What the rate cut can mean for your cash
By As expected, the Federal Reserve announced last month that it is making its first interest rate cut, with all signs pointing to more in the near future. I’ve been writing about this for a while, and it should mean good news for those of you who are in the market for a new home or car or are simply looking to save a little money each month by refinancing a loan.
But for those of you who have enjoyed the benefits of high federal fund rates by keeping your cash in money market accounts yielding up to 5%, this recent cut may be a signal that it’s time to take a closer look at your holdings to avoid earning potentially lower returns in the future.
This may be a good time to explore fixed-income investments, which often include corporate and municipal bonds and treasury bills. Fixed-income investments generally have longer time horizons unlike the day-to-day accrual akin to a money market. They are typically low-risk and frequently offer yields comparable to those earned in your money market or high-yield savings accounts over the last couple of years. In addition, as the Federal Reserve lowers rates, many of these fixed-income investments may gain value, potentially moving these discounted fixed-income plays back to “par.” Sorry for the parlance. Par is Wall Street’s way of simply saying a bond is trading at face value, i.e., the same price at which the bond was issued.
My team at Family Financial Partners would be happy to go through these options with you and help find a strategy that will work for your short- and long-term goals. That said, I know that many of you receiving this newsletter like to handle these types of cash investments yourselves, so I wanted to leave you with a couple of considerations as you choose your next step:
1) Don’t over-extend yourself. You may have gotten used to the liquidity in your recent cash investments. It’s worth remembering that fixed-income investments may lock you in for a certain period, so you want to keep enough cash on hand for emergencies or any short-term purchases that may arise. With most bonds, you typically receive some interest payments along the way, but the principal won’t be paid back until the end of your term.
2) Diversify, even within the investment type. Not all fixed-income securities are created equal. Generally, safer investments like treasury bills and municipal bonds yield may offer lower yields compared to riskier ones like mortgage-backed securities and corporate bonds. A combination of investments and a well-balanced mix can help you earn a higher return while potentially mitigating volatility*.
Again, this may be new for you, as it’s been a while since the Federal Reserve has embarked on a lowering of fed fund rates campaign. If this is you, please reach out to us at FFP. We are here to help you navigate the process and explore your options for reallocating cash from money market accounts to fixed-income investments. Contact us today.
* Diversification and asset allocation are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
Article by David Smyth, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.