Where to Put Your Cash
By Luma Wealth on September 22, 2020
When Interest Rates are Near Zero
In anticipation of the economic fallout from COVID-19, the Federal Reserve cut the federal funds rate (the rate at which commercial banks borrow) to zero in March. The purpose was to stimulate the economy by lowering the cost of borrowing. While this aggressive move may help prevent a financial crisis, today’s low-yield environment also means that you may be earning next to nothing on your cash. Should you change your portfolio allocation?
Rick P. D’Amico, CFA and Luma Wealth’s Manager of Investments, offers several considerations when investing in today’s low-rate environment, including:
Know the real rate of return you are earning. Although inflation is currently low, the 10-year treasury rate of return is -0.85% after factoring in inflation (as of August 31, 2020). Some investors may see a decrease in their purchasing power if they are holding bonds.
This is a global issue. Nearly 80% of developed market government bonds are yielding less than 1%, with about one-third trading at negative yields.
Savings and money market rates are also at historic lows. Most money market funds are waiving management fees just to keep seven-day yields positive. According to an analysis conducted by J.P. Morgan, money placed in savings and money markets will not keep up with inflation, and earnings are expected to be well below what is needed to keep up with educational and medical care expenses.*
Low rates may be here for quite some time. Both the Federal Open Market Committee (FOMC) and the financial markets suggest that the federal funds rate will continue to be pegged at zero for the foreseeable future.
Reaching for yield can get risky. The low rate environment may tempt you to reallocate some of your fixed income or cash investments into equities in search of returns. However, an increase in your equity allocation also increases your portfolio risk. The main role of fixed income and cash in an investment portfolio is to add stability and diversification, helping to reduce risk. At Luma Wealth, we believe in a long-term, diversified approach to investing and recommend that you speak with your advisor before reaching for yield.
Please contact your Luma Wealth advisor if you have concerns about how low interest rates may impact your investment portfolio. For additional insights for your wealth and wellness, click here to join us for an educational event – and share this info with a friend!
