WSJ on High Rates and 'Cash Trap'
The Wall Street Journal writes that, "Americans Chasing High Interest Rates Risk Falling Into a 'Cash Trap'." The article says, "Americans have poured money into cash-like investments since the Fed began raising interest rates, driving assets in money-market funds to a record $6.12 trillion earlier this month, according to the Investment Company Institute. Now, Wall Street traders are betting rates have peaked and those investors face a choice: keep sitting on their cash as interest payments shrink, or figure out how to redeploy the money. Deciding when and how to rebalance a portfolio is challenging even for pros, and depends on factors including a person's age, savings and expected needs. But staying on the sidelines risks missing out on years of potential gains from holding a broad portfolio of stocks, bonds and other riskier investments. J.P. Morgan Asset Management calls it the 'cash trap.'" They quote Vanguard's John Croke, "If you've owned cash for the last year and a half, that view in the rearview mirror is pretty attractive and you feel good about yourself. But you have to remind yourself that that's the rearview mirror." The piece tells us, "Croke said long-term investors should return to a diversified bond portfolio so they can lock in attractive long-term yields before the Fed starts cutting rates . Savers might find that hard, with short-term rates at 5.25% to 5.5%, their highest level in two decades.... The decision could cost ... over the long run. Since the end of 2021, the Vanguard Federal Money Market Fund has returned 9.1% through the end of May. The S&P 500, meanwhile, rose 15.1% over the same period when including price changes and dividend payments. The Bloomberg U.S. Aggregate bond index has lost 9.7%, according to Dow Jones Market Data." The Journal piece adds, "Some investors cite reasons other than attractive interest rates for sticking to cash.... But investors shouldn't try to time the markets or invest based on their emotions, said David Kelly, chief global strategist at J.P. Morgan Asset Management. 'People generally feel negative and pessimistic,' he said. 'If they invest based on how they feel, they are going to hang on to cash forever.'"
