Fin. Advisors' Puzzle: $8T Cash Pile, Looming Rate Cuts

As the Federal Reserve inches closer to interest rate cuts this year, financial advisors face the challenge of convincing nervous clients to step away from the security of cash and cash equivalents and assume more market risk for potentially better returns. 

“It’s tough to not feel like you’re late to the party for stocks on the short term,” said Tim Holsworth, president of Midland, Mich.-based investment advisor AHP Financial.

The Fed’s stretch of 11 rate hikes between March 2022 and July last year to tamp down inflation created a unique opportunity for earning upwards of 5% to sit in cash. The central bank left rates unchanged at its first meeting of 2024 on Wednesday. As a result, global money market fund assets have swelled to over $8 trillion, which is up from $4 trillion in 2018, according to BlackRock. 

The steady, predictable performance of cash held up well over the past few years against the broad equity markets. 

According to Portfolio Visualizer, comparing the 1.62% compound annual growth rate of the SPDR S&P 500 ETF Trust (SPY) with a 3.48% rate for a cash proxy over the past two years made the case for cash.

But while cash looked great in 2022 when SPY lost 18.1%, sitting in cash cost investors last year when SPY rebounded by 26%. 

Fed Signals Less Love for Cash 

“Folks sitting on the sideline got their 5% last year but they missed out on bigger returns,” said Jordan Naffa, director of financial planning at Arista Wealth Management in Las Vegas. 

“Usually, cash isn’t a great position to be in in the long term, but we’ve been getting close to 5.5%,” he added.  

Naffa said he is “making systematic changes (to client portfolios) as rate cuts seem inevitable.” 

Depending on where client portfolios have become out of balance relative to long-term objectives, Naffa said he is directing clients to move into stocks and bonds. But when it comes to fixed income, he is recommending intermediate-term bonds to capture the upside potential of falling interest rates without extending too far on the yield curve. 

Holsworth is also looking at the fixed income side to navigate the anticipated interest rate cuts. 

“It’s probably more important to look at going into bonds as an opportunity to take advantage of rate cuts, again, for the short term,” he said. “Since we don’t time the markets, this is more about managing expectations than actually buying investments.” 

Zachary Bachner, head of investment research at Summit Financial, an investment advisory based in Sterling Heights, Mich., is alerting clients about the likelihood of lower yields on cash going forward.  

“We have seen a drop in treasury rates, annuity rates, and savings rates already since the interest rates have declined over the past few months and it is possible this trend will continue further when the Fed begins to cut rates,” he said.  

Bachner said his clients are choosing a couple of different strategies. 

“We have some clients who are deciding to buy treasury bonds with a longer duration, or we have clients who are funding annuity policies to lock in the currently offered rates,” he said. “On the other hand, we have clients who have kept funds in cash, money markets, or a high yield savings account and are looking to get into the stock market since their interest yield has begun to decline.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWrite