Interest rates are dropping. Why so many investors are clinging to cash, CDs and savings accounts.

When the Federal Reserve began raising interest rates in 2022, financial adviser David Flores Wilson needed time convincing clients to put their cash in places where it would produce yield — like CDs, money-market funds, T-bills BX:TMUBMUSD06M and high-yield savings accounts.

Now, the opposite is true. Wilson says it’s a challenge persuading some of them to reduce their money in those positions.

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For the past year or so, these supersafe investments were fetching investors 4% or 5% on their cash. But when the Fed starts cutting rates, that return is expected to diminish. Yet even when Wilson’s clients know this, some are still hesitant to budge.

“It’s a little bit of fighting city hall,” said Wilson, managing partner of Sincerus Advisory, where he’s compromised with certain clients on smaller allocations out of cash. “The certainty of a return is so attractive to so many people, and particularly to my client base.”

There’s plenty of people who have learned to love cash in recent years, and they don’t plan to break-up with it anytime soon. The coming Fed cuts aren’t going to change that, financial advisors and cash investment experts agree.

See also: Most retail investors are holding on to their cash these days. Here’s why.

What’s playing out on a big scale is “ambiguity aversion,” according to Vicki Bogan, a professor at Duke University’s Sanford School of Public Policy where she specializes in behavioral finance.

People tend to prefer what’s known and familiar, avoiding actions with an uncertain range of outcomes. Cash is a conservative asset, but Bogan said this isn’t “risk aversion.” That’s where people avoid risk — but at least they know the distribution of outcomes and odds.

Questions surrounding the Fed’s rate moves, the economy’s health and presidential election are clouding the range of scenarios, Bogan said. “As the dominoes start to fall, investors will become more confident or certain about what the distribution could be.”

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Until then, guaranteed yield is still going to look pretty good.

Automated investing company Wealthfront currently offers up to 5.5% APY on its high-yield cash account. Leading into rate cuts, the company said it’s still seeing clients open new high-yield cash accounts and more money flowing into current accounts.

Betterment, another fintech company that offers high-yield cash accounts, also confirmed that it’s still seeing money flow into these accounts from new and existing clients.

Where to put your cash now

Some financial advisors think this money is better off invested elsewhere.

“I would not be in short-duration fixed income or money markets,” Elliot Dornbusch, the chief executive and chief investment officer of CV Advisors, told MarketWatch.

CV Advisors provides investing advisory services and asset management for high-net worth individuals. Dornbusch said that many of CV Advisors’ new clients come to the firm with portfolios that are filled with short-term fixed income securities or cash parked in money-market funds. Getting them to move their money out of those positions takes a little persuasion.

“They were afraid of investing. We’re trying to take away that idea of being afraid,” Dornbusch said. “If they’re very conservative, we’ll put them in longer-duration fixed income. And if they have more appetite for risk, we can combine that with some equities.”

Dornbusch believes that the best way to take advantage of high rates isn’t by maximizing yield through short-duration bonds or by collecting interest on cash assets, but instead by investing in long-term Treasurys BX:TMUBMUSD10Y and investment-grade bonds. Although the yield might not seem quite as high, those rates can stick around for years.

Dornbusch tells clients that long-term fixed income securities have all the benefits of the yield-generating assets that investors love — they are conservative assets that offer reliable returns — but they’re more insulated from rate cuts.

“When you explain it in simple terms, people can understand. It’s a matter of just having the conversation,” he said.

Investing strategies should depend on personal risk tolerance, as well as someone’s age. Maybe locking away money for 10 years or longer isn’t the best idea if an investor is of an advanced age. Others might be hesitant about migrating into riskier investments like stocks while they’re close to record highs.

When the market changes, it’s important to adjust your investing strategies as needed. Even without a financial adviser, retail investors can choose to shift their strategies as the market shifts.

Or not.

Yields on cash will fall, but how quickly will hinge on the size of the Fed’s first rate cut in four years, which is expected at next week’s central bank meeting. It also depends on if economic data allows for a slow, or swift pace, of future rate cuts.

“A lot of people have been rewarded for having way too much in cash. Those day seems to be numbered,” Daniel Masuda Lehrman, a Honolulu-based financial adviser, told MarketWatch.

There’s over $6.3 trillion sitting in money-market funds right now and roughly $2.6 trillion comes from retail investors, according to the Investment Company Institute.

Even if the Fed eventually brings its rate to 2.5% or 3%, that’s still a relatively good-looking yield that keeps money pouring into money-market funds, said Shelly Antoniewicz, deputy chief economist at the asset management industry association. 

As rates decline, she said, “retail investors certainly may slow the pace of their investment in money-market funds as they decide where to put newly available cash to work. We’ve already seen this happening this year, but we don’t expect widespread outflows.”

So whether retail investors will break up with their interest yielding assets is to be determined. Maybe people will be happy collecting 2.5% interest — as long as that return is reliable.

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