In the dynamic world of investments, where once-surefire strategies lose their glitter, a seismic shift is reshaping the financial landscape. The seemingly invincible money-market funds, a haven for investors seeking both safety and returns, are witnessing a decline in their erstwhile soaring fortunes. As the echo of an $8.8 trillion investment in money-market funds and CDs reverberates through Wall Street, the question now looms: What's the next move in this evolving financial chessboard?
For a considerable part of 2023, the unassuming money-market fund stole the spotlight, emerging as an unexpected darling of investors. With returns well over 5%, these funds, often regarded as the uneventful parking lots for investor capital, became a hot commodity. However, as the third quarter concluded, the tide began to turn. Returns started to dwindle, setting the stage for a possible downturn if the Federal Reserve decides to lower interest rates.
The alternatives to the once-reliable money markets come with their own set of challenges. Bonds and savings yields, entwined with interest rates, appear to be descending from the peaks of the previous year. The S&P and Dow, having recently scaled new heights, pose a predicament for those eyeing further gains. In these tumultuous times, the sage advice from Todd Walsh, CEO of Alpha Cubed Investments, echoes: "We're at all-time highs. Don't throw it all in today."
Financial advisors emphasize the need for strategic, gradual shifts in moments of market uncertainty. Dollar-cost averaging, a methodical approach involving incremental investments over time, emerges as a prudent strategy. This mitigates the risks associated with market volatility, offering a nuanced path for those contemplating an exit from money markets.
Yet, the allure of money markets persists, with funds and bonds still boasting returns exceeding 5% in many cases. The decision to stay put is not to be dismissed lightly, especially as financial markets navigate the delicate balance between risk and opportunity.
Amidst the ebb and flow of financial trends, seasoned investors are exploring uncharted waters. Here are three compelling alternatives to consider:
1. U.S. Stock Market: Resilience Amidst
Highs and Milestones
While the safety of money markets holds its appeal, the allure of the stock market beckons. The S&P 500's remarkable 26.2% return to investors last year serves as a compelling reminder that safety doesn't always equate to profitability. Despite the current high prices in the stock market, financial advisors and analysts advocate for a long-term investment perspective.
Historical analyses by Royal Bank of Canada reveal that new highs in the market often beget more highs. John Bollinger, president of Bollinger Capital Management, asserts that consistent upward momentum is a bullish sign, acting as a self-fulfilling prophecy. Market milestones attract attention, prompting investors to move cash into the market to avoid missing out on potential gains.
A study by Meb Faber of Cambria Investment Management further challenges the notion of diverting funds to bonds during market highs. Elliot Dole, a wealth adviser at Buckingham Strategic Wealth, emphasizes that, in terms of return drivers, bonds often prove inferior.
2. Value or International Stocks:
Unearthing Opportunities Beyond Borders
As technology stocks dominated the market surge last year, a shift is underway, hinting at potential rallies in lower-profile sectors. Value stocks, characterized by lower prices relative to earnings, have been gaining traction since late last year. The momentum in this "new trade" suggests lasting potential, offering investors an alternative avenue for growth.
For those hesitant about domestic stock prices, international and emerging stocks present an intriguing opportunity. Dole advises considering index funds or exchange-traded funds (ETFs) to navigate the volatility inherent in individual companies, especially in emerging markets. Aligning a stock portfolio with the global market value, as suggested by Fidelity's Asset Allocation Research Team, could provide a diversified approach. The team predicts that international stocks will outperform U.S. stocks over the next two decades.
3. Do Nothing: The Wisdom of Patience
Amidst Market Swings
In the midst of market uncertainties and flashy headlines, financial advisors advocate for a measured approach. Making drastic changes based on short-term market fluctuations is discouraged. Andrew Feldman, an independent financial adviser, views market milestones as signals for portfolio rebalancing rather than impetus for hasty decisions.
The easy-money allure of money-market funds and high-yield savings accounts might wane if the Federal Reserve lowers rates. However, Kevin Shuller, CIO of Cedar Peak Wealth Advisors, cautions against premature moves: "I don't think it makes too much sense to get really excited about the stock market when your alternative is 5.2%."
