We’ve been hearing variations of this question from several clients recently. As interest rates continue to rise for money markets, CDs, high-yield cash savings accounts, and treasury bills, the decision on how to allocate your investment capital has become more complex compared to the “There Is No Alternative” (TINA) world we were in a few years ago. The short answer is—unfortunately—that it depends.
If you find yourself with excess cash savings languishing in a bank account earning you a mere 0.01% (or something less than 4%), it’s worth exploring alternatives to earn a more competitive return on your liquid assets. We consistently advise our clients to seek out FDIC-insured high-yield savings accounts for parking their short-term reserves. We’ve also discussed the potential of investing in iBonds when inflation-adjusted rates are compelling. There are even options to achieve higher yields by locking up your money in short-term CDs and Treasury Bills, although these require you to commit your capital for specified periods (weeks or months) before accessing it again.
For those with diversified investment portfolios who are assessing their fixed income holdings, it’s natural to question whether it still makes sense to invest in bonds (whether treasury, corporate, or municipal) given the current high short-term rates. However, when evaluating your investments against available short-term rates, it’s crucial to consider the purpose and timeline of your investments. Our aim is to allocate a client’s portfolio to generate returns that surpass the long-term rate of inflation, achieved through a mix of stocks and bonds. Stocks provide the portfolio’s growth engine, while a laddered bond portfolio offers the dual benefits of consistent cash flow and principal repayment. With bonds maturing at regular intervals (monthly, quarterly, yearly), adjustments can be made to accommodate shifts in interest rates over time, including rebalancing into stocks when market conditions warrant.
Despite the current higher short-term rates compared to some longer-term investments, the yield curve (a chart depicting bond rates for different time periods) reflects the market’s expectation that short-term rates will decrease in the future. This presents an opportunity, particularly for those with longer time horizons, to secure higher rates for extended periods by considering investments spanning 5, 7, 10, or more years.
As is the case with any comprehensive financial plan, the decision to invest in any asset should be made within the scope of all of your personal finances, as well as your time horizon for your investments. We have advised some clients to place short-term cash savings accounts. Others with less pressing cash needs have changed their asset allocation to include a higher portion of their portfolio to fixed income. Our focus on the preservation of capital requires us to assess a client’s long-term financial plan, rather than looking solely at a relatively short time frame in their overall retirement plan, especially when there are indications (e.g. the inverted yield curve) of the current investment environment may change in the coming years, as we have seen time and time again.
In conclusion, the most critical directive is to have a comprehensive financial plan that addresses your short, medium, and long-term goals. Making wise capital allocation decisions across diverse investment options requires us to navigate the entire landscape of fixed-income investments, rather than fixating solely on current rates.
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