Investing
Where to invest idle cash as money market funds yielding over 5% are not sustainable
As the Federal Reserve considers rate cuts, the appeal of money market funds is increasing, with yields on cash remaining strong for the time being. However, there is a risk that investors who keep too much of their money in cash deposits may miss out on potential bond price appreciation once the Fed begins reducing rates. Financial planning experts suggest evaluating your goals and asset allocation to determine where to reallocate some of your cash. Factors to consider include interest rate sensitivity, credit risk, liquidity, duration, diversification, and tax implications.
When deciding where to move your idle cash, it’s important to assess the sensitivity of different investments to interest rate changes. Longer maturity bonds tend to have greater duration and may experience more significant price fluctuations when rates change. Diversifying your fixed income investments across various sectors and maturities can help mitigate risk. Tax considerations are also crucial, as interest income from corporate bonds and money market funds is taxable, whereas income from Treasurys and municipal bonds may be tax-free at the state and local levels.
For investors looking to gradually increase their fixed income allocation, laddering CDs or Treasury bills can be a good starting point. This strategy involves investing in fixed-income assets with varying maturities and reinvesting the proceeds as they mature into longer-term instruments. Dollar-cost averaging into fixed income or using mutual funds and ETFs can also provide exposure to bonds in a more gradual and diversified manner. While some prefer individual bonds for their ability to hold to maturity, others advocate for actively managed bond funds to potentially outperform passive index funds.
In conclusion, with cash yields remaining high and uncertainty surrounding future rate cuts, investors should carefully consider how to reallocate their cash into fixed income investments. Evaluating interest rate sensitivity, credit risk, liquidity, duration, diversification, and tax implications can help guide decision-making. Whether through laddering CDs, dollar-cost averaging, or utilizing actively managed mutual funds, investors have a range of options to gradually build out their fixed income portfolios while mitigating risk and maximizing returns in the current economic environment.
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