How to move from cash to investable assets before interest rates drop.

Over the weekend, I was catching up on some financial news and came across the following headline from Barron’s: “How to Move Out of Cash Before Interest Rates Drop”

Well, I have a super simple solution. All you need to do is build a time machine, go back to January 2023, invest your cash, forgo the 5% yield cash was offering and invest your free-cash each month.

Simple, right? Lol.

The market has been preparing for a rate cut from the Fed for some time now. Initially, we had expected three .25% (25bps) rate cuts throughout 2024. Thus far, we have had none. Now we are predicting one… maybe two.

Whether you think the market is reliant on a rate cut to keep its momentum or not is irrelevant to me. Frankly, I am not in the business of predicting rate cuts, hikes, or the market’s day-to-day movement.

What I do know is that people got burned over the past 18 months. It is one of the worst ways to get burned too, because they likely don’t even know how badly they got burned.

When cash began yielding 5%, people flocked to risk-free investments such as high-yield savings accounts, Treasury Bills and CDs. There is some serious psychological weight that 5% carries when talking about risk-free yield. Especially to younger generations that have essentially spent their entire adult life in a zero-interest rate environment.

The joke being to build a time machine is really derived from the fact that the S&P 500 outperformed a risk-free rate of 5% by many multiples. Risk takers were handsomely rewarded for staying invested and in almost all cases for continuously adding to their investments over the past year.

I had previously written about the opportunity cost that was lost by investors rotating to cash. From the time I wrote that, the opportunity cost has been extremely exacerbated. The S&P 500 is up over 52% from its low on September 30, 2022. Again, multiples higher than any risk-free investment would’ve yielded.

For young investors, it is so much more important to let go of the short-term, embrace the volatility and understand that we are looking way, way down the line.

Let me put some compounding in perspective. In scenario 1 (risk-free investor), we will assume the investor fully rotated to cash one year ago today. Scenario 2 (risk-on investor) will be an investor allocated to the S&P 500, which returned 22.85% from a year ago today.

Scenario 1:

Starting amount: $100,000

Ending amount: $105,000

Scenario 2:

Starting amount: $100,000

Ending amount: $122,850

Fairly simple math. Now let’s assume the risk-free investor rotates back to stocks. Each investor will contribute $1,000 to their accounts monthly and will do so for 30 years. We will assume each investor achieves a 7% rate of return.

Risk-free investor ends with: $1,975,351

Risk-on investor ends with: $2,111,230

An initial difference of $17,850 compounded over 30 years ends up becoming a $135,879 difference. Calculate that from the S&P 500’s lows in 2022 and this will be even more extreme.

This is the opportunity cost of rotating to cash. This is the risk. Was 5% nice? I’m sure. Did that 5% potentially do more harm than good for us over the long-term? Probably…

We can’t go back in time, but we can learn from our mistakes. Setting yourself up with a regimented and systematic investment strategy can pay dividends (literally and figuratively) over the course of your career.

Tune out the noise. Set it and forget it. Let compounding do its work.

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!