Since Don Ross retired as an airline pilot a decade ago, all the financial planners he has spoken with have wanted him to invest his cash. He isn't sold.
He is keeping 85% of his portfolio in stocks and the rest in a money-market fund yielding 3.62%. Ross looked at historical bear markets and determined they typically don't last longer than three years. He keeps enough of his portfolio in cash to comfortably get himself through that period, and he sells stocks when he needs to replenish his cash pile.
The financial planners have suggested bond funds, but to the 75-year-old, "there couldn't be a worse stream of income."
He is among the investors giving headaches to the money managers who want them to part way with their cash. Individual investors are sitting on a mountain of it. There is over $3 trillion in retail money-market funds, hovering around a record high, according to the Investment Company Institute. (And that doesn't include the trillions of institutional dollars sitting in money-market funds.)
Assets flooded into these funds in 2022 when the Federal Reserve ended its policy of near-zero interest rates. Money-market yields rose above 5%. Rates have since fallen, but money-market funds, which now yield 3.49% on average, according to Crane Data, have retained their appeal.
Now wealth and asset managers, eager to prove their worth and in many cases earn more fees, are trying to convince investors to put it to work. Search for the phrase "too much cash" and you will find numerous articles penned by the likes of JPMorgan Chase and Charles Schwab, warning about the risk of being underinvested.
The risk, they argue, is that the yield on cash won't keep pace with inflation. Money-market yields are currently right about at the rate of inflation. Many advisers are pitching alternatives, including corporate bonds, municipal bonds and more exotic offerings such as buffer exchange-traded funds and private credit.
"I think 2022 kind of warped people's perception," said David Royal, chief financial and investment officer at Thrivent. It was an unusual time when investors lost money in both the stock market and on bonds, he said. "People have forgotten the important diversification benefit that comes with duration."
Buying longer duration bonds allows investors to secure current yields for an extended period and protect against future interest rate drops. By contrast, money-market funds, high-yield savings accounts and certificates of deposit are likely to drop their yields along with going rates.
Royal recommends investors consider locking in historically high yields in investment-grade corporate bonds by building a ladder of investments with staggered maturities. A flood of new issuance from hyperscalers raising money to fund the artificial-intelligence build-out has pushed up yields. That has led some to worry about the risks, especially to longer-duration bonds.
But even transferring cash to an ultrashort bond fund could deliver a higher yield than a money-market fund, Royal said.
Royal said he also likes high-quality municipal-bond funds. These yield around 4%, are typically exempt from federal income taxes and can also be exempt from state income taxes. States are generally required to have balanced budgets, making them an attractive option for investors concerned about owning U.S. Treasury bonds because of the country's widening deficit, Royal said.
Todd Stankiewicz, chief investment officer of wealth manager Sykon Capital, said he devotes a significant amount of time to getting clients to consider alternatives to cash amid lackluster bond performance.
"If you're a wealth manager, how do you tell someone who is 65 years old to go all equities?" he said.
Stankiewicz has recommended buffer ETFs, which use options strategies to protect against market downside but also cap the amount of upside an investor can earn. They typically operate over a specific time frame, such as 12 months. For example, Innovator Capital Management has an August offering with an 8.37% cap on the upside but 100% downside protection, according to its website.
Such funds are more expensive than a typical ETF -- 0.79% to 0.89%. But Stankiewicz argues that they are cheaper than buying a structured note from a bank, offering the equivalent protection. He creates a buffer ETF ladder with staggered reset dates and maturities.
Still, he acknowledged, if the stock market underperforms the yield on a money-market fund, investors would have been better off staying put.
Ross, the former airline pilot, says he is wary of complex investments with high fees. He also doesn't like bonds, noting that the 10-year annualized return on Vanguard's total bond market ETF is just over 1%.
He recently started working with a new financial adviser who asked if he was interested in investing in private credit. Ross requested she stick to estate planning and leave the investing to him.
"When I look at somebody saying, 'you need to get back into the market,' the first thing I'm asking is: Why are they saying that?" he said.
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