securities with near-term maturities. According to data from the Investment Company Institute, total money market fund assets went up by $40.07 billion for the week of April 5, making the new total $5.25 trillion in money market fund assets.
“These funds typically earn a higher interest rate than a checking or savings account,” explained Shenkman. “While many money market funds are not FDIC-insured, the risk of investors losing money is minuscule since they invest in the highest-quality bonds with an extremely short duration,” he added.
McBride explained that he advises clients to use these funds for money that you may be planning to invest. “Money funds are a great option for your brokerage account and the money that you want to be able to invest at a moment’s notice, using the money market fund as your temporary parking between selling one investment and buying another,” said McBride.
Invest in short-duration bond funds
Short-term bond funds are relatively low-risk investment options for those who want to benefit from higher yields. Short-term bond funds invest in mostly corporate bonds and other investment-grade securities. “For investors who have a slightly longer time horizon and are willing to endure some slight fluctuation in their holdings, short-duration bond funds are a wonderful option,” explained Shenkman.
However, even relatively low-risk investments carry more risk than having your money in cash accounts. Investors should not put the cash that they might need readily available in any kind of equity or bond fund. “While these funds still provide safety, it’s important to keep in mind that they are not a substitute for money market accounts since cash will fluctuate in value, especially as interest rates increase,” added Shenkman.
With higher risk comes higher returns
It’s important to keep in mind that while being savvy with your cash 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 are skittish and say, 'You know what, maybe I'll just wait on investing,’ so I want to reiterate this point: What a CD ladder [or another cash account] shouldn't be is an alternative to a longer-term investment or wealth-building strategy,” explained Weiss. “So if you're nervous about investing, make sure you’re investing money you don’t need to touch for the next five to 10 years.”
While the equity market is rocky now, the sage wisdom of seasoned investors is true: Don't let tumultuous market conditions scare you away from seeing long-term returns.
