May 31, 2023
How to Capitalize on High-Interest Rates
Recent periods of high inflation have led to an increase in interest rates to levels not seen in well over a decade. During times like these, it’s important to continue to stay diligent and avoid leaving money on the sidelines earning low returns that are outpaced by inflation and losing purchasing power.
With interest rates continuing to rise, investors with excess cash should be taking advantage of opportunities that will allow them to maximize their returns without compromising their principal. Individuals will often turn to bond funds or certificates of deposit as a priority when attempting to keep excess cash yielding meaningful returns. One main reason is that financial institutions will market and advertise appealing rates. While these are great options for some, one additional option that is often overlooked is the Money Market fund.
Money Market funds are highly liquid open-ended mutual funds that invest in short-term instruments. Designed to prioritize the preservation of capital while generating a reasonable level of income, these funds become even more attractive as they offer higher yields compared to traditional savings accounts or even some certificates of deposit. By investing in Money Market funds, one can safeguard their capital and earn a competitive return on their investment, thus effectively preserving their purchasing power over time. Money Market funds combine the benefits of stability, competitive returns, and perhaps most importantly they provide excellent liquidity.
Unfortunately, as interest rates rose in the past ~12 months, so did average mortgage rates, a fact not lost on prospective home buyers. As such, many of those prospective home buyers may be waiting to commit to purchasing a home until mortgage rates begin to dip. This is an excellent example of someone that may have a large cash reserve built up from years of saving for a house, that doesn’t want to see their hard-earned money lose purchasing power to inflation but also does not want to expose their savings to the volatility of the stock market. A fixed-income strategy would be very beneficial in this instance and provide the liquidity to access their money when the time comes. This is just one specific example of a fixed-income strategy.
While we certainly cannot discount the safety and advantages offered with a high-yield savings account, or certificate of deposit, Money Market funds such as the Charles Schwab Advantage Money Fund (SWVXX) offers extremely high liquidity while providing an annualized yield of 4.90%. If liquidity is not a high priority, certain CD’s are offering returns in excess of 5.0%.
The Bureau Of Labor Statistics recently reported the 12-month percentage change, Consumer Price Index (CPI), for All Items is 4.9%. While inflation has pulled back some in recent months, it remains an eroding factor in one’s portfolio but fortunately can be mitigated with the right investment strategy.
Fixed-income investments should always be matched to one’s goals. For the long-term investor, a Money Market fund, or CD is not our recommended investment strategy. However, the individual with excess cash set aside for future known expenses may find value in the appropriate strategy and simultaneously maintain purchasing power during a period of high inflation.
Please reach out to your financial advisor if you would like to further discuss fixed-income investment strategies and how they may or may not align with your goals.