Your Cash Is Earning 5% Interest. Is Now the Time to Move It?
Playing it safe paid off for investors in 2023 better than it has in years. Now, it could be time to take more risk with your money. Americans piled into the safe, guaranteed return provided by cash and cash-like investments in the past year.
Money-market funds and high-yield savings accounts each had inflows with households adding more than $651 billion to money-market funds in the second quarter compared with last year, according to Federal Reserve data. Driving the decision to take money out of stocks and bonds and into cash was the Fed. A campaign of interest-rate increases from the Fed pushed the returns of money-markets and similar securities higher.
In many cases, investors figured grabbing an easy and guaranteed 5% annual return on their money was a no-brainer. While there is no guarantee the Federal Reserve is done raising rates or will cut them soon, the board is pausing for now. And history suggests it pays to make moves now, before a possible first rate cut.
Stocks and bonds both tend to perform better in a pause before rate cuts than after, according to an analysis from BlackRock. Since 1990, stocks purchased in the six months after the first rate cut in a cycle have returned an annualized average of 15%, compared with a 21% return for investments made during the pause. Bonds returned an average 15% in the pause before the cuts and 7% afterward.
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