After the Fed cut interest rates, cash investment strategies are still favored, but reinvestment risks are emerging.

Even if the Federal Reserve starts cutting interest rates, the strategy of investors earning a 5% return in "cash" investments with minimal risk remains popular. Last week, the total assets of money market funds - a popular cash investment tool since 2022 - exceeded $6.3 trillion, even after the Fed announced a significant 50 basis point rate cut. However, according to analysis from the Bank of America Investment Institute, this strategy also brings "reinvestment risk." As the bond market readjusts to lower interest rates, investors will find it difficult to find opportunities to continue earning a 5% return without increasing risk. Michelle Wan, the global investment strategist at Bank of America, believes that it may be time for investors to reduce their allocation to cash alternatives and turn to "medium-term" fixed income investments, such as residential mortgage-backed securities and US municipal bonds. In a client report on Monday, Wan wrote that this strategy can "help investors lock in coupon income and potentially benefit from asset price increases during periods of declining market rates." Furthermore, Wan pointed out another risk known as "cash drag." She and her team studied the performance of investing $1 million in higher-risk assets since 1926, comparing it to cash and cash alternatives. The research found that the performance of small-cap stocks stood out the most, with a $1 million investment growing to $620 million; large-cap stocks grew to $210 million, while US Treasuries as cash alternatives grew to $24 million. According to FactSet data, the stock market continued to set new historical highs on Monday, with the Dow Jones Industrial Average rising by 0.15%, the S&P 500 rising by 0.28%, and the Nasdaq Composite Index rising by 0.14%.