Cash is king again.
In times of market uncertainty, investors
may be tempted to move their
investments into cash, which can offer
stability and higher yields than equities.
However, financial advisors and
investment analysts caution against this
strategy, as it can be a form of market
timing and may not align with long-term
financial goals.
Cash may seem like a safe option in the
short term, but it carries risks over the
long term. Inflation can erode the value
of cash, and investors who try to time
the market by moving their cash in and
out may miss out on potential gains.
Instead, investors should stick to their
long-term financial plan and consider the
time horizon for their investments. While
cash may be appropriate for short-term
needs, stocks and bonds are likely to
outpace cash over the long term.
If investors do want to park some of
their savings in a safe place, there are
strategies that personal finance experts
endorse, such as high-yielding CDs,
money market funds, or treasuries.
However, it's important to carefully
consider the risks and benefits of each
option and how it fits into your overall
financial plan.
Search for high yields:
Financial advisors recommend taking
advantage of high interest rates by
ensuring your emergency fund is in a
high-yield savings account. While
traditional financial institutions offer
savers APYs of about 1%, online banks
offer yields of up to 4% for their high-
yield accounts.
Some of the most competitive APYs can
be found at online brokerages such as
Ally bank and UFB bank. If you are
worried about bank failures, remember
that as long as you are at a bank that is
federally insured, your money is safe up
to $250,000. Advisors recommend
opening accounts at different banks to
stay under the limit or opening accounts
under different ownership categories at
the same bank if you have more than
that amount in a bank account.
It's important to have accounts with at
least two different banks, especially if
you are saving more than the FDIC-
insured $250,000. This ensures that if
one bank encounters issues, you have
another bank with cash available.
By taking advantage of high-yield
savings accounts and keeping your
money spread out among different
banks, you can make the most of your
savings while minimizing risk.
Consider building a CD ladder:
CDs, or certificates of deposit, are a
popular fixed deposit option for investors
that offer a guaranteed interest rate over
a specific period. A CD ladder is a
savings strategy that involves
purchasing multiple CDs that mature at
different times to create a "ladder" of
staggered returns.
According to financial advisor Greg
McBride, CDs work best when investors
have a specific cash need at a known
point in the future or when they want to
generate a predictable stream of interest
income without taking any risk. They can
be particularly useful for retirees who
want a steady income or those who have
fixed expenses in the future, like tuition
or car payments.
Like high-yield savings accounts,
different financial institutions offer
varying CD rates, so it's essential to
compare rates to find the best option.
Building a CD ladder is relatively
straightforward - investors can purchase
several CDs with varying maturity dates
in succession. For example, if an investor
has $2,500 to invest, they could
purchase five CDs with maturity dates
ranging from one to five years. When the
first CD matures, they can reinvest the
money into a new CD that matures at a
future date to continue the ladder.
However, while CD ladders can provide a
reliable return and low-risk investment,
it's important to note that they are not
immune to inflation risks. Additionally,
withdrawing funds from a CD before
maturity can result in penalties, so
investors should carefully consider their
cash needs before investing in a CD
ladder.
In conclusion, while CD ladders can be a
valuable investment tool, investors
should weigh their options carefully and
consider their long-term financial goals
before committing to a specific strategy.
By comparing rates and consulting with
a financial advisor, investors can create a
savings plan that maximizes their
returns while minimizing risk.
Money market funds are a popular option:
Money market mutual funds have been
gaining popularity among investors as an
alternative investment option. These
mutual funds invest in short-term assets
like cash and debt-based securities that
have near-term maturities. According to
the Investment Company Institute, the
total money market fund assets reached
$5.25 trillion in the week of April 5, with
an increase of $40.07 billion.
Money market mutual funds typically
offer higher interest rates than checking
or savings accounts. Although they are
not FDIC-insured, investors' risk of
losing money is minimal as they invest in
high-quality bonds with short durations.
Financial advisors recommend using
money market funds for the money you
plan to invest. These funds serve as a
temporary parking spot for your
brokerage account's cash while you sell
one investment and buy another. Greg
McBride suggests using money market
funds for the money that you want to be
able to invest at a moment's notice.
With the convenience and flexibility that
money market funds offer, they are a
great option for investors looking to
diversify their portfolio with a low-risk
investment. However, it's essential to do
your research and compare the different
funds available to find the one that best
fits your investment goals.
Invest in short-duration bond funds:
Short-term bond funds are an excellent
choice for investors seeking to benefit
from higher yields while still maintaining
a relatively low level of risk. These funds
primarily invest in investment-grade
securities, including corporate bonds.
According to financial experts, short-
term bond funds are a great option for
investors who have a slightly longer time
horizon and are willing to tolerate some
fluctuation in their holdings. However,
it's important to note that even low-risk
investments come with more risk than
keeping your money in cash accounts.
Investors should avoid putting the cash
they might need immediately in any
equity or bond fund, as even the safest
investments carry some risk. Investors
must remember that while short-term
bond funds offer safety, they are not a
replacement for money market accounts.
It's critical to bear in mind that cash
values will fluctuate, especially as
interest rates rise.
Investing in short-term bond funds can
be a smart way to increase your return
on investment while maintaining a
relatively low level of risk. However,
investors must keep in mind that no
investment is entirely risk-free, and they
should always evaluate their financial
goals and risk tolerance before making
any investment decisions.
With higher risk comes higher returns:
Investing your money in cash accounts
can be a smart move in today's market
environment, but it's important to
remember that these accounts still fall
short of beating inflation. Cash accounts
should never be a substitute for a long-
term investment strategy, particularly for
goals such as retirement.
Investment advisor Weiss cautioned that
a cash account, whether it's a CD ladder
or another type of cash account, should
not be an alternative to a longer-term
investment or wealth-building strategy.
If you're hesitant about investing, make
sure that the money you invest isn't
something you'll need to touch for the
next five to ten years.
Although the equity market is presently
volatile, experienced investors often
advise not allowing turbulent market
conditions to prevent you from seeing
long-term returns.
This story was originally featured
on Fortune.com
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