Cash: Now What?
A few years ago, when interest rates were at historic
lows, many investors ventured away from cash holdings in
search of higher yields. Certificates of deposit (CDs) and
money market funds were barely keeping pace with inflation.
But with interest rates climbing steadily over the past two
years, now may be a good time to rethink your cash position.
Why Interest Rates Matter
Rising interest rates can have an adverse effect on some
of the investments in your portfolio. For example, bonds
typically lose value when interest rates rise. That’s
because new bonds sold today may offer higher yields than
the bonds you purchased last year.
The stock market may also react negatively to
interest-rate increases. When companies have to pay more to
borrow money, corporate earnings tend to suffer. This can
lead equity investors to exercise added caution.
Interest-rate hikes have the opposite effect on cash
investments. When rates go up, yields on money market funds
and CDs generally rise in sync. CDs typically offer better
rates than money market funds, but they lock up your money
for a set number of months or years, and they impose a
penalty for early withdrawals. That’s something to keep in
mind if you expect rates to continue rising.
Money market funds are neither insured nor guaranteed
by the FDIC or any other government agency. Although a money
market fund attempts to maintain a stable $1 share price,
you can lose money by investing in a fund. Ask your
Financial professional for a prospectus, which contains
information you should read about the fund’s investment
objectives, risks, and expenses. The FDIC insures bank CDs,
which generally provide a fixed rate of return.
Don’t Spend It All in One Place
Of course, a portfolio that is too heavily weighted in
cash may not be the best scenario either. Over time, both
stocks and bonds have historically outperformed cash
equivalents, and they generally experience greater
volatility.1 A well-balanced portfolio might
diversify your investments over many different asset types,
allowing you to manage risk and weather market volatility.
Diversification does not guarantee against loss; it is a
method used to help manage investment risk.
Since the tech boom of the late 1990s, interest-rate
fluctuations have kept investors on their toes. Today’s
interest rates may prompt some individuals to give cash a
greater role in their portfolios.
From:
David Waters
Phone: 215.875.8790
1) Thomson Financial, 2006,
for the period 12/31/1985to 12/31/2005. Stocks are
represented by the S&P 500 Composite (total return), which
is considered representative of the U.S. stock market. Bonds
are represented by the Citigroup Corporate Bond Composite
Index, which is considered representative of the U.S.
corporate bond market. The performance of an unmanaged index
is not indicative of the performance of any particular
investment. Individuals cannot invest directly in an index.
Past performance is never a guarantee of future results.
