A Cash Investment Shift

By Suzanne McGee

(Reuters) – A golden era for cash may be winding down as the Federal Reserve prepares to cut interest rates, yet many investors remain attached to this asset class.

Assets in U.S. money markets reached a record $6.24 trillion this month, highlighted by data from the Investment Company Institute on Aug. 21, signaling growing confidence in an impending Fed rate cut scheduled for Sept. 17-18.

These reductions are anticipated to decrease money market yields from current levels above 5%, a rate previously unimaginable. Nevertheless, individual investors show little inclination to exit cash for the lure of stocks and bonds, evidenced by a robust $100 billion influx into money markets in August, as stated by EPFR.

Vance Arnold, a 71-year-old from Fayetteville, Arkansas, holds that cash is still a viable option: “We don’t feel any need to move our money.” With around 80% of his seven-figure portfolio in cash equivalents, he notes the growth of yields from near-zero to current figures of 4.5%-5.2%.

Money markets have become an appealing alternative to stocks and bonds, particularly for retirees and cautious investors looking to stay liquid while still earning interest. Despite expectations of falling yields, they are predicted to remain above the low levels seen a few years ago, when cash was seen unfavorably by investors like Ray Dalio.

Investors are also grappling with high stock valuations after an 18% S&P 500 rally, alongside uncertainties related to the upcoming U.S. presidential election.

However, those overly reliant on cash might miss out on potentially higher returns from other asset classes. Historical data shows cash generated an average return of 2% in the 12 months post rate cuts, while stocks yielded 11% and Treasury bonds gained 5%.

Anne Marie Stonich from Coldstream Wealth Management advocates for diversifying out of cash, urging clients to take action while noting resistance from those favoring liquidity: “It’s time to wake up and pay attention to moving your cash onward.”

The economic landscape may challenge investors’ commitment to cash if the Fed accelerates cuts due to a weakening economy, enhancing the appeal of safe assets amid market volatility.

Market participants will monitor U.S. employment data on Sept. 6 to assess the economic climate following labor-market fluctuations in late July and August.

Consequently, futures indicate expectations of two percentage points of rate cuts in the coming year.

Despite cash’s popularity among institutional investors aiming for yield security ahead of Fed decisions, over $4 trillion of money market funds belong to individual investors, according to the Federal Reserve Bank of St. Louis.

Judith Astroff, a 75-year-old New York systems analyst, keeps 15% of her $500,000 retirement in cash, despite her prior success with high-risk stocks like Nvidia. She expresses hesitation regarding branching out into riskier investments.

Brian Nick from NewEdge Wealth aims to encourage clients to diversify their portfolios if yields decline as projected, emphasizing the need for better investment opportunities than what cash currently offers. “This will be the approach that eventually wins out.”