Financial Insights & Things to Think About

With yields on cash climbing, advisors struggle to keep some clients in stocks

Posted by Nicole Gopoian Wirick | Jan 23, 2023 | 0 Comments

Even though history suggests the best strategy has always been to stay invested for the long haul, a safe 4% return is luring more investors to the sidelines.

January 20,2023 By Jeff Benjamin

In the immediate wake of the worst year for balanced portfolios since 2008 and the worst year ever for bonds, and against the backdrop of a looming recessions, investors are once again weighing their options regarding allocations to cash.

Despite wide-ranging bullish outlooks for the 2023 that cite slowing inflation and likely just one more interest rate hike, the reality of economic uncertainty combined with money market yields reaching 4% at some online bank has made cash a tempting alternative to risk assets.

“The chaos of the last 12 months has clients asking whether or not they should move to cash or into more conservative investments,” said Eric Amzalag, founder of Peak Financial Planning.

Amzalag said the growing talk of recession has not helped his efforts to keep clients focused on longer-term investment goals.

“In response to the chaos of the last 12 months, I have taken a more active management position within clients' accounts,” he said, with “more proactive harvesting of gains in clients' winning positions and redistributing that periodically to opportunities that have gotten cheaper over the past 12 months.”

Amzalag has also embraced a more conservative allocation strategy that is “heavily positioned in cash and short-duration U.S. government bonds.”

“We are very underweight equities and plan to redistribute profits from our longer-duration bond positions into equities as bonds go up in value and equities go down in value,” he said.

For Dennis Nolte, vice president of Seacoast Investment Services, loading up on cash is not new to 2023.

“We've been 35% to 50% in cash most of the last two quarters,” he said. “Clients are absolutely not committing new capital to equities or bonds, but certainly are paying attention to what is happening with their cash.”

Nolte cited clients recently asking about getting a 5% yield for a 15-month certificate of deposit or wanting to be invested only in short-term Treasuries.

“People are yield-shopping for their cash and feeling no pressure to add risk right now,” he said. “We agree with them.”

But even as cash finished 2022 as the second-best performing asset class behind commodities, some advisors are pushing back on the temptation to seek shelter.

“It is reasonable for clients to hold cash for expected expenses over the next couple years given how close money market rates are to short-term bonds,” said Seth Mullikin, founder of Lattice Financial. “However, it does not make sense to hold cash with the intention of timing the market.”

Nicole Wirick, founder of Prosperity Wealth Strategies, isn't buying into the instinct to rush to cash and the philosophy that investors “need to do something to fix the situation.”

“It's our human nature to want to solve problems, however, this basic human tendency can be destructive when it comes to investing,” she said. “I use this opportunity to pause and remind clients that volatility is a normal and expected part of the investing. I then refocus the conversation on long-term goals and illustrate how short-term, emotion-driven reactions to the market can derail a disciplined long-term plan.”

Nate Creviston, portfolio analyst at Capital Advisors, takes the approach of trying to keep clients looking forward instead of back, but keeps an eye out for cash management opportunities if that's the only place clients feel comfortable in this market.

“Our clients are not moving to cash; if anything, now could be an advantageous time to buy stocks,” he said, citing the stock market's history of strong rebounds. “The returns after 25% market corrections average to be up 27% after one year, up 45% after three years, up 93% after five years, and up 238% after 10 years.”

Of course, for those clients who have shorter time horizons or just can't stomach the current market volatility, Creviston said he would be allocating to Treasury bills.

“If a client is set on moving to cash, we would currently be purchasing Treasury bills that are yielding between 4.3% and 4.5% for a two- and three-month maturity,” he said. “This is far more yield than you'll find in a traditional bank account or most online high-yield savings accounts.”

About the Author

Nicole Gopoian Wirick

Hello! Financial planning with a personal touch. One of Nicole's greatest joys is developing a relationship with her clients, who have become a meaningful part of her life. Nicole Gopoian Wirick, JD, CFP® founded Prosperity Wealth Strategies to help clients define and achieve prosperity. Nicol...

Comments

There are no comments for this post. Be the first and Add your Comment below.

Leave a Comment

Contact Us

Prosperity Wealth Strategies is committed to answering your questions about your financial planning goals. We offer a complimentary consultation at your convenience. Contact us today to schedule an appointment.

Let's Connect

Office: (248) 963-0568
Cell: (248) 701-7126
[email protected]
36400 Woodward Avenue
Suite 128
Bloomfield Hills, MI 48304

Site Design Chris Ward Studio, Photos: Laurie Tennent Photography, Unsplash: phil-hearing, hosein-emrani, jovaughn-stevens, remi-valle, samuel charron, annie-spratt, tim-mossholder, sasha-freemind, katherine-auguste, quino-al,lerone-pieters, alec-favale, ante-hamersmit, lo-lo, xps, bruno-nascimento, faith-atlas, kate-che, max-ven-den-oetelaar, josh-hoehne, lars-schnieder, alex-azabache

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
Disclaimer

Menu