The Value of Staying in the Middle of the Net

Executive summary:

  • While money market assets have risen in recent years, returns have historically lagged behind a diversified portfolio.
  • A weaker U.S. dollar is expected to boost returns from international holdings.
  • No matter what the market is doing, there are always opportunities for tax-loss harvest.

In the world of investing, finding the perfect balance is crucial, as it is when you're skating on a pond or minding the net. Our Economic and Market Review for the second quarter of 2023 provides some valuable insights that stress the importance of avoiding extreme positions.

Here are some key highlights from the Q2 Economic and Market Review:

The temptation of holding cash

As interest rates rise, some investors are tempted to hold more assets in cash or cash equivalents. While this might appear to be a safe strategy, it comes with its drawbacks. Taxes on non-qualified accounts can reduce overall returns, and cash investments do not benefit from equity market rallies when interest rates decline. A diversified portfolio has historically performed better than cash returns over the long term. Additionally, it can be challenging to properly time when to re-enter the market, underscoring the importance of careful consideration when making decisions related to increasing cash holdings.

CASH CRAZE Money market assets reach highest historical level

Currency impact on market performance

One aspect that often goes unnoticed is the impact of currency on market performance. When the U.S. dollar is strong, it bodes well for U.S. equities, while a weaker dollar benefits global markets. For investors who have investments outside the U.S. but reside in the country, a weaker dollar is advantageous because it means better returns when their international earnings are converted to U.S. currency. Looking ahead, there’s speculation the U.S. dollar might weaken, which could make non-U.S. equity more appealing due to the potential for gains from currency fluctuations.