Yahoo Finance Sitting on cash? Here is where to put it
Money market funds, high interest savings ETFs and GICs have gained in popularity over the past year
Cash and cash equivalents are back in vogue with investors after the big jump in interest rates and market volatility of the past year, with investments such as money market funds, high interest savings ETFs and guaranteed investment certificates seeing big inflows.
“Most everyone knows that 2022 was a very challenging market for all asset classes – save for cash – so many people’s appetite for risk has changed,” Diana Orlic, portfolio manager and wealth advisor at Richardson Wealth, tells Yahoo Finance Canada. Her firm is currently holding higher levels of cash for clients.
“Cash equivalents are now paying clients to wait. Although it could have a slight drag on performance in the longer term…there is still competition for yield now. Do you take risk in the market to earn dividends or take little or no risk and earn a safe 4.5-5%.”
She said she favours high interest savings account funds and shorter-term GICs as cash proxies.
About the only thing investors should not do is leave money sitting in a bank accountKarl Berger, Cidel Asset Management
“For retired clients or clients approaching retirement, we recommend holding 2-3 years of cash flow needs in a cash or cash equivalent position. Being secure in knowing that your cash flow needs are safe, secure and liquid when you need them is important,” she says.
“You do not want to be forced to sell an investment that is down in value to provide your retirement income.”
Cash investments make a comeback
Many investments linked to interest rates have seen their returns more than double compared to a mere year ago when rates were at record lows. This has made cash equivalents a key part of investors’ defensive strategies, according to many portfolio managers, as they await clarity on how the economic environment unfolds.
Investors poured a net $7 billion into money market mutual funds in 2022, according to an annual report from the Investment Funds Institute of Canada. Money market funds greatly outpaced equity and bond funds, which each saw net outflows last year.
Karl Berger, a senior wealth consultant and director at Cidel Asset Management, says cash and cash equivalents are “more interesting” now, but expects these yields to start falling towards the end of this year or early next year.
“Absolutely nothing wrong with holding cash, especially for investors who may need that cash for something else in the next few months because the short-term trajectory is uncertain,” he says.
“But for any long-term investor holding cash, I would want to be clear on what the trigger might be for them to invest more productively, and in line with their long term goals.”
Keep an eye on returns
Despite the uncertain outlook, equity market returns have, for the most part, already outpaced the returns of cash investments. Berger says this is a good reason for investors to figure out when to shift that money to stocks.
“While the short-term trajectory is completely unknown, if markets continue with even modest gains they will have out-earned the cash yield. It is awfully tough to buy into a rising equity market for most investors, so unless investors get the perfect opportunity where equities correct and people feel comfortable buying in, they run the risk of remaining on the sidelines for potentially many months (or more),” he says.
Regardless of where investors are putting their money to work, there’s one place investors should steer clear.
“About the only thing investors should NOT do is leave money sitting in a bank account, because even ‘high’ yield bank accounts don’t provide much interest,” he says.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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