After spending years on the sidelines of investor portfolios, high-interest savings accounts (HISAs) have surged in popularity.
But with interest rates expected to start falling soon, are these funds still the right place for your money?
Over the last two years, as rates skyrocketed and economic uncertainty increased, savers moved billions out of traditional investments and into HISA funds and other cash-like instruments, such as money market funds and guaranteed investment certificates (GICs). And for good reason: during that time, these safe cash-like securities started paying about, if not more than, five percent.
But with inflation slowly coming down and interest rates expected to be cut, holding assets inside of a HISA fund may not be as appealing. To get ahead of the expected drop in returns on those funds, now may be the right time to start moving your money back into more diversified portfolios.
'HISAs are great for parking money but are not long-term assets,' says Corrado Tiralongo, Chief Investment Officer at Investment Planning Counsel (IPC)'s Counsel Portfolio Services. 'After taxes and inflation, they aren't going to keep up.'
Potentially Falling HISA Rates
HISA funds, like the one offered by IPC, earn interest higher than traditional savings accounts, providing investors with steady interest income. Prior to 2022, these funds paid next to nothing because rates were so low. As rates increased, so too did the popularity of HISA funds.
But the fortunes of HISA funds rise and fall alongside interest rates - when rates drop, the interest you earn on these accounts also declines and most experts do say that rates will likely fall from here. 'Rates are going to come down,' says Tiralongo. 'Whether it's July or October, that's irrelevant - you need to start thinking about these things now.'
'HISA funds weren't meant to provide investment growth or help people meet their long-term needs, whether that's saving for retirement, buying a house or achieving another financial goal.'
HISA funds weren't meant to provide investment growth or help people meet their long-term needs, whether that's saving for retirement, buying a house or achieving another financial goal. That's what diversified portfolios do. These vehicles, such as mutual funds, which hold stocks that can grow your money and bonds that can help lower your risk, may provide returns that exceed what you would get in a HISA.
'If the money isn't targeted for a specific purpose in the near few years, it should be invested for the long term,' says Tiralongo.
Capturing Market Returns
Here's another reason why you might consider moving at least some of your money back into diversified assets: when rates do fall, other securities tend to improve, he explains.
For instance, bond prices increase when rates fall. Stocks often climb, too, because returns on higher rate-paying options, such as a HISA, money market fund or even bonds, become less attractive compared to what you could potentially receive from stocks.
'…there's no time like the present to start moving money into potentially better-returning securities.'
Since it's impossible to time the market - you can't know when rates might fall or when stocks or bond prices might climb higher - there's no time like the present to start moving money into potentially better-returning securities.
'Unless you get lucky timing these things, going from cash to being fully invested is a crapshoot,' says Tiralongo. 'People should start to think, if they're saving for a long-term asset, they should put that money into longer-term investments which could return more than safer assets, like a HISA, over time.'
Plan Your Strategy
Moving funds into a long-term portfolio from your HISA, however, doesn't mean you have to transfer all your assets at once. Tiralongo suggests investors employ a dollar-cost averaging strategy, which means automatically moving smaller amounts from your HISA into a fund over a set period, such as once a month.
'By doing it systematically you take the emotion out of investing,' he explains, acknowledging that putting a large chunk of money at risk in the markets at one time can be stressful. 'It helps people sleep better at night.'
'Whether you decide to shift your money all at once or in stages, you'll want to talk to your advisor before making any significant changes.'
Whether you decide to shift your money all at once or in stages, you'll want to talk to your advisor before making any significant changes. They can help you determine how best to move your money and what to put it into - such as a balanced mutual fund that holds an almost equal amount of both stocks and bonds or a fund that holds more of one or the other.
Another important role advisors play is helping you avoid making emotional decisions that could impact your portfolio performance today and in the future. That might include panic selling when markets will invariably fall or jumping into a security that doesn't suit your long-term needs.
'Your advisor will help you make good investment decisions based on where you're at in life and where you want to get to,' he explains. 'Whether it's around moving money out of your HISA or something else, your advisor can help you make a plan - and stick with it.'