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Investors were able to get the best returns on their cash as the US Federal Reserve raised interest rates to curb the pace of inflation.
Even as central banks cut interest rates, with the Federal Reserve announcing another quarter-point rate cut on Thursday, experts say holding cash can still be a competitive strategy.
“Highest yields across high-yield savings accounts, money market, and CDs. [certificates of deposit] It's well ahead of inflation and will remain so for some time,” said Greg McBride, chief financial analyst at Bankrate.
“Even though interest rates are coming down, cash is still in a pretty good position,” he said.
But how much cash to set aside is a question every retail investor must decide.
Earlier this year, Karrie Cox, chief market strategist at Ritholtz Wealth Management, warned that investors may be holding too much cash. That may still be the case, she said Thursday.
“If you're holding cash because you don't feel the environment is right, that's probably not a good reason to hold cash,” Cox said.
Try to have at least 6 months worth of emergency funds.
Most financial advisors recommend setting aside cash so that unexpected expenses don't blow up your budget or add to your credit card debt.
“A good rule of thumb is six months' worth of expenses,” says Natalie Colley, a certified financial planner, partner and senior lead advisor at Francis Financial in New York.
However, depending on your household budget, it may make sense to set aside a year's worth of expenses, she says.
If you haven't yet reached your six-month or one-year savings goal, start with a goal of having three months worth of expenses and keep adding to your cash, says Cory.
If your emergency savings is delayed, you're not alone.
A September Bankrate survey found that nearly two-thirds (62%) of Americans are behind on their emergency savings. For many people, finding cash to set aside is becoming more difficult due to inflation and too many expenses.
Focus on asset allocation
Savers could be at risk of missing out on today's higher interest rates if they don't move their savings to high-yield online savings or other accounts that pay more competitive yields.
But even if you can take advantage of these higher interest rates on cash, investors may still be missing out.
Whether that's true for investors ultimately depends on their time horizon, experts say.
For long-term goals, stocks offer the best return on capital and are most helpful in ensuring you have the funds you need for your intended milestones.
“Stock prices will go up over time,” Cox said. “If you let your emotions get in the way, you could miss out on important upside to reaching your financial goals.”
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If you have cash on hand that you want to put into the market, it makes sense to add a certain amount of that money over time, say every month, Colley says. This is a strategy called dollar-cost averaging.
Having a fixed schedule eliminates the hassle of timing the market, which can be difficult to do effectively, he said. Importantly, investors should try to choose broadly diversified funds rather than individual stocks.
Taking a long-term perspective can pay off.
If he had invested all his money before the financial crisis, Colley says it would have felt like the worst timing in the entire world.
If you grow that money for 15 years, the returns will be impressive, she said.
Modify your financial strategy as circumstances change
Certainly, there are risks that investors need to monitor with respect to cash and other investments.
“Interest rates will fall slower than they rise. Much slower,” McBride said.
As a result, physical investors could potentially enjoy returns that outpace inflation over the long term, he said.
Still, there are risks that savers should be aware of.
Cox said policies introduced under the next presidential administration could impact both inflation and interest rates.
“If inflation picks up again, it could be difficult to get good yields on cash,” Cox said.
In that case, he said, stocks could be a better way to reduce inflation, although there are no guarantees about future returns.
Regardless of whether investors choose cash or stocks, they need to ask themselves why they are making that choice and what they need the money for, he said.
