Cash management and investing strategies when interest rates are changing

Higher interest rates and volatile markets have influenced investors to hold significant sums in cash-equivalent investments and short-term instruments. According to the Investment Company Institute, investors’ total money market fund assets have surpassed $7 trillion. ¹ Although these vehicles offer greater safety, they may not align with your long-term investment goals.

For years, money market accounts, CDs, and U.S. Treasury bills provided only modest returns. Recently, investors enjoyed elevated yields as interest rates rose, with 3-month U.S. Treasury bills yields exceeding 5%. ² The Federal Reserve (Fed)’s aggressive rate hikes in 2022 and 2023 drove this yield surge, but since late 2024, subsequent rate cuts have caused short-term yields to fall from their peaks. Despite declining short-term rates, cash yields remain attractive to investors, prompting investors to question whether they are holding too much money in cash-equivalent vehicles.

Choosing short-term safety over long-term potential

During periods of market volatility, investors often shift more funds into cash. In 2022, as the Fed raised rates to slow the economy and curb inflation, equity markets declined sharply, with the S&P 500 Index dropping 25% in ten months. ³ Investors typically move money out of stocks and into less risky investments during such times.

This trend toward owning money market funds and similar instruments continues today. However, those who exited stocks and stayed in cash missed significant wealth accumulation in 2023 and 2024, when the S&P 500 delivered total returns above 25% each year. ³ “While people became comfortable with higher savings yields, over time, they’ll find they are likely better off diversifying into long-term assets such as investment-grade bonds and equities,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group.

The Fed’s influence on short-term rates

Haworth advises investors holding significant cash positions should consider where interest rates may go from here. “Investors should be aware that as the Fed lowers interest rates, yields on cash-equivalent instruments fall. That results in an even bigger opportunity cost when leaving long-term money tied up in short-term investments.” The Fed cut its fed funds target rate by 1% in late 2024 and twice more by 0.25% each in 2025, with another cut possible in December. ⁴ The Fed’s actions have already reduced short-term security yields, and further rate cuts will likely continue this trend.

Cautious investors who hesitate putting long-term, investable assets to work in equities or bonds may find the market unrewarding. “Investors earn returns from taking on uncertainty or risk,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group. “While short-term returns are not guaranteed, markets typically reward long-term patient investors for lending money to a business or government entity (bonds) or participating in a corporation’s future growth (equities).”

Hainlin advises investors in equities and fixed-income instruments to stay disciplined even amid market uncertainty. “The unknown is always on the horizon and at no point will you be absolutely certain the time is right,” notes Hainlin. “That’s why we recommend investing in alignment with your financial plan.”

Haworth also notes that along the way, changes may be appropriate. “It’s important to regularly rebalance a portfolio to reflect how market performance has changed your asset mix and restore your intended allocation based on your risk tolerance, time horizon and goals,” says Haworth.

Prioritizing portfolio objectives

Haworth also recommends considering how asset allocation can address both short-term and long-term goals. “Your cash investments can meet more immediate needs but invest money for long-term objectives in assets like stocks and bonds to work toward those goals.”

For cash needs, consider separating your assets into two categories:

• Money set aside to meet current and pending cash flow needs for the next year or so.
• Money intended to meet a specific spending objective, such as a downpayment for a major purchase.

For money targeting specific spending objectives, investors could consider investments with higher yields, giving up some liquidity and price stability. Examples include money market funds, Treasury bills, and short-term bonds that may offer the potential to generate additional yield while still protecting principal.

Consider your cash management and investing opportunities

Accurately predicting near-term market performance difficult. However, if you have long-term financial goals, you should actively seek opportunities to invest your cash in ways that will help you achieve those objectives. While no one-size-fits-all solution exists for every investor, focus on strategies that align with your risk appetite, time horizon and goals.

Review your financial plan with a wealth professional and explore cash management opportunities – along with your long-term investing goals – to help you capitalize on today's interest rate environment.

Note: The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.