News

You’re Probably Losing Money If You’re Going With Cash & Not Bonds

S&P 500

3,719.98

+42.03(+1.14%)

 

Dow 30

30,523.80

+337.98(+1.12%)

 

Nasdaq

10,772.40

+96.60(+0.90%)

 

Russell 2000

1,754.62

+18.87(+1.09%)

 

Crude Oil

83.13

-2.33(-2.73%)

 

Gold

1,656.20

-7.80(-0.47%)

 

Silver

18.64

-0.08(-0.42%)

 

EUR/USD

0.9860

+0.0016(+0.16%)

 

10-Yr Bond

3.9980

-0.0170(-0.42%)

 

GBP/USD

1.1328

-0.0034(-0.30%)

 

USD/JPY

149.2130

+0.2570(+0.17%)

 

BTC-USD

19,230.64

-308.12(-1.58%)

 

CMC Crypto 200

436.44

-8.28(-1.86%)

 

FTSE 100

6,936.74

+16.50(+0.24%)

 

Nikkei 225

27,156.14

+380.35(+1.42%)

 

SmartAsset: How Much Money Do You Lose by Going With Cash Instead of Bonds?

Investors holding cash and waiting for interest rates to rise before buying bonds may be making a significant mistake. With the Federal Reserve poised to keep interest rates near zero for at least another year, investors should consider purchasing short-term corporate bonds now instead of waiting for rates to rise, according to the Schwab Center for Financial Research.

SPONSORED: Find a Qualified Financial Advisor

A financial advisor can help you invest in short-term corporate bonds. Find an advisor today

——————

While cash plays an important role in a well-diversified portfolio, it shouldn’t serve as a proxy for fixed-income securities, notes Collin Martin, a fixed-income strategist and director of the Schwab Center for Financial Research. The surplus cash can be put to better use by investing in short-term corporate bonds.

“For those tactically waiting for rates to rise before investing in bonds, there is a cost to that strategy: the opportunity cost of compounding the higher yields that are available today in other high-quality investments,” Martin writes in Schwab’s most recent “Bond Insights.”

Short-Term Corporate Bonds vs. Cash

SmartAsset: How Much Money Do You Lose by Going With Cash Instead of Bonds?

As mentioned above, cash has a place in most portfolios. Short-term corporate bonds should not replace cash needed for daily liquidity needs or near-term expenses, Martin writes. However, investors with cash earmarked for fixed-income securities are better off buying short-term corporate bonds now than waiting for interest rate hikes to buy Treasury bills.

Schwab initially expected interest rates to remain near zero until late-2022 or 2023, but the U.S. Federal Reserve rose 0.75% on June 16, which is the highest increase since 1994 (28 years). You should note that traditionally when market rates go up, the prices of fixed rate bonds fall. But even so, Schwab has also said that they believe that the magnitude of that decline “will be significantly less than the price declines already experienced this year.”

Keeping all of this in mind, the global financial services company has also said that short-term corporate bonds also generate better yields than Treasury bills.

For example, the Bloomberg U.S. Corporate 1-5 Year Bond Index has an average yield-to-worst of roughly 1%, nearly double that of the Bloomberg U.S. Treasury 1-5 Year Index (0.51%). Yield-to-worst is used to predict the worst possible yield of a bond based on the earliest it can be called or retired by its issuer.

Even if the Federal Reserve raises rates to 1% in one year, investing in short-term bonds would still net better returns than investing in Treasury bills when rates rise.

According to Bloomberg data, an investor who buys $10,000 worth of three-year corporate bonds with a yield-to-worst of 1% would have $10,300 after three years. Another investor who keeps their $10,000 in cash for one year and buy three-month Treasury bills when rates go to 1% would end the three-year period with slightly less, $10,200.

But Schwab notes that the federal funds rate, which is determined by the Federal Open Market Committee (FOMC) within the Federal Reserve System, isn’t expected to hit 1% until 2023. “The longer the Fed remains on hold, the longer investors sitting in cash may miss out on the higher yields that other investments offer,” Martin writes.

Look to Fixed-Rate Corporate Bonds

SmartAsset: How Much Money Do You Lose by Going With Cash Instead of Bonds?

When investing in bonds, it’s important to distinguish between fixed-rate bonds and floating rate notes.

As their name indicates, fixed rate bonds have coupons that remain constant throughout the life of the bond. A coupon rate is simply the annual rate at which the bond repays its holder relative to the bond’s par value. For example, a $1,000 bond with a coupon rate of 10% pays out $100 per year until reaching maturity.

Floating rate notes, or “floaters,” have coupons that are variable and fluctuate based on the federal funds rates.

So why are fixed-rate corporate bonds preferable to floaters? Higher yields. According to Schwab, the average yield-to-worst of the Bloomberg U.S. Corporate 1-5 Year Bond Index is approximately 1%, more than three times that of the Bloomberg U.S. Floating Rate Notes Index.

“In the meantime, floater investors are earning less income until the Fed starts to hike rates, which can weigh on total returns,” Martin writes. “We believe the Fed could begin hiking rates as early as late 2022, but we don’t know for sure. The longer the Fed remains on hold, the longer floater investors are missing out on higher yields available elsewhere.”

Bottom Line

Investors who were waiting for interest rates to rise before buying bonds could be missing out on more robust short-term returns. These investors would be better served by purchasing short-term corporate bonds with fixed coupon rates instead of keeping extra cash in their portfolios, according to the Schwab Center for Financial Research. Fixed-rate corporate bonds not only present higher potential returns than cash, but also outperform floating-rate notes, whose coupon rates fluctuate.

Tips for Investing in Corporate Bonds

If you’re hoping to diversify your portfolio with more fixed-income securities like corporate bonds, you don’t have to buy bonds individually. You can also invest in mutual funds and exchange-traded funds (ETFs) whose holdings are exclusively corporate bonds, like the Schwab 1-5 Year Corporate Bond ETF. Read our Guide to Investing in Bond Funds for a deeper dive into this strategy.

Don’t be afraid to seek out help, especially when it comes to your investment portfolio. A financial advisor can help you determine whether corporate bonds are right for you and how to integrate them into your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.

Photo credit: ©iStock.com/PashaIgnatov, ©iStock.com/pabradyphoto, ©iStock.com/katleho Seisa

The post How Much Money Do You Lose by Going With Cash Instead of Bonds? appeared first on SmartAsset Blog.

Advertisement

SmartAsset

Selling Off Investments and Parking Money in Cash? Don’t Make This One Mistake

With interest rates rising to levels not seen for years, this is a good time to evaluate where you are parking your cash. Some securities and accounts offer newly attractive annual percentage yields (APY), while other types of securities and … Continue reading → The post Selling Off Investments and Parking Money in Cash? Don’t Make This One Mistake appeared first on SmartAsset Blog.

SmartAsset

How to Turn $200,000 into $1 Million

If you’re ready to invest $200,000 (or something close to it) with the goal of turning it into $1 million, this article will help you understand your options and focus your investment strategy. If you’re not sure what you should do, … Continue reading → The post How to Invest $200K and Turn It Into $1 Million appeared first on SmartAsset Blog.

MarketWatch

I’m 60, have ‘well into seven figures’ saved and my only debt is a $60K HELOC. Do I need a financial adviser to help, or can I navigate this myself?

My question is, do I need to retain a financial advisor for a 1% fee or can I navigate my retirement financially with an accountant only? Answer: Firstly, understand the differences in what an accountant can do for you, and what a financial adviser can. “An accountant could help with taxes, but is unlikely to address anything else,” says Julia Kramer, certified financial behavior specialist and certified public accountant at Signature Financial Planning.

Bloomberg

BofA Survey ‘Screams’ Capitulation With Rally Set for 2023

(Bloomberg) — The sentiment on stocks and global growth among fund managers surveyed by Bank of America Corp. shows full capitulation, opening the way to an equities rally in 2023.Most Read from BloombergBlinken Says China Wants to Seize Taiwan on ‘Much Faster Timeline’Putin’s War Escalation Is Hastening Demographic Crash for RussiaForecast for US Recession Within Year Hits 100% in Blow to BidenStocks Regain Lost Ground With Two-Day Advance: Markets WrapThe bank’s monthly global fund manager su

The Wall Street Journal

Inflation Causes IRS to Raise Tax Brackets, Standard Deduction by 7%

To reflect higher inflation, the agency implemented adjustments to key tax code parameters for 2023 such as the standard deduction and the income thresholds where tax rates take effect.

TipRanks

Jim Cramer Says Bank Stocks Are Headed for Sustained Growth Thanks to Rising Rates; Here Are 3 Names That Analysts Like

Jim Cramer, the well-known host of CNBC’s ‘Mad Money’ program, has noted a shift in the markets, one that marks a change in potentially winning investment strategies. Last year, tech stocks were the place to go for profits, but this year they’ve been hit hard by the Fed’s rate hikes. Higher interest rates have made money and credit more expensive, which in turn has made it less attractive for investors to leverage buys into high-risk sectors like tech. But while higher interest rates have hurt t

MarketWatch

Stocks are rallying now, but the 9 painful stages of this bear market are not even halfway done

The official definition of a bear market is a 20% or greater decline from an index’s previous high. Accordingly, the three major U.S. stock-market benchmarks — the Nasdaq (COMP) the S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) — are currently all in a bear market. Based on my work with stock market strategist Mark D. Cook, a typical bear market goes through nine stages.

Investor’s Business Daily

Even The Hellbent Fed Can’t Slow Down These 8 Stocks’ Profit

Rising rates and a Fed determined to “break the world” is chilling the S&P 500. But some fast-growth companies are powering right through it, analysts say.

SmartAsset

How to Pay Fewer Taxes on Your Retirement Income

Looking to pay fewer taxes on your hard-earned retirement income and extend the life of your savings? Doing so may be easier and simpler than you expected. For retirees with assets spread across various buckets, from taxable investment accounts to … Continue reading → The post Pay Fewer Taxes on Your Retirement Income With This Withdrawal Strategy appeared first on SmartAsset Blog.

MarketWatch

Retirement can mean a loss of identity — how to bring happiness to your next act

Struggling with carving out a new identity in retirement, or massaging the identity you had when working full time, can be a serious challenge. “That identity issue is so huge because we spend our entire life building up to who we’re supposed to be,” said Michael Kay, who recently retired from the Livingston, N.J., financial planning firm he founded in 2001. Stuart Silverman wrestled with that question at age 67 in 2016 after retiring from the Mountain View, Calif., sales and market company he founded about 15 years earlier.

Investor’s Business Daily

PE Deals Misfire; Losses Pile As Tesla CEO Musk Tries To Take Twitter Private

Elon Musk’s $44 billion deal to buy Twitter will cause pain in an already crumbling private equity market. Musk has sold $15.4 billion worth of Tesla shares to finance the Twitter purchase. But the $44 billion private equity deal also involves $12.

Bloomberg

China’s Junk Debt Is Sliding Deeper Into Unprecedented Distress

(Bloomberg) — A worsening crisis in China’s property market is dragging junk dollar bonds from the nation’s borrowers deeper into distress, as the implosion of what was once one of the world’s most-profitable bond trades sends ripples across trading floors. Most Read from BloombergBlinken Says China Wants to Seize Taiwan on ‘Much Faster Timeline’Forecast for US Recession Within Year Hits 100% in Blow to BidenPutin’s War Escalation Is Hastening Demographic Crash for RussiaS&P 500 Bounces Off Mak

SmartAsset

How to Legally Avoid Capital Gains Tax on Mutual Funds

In the long run, if you sell an investment asset for a profit you will owe capital gains taxes. But for active investors, it’s important to understand that the IRS gives you a few ways to defer those taxes. This … Continue reading → The post How to Avoid Capital Gains Tax on Mutual Funds appeared first on SmartAsset Blog.

Bloomberg

Oil Drops as Biden’s Emergency Crude Release Quells Supply Fears

(Bloomberg) — Oil fell as the prospect of additional supplies from strategic reserves assuaged market concerns of a tight market heading into Northern Hemisphere winter.Most Read from BloombergBlinken Says China Wants to Seize Taiwan on ‘Much Faster Timeline’Putin’s War Escalation Is Hastening Demographic Crash for RussiaForecast for US Recession Within Year Hits 100% in Blow to BidenStocks Regain Lost Ground With Two-Day Advance: Markets WrapWest Texas Intermediate futures dropped 3% to settle

TipRanks

Cathie Wood Doubles Down on These 2 Innovation Stocks

Not many hedge managers have ignited as much controversy as Cathie Wood. The founder of Ark Invest has built her brand on running against the crowd. From her early embrace of tech stocks to her outspoken political conservatism, Cathie Wood has always been something of a lightning rod. Wood is staking her reputation and fortune on a belief that new technologies, and especially the way that new technologies will interact with each other, are going to completely transform our world. In her view, se

Leave a Reply

Your email address will not be published. Required fields are marked *