Interest rates are falling. Why so many investors cling to cash, CDs and savings accounts.

When the Federal Reserve began raising interest rates in 2022, financial adviser David Flores Wilson needed time to convince clients to put their cash where it would produce returns — such as CDs, market funds money, government bonds BX:TUBMUSD06M and high yield. savings accounts.

Now, the opposite is true. Wilson says it’s a challenge to get some of them to reduce their money in those positions.

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Over the past year or so, these super-safe investments have returned investors 4% or 5% in cash. But when the Fed starts cutting rates, that yield is expected to fall. However, even when Wilson’s clients know this, some are still hesitant to give in.

“It’s a bit of a fight against the mayor’s office,” said Wilson, managing partner of Sincerus Advisory, where he has compromised with certain clients on lower cash allowances. “The certainty of a return is so attractive to so many people and especially to my customer base.”

There are plenty of people who have learned to love cash over the past few years and don’t plan on parting with it anytime soon. Future Fed tapering won’t change that, financial advisers and cash investment experts agree.

See also: Most retail investors are keeping their money these days. Here’s why.

What’s playing out on a large scale is “ambiguity aversion,” according to Vicki Bogan, a professor at Duke University’s Sanford School of Public Policy, where she specializes in behavioral finance.

People tend to prefer what is known and familiar, avoiding actions with an uncertain range of outcomes. Cash is a conservative asset, but Bogan said this is not “risk aversion.” Here people are risk averse – but at least they know the distribution of outcomes and odds.

Questions about Fed rate moves, the health of the economy and the presidential election cloud the range of scenarios, Bogan said. “As the dominoes start to fall, investors will become more confident or certain about what the distribution might be.”

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Until then, the guaranteed return will still look pretty good.

Automated investment company Wealthfront currently offers up to 5.5% APY on its High Yield Cash Account. Leading up to the rate cuts, the company said it’s still seeing customers open new high-yield cash accounts and more money flowing into current accounts.

Betterment, another fintech company that offers high-yield cash accounts, also confirmed that it is still seeing money flow into these accounts from new and existing customers.

Where to put your money now

Some financial advisors believe that this money is better invested elsewhere.

“I wouldn’t be in the short-term fixed income markets or money markets,” Elliot Dornbusch, CEO and chief investment officer of CV Advisors, told MarketWatch.

CV Advisors provides investment advisory and asset management services for high net worth individuals. Dornbusch said many of CV Advisors’ new clients come to the firm with portfolios that are filled with short-term fixed income securities or cash parked in money market funds. Getting them to move their money out of those positions takes a little persuasion.

“They were afraid to invest. We’re trying to eliminate the idea of ​​fear,” Dornbusch said. “If they’re very conservative, we’ll put them into longer-duration fixed income. And if they have more of a risk appetite, we can combine that with some equities.”

Dornbusch believes that the best way to take advantage of high rates is not to maximize yield through short-term bonds or by collecting interest on cash assets, but by investing in long-term Treasurys BX:TMUMUSD10Y and investment-grade bonds. Although the return may not seem as high, these rates can remain for years.

Dornbusch tells clients that long-term fixed-income securities have all the benefits of yield-generating assets that investors love — they’re conservative assets that deliver reliable returns — but they’re more insulated from rate cuts.

“When you explain in simple terms, people can understand. It’s a matter of just having the conversation,” he said.

Investment strategies should depend on one’s personal risk tolerance as well as one’s age. Perhaps locking up money for 10 years or more is not the best idea if an investor is of advanced age. Others may be hesitant to migrate to riskier investments, such as stocks, while they are near record highs.

When the market changes, it’s important to adjust your investment strategies as needed. Even without a financial advisor, retail investors can choose to change their strategies as the market changes.

Or not.

Cash yields will fall, but how quickly will depend on the size of the Fed’s first interest rate cut in four years, which is expected at the central bank’s meeting next week. It also depends on whether the economic data allows for a slow or fast pace of future rate cuts.

“A lot of people have been rewarded for having way too much cash. That day appears to be numbered,” Daniel Masuda Lehrman, a financial adviser in Honolulu, told MarketWatch.

Right now, money market funds are more than $6.3 trillion, and about $2.6 trillion comes from retail investors, according to the Investment Company Institute.

Even if the Fed eventually brings its rate to 2.5 percent or 3 percent, that’s still a relatively attractive yield that keeps money flowing into money market funds, said Shelly Antoniewicz, deputy chief economist at the industry association asset management.

As rates fall, she said, “retail investors can certainly slow the pace of their investments in money market funds as they decide where to put the newly available cash to work. We’ve already seen that this year, but we don’t expect large-scale exits.”

So whether retail investors will part with their interest-earning assets remains to be seen. Maybe people will be happy to collect 2.5% interest – as long as the return is reliable.

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