With rates falling, don’t make this ‘big mistake’ with your cash

If you haven’t started moving out of cash, you may not want to wait much longer. Yields are coming down now that the Federal Reserve has started its rate-cutting cycle , decreasing the federal funds rate by half a percentage point on Wednesday. Still, there is a near record $6.3 trillion sitting in money market accounts, a popular place to park cash and earn yields over 5%, according to the Investment Company Institute . While the total money market fund assets are down slightly in the week ended Wednesday, it was from institutional funds due to quarterly corporate tax payments, explained ICI deputy chief economist Shelly Antoniewicz. Retail funds actually increased by about $5 billion. “The Fed rate cuts are likely to support inflows to money market funds over the course of the next year,” Antoniewicz said. While retail investors may slow their pace of investment, institutional flows tend to ramp up since yields on money market funds lag the funds rate, she noted. “Yields are still pretty high, but it could really be a big mistake to hold too much cash,” said certified financial planner Chuck Failla, founder of Sovereign Financial Group. The annualized 7-day yield on the Crane 100 list of the 100 largest taxable money funds sits at 5.06%. That yield is expected to move down, mirroring the Fed’s 50 basis-point cut, over the next month. “Your asset allocation should not be driven by yesterday’s news, and it definitely should not be driven by what you think tomorrow’s news should be,” he said. “You are setting yourself up for failure.” If you wait for rates to come down before moving money into bonds, you’ll be paying higher prices for those assets, he explained. Bond yields move inversely to prices. Instead, consider what money you need to save in an emergency fund, typically enough to cover six to 12 months of expenses, Failla said. That cash can stay in a money market fund, a high yield saving account or certificates of deposit. If there are any other cash-flow needs within the next year, like a college tuition payment, that money should also be in a cash vehicle, he said. CD rates have already moved below 5%. This week Capital One and Marcus both lowered the annual percentage yields on their one-year CDs, according to Wells Fargo’s rate tracker. Bread Financial remains the highest, with its one-year CD at a 4.9% APY. Where to park excess cash Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, has been advocating extending duration for the last year. Once hovering around 5%, the yield on the 10-year Treasury is now around 3.7%. “It’s still not a terrible place to be if you want to be in a super-safe allocation,” she noted. That said, she favors investment-grade bonds for money you want to put to work for the next five to 10 years. Investors can nab yields over 4% for a bond that’s approximately a six-year duration, she said. For wealthy investors, Jones suggests municipal bonds, which are exempt from federal taxes and, in some cases, state taxes. They are high credit quality and are good for those with a longer time horizon, since the yield curve is somewhat upward sloping, she said. “Unless you think tax rates are going to go down significantly … that is a staple in fixed income portfolios for people in high tax brackets,” Jones noted. Failla always advises clients to have buckets within their portfolio based on their time horizon and cash-flow needs. Money needed in one to two years is largely in corporate bonds that are high quality and low duration. About 15% can be in high-quality, value-oriented dividend stocks. The bucket for three to five years has about 70% in fixed income, with a small amount of high yield bonds added that have durations under five years. He’ll dip more into high yield, as well as private credit, in the six to 10-year fixed income category. For 10 years and longer, the portfolio is more aggressive and tilted heavily towards equities, although Failla also includes high-yield bonds, unconstrained bond funds and private credit. However, you can get diversification by simply investing in a core bond fund, said Jones. “It can be challenging to try to build your own portfolio,” she said. “You need a fair amount of money to buy enough bonds to get diversification. With a fund, every dollar invested provides a fair amount of diversification within the portfolio.”