“Is Cash King Yet Again?”
The rapid and parabolic rise of interest rates throughout 2022 and into 2023 has meant that there are finally alternatives to investing only into high growth stocks. For so much of the bull run in 2020 and 2021, the alternatives were not attractive enough to warrant having your money outside of equities. However, with the federal funds rate currently at 4.75% to 5.00% (at time of writing) there are a range of options for investors to consider putting their cash to work. For the purposes of this post we will be exploring a few options that I believe are worth considering. Note, this is not an exhaustive list, and none of the options listed here should be considered as specific advice on where to put excess cash as your risk tolerance, timing, and many other factors should be taken into consideration.
If you begin to look outside of the large brick & mortar names, you can find some very attractive savings rates at online banks, credit unions, etc. that still provide FDIC insurance or other credit union insurances.
As of May, it is not uncommon to find savings accounts offering 4.5% to 4.75% on their high interest savings accounts that have NO lock-up period like a CD might. I would encourage anyone that has a shorter-term timeline to consider parking cash into a high-interest online savings account while keeping federal insurance limits in mind.
If you aren’t as concerned with locking up funds for a short period of time, you could consider a single CD or even a laddered maturity CD approach. There are many reputable institutions that are currently offering rates around the 5% mark for CD’s maturing between 10 months and 24 months.
Investment Grade Corporate Bonds
As you move out on the risk scale, you certainly want to ensure you have done proper due diligence on your investments. Investment grade bonds are anything rated BBB or above by Fitch (Baa for Moody’s). These rating agencies believe that bonds with these ratings or higher have a lower risk of default in order to receive these ratings.
If your timeline for maturity is 24 months or less it is not uncommon to find yields on investment grade bonds between 5.5% to 6.25%.
Note: Again, it is VERY important to complete due diligence on individual bond purchases. There are many investment grade bonds paying higher yields than quoted above, but other macroeconomic factors should be considered.
Structured Income Notes
Structured Notes are issued by large investment banks and come in many different shapes and sizes. However, the income notes that we generally use offer a fixed interest rate that is payable each month. The yield is typically higher than what can be found for a corporate bond (current notes have been in the 7% to 8% range), but are subject to change.
Your initial investment for the note is actually linked to the performance of a large index (usually the S&P 500). You can choose your barrier level of protection against the S&P 500, but if the index drops further than your barrier level then your principle investment is now exposed and subject to losses. For example, if you chose a 30% barrier on an 18-month structured income note, and 18 months from now the S&P 500 index is down less than 30% you will get ALL of your principal investment returned (plus your monthly interest along the way). However, if 18 months from now the S&P 500 index is down 35% for example, then your principal will also be down 35%. In other words, it would have “broken through” the 30% barrier point set. Because an investor is taking on further risk of their principle being lost, then they are typically compensated with a higher rate of interest than an investment grade bond.
We cannot stress enough that your individual circumstances should be fully understood before choosing if and how to put your cash to work, but it is important to know that in our current environment there are some attractive options for your cash to be working for you.
** Structured products are complex. Protections on structured notes may be full, partial or contingent on a specific event occurring, such as a specific loss range. Gains may also be capped as a tradeoff for protections. Notes carry a call risk or the ability for the issuer to call or redeem the note before maturity. This can result in gains or losses. Protections are subject to the creditworthiness of the issuer. Protections may only apply if held to maturity and there may be no secondary market for structured notes. Investing involves risk of loss. Further, depending on the different types of investments there may be varying degrees of risk. Clients and prospective clients should be prepared to bear investment loss including loss of original principal **