Investment advisors now recommend that clients reconsider large amounts of cash as the Federal Reserve begins to ease interest rates.
Money-market funds that have seen massive inflows may soon lose their appeal, leading investors to seek out other options with higher risk.
Money-market funds are on the rise since 2022. Will this trend continue?
According to the Investment Company Institute (an organization that represents investment funds), retail money-market funds have attracted $951 billion since the Fed began its rate-hiking program in 2022 in order to curb inflation.
By September 18th, 2023, the total assets of these funds will have risen to $2.6 trillion. This is an 80% increase from early 2022.
The Federal Reserve has reversed course and is now lowering rates. This may shorten the life of these ultra-low risk investments.
According to Reuters, “As policy rate falls, the appeal of money market funds will wane,” Daniel Morris Chief Market Strategist, BNP Paribas asset management.
Fed rate cut signals shift in investment strategy
The Federal Reserve cut its federal funds rate on Wednesday by 50 basis points. It now ranges from 4.75% to 5.0%.
This significant reduction in returns may cause investors to reassess their cash holdings and low-risk assets.
Jason Britton is the founder of Reflection Asset Management and oversees $5 billion in assets. He advises investors to accept more risks.
Britton stressed the need for higher risk strategies, adding:
Money-market assets must be converted into fixed-income holdings. Fixed income will then move to preferred stocks or dividend paying stocks.
Looking for higher returns amid falling rates
Money-market funds have been popular for many years due to their low-risk returns. They invest primarily in short-term government bonds.
Investors seeking safety are attracted to rising interest rates. Now that rates are declining, the shine of these investments may begin to fade.
Ross Mayfield, an investment strategist at Baird Wealth and a Reuters reporter, suggested that investors reevaluate their portfolios.
If you rely on money-market funds for income, you might want to consider investing in longer-term investments. This will help you lock in rates and protect you from falling rates.
Carol Schleif, Chief investment officer at BMO Family office, believes that despite the changing landscape, it is still worthwhile to hold cash in order to take advantage of future stock-buying opportunity.
The latest report from the Investment Company Institute shows that money-market fund flows are stable, despite the fact that analysts believe it could take a few weeks or more for the market’s reaction to the Fed’s announcement.
Advisors report that retail investors have been reluctant to completely abandon their cash holdings.
Investors are faced with tough choices
Christian Salomone is Chief Investment Officer of Ballast Rock Private Wealth. As interest rates decline, clients are more eager to find cash alternatives.
Jason Britton warns, however, that “investors find themselves between a rock ad a hard place,” forced to choose between taking on greater risk or accepting lower returns from cash-like investments.
Investors will adjust to the new economic realities in the months ahead as the Fed’s rate-cutting cycles begins.
This post As Fed lowers interest rates, advisors urge shifting from cash to higher-risk investment may be modified as new developments unfold.
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