What to do with cash continues to be a big question for investors, given rock bottom interest rates. So we asked investors to share what they were doing with cash in this market, and we got many great responses.
Here’s what we learned from investors like you.
Most investors, even experienced longtime investors, have more questions than answers right now. They’ve tried CDs and money-market funds, but with yields so low, many are looking for new ideas. (We shared some of our ideas here.)
Many investors also assume that they have to take more risk in this environment. As one investor put it, “I'm toying with something with a little more risk but at least some return.”
Where does your cash belong?
Different investors have different needs for cash, so before taking more risk, consider what role cash plays in your investment plans.
Is this money you need in case of an emergency? Do you have cash that you’ve allocated to equities but you haven’t invested it yet? Or is this cash that you’d normally invest in fixed income, but you’re frustrated with low-yielding bonds. You also might use cash as an allocation of your low volatility portfolio.
Some of the investors we heard from knew exactly where their cash belonged.
- One investor needed growth, and he invested any extra cash in a stock market index fund.
- A retiree in his late 60s said he needed to stay more fully invested, so these days he puts his cash in balanced funds.
- A 90-year-old investor is more focused on stability at this point; he’s “looking for a safe and liquid home” for this portion of his assets.
Other investors were struggling to figure out where cash fit into their investment plans. One retiree said she felt stuck between stocks and bonds: stocks could sell off quickly, while bonds might drag down her returns.
If you’re feeling stuck, then reach out to one of our advisors and let’s see if it helps to talk through it together. Sometimes two heads are better than one.
Funds for low-yield investing?
Many investors are considering new funds or strategies in this market environment, but, as always, it’s important to understand the trade offs.
Some investors said they were looking into alternative funds and alternative strategies, which tend to be less correlated to traditional stocks and bonds. Funds that are less correlated to bonds may hold up better when interest rates eventually start to rise or during inflationary periods, as we’ve seen this year. However, the alt fund universe includes riskier and more conservative funds, so you’ll want to choose carefully.
In the alternative strategy that we manage, we focus on less volatile alternative funds that when taken together have bond-like risk. This approach may appeal to investors who are frustrated with current bond yields or looking for a lower volatility allocation that has modest growth potential.
One investor asked about closed-end muni funds, some of which have decent yields. But closed-end funds lack liquidity and could be costlier and riskier than you might expect.
Open-end funds (like most mutual funds) create and redeem shares, which provides ample liquidity. Closed-end funds, on the other hand, have a fixed number of shares, and shares are traded between investors (the fund itself doesn’t issue or redeem shares). So you can only sell shares of a closed-end fund if a buyer is available, and you’re likely to sell your shares for less than the value of the underlying securities.
An Investment Company Institute study found that the majority of closed-end funds trade at a discount in any given month, and these discounts can be particularly steep in volatile markets. In the March 2020 Covid crash, equity closed-end funds traded 11% less than their NAV on average, and bond closed-end funds traded at an average 7% discount.
Some CEFs also use leverage to boost yields, which can add risk.
How are you dealing with cash?
Are you considering new funds or strategies? Are you still trying to figure out how much to have in cash and where it fits into your portfolio? Share your story with us and let’s keep the conversation going.