The market dropped on Friday, with the S&P 500 dropping just under 2%, and the Volatility Index, or VIX, surged to its highest level since March of 2023.[1] Two key things happened last week: the Federal Reserve held interest rates steady as expected, and the jobs report was released. The US added only 114,000 jobs in June, well below expectations, pushing unemployment up to 4.3%. The markets are worried we may be in for a recession. This data does increase expectations that interest rates will be cut by at least a quarter of a percent in September.
Those rate cuts help borrowers but hurt savers. Now may be a good time to lock in rates on CDs for a portion of your savings. Another place to look at cash is in your portfolio. There are several places where you may see cash. The first is inside mutual funds. The funds keep some cash to handle inflow and outflows of the fund. Managers may also hold cash intentionally, if they are waiting for a strategic opportunity to invest, believing stocks are overpriced. You can look up the mutual funds you hold online to see how much cash they hold as a percentage of the fund.
The bigger worry is inside your investment account itself. The cash may be intentional – you want the safety and liquidity of having some cash available, or your advisor is waiting for stock prices to drop. You may be dollar-cost averaging your investments, where you purchase the same dollar amount every month regardless of the price. The cash may have also built up due to dividends or interest income that hasn’t been invested. Regardless of why you hold cash, you need to see how that cash is being held.
You may have cash holdings in a sweep account, where the custodian pulls the funds out overnight and pays interest on them before replacing them in the morning. This is commonplace and can be a way for savers to earn more on their cash. The downside is when custodians are paying below market rates on the cash, keeping the spread – the difference between what they earn on your cash and what they pay you – mostly for themselves. Several large brokerage firms have been in the news lately, as lawsuits have been brought against Morgan Stanley, Wells Fargo, LPL, and Ameriprise, among others.
You can also hold cash in a money market or government fund, both of which are liquid and, while not as secure as cash savings, are reasonably secure. These funds pay more interest, but you should ask your advisor if you are paying fees on these investments, and on the pure cash in your account. Some firms do not charge on cash or money markets, and some do. Because of this, large cash positions can be a drag on portfolio returns in multiple ways: low interest on sweep accounts, fees paid on cash holdings, and the lost potential investment return if the cash is not being held intentionally.
Your action item is to ask your advisor about the cash in your investment accounts.
Be sure to check out our website at covingtonalsina.com, or our Facebook page, for more information and to register for our upcoming educational events.
CovingtonAlsina is a registered investment adviser. 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.
[1]S&P 500 Has its Worst Jobs Day Since October 2022; Bloomberg, by Rita Nazareth 08/01/2024