Managing Your Finances

Following the recent market flux, investors are especially attentive to the direction of rising interest rates. Although some may focus on the negatives associated with a potential increase, there are several positive aspects for investors. Here is one way the rising rates might be a welcome development:
Investors Should Get a Boost in Returns
Since the financial recession, many investors have chosen to hold an outsized allocation to cash and cash alternatives. Some investors have been concerned about locking in historically low interest rates in fixed-income investments while others are looking to avoid market risk and volatility or simply to store more away for a rainy day.
Given the slow pace of expected rate increases, investors in cash alternatives should not expect returns that will offset inflation in the near term. We continue to encourage investors to examine their cash alternatives holdings and, where appropriate, systematically invest those excess allocations in the market. Investors should hold modest amounts of cash alternatives to meet near-term liquidity needs and emergency expenses. Unfortunately, the amount of cash alternatives held in many accounts today exceeds long-term averages and these requirements.
It is not just cash alternative allocations that may experience an increase in income; other fixed-income investors might also experience higher income potential over time. This is especially true for investors who will experience maturing fixed-income positions. Many bonds bought over the last several years offered investors very low income-earning potential; as those bonds mature and the proceeds are reinvested, a higher-interest-rate environment could offer investors the opportunity to increase the income their fixed-income portfolio produces.
“Earning zero or close to zero on cash alternatives over the last six years has been an expensive proposition for many investors. While inflation has remained low, the impact on the purchasing power of an asset that is earning little is meaningful as the inflation impact compounds over time. Further, many investors waiting in cash alternatives have missed out on strong performance in many other investment sectors. As the Fed raises interest rates, investors should finally begin to see the returns of risk-free assets move higher, albeit slowly.”