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Financial markets are in flux – are you positioned correctly for your personal goals?

Financial markets are in flux – are you positioned correctly for your personal goals?

November 30, 2023

Cash has been quite cozy in 2023. With 3-12 month CD rates over 5% and Money Markets yielding 4+%, you may be wondering why you shouldn’t just put all of your money into something that seems that care-free. The short answer is that while current interest rates are robust - especially compared to the near-zero rates we've all endured over the past 15 years - they won't last forever. They may not even last until this time next year.

 

With so much discussion about a looming recession that has not yet materialized, and with the negative returns of the stock and bond markets just last year, it would be tempting to choose low risk options like Money Markets over stocks and bonds. Indeed, many Americans have. As you can see from the chart below which tracks the funds held in Money Markets since 2018, the total is almost $6T.



While current short-term rates are quite compelling, they aren’t a solution for long-term goals, especially if you as an investor can tolerate the normal volatility of the stock market. If we compare the long-term historical numbers for the returns on cash (3%) vs. a portfolio that holds mostly stock (8%), we can use the Rule of 72 to show the power of having the right amount of risk in your portfolio.

 

The Rule of 72 is simply a formula that tells you how long it will take you to double your money at a given rate of return. As you can see from the calculations below, investors who are comfortable with risk can actually leverage risk to shorten the amount of time it will take them to meet their goals:

 

              Cash Portfolio:   72 / 3 = 24 years to double your money

             

              Stock Portfolio: 72 / 8 = 9 years to double your money

 

We believe that every investment should be paired to a financial goal, and that your financial plan should tell you how to manage your investments. For example, the tax strategy woven into your financial plan will tell you when it’s time for a Roth conversion, tax loss harvesting, or a charitable contribution. When designed well, your financial plan should also tell you how much risk you need to take and where.


The high fixed rates that are currently available are a gift for those who need to save money, or who are holding short-term funds and emergency cash reserves. However, these same rates may be causing some investors to veer off course from their financial plan, especially if they hold funds designated for long-term goals in a Money Market and miss a stock market rally like the one we saw in November.

 

As the Fed starts to contemplate when it will decrease interest rates - widely expected to occur in 2024 - the stock and bond markets have started to respond. This is an excellent time for long-term investors to consider their risk tolerance and whether all of their assets are aligned with their financial plan and their short-, medium- and long-term goals. If you’d like to assess your risk tolerance, take our short questionnaire





Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.