Out of the mattress and into the market

It’s everywhere – in IRAs, retirement plans, banks and investment accounts. I’m sure there are more than a few mattresses out there hiding their share of currency. All that cash, despite today’s rock-bottom interest rates.

I can see why it’s happening, even if I don’t think it makes a lot of sense in some cases. But people are afraid. They’re afraid of bonds because rising interest rates could send them into the tank. They’re afraid of stocks because the run-up in recent years makes them seemingly ripe for a turn south. Add the turmoil in Washington, and it’s not hard to see why people are hesitant to take any action.

Our market experts here at USAA anticipate that rates will eventually rise, but only gradually over the next two to three years. So what do you do with that cash?

  • Why the cash? The first step is to assess where you stand relative to your goals and in the context of the current economic environment. Putting your head in the sand and waiting for rates to rise is not a plan. It may be that a portion, if not all, of your cash is right where it should be: safe, liquid and stable. That’s certainly the case for rainy day funds or money set aside for the next couple of years, but it’s probably not true for money earmarked for your longer-term goals. The wait for higher rates may leave you with your hands still in your pockets several years from now.
  • Incorporate short-term bonds. If you’re willing to accept the potential for your principal value to fluctuate and even go down, you may be able to squeeze out some additional income by using a short-term or ultra-short-term bond fund. This is an option you should review with your financial adviser because you need to understand the additional risks you’d be taking.
  • Shift to equities. This represents a major adjustment to your investments, but it might make sense for cash targeted for long-term goals, like an IRA or retirement plan. We’re all living longer, and the growth potential of stocks may help you achieve your goals despite offering what will likely be a bumpier ride.
  • Use some of both. Ultimately, if you’re getting into or back into investing, there’s probably not just one solution. As always, it’s best to build a diversified portfolio – a mix of different types of stocks, bonds, cash and alternative investments.

One thing you don’t want to do is put yourself in a bad position in the quest for higher rates or returns. Funding short-term savings goals with long-term investments can be a recipe for disaster. Would you put next month’s mortgage payment in the stock market? I hope not. Along those same lines, leaving money earmarked for long-term goals in cash will likely lead to a situation where your portfolio is outpaced by inflation. It may feel safe, but you’ll lose purchasing power over time.

In the end, there are no easy answers. But if you’re sitting on a pile of cash, one thing that does make sense is to revisit your overall saving and investing plan. It may also be a great time to enlist the help of a financial adviser who can help you step back and take an unemotional look at where you’re at and what’s been going on. That’s why we’re here.