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We’ve all heard the saying, “Cash is King” and with the rise in interest rates in 2022 and 2023, cash and money market positions have been very attractive. At one point these rates were north of 5%. When you can earn 5% in a “risk-free” asset it’s easy to make the case to hold excess cash in your portfolio.
However, like all good things, they must come to an end and the attractive “risk-free” rates are no different. Money market rates have decreased over the last two years by 21% from the high in 2023. Fidelity’s Money Market is earning 4.13% (as of today, the rates change daily).
Money markets and cash are great tools and warrant consideration when it comes to investing programs. The goal is to make sure you aren’t holding too much. Everyone has a different set of circumstances, so this is not a one-size-fits-all. Of course, making sure there’s enough for emergencies and any short-term purchases is a no-brainer, but excess cash could harm your long-term growth goals.
The S&P 500 has averaged 10.021%* adjusted for inflation in the last 10 years. Let’s assume that we can earn 7% over 10 years and the Money Market stays at 4% for the next 10 years. If you invested $100,000 in the money market it would be worth close to $150,000. The same $100,000 earning 7% would be worth close to $200,000. In this example, the cash investment cost you around $50,000 over 10 years.
The math makes it easy to see why investing over long periods makes sense. For those of you who chose cash over the last year or two, you might find that it’s hard to jump back into the market. It’s easy to feel like you need to find the perfect time to get back in the game, and herein lies the potential problem. Rarely has anyone successfully timed the market – entering or exiting. The fact is you may never find a perfect time to re-enter the market.
One way to re-enter the market is to select a day of the month and a predetermined percentage of the account that you’re going to invest on that day, taking out all emotions of the decision. At OmniStar, we invest 50% initially and the remaining 50% over two periods.
Our portfolio team always says, “It’s not timing the market, it’s time in the market.” This axiom can be tough to implement since human nature is to make decisions based on emotion. Yet, many people feel like they can “time the market” and know when to move from cash to stocks and bonds, but it’s not that simple. If you find yourself trying to re-enter the market, consider the slow drip, or dollar cost averaging method. This is best for those who are fearful of a declining economy. If you are trying to make this decision or think you may be holding too much cash, our second opinion service can help you determine the ideal amount of cash, and other asset classes, for your situation. Talk to one of our associates to learn more about investing during every stage of life.
*https://tradethatswing.com/average-historical-stock-market-returns-for-sp-500-5-year-up-to-150-year-averages/#:~:text=Stock%20Market%20Average%20Yearly%20Return%20for%20the%20Last%2010%20Years,including%20dividends)%20is%2010.021%25.
