INVESTING IN THE CHANGING ENVIRONMENT
Put cash to work in 2024
Help clients move out of cash to bonds. The persistence of higher real interest rates provides a solid foundation to make that move.
Check out these insights to better inform your client conversations.
Evaluate your portfolios
You may have preferred cash or cash equivalents in recent years as you anticipated interest rate hikes by the Federal Reserve. But that rate-hiking cycle may have neared its conclusion.
Continuing to overweight cash may prove to be another example of how what worked in the past may not work so well again in the future. With an economic downturn expected by markets in 2024, it may be a good time to reassess how your fixed income portfolio is invested across maturities.
Consider the trade-offs of maximizing yield today by overweighting cash or very short-term bonds compared with moving out on the curve to take advantage of yields and better defend your portfolio from equity weakness (see chart below).
Returns on bonds compared to CDs
Sources: CD rates are from Bankrate.com. Annualized return delivered by the Bloomberg U.S. Aggregate Bond Index. U.S. Treasuries, U.S. high yield, and U.S. credit after the Federal Reserve stopping raising interest rates (we rounded dates to the nearest month-end). The blue bar shows the peak CD rate an investor could have locked in at the time the Fed was finishing its rate-hiking cycle.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Of course, the typical practice is to align the duration of a portfolio allocation with your client’s approximate timeline, especially if money will be needed relatively soon. For needs within a year or so, cash remains an appropriate option, while short-term bond funds can work well for needs within the next few years.
Cash or bonds? Which one is right for you?
Share this brochure with your clients to help them choose between a money market or other cash-like account and a bond fund.
Getting back into bonds - Choosing the right strategy
This analysis from Vanguard’s Investment Advisory Research Center (IARC) compares the effectiveness of an immediate lump-sum investment with dollar-cost averaging or waiting in cash to invest in the future.
Have more questions? Contact us.
Disclosures and footnotes
- For more information about Vanguard funds or Vanguard ETFs®, view detailed product information or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
- All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
- Investments in bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
- U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
- Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets. \
- IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
- The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
- The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.