Video Summary:
Right now, cash savings options are better than they’ve been in years.
Interest rates on high-yield savings accounts and money market funds are close to 5% and short-term CD rates are over 5%.
These are great interest rates and the principal in these accounts is considered safe because it is typically guaranteed by FDIC insurance subject to limits.
So, why would you not keep all of your money in cash?
First- It is important to define what you want your money to do for you. I recommend separating short-term vs. long-term objectives.
You may not be getting the return you think:
Historically, the real return earned on cash is low. It is important to consider the effect of taxes and inflation. Right now, yields are high, but inflation is high as well...
Source: Hartford Funds. Insights. 3 reasons to examine your cash allocation. 2023
Riskier assets have outpaced inflation over long periods of time. This growth is important for reaching long-term objectives.
Source: JP Morgan Asset Management GTM 02 2023
Second- There is an opportunity cost to moving money to cash.
If you have experienced losses recently and move your money to cash, your future returns may not make up the losses…
This hypothetical shows what return is needed to get back on track after a loss.
Source: New York Life Investments. Investment Essentials: Doing the Math. 2023
Missing the rebound could be costly…
Both stock and bond markets lost money in 2022.
The aggregate bond index has a negative 3-year return.
However, history shows that risk assets bounce after the Fed is done hiking rates:
Source: Capital Ideas. As rate hikes near end, historic investor opportunity may begin. 2023
Putting it all together:
It’s important to take advantage of cash yields right now:
Keep 3-6 months of expenses in savings
What amount do you need for short-term objectives? (Withdrawals that you plan to take in the next 12-24 months)
It’s also important to stick to your investment strategy for long-term goals.
Stay invested in your long-term portfolio!
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.
Comments