Key takeaways
Investors today hold more than $6 trillion in money market funds.
Many are attracted by today’s higher interest rates available on low-risk, shorter-term securities.
However, the interest rate environment is changing, as the Fed starts to cut interest rates.
Total assets in money market funds grew from $3 trillion in 2018 to a record $6.6 trillion today.1 “Some of that money is appropriately invested there to meet investors’ short-term or emergency needs,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Chances are, however, that some investors may be overdoing it.” Haworth points out that it can be useful to distinguish cash invested to meet long-term goals from cash needed to meet regular or emergency expenses.
“Those who continue to put money to work in cash-equivalent vehicles as an alternative to stocks have, since late 2022, missed out on what proved to be an impressive period for stock market returns,” says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management.
Since early 2024, yields on shorter-term securities trended lower as markets anticipated the onset of Federal Reserve (Fed) interest rate cuts, reversing a policy put in place in 2022 that resulted in significant Fed rate hikes. “Rates controlled by the Fed are closely linked to market rates for shorter-term securities,” says Haworth. While the Fed’s rate hikes resulted in elevated money market yields, the Fed recently began cutting rates.
Haworth, points out that even when rates were at their highest levels, “Those who continue to put money to work in cash-equivalent vehicles as an alternative to stocks have, since late 2022, missed out on what proved to be an impressive period for stock market returns.” The benchmark S&P 500 stock index generated a total return of more than 26% last year and as of mid-November 2024, was close to matching last year's performance.2
Through much of 2024, the bond market has been a mixed bag. Early in the year, the benchmark 10-year U.S. Treasury note’s yield moved higher, and bonds generated negative total returns (bond prices drop when yields rise). However, bonds rallied from April to mid-September. Then, when the Fed began cutting rates, bond markets appeared to react to data showing stronger-than-expected economic growth, raising modest inflation fears and pushing bond yields higher. The 10-year U.S. Treasury yield jumped from 3.63% in mid-September to 4.44% in mid-November.3
Haworth says it can be helpful for investors to consider how assets are allocated to meet both short-term and long-term goals.
You may want to maintain up to 18 months’ worth of assets in accounts that offer some degree of immediate liquidity. These resources can be used to meet living and lifestyle expenses, tax liabilities, repay debts and serve as an emergency fund. For these purposes, consider higher yielding checking accounts, money market mutual funds or CDs.
For money that may be required after 18 months, consider money market funds, Treasury bills and short-term bonds that may offer the potential to generate additional yield while still protecting principal.
As indicated in the chart, six-month Treasury yields exceed those of 1-year Treasury bills, which pay more than 2-year Treasuries.3 However, in recent months, the yield difference has greatly diminished. Investors wanting to secure higher yields for as long as possible may wish to lock in using 2-year Treasuries before potential additional Fed rate cuts result in lower yields. Haworth notes that tax-sensitive investors face a different environment. “Municipal bond yields are tracking along a normal yield curve,” says Haworth. “Municipal bond investors can earn higher yields as they move farther out on the maturity spectrum.”
Resources not needed for near-term purposes can be invested with the objective of generating more attractive, longer-term returns. “If money is meant to be in the market, the time to be invested is now,” says Haworth. “Stocks and bonds historically generate returns that outpace inflation over time.”
Haworth says for investors with long-term goals, consider putting more money to work in longer-term fixed income securities. For tax-aware portfolios, investors should explore municipal bonds with slightly longer than average durations, including a modest allocation to high-yield municipal bonds. Within taxable portfolios, consider including global fixed income securities as part of the mix, along with a meaningful investment in non-government agency issued residential mortgage-backed securities. Trust portfolios should consider reinsurance investments.
Haworth says its important investors build and maintain their equity allocation. “Equities are likely to continue to benefit from positive economic growth, which will help corporate earnings grow.” He also suggests that real assets, such as real estate, offer an opportunity to protect against the impact of persistent inflation. In this environment, dollar-cost averaging can help mitigate risk by shifting funds into longer-term assets systematically over time. “This helps avoid the potential regret of investing a lump sum at the ‘top’ of the market,” says Haworth.
“Investors often pull money intended to achieve long-term goals out of markets after prices have already declined, then are hesitant to get back in until the markets have already recovered,” says Paul Springmeyer, senior vice president and regional investment director at U.S. Bank Private Wealth Management. This was true of investors who stayed out of the stock market in 2023 and 2024, as the S&P 500 frequently topped new highs.4
Springmeyer says for many investors, keeping long-term money on the sidelines turns out to be counterproductive. “It’s important to stay invested for the long-term to capture the opportunities that equities and bonds ultimately generate, without having to make decisions about whether the time is right to get into the market.”
Haworth also notes that along the way, changes may be appropriate. “It’s important to regularly rebalance a portfolio to reflect how market performance has changed your asset mix and bring it back to the intended allocation based on your risk tolerance, time horizon and goals,” he says.
It is not possible to predict with accuracy what to expect of the equity and bond markets in the near term. But those with long-term financial goals should seek reasonable opportunities to put cash to work consistent with their objectives, investment time horizon and risk tolerance.
Review your financial plan with a wealth professional and explore cash management opportunities – along with your long-term investing goals – to help you effectively position assets in today’s changing interest rate environment.
Note: The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.
In today’s market, in which investors can capitalize on very attractive yields on short-term assets such as money market funds, CDs and Treasury bills, significant money is held in cash-equivalent vehicles. However, it’s important that investors seeking to achieve long-term goals look for reasonable opportunities to put cash to work in ways that will help achieve those objectives. This includes using stocks, longer-term fixed income instruments and real assets such as commodities or real estate. A diversified mix of long-term assets is can help generate competitive returns over time. In an environment of elevated inflation, it is critical to position assets in long-term investments that can generate solid, after-inflation returns.
The term “cash equivalents,” from an investment perspective, technically refers to a range of short-term vehicles. This can include bank CDs, Treasury bills, commercial paper and instruments such as money market funds. To be considered liquid, the maturity date should not exceed 90 days. However, individual investors will also categorize as “cash,” various relatively safe securities (CDs, short-term U.S. Treasury securities) as “cash,” within a broader portfolio.
You may want to maintain up to 18 months’ worth of assets in accounts that offer some degree of immediate liquidity. These resources can be used to meet living and lifestyle expenses, tax liabilities and to repay debts. It’s also important to maintain at least a six-month emergency fund. For these purposes, consider higher yielding checking accounts, money market savings or CDs. For money that’s not needed in the next 18 months or so, but that may be required after that period, consider money market funds, Treasury bills and short-term bonds that may offer the potential to generate additional yield while still protecting principal.
Instead of trying to time the market, consider buying stocks and other securities and holding on to them regardless of changes in the market. Read more about the benefits of this long-term investment strategy.
Having reached new record highs more than 50 times in 2024, investors wonder if S&P 500 is due for a pullback.
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