June 2024 Market Update

When I first learned to ski, I was a kid in West Virginia. I did not have anyone giving me lessons. My friends and I rode the ski lift to the top of the mountain, and as I stood on those awkward ski boots mounted on those two small, slick sticks, I realized one major issue. I had no idea how to stop. I had choices.

1. I could freeze at the top in fear, never experiencing the thrill intended in skiing.

2. I could proceed with no plan and risk life and limb.

3. I could get some advice, training and develop a plan to balance thrill and safety.

Being your typical adolescent boy and not wanting to lose face with my friends, I did what all young boys do—proceeded without a plan.

Thankfully, my young body was able to recover from the method of stopping, which resulted from not having a plan. (commonly called a “yard sale” due to the string of skis, scarves, gloves, and poles left after falling at great speed.) Today, with my well-worn bones, joints, and ligaments, I would not think of proceeding down the mountain without knowing how to stop.

The same thing goes for investing. When you are young, you can potentially take more risks, although at any age, that can still be a painful experience. The issue I often see today is that people even older than I have no plan for stopping when the market falls or when the paycheck stops. No gains have been locked, and cash flow cushions have not been established.

In the interest of putting the bottom line at the top:

Positioning yourself to profit means taking advantage of new investment innovations and old ideas that are now engineered to be significantly better to balance your risk tolerance, cash flow, and need for growth. The why and the how are what follows:

Money market funds have experienced significant inflows

During times of market uncertainty, investors often seek the safety of cash. This has been true over the past several years as markets have swung due to the pandemic, geopolitical events, Fed rate hikes, inflation, gridlock in Washington, technology trends, and more. More recently, the possibility of worse-than-expected inflation and a delay of the first Fed rate cut have led to renewed investor concerns. At the same time, interest rates on cash are at their highest levels in decades, making it appear that there are attractive “risk-free” returns. What role should cash play in investor portfolios today?

After over a decade of historically low interest rates, higher cash yields are a welcome development for many investors. However, for those participating in the outdated strategy of holding a set percentage of their portfolio in bonds and a set amount in equities, the experience has been a painful reminder that what worked in the past may not work in the future. Interest rates are higher across all cash instruments, including many savings accounts, certificates of deposit, and money market funds. These higher rates will likely continue through the rest of the year.

These dynamics have led many investors to hold more cash than in the past. Money market funds have attracted inflows, with total assets reaching new all-time highs of $6 trillion. This is more than double the assets held in money market funds before the pandemic when interest rates were near zero for the better part of a decade. As the accompanying chart shows, money market fund assets have typically grown during economic distress or when interest rates have been high.

From a financial planning perspective, cash provides the liquidity needed to cover expenses and significant life events. It is also essential to have enough cash to serve as an emergency fund in case of unexpected personal events. From an investment standpoint, cash can serve important roles including reducing overall portfolio risk and allowing investors to take advantage of attractive market prices. However, like most things, too much of a good thing can be a bad thing. Too much cash can erode your future ability to meet your financial obligations and support your best life.

Inflation erodes the value of cash

This is because cash is not genuinely risk-free for two crucial reasons. Inflation erodes the purchasing power of cash over time. So, even if yields appear to be high, the actual value of your money could decline. As the accompanying chart shows, the inflation-adjusted income on cash has consistently been negative when considering average certificate of deposit rates.

While many cash instruments could generate more yield than these averages, the problem is that these rates are not “locked in.” By definition, short-term rates need to be rolled over often as they mature or expire, introducing what is known as “reinvestment risk,” or the idea that future rates may not be as attractive. Even in the best-case scenario, investors need to actively manage these instruments to ensure they are still receiving the level of rates they expect.

The second challenge with holding excess cash is the opportunity cost of not investing in stocks or other investment instruments. The stock market has performed well despite many investor concerns over the year. While the past is no guarantee of the future, these returns have far outpaced inflation and would have helped to offset the erosion of purchasing power across a portfolio.

Stocks and bonds have outpaced inflation over history

The prospects for cash will only worsen when the Fed begins to cut rates, possibly in 2025 or later this year. Cash investors will then be forced to reinvest at lower interest rates or stocks and bonds whose prices may have already risen. The possibility of falling rates has been an important driver of the overall stock market that will likely continue.

The accompanying chart makes this opportunity cost clear. Due to inflation, what cost one dollar in 1926 now costs $17. However, the stock market has significantly outpaced inflation over long periods. A hypothetical one-dollar investment in the stock market in 1926 would be worth over $13,000 today. A similar investment in long-term bonds would be worth $106, also outpacing inflation. Using new methods available in today’s marketplace allows investors the possibility of even greater returns.

Thus, while short-term investments can play essential roles in financial plans and portfolios, it’s critical in today’s market environment to avoid holding too much cash for the wrong reasons. Market fear and high short-term rates have driven significant flows into cash and cash-like instruments. While these may make sense in the right amounts, history shows they are not the foundation of long-term financial success.

Positioning yourself to profit means taking advantage of new investment innovations and old ideas that are now engineered to be significantly better to balance your risk tolerance, cash flow, and need for growth.

If you would like to learn more about how to create your personal paycheck protection program in retirement without relying on traditional fixed income so you are not worrying about running out of money or not being able to live your best life, reach out to us at the “Contact Us” section of Guardianrockwealth.com or by texting the word LIFE to 321-421-5213

This note is not investment guidance for you; it is information and opinion only.

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Talk soon,

John

Phone: (312) 749-8287

Email: [email protected]

John Browning, MBA, and CSA®

* Securities and investment advisory services are offered through Guardian Rock Wealth Investment Mgmt. Inc. (GRWIM). GRWIM is a wholly-owned subsidiary of Guardian Rock LLC. Neither of these entities provides tax or legal advice. Guardian Rock has offices in Palm Springs (West Palm Beach), & Port St. Lucie, Florida, Pinehurst, North Carolina, and Lisle, IL, and services individuals across the United States.

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