How to allocate cash is one of the most critical decisions investors face, especially given the significant changes in interest rates over the past few years. Let me share some key perspective on this topic.
• Money market funds have become increasingly attractive, with total assets reaching record highs of $6 trillion as investors seek higher yields on their cash holdings.
• Treasury bonds are currently yielding 4.3%, which is more than double the 2.0% average since 2009, while investment grade corporate bonds offer even higher yields of 5.2% as of November 2024.
• While cash feels safe, it faces two key risks - inflation eroding purchasing power over time and the opportunity cost of missing out on potentially higher returns from stocks and bonds.
The included chart shows how money market fund assets have grown to record levels as investors have sought higher yields on their cash holdings. This trend illustrates how many investors are actively managing their cash positions in response to higher rates.
Ultimately, while maintaining some cash is important, the key to long-term financial success is having a properly diversified portfolio aligned with your goals and risk tolerance. This helps protect against both inflation risk and market uncertainty while providing opportunities for growth over time.
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