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Are Money Markets and CDs a Good Investment Now? Advisors’ Advice

By John Manganaro

Slideshow January 03, 2023 at 02:49 PM Share & Print

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Related: Where 11 Advisors Are Telling Clients to Park Their Cash: Advisors’ Advice

With interest rates higher than advisors have seen in a generation, is it time to reconsider investments such as money market funds or certificates of deposit?

ThinkAdvisor put this question to a stable of financial professionals with the XY Planning Network for the latest edition of the Advisors’ Advice series. We posed a simple query: Have interest rates now increased enough to make the potential role of CDs, MMFs or straight-ahead savings accounts more important in 2023?

As the advisors note, with the Federal Reserve’s target interest rate now sitting firmly in the realm of 5%, investors can now expect to earn far higher returns from these types of investments in the years ahead. As such, their possible roles have expanded in retirement portfolios — as have the number of client inquiries regarding these investment and savings vehicles.

See the gallery for timely portfolio insights from the advisory experts. While each brings a different perspective to the interest rate discussion, all agree that 2023 is shaping up to be a challenging but opportunity-rich year for retirement investors.

John Manganaro

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Are Money Markets and CDs a Good Investment Now? Advisors’ Advice

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Are clients bringing up the subject of high-yield savings accounts and CDs? Yes!

FDIC-insured 4%-plus rates are quite attractive to someone who has just seen a 15% or greater drop in their investment portfolio. As a financial planner, I regularly speak with clients about the importance of a long-term perspective, but the numbers one sees on their statements can still be unsettling.

This has been an unnerving year for investors, but should investors run toward cash accounts offering what seems today like an attractive rate? The answer depends on a person's goals, time horizon and interest in babysitting such an account.

A 4% savings account today may not pay such a lucrative rate in later years. It is easy to set it and forget it in a savings account. Currently, the banks are happy to send numerous bold print announcements that their rates have risen again. However, investors may not notice less glamorous notifications when rates begin to shift down. This could cause opportunity loss.

— Marianne Nolte, certified financial planner at Imagine Financial Services

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Although CD and money market rates have crept up, there are still other options out there for cash holdings that may be more attractive. Often, we can get our clients better rates with Treasury bills — without having to face any liquidity restrictions — and you also get state income tax benefits that come along with government securities.

I still remind my clients to remember their end goal for the money they are considering for a T-bill, CD or money market investment. If this is a true emergency fund, or if this cash is reserved for a short-term purchase or goal, then yes, short-term Treasuries are a great option.

However, if these funds are for a longer goal, then you are probably better off in a diversified portfolio that will provide you with the growth needed to achieve those goals.

— Brett Fry, certified financial planner and managing director at Forteris Wealth Management

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Instead of savings accounts and CDs, we recommend money market funds and T-bills as solutions for cash within an investment portfolio.

These solutions offer daily liquidity without the fuss and trouble of opening new bank accounts and the lack of liquidity of a CD. With 3-month, 2-year and 5-year Treasuries offering 4% to 4.5%, the yields are generally on par or better compared to savings accounts and CDs.

— Noah Damsky, principal at Marina Wealth Advisors

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Have rates in these traditional types of savings accounts increased enough to make their potential role in retirement planning more important in 2023 and the years ahead? Yes.

Having some duration risk in your portfolio can prove valuable. We don't know where rates are going, and longer-duration assets can provide some of the more traditional recession or depression hedges.

That being said, investing at 4% to 5% for one year can still provide some recession hedging while getting you a solid short-term return. We are currently buying 3-month to 12-month Treasuries. The issue with savings accounts is the return can often disappear as quickly as it comes.

If rates rise, you can reinvest in Treasuries at a higher rate, assuming you can hold the account/bond to maturity. With bonds, you could benefit from capital appreciation in the short term if rates fall. If they fall too long, though, you do have reinvestment risk.

Depending on the client, we will likely not abandon any asset class, including longer-duration bonds.

— Mark Struthers, certified financial planner at Sona Wealth Advisors

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Given my background in fixed-income investing, I'd like to respond to this.

While interest rates have risen dramatically for interest-bearing savings accounts, it's important to keep the full perspective on how valuable this is, and to whom. If you have cash that is not meant to be invested (like an emergency fund) high interest savings accounts are a good option for people who want to keep things simple.

That said, inflation remains higher than these rates, and short-term bonds will have a higher yield than this — and you need to keep your time horizon in mind.

Also keep in mind that outside of an emergency fund, for any money that you would intend to invest, it needs to be located in a place you can quickly invest it when you feel the time is right.

— Jeremy Bohne, financial advisor and founder, Paceline Wealth Management

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