Return of the Third Asset Class

Since the Federal Reserve dropped interest rates to near zero in 2008, cash has been considered an uninvestible asset class. Prior to the Great Financial Crisis there were three primary asset classes: stocks, bonds, and cash. In 2007 and for most of the 50 years prior, cash in bank CDs or money market funds yielded at least 5%. For the last 15 years since, the yield on cash has been near zero and investors have used the motto “when cash pays you nothing, get invested in something!”

One silver lining in the cloud that has descended over wall street this year 2022 is the return of a meaningful rate of return on cash. Even with the recent rise in interest rates, many banks have stubbornly kept their savings and CD rates low. Money market mutual funds, on the other hand, now have yields a little above or below 3%, and those rates will continue to increase with expected increases in Federal Reserve interest rates.

Because it’s been 15 years since money markets have been interesting, a short refresher is in order. Money market mutual funds are daily liquid and priced at $1 per share. Interest is paid monthly and is generally re-invested in new $1 shares You won’t see a change in share price over time.

You may have heard that in 2008 money market funds “broke the buck” (went below $1 per share) and that their assets are not Federal Deposit Insurance Corporation (FDIC) insured. In fact, it was only one fund, Reserve Primary Fund, holding nearly $65 b in assets that dropped in value from $1 to $0.97 in 2008 when their small holdings in Lehman Brothers bonds became worthless overnight. Others were at risk but even in that time of great financial stress, didn’t “break”. Money market funds are not FDIC insured, but their history of stability and safety is well documented.

We recommend taking a look at the cash you hold in banks. Review the interest rate being offered in light of the alternative. We can establish a link between your bank and a taxable investment account that will allow us to transfer funds for you either into or out of your checking account at your direction. Now that a $100,000 balance can generate $3,000/year rather than the $50/year it did just a year ago, managing cash has become much more impactful.