After what seems like an eternity in investing time, cash investments are now offering competitive yields.
As we use the term “Cash,” it is a catch-all for bank accounts, CDs, Money Market Mutual Funds, Treasury Bills, and the like. The investments other than currency and bank accounts are often called cash equivalents. But, for discussion purposes, let us just call them all “Cash.”
Yields on cash have been near zero for most of the last 15 years since the great financial crisis. As recently as January 2022 the average yield on a taxable money market mutual fund was 0.02%. Since then, the Federal Reserve has raised short-term interest rates 11 times and now the benchmark Federal Funds rate is 5.25-5.50%. Yields on short-term government securities follow the Federal Funds rate and now yield similar rates. Rates on CDs and money market mutual funds also tend to follow those rates closely. The average yield on traditional bank accounts is still very low-under .50% according to Bankrate.com.
Money market mutual funds and CDs offer rates hovering around 5%. That is a very seductive rate but it will not last forever. As an aside, longer-term rates are currently lower-the 10-year US Treasury Bond yield is about 4.25%.
How much should investors have parked in cash? For the last 15 or so years, the answer was obviously zero (other than emergency reserves and necessary operating funds). Today, it is not unreasonable to allocate a small percentage of a portfolio to cash, say 5% or so. Coordinating this with your overall asset allocation and portfolio goals still takes precedence. As an example, you might replace some of your short-term bond funds with cash equivalents. And, when the Federal Reserve starts to lower interest rates in the future, be prepared to modify your allocation.
Be careful not to get too attracted to the shiny new toy that cash seems to be. If you have a bond ladder, stick to it. You do not want to get stuck having to replace maturing or called bonds when short and long-term rates are both lower than they are today.