Is it Time to Break Up With Your Money Market Funds?

With money market funds recently paying an average interest rate of 5.20%,¹ it’s no secret why total assets in such funds kept hitting all-time record highs in 2023. Money market funds invest in short-term debt, such as Treasury bills, that are generally safe investments. Money market funds also provide liquidity, which means investors can access their money quickly when they need it. This makes them an attractive option for people looking for high yields with minimal risk, especially compared to the interest rates the big banks are offering these days in their standard savings accounts. You can read more about the pros and cons of money market funds and other cash management options here: Cash Management Options. To summarize, money market funds can represent a good option to help cover short-term expenses, but you may miss out on higher returns over the long term if your investment strategy unduly revolves around them.

Trading safety for growth

Most long-term investors should prioritize a diversified portfolio of stocks and bonds that aligns with their risk tolerance and investment goals. Maintaining the correct asset allocation is important because it can help to reduce overall portfolio risk and maximize returns over the long term. While everyone’s specific asset allocation will vary depending on their unique circumstances, a general rule of thumb is to allocate a larger percentage of investments to stocks when you’re younger and have a longer time horizon to weather inevitable market fluctuations. As investors approach retirement, they may want to consider gradually shifting more of their allocation toward fixed income to help prioritize stability and liquidity.

Using the graph below as an example, you can see that a 60/40 asset allocation (60% stocks, 40% bonds) has generated a positive return over any 10-year rolling period since 1976. While past performance does not guarantee future returns, this historical consistency suggests that the 60/40 portfolio could be a reliable strategy for long-term investing, depending on your personal circumstances. If you’re concerned about market volatility, this type of asset allocation may offer you some reassurance. Implementing this long-term strategy with a disciplined investment plan can help you build a more secure financial future.

Rolling return periods of a 60% stock/40% bond portfolio

As interest rates fall, fixed income portfolios may benefit

After a flurry of interest rate increases in recent times, the likelihood of declining interest rates over the coming years presents good opportunities for fixed income investments. The magnitude of the benefit to existing fixed income portfolios will largely depend on the portfolio's duration. Duration measures the sensitivity of a bond (i.e., how volatile its price will be) in relation to changes in interest rates. Longer-duration bonds are more sensitive to interest rate fluctuations compared to shorter-duration bonds.

Typically, the value of existing bonds increases as interest rates decline. This is because new bonds will be issued with lower yields than existing ones, making existing bonds with higher yields more attractive to investors. However, when interest rates rise, the opposite occurs. The price of an existing bond will decline as investors can now purchase new bonds with higher yields. While a tilt toward short-term fixed income worked well in 2022 when interest rates were rising, adding more duration exposure could prove valuable moving forward if rates decline.²

Why equities may benefit from lower interest rates

In general, equities are also expected to benefit from a decline in interest rates. Lower rates mean reduced borrowing costs for companies. This typically allows them to allocate more capital toward growth initiatives such as expanding operations, investing in research and development, and pursuing strategic acquisitions. These investments can increase profitability, market share, and stock prices. Lower interest rates also tend to boost consumer spending, positively impacting corporate profits as economic activity increases. This heightened demand often translates into higher sales and revenue for companies, further boosting their earnings potential.³

Short-term cash needs vs. long-term investing goals

The time period that differentiates short-term cash relative to long-term investments is typically defined as one year.⁴ However, there is no hard-and-fast rule, and this definition could vary depending on an investor’s individual circumstances. For instance, although you may be saving for a house or a car that might be purchased soon but not within a year, it’s usually still a good idea to prioritize the safety of principal when investing for these short-term goals. Once you have defined your shorter-term goals, you can develop a plan to invest for your longer-term goals.

Steps to consider before putting cash to work

If you’re a long-term investor, we believe that you should re-assess your investments in money market funds versus stocks and bonds. Here are four practical steps you may wish to take when getting started:

1. Confirm your asset allocation: Meet with your Corient Wealth Advisor to confirm that your asset allocation is appropriate for your risk tolerance and investment goals.
2. Confirm your long-term vs. short-term cash goals: Review your cash flow needs and determine how much cash you must keep on hand for short-term expenses.
3. Develop a plan to invest your excess cash: Work with your advisor to develop a plan to invest your excess cash in accordance with your asset allocation strategy. If you are uncomfortable putting all your cash to work immediately, ask your advisor about a “dollar cost averaging” plan that allows you to invest a set amount at specific intervals.
4. Rebalance your portfolio regularly: This ensures sufficient alignment with your long-term asset allocation objectives.

We are confident these steps will assist you in putting your cash to work, managing your overall risk, and taking positive steps toward achieving your long-term financial goals.

Talk to your Corient Wealth Advisor to ensure that you make certain moves now that can help maximize your long-term financial success.

¹ Peter Crane, and Shaun Cutts. “Crane Data Money Market Mutual Fund News and Intelligence.” Cranedata.com, 11/25/23
² Samuel Martinez and John Croke, “Don’t Be Too Shortsighted in Fixed Income,” Vanguard.com, 3/9/23.
³ Chris Seabury, “How Interest Rates Affect the U.S. Markets,” Investopedia, 6/17/22.
⁴ Ben Geier, “Long-Term Investments vs. Short-Term Investments,” SmartAsset, 6/3/22.

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