In this episode of Questions With Kian, Castlepoint Associate Advisor Kian Rahmanzadeh, CFP®, MBA, dives into cash equivalent positions, such as money market funds, which currently offer higher interest rates than seen previously. These options are becoming more attractive to investors seeking low-risk investments with returns of around 5.5%. However, the implications of shifting assets from the market to cash-like positions warrant careful consideration. While these cash equivalents may offer some growth, they usually yield lower returns than the average 8-9% growth of total market indexes. Investing in cash equivalents should align with an investor’s individual goals and investment timeline. Cash equivalents could be advantageous for immediate financial needs within the next 6-12 months, like a down payment or impending college costs. Yet, for those with a longer investment horizon of 15-20 years, forgoing the higher market growth potential poses a significant opportunity risk.
Video Transcript:
Hey Kian. So what are your thoughts on cash equivalent positions and how they may affect my goals and plans?
Kian Rahmanzadeh:
Cash equivalent positions are paying relatively higher than what we’ve seen historically. You could find money market cash positions paying close to 4.5 to 5.5% right now, and if you ask me, I’m all for that. If I could put assets into something that is relatively “risk-free” and receive 5.5%, I’m all for that. But I want to ask you, what’s the risk in changing your allocation out of the market into money market-type funds? If we look at November, 2023, while we’re in these cash-like money market positions, you would’ve seen about half a percent in growth. If we look at just a total market index, we could see eight to 9%. That’s the stuff that’s going to grow portfolio wealth over the long term. So when we talk about cash equivalents and money market type funds, our first question is going to be, what’s the goal of that? What’s the goal of putting this percentage if it is going to meet a short-term goal of a house down payment or a future college expense in the next six to 12 months? It might make a lot of sense to do that, but what we’re talking about 15 to 20 years of investing, we can’t afford to miss out on that one month of unexpected, well, let me reframe that as expected growth. We know those type of months will happen. We can’t tell you when those months are going to happen. So that’s the risk you take when moving into these money market type funds.
Do you have any questions about cash equivalents or money market funds and how those relate to your financial plan? Don’t hesitate to reach out to your advisor. They’ll be happy to guide you through some of the questions you might have.
The content of this video is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.
