For months, pundits have been speculating when the Federal Reserve might start lowering interest rates. It might make little difference in the long run.
Many financial advisors may be missing the real story: History suggests that cash can play an important role in a client's financial plan, and overall well-being, by providing safety, liquidity and helping to keep up with inflation.
When rates were at historic lows, some investors with cash on the sidelines were drawn to shiny objects like meme stocks, cryptocurrencies or other risky assets. As rates have returned to more normal levels, clients' appetite for risk has decreased, and traditional approaches to asset allocation have returned to their regular place in financial planning.
Here are three things that financial advisors should keep in mind when supporting their clients' financial plans.
Higher Rates Are Here to Stay
During the zero-interest rate environment that characterized much of the period after the financial crisis of 2007-2008, cash was seen as something to be avoided. Many investors chased higher yields and took risks they shouldn't have, since savers were not being rewarded for holding cash when rates were near-zero for the better part of a decade.
Cash rates have grown more attractive, with some banks delivering rates as high as 5.36%, exceeding inflation and delivering a positive real return. Many have begun wondering when rates will start to come down. While speculation about the Fed's actions has only increased this year, as JPMorgan Chase CEO Jamie Dimon noted in April, there's a long list of macro drivers that could keep interest rates higher for longer.
In his annual report to shareholders, Dimon cited increased military investments, climate change mitigation efforts, global supply-chain reconfigurations and rising healthcare costs as among the reasons that rates may stay higher for longer than many expect. Advisors focusing on when the Fed will lower rates may be missing the larger story, which is that the issues that Dimon cited, along with political stalemate in Washington, makes it difficult to curtail government spending or raise taxes. That means that U.S. debt will continue to grow, with inflation and sustained higher rates likely a consequence.
Clients Rewarded for Thrift
Even as we hope for more sustainable fiscal choices, an enduring positive from higher rates is that some clients will benefit. Those with high levels of savings, such as retirees and those on fixed incomes, are now being rewarded for their thrift.
