When to Invest Back Into Markets After Interest Rates Are High

In an era of enticing 5% interest rates on savings accounts and money markets, many investors are caught in a dilemma. Should you park your cash in these seemingly attractive short-term vehicles, or pursue long-term investment strategies? Our latest episode dives deep into this pressing question.

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Transcript

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All right, so let's dive into today's discussion. With interest rates on savings accounts and money market funds around 5% these days, I know a lot of listeners are wondering if they should just park their cash in those vehicles or look at other long term invest investment options. So let's start with the pros of savings accounts and money markets in this environment. What are your thoughts? This question gets right at where we started on the market updates. Right. Interest rates. And we always talk with our clients about if you have short term needs in the next few years, take advantage of these interest rates that are high. Money markets at 4.5% 5%, a little over that are all really good ways to get higher amounts of earnings on money that you might need now or in the next few years. So there's definitely obviously those are safe, the principal safe. You're not going to lose money on what you've put in. And you're earning on an annual basis somewhere between four and 4.5%, 5%. So for short term, next few years, really positive. All right. No doubt about the security and liquidity benefits. There that's kind of obvious, but what are the potential downsides, especially for longer term investing? Yeah, I mean, so this is one. So if you need it in the. Next few years you're going to probably get somewhere in the neighborhood of 5% today in a money market, depending on which bank or if you're investing in institutional money market shares the downside, potentially, right, we just talked about it, which is if the fed lowers interest rates or borrowing rates really is what they'd be lowering, which then has an effect on interest rates. You may be earning less over the next year, and that may be okay to you. It could be 4%, it could be 3.5%. We're not exactly sure what that would. Look like, but that's something you can't control. That's controlled by monetary policy run by the Federal Reserve. And so, therefore that may be a downside risk to how you're investing in the short term. It just may not be earning as much as it is right now in a year. What about bond investments? Drill down on that. What's that? Well, right, and that's another consideration at this point, right, for this short term money, if you're playing this, I want to get yield or income, which is the interest you're earning in it, you may want to consider treasury bonds and lock in the rates while they're higher. If you look at, and these are things that you could buy in short term instruments in six months, a year, three years, all the way, as much as 20 years, you may be able to lock in a higher rate, depending on what your investment objective is. If it's the next few years, if you lock in something for three years, four, four and a half percent, you may be happy with that. The downside to that, though, Gary, potentially, is it's not as liquid as the money market, right. So if you lock into a treasury bond for three years and you try to trade that within the three years because you need the money, you're actually not going to get that full yield back. So that's the downside to treasury bonds. But if you don't need that money in the next few years and you lock it in for three at 4.5%, obviously you're earning more money than you had. Good perspective. Obviously. Another consideration for longer term investors is the opportunity cost, the opportunity cost of forgoing potential stock market returns by staying heavy in cash and short term vehicles, even at higher rates. What do you think about that? Well, you know, this is the dilemma between the short term need, right, everyone and we sort of define short term as a couple years, and this may be your emergency fund. So, if you're someone who spends$5,000 a month, maybe you've got four to. Six months in an emergency fund. So say you got $30,000 or something like that,$35,000 in an emergency fund. That might be something you put in a money market. However if you're saving for retirement and your time horizon is ten to 15 years away, if you're sitting in those yields in a money market at four, 4.5%, you're missing out. And if you look at the stock market returns, if you just use. The S&P 500, since Post World War Two, it's averaged about an 11% return. And so while some years have been bad and some years really good, the average, you can't debate. So that's why when you think of the time horizon of being longer term for retirement money, if you're just sitting in cash in that, you're really missing out, and that, and that's something we call wealth building. Right? When you, you look at our name at strategic wealth advisors, you don't always need to have a lot of money to build wealth. You're just making a decision between having yields of four and a half, 5%, versus yields at eleven. And the difference between that builds wealth. Again great insight. Always, when we sit down, I know our listeners are walking away, hopefully with a much better understanding of pros and cons. That's what we do of various options in this rate environment. But before you leave, any final words of wisdom for us today? Jim? Well, I'm not sure I have - no pressure on you, but I would say that the moral of this story is, in the short term, you definitely have to think about taking advantage of the yields that are in money markets. And as interest rates are higher, the risk there is, they may become lower for all of your long term money. And this gets at sort of having a diversified portfolio, really think about the types of risk you can take, because usually risk is rewarded by markets. The simple term of saying the S&P 500 yielded 11% per year since 1957, on average, gives you a perspective on how long term money, when taking some risk, can really benefit and build your wealth. And so those are the two takeaways, really, is. While yields are enticing in short term money definitely use it for that short term money. But anything long term, you should be thinking about a diversified portfolio that takes some risk. Yeah. Complimentary consultation, that can happen anytime, right? Yeah, absolutely. Our team works with our clients on this stuff all the time. We listen to how they might perceive risk and try to adjust portfolios that can help them achieve their goals. And that's what we do for a living. All right, always good advice. I enjoy our sit downs. We're out of time here today. Thank you again for joining us. Thanks for having me here. Thank you very much. For more information regarding wealth management and customized financial planning with Weiss, Hale & Zahansky Strategic Wealth Advisors, please visit whzwealth.com Weiss, Hale & Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial network member FINRA SIPC, a Registered investment advisor, fixed insurance products and services offered through CES Insurance agency. They practice at 697 Pomfret Street Pomfret Center, Connecticut 06259 392-A Merrow Road, Tallinn, Connecticut 06084 They can be reached at 860-928-2341 Weiss, Hale & Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strives to support clients in achieving their financial life goals while providing absolute confidence and unwavering partnership for life.