Does it make sense to move money from savings to the stock market because yields are falling?
Interest rates on things like CDs, high-yield savings accounts and money market funds look like they will continue to fall due to the Federal Reserve lowering interest rates. Should you try to earn more return on your dollars because yields are falling?
In this week’s video, Casey discusses how folks should think about making this decision. You have to weigh factors such as risk levels, and the overall role each dollar has in your life.
Casey also sheds some insight on how quickly banks tend to make changes to the yields they offer. If you’ve been considering changing your investment approach based on the latest Fed rate cuts, please take a few minutes and check out this week’s video!
- 0:18 – Cash on the sidelines
- 0:42 – Real yields
- 1:10 – Keep up with inflation
- 1:30 – Asset location
- 2:48 – Take risk here
- 3:52 – Banks lower yields quicker
Should You Invest More Since Yields are Falling? – Links
Where to Put Your Money After the Fed Rate Cut – The Wall Street Journal
When Will Money Market Funds Lose Their Allure? – The Wall Street Journal
The guys talk more about the recent Fed activity and what that means for investors here.
Should You Invest More Since Yields are Falling? – Transcript
**Click here for a PDF version of this transcript**
Casey Mullooly: The question we’ve been getting a lot here lately is since the Fed lowered interest rates and says that they’re going to continue to lower it, should we think about moving money from things like our high-yield savings account or CDs and investing it in the stock market?
One of the big narratives in the financial media right now is the all-time high that we’ve seen in cash or money market funds. This has been growing over the last year or two.
As rates have gone up, people have put more in these higher-yielding areas because as inflation has come back to just about 3%, they’ve been getting 5% risk-free, and inflation is 3%, so they’re making a real yield. Real yield is your yield minus inflation, real yield. So the real yield has been about 2% for taking no risk which is pretty good.
That’s what people think is going to go away in the future now that rates are coming down and it probably will lessen to a degree, but I don’t think it’s going to go away completely.
The idea is you want to keep up with and outpace inflation while maintaining an appropriate amount of risk. Risk being the key word there. Super important. With rates falling, does that mean that you should take your emergency fund and invest it in crypto or something extremely risky and speculative? No, that is not recommended. Please don’t do that.
What it does mean is this is a good time to right size where you have your money. You have your short-term bucket, this is checking, savings account. This is going to be where you are focused on stability and liquidity. You want to be able to access this money in a pinch. You want to access it today, something comes up, you got to get it, and you got to get it now, and it has to be there.
This is your short-term bucket, three to six months of expenses for an emergency fund is recommended. Everyone feels differently about that, but that’s the general guidelines. Maybe you’re saving up for a big purchase. You want to keep your down payment there, maybe something for a car or a house in the next 12 to 24 months. Good idea to keep it in the short-term bucket.
Intermediate-term bucket is where you can reach for some extra yield. It’s kind of a blend, obviously, between shorter-term and longer-term. This is where you want to be able to access it. You don’t want to be penalized for taking this money out.
Think Roth IRA, brokerage account, maybe longer-term CD. You could do things like a balanced allocation between short-term bond funds, that’s the piece that you’re going to access and stocks or stock market exposure. That’s the intermediate-term bucket.
Longer-term bucket, this is where you want to take your risk. This is where you’re not going to have to access this money for five years plus. You can invest and keep buying shares along the way, let the money compound, and this is where you’re really going to outpace inflation.
You pair your longer-term bucket with your shorter-term bucket, and you should be able to outpace inflation over the long term. This is going to be your retirement account, most likely 401k, 457, 403B, and IRA. This is where you want to take your risk.
So should you be moving money from your shorter-term safety bucket into your longer-term bucket and investing that in the stock market? That is probably not a good idea.
You want to, like I said, you want to right-size the amount that you have in each bucket, but if the extra interest you’ve earned in your shorter or intermediate-term bucket has you feeling like you have filled that up all the way, then maybe it is time to tweak your allocation and dial up the amount that you’re sending into your longer-term bucket.
I do want to throw this in here too at the end, that banks are quicker to cut the yields that they’re paying than they are to raise their yields. So the Fed did a study back in 2022 that showed the median time in a falling rate environment for banks to move the rates was about three weeks. When rates are rising, that is about six weeks, so they’re slower to raise your yields and faster to cut your yields.
That doesn’t mean that you have to move now. Like I said, if you have individual questions about how to right-size your money approach, your bucket approach, get in touch with us here. We’d be happy to help. So that’s going to do it. Thanks, as always, for watching.
