After Fed's 50-basis-point rate cut, where should I invest $50,000? I'm 38 - and have a high risk tolerance.

By Quentin Fottrell

The U.S. Federal Reserve made its biggest cut to the benchmark rate in 16 years on Wednesday

Dear Quentin,

I need some advice. I am 38 and I want to invest $50,000 in a brokerage account. I don't have much knowledge about the stock market, but I'm trying to do some research since I'd like to do it myself. I just opened an account with Charles Schwab (SCHW), but I'm not sure what I should include in my portfolio.

My risk tolerance is about 80%. Is this a good time to invest, with the Federal Reserve reducing interest rates? If so, what are my options?

Retail Investor

Related: 'It's a momentous moment': I'm selling my house. With the Fed poised to finally cut interest rates, is this the perfect time?

Dear Investor,

You have a smorgasbord of opportunities.

You say you have a high risk tolerance, but that does not mean you should invest your entire $50,000 in high-risk stocks. The risk-tolerance metric is simply an indication of how able you are to ride out the highs and lows of the market without panicking. You're relatively young, so you have time to make long-term investments.

The Federal Reserve made its biggest cut to the benchmark rate in 16 years on Wednesday, reducing the benchmark rate by 50 basis points. The first rate cut in 4 years brings the benchmark rate to a range of 4.75% to 5%. A decreasing interest-rate environment will, eventually, help change the landscape for stocks and, hopefully, real estate.

First off, stocks closed lower on Wednesday. But as MarketWatch columnist Joseph Adinolfi wrote: "Prudent investors would be better served by tuning out the noise. That's because there's still only one question that matters for stocks: Is the economy in a recession or not?" What's more, at 38, you can afford to play the long game.

If you're concerned about short-term fluctuations, Martin Schamis, vice president and head of wealth planning at Janney Montgomery Scott, suggests employing a dollar-cost-averaging strategy, where you divide the amount to be invested into equal size contributions and then invest them over a longer period of time, "is a good way to limit volatility."

'While rate cuts have historically been positive for stocks in general, they might provide a greater boost to small-cap companies.'Fidelity Investments

Alonso Munoz, chief investment officer of Hamilton Capital Partners, says that although equities have done well this year overall, specifically tech stocks, you could consider allocating a portion of your funds to equities, as earnings have been strong, "and a lower rate environment could help broaden out the equity market rally outside of the mega-cap growth companies."

"Rate cuts have historically been a positive for the stock market broadly - a relationship that's held true, on average, regardless of whether the economy is in a recession or not," says Fidelity Investments. Stocks tend to underperform prior to a first rate cut in a recession but typically outperform over the following 12 months in both recessionary and nonrecessionary markets.

On the equity side, Paul Karger, co-founder and managing partner at TwinFocus, suggests equities that benefit from lower rates and/or pay higher dividends. "We like utilities due to the amount of power needed for the AI world," he says. "Small-cap stocks and commodity producers also benefit from lower borrowing costs. Lower rates can lead to a weaker dollar."

"While rate cuts have historically been positive for stocks in general, they might provide a greater boost to small-cap companies," Fidelity adds. "Small companies generally carry more debt than larger companies, which means they've felt the pinch of higher rates more than their larger brethren - and could benefit more from relief on rates."

Small-cap companies and REITS

On the fixed-income side, you and other retail investors want to lock in current rates before the nest rate cycle begins in earnest. Karger advises locking in longer-duration bonds now before rates fall - by buying 10-year Treasury bonds, for example, or "buying municipal bonds and other safe bonds which benefit (price increase) from a decline in rates."

Karger says that real-estate investment trusts are more attractive than bonds due to higher relative yields, noting that they provide both diversification and liquidity, which means you can access your cash more easily than with many other investments. You can read more about these four REIT stocks that pass a strict quality screen, with dividend yields up to 6.19%.

Real-estate investment trusts are more attractive than bonds due to higher relative yields; they also provide both diversification and liquidity.Paul Karger

Denise Chisholm, Fidelity's director of quantitative market strategy, believes the real-estate and financial sectors look potentially compelling and are likely pricing in too much bad news. "This year has been unusual because these sectors have instead lagged, performing roughly the way I might expect before an interest-rate hike," she says.

Treasury bonds could even outperform stocks and other bonds. "Despite rising federal government debt, U.S. Treasurys remain one of the least risky investments available, and investors are likely to continue to look to them in times of economic uncertainty," Fidelity says. "For that reason, Treasury bonds have historically thrived when the economy has contracted."

Brace yourself for a bumpy ride in the run-up to November's presidential election. In a statement last week, Rick Rieder, BlackRock's chief investment officer of global fixed income, said that given "U.S. debt/Treasury supply dynamics and a particularly impactful period for volatile seasonal factors in economic data, there is a good deal we don't know about the year ahead."

Remember that diversity is king, especially in these uncertain economic times.

The Moneyist regrets he cannot reply to letters individually.

More columns from Quentin Fottrell:

'We're happily married, mediocre gay men': We're 58, earn $160,000 and saved $2.2 million. We grew up poor. Our families treat us like ATMs. Are we OK?

'It's the saddest thing': I'm happily retired and my friends in their 60s want to know how I did it. Should I tell them my secret?

I'm a veteran, 53, with 6 degrees and $245,000 in student debt. I plan to discharge my loans due to my disability when I hit $1 million. Is this immoral?

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-Quentin Fottrell

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09-23-24 0733ET

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