How to Invest Cash as it Loses Value to Inflation
September 17, 2023
We hope this article finds you having a great start to the season and that all of the hard work in the offseason by your team and your staff is paying dividends.
Dividends? Did someone say dividends? In this article, we will discuss a few ways- including dividend-paying stocks- how investors can battle inflation while interest rates on traditional banks’ savings accounts have not risen much and still only averaged about 0.42% as of July (2). With inflation registering at 4.65% in July (3) after topping out at around 9.0% last year, some data shows that there is still over $3.5 trillion in U.S. money market funds (4).
Investors have always wondered how much cash to keep on hand, relative to their longer-term and perhaps riskier investments. It’s an especially timely question now. After many years of muted inflation, investors are contending with stubborn price increases that are fast eroding the purchasing power of cash.
Many savers and investors still may find themselves with more cash than usual. Amid recent market volatility, some may have felt a need to sell riskier assets and hide out in cash, while others may prefer to keep some cash on hand as “dry powder” to deploy when they spot an attractive buying opportunity.
Aside from saving for emergencies and paying off debt, are there ways to put excess cash to work? Here are a few ideas to deploy cash while potentially adding some defensive qualities to your portfolio.
- Short-term Treasuries may be an overlooked investment opportunity. As the Federal Reserve has responded to decades-high inflation by aggressively tightening monetary policy over the last two years, Treasury yields have risen significantly. At last check, 3-month and 12-month bills were yielding around 5.4% (5). These numbers suggest decent value, especially considering that they were near-zero at the start of 2022 and that Treasuries are backed by the full faith and credit of the U.S. government.
- Investment-grade bonds are high-quality bonds that can provide some resilience against growth concerns, while generating income. Bond prices fluctuate with interest-rate moves, but the income component can help offset that volatility. Lately, yields on investment-grade bonds have been looking relatively attractive, at a multi-year high above 5%. In addition, for taxable fixed-income investors, the relatively high ratio of the yields on municipal bonds versus comparable Treasuries indicates some attractive value opportunity.
- Dividend-paying stocks are a staple of portfolios built to generate income. They can provide limited sensitivity to interest rates on a regular, and potentially growing, income stream. You can also reinvest dividends and seek the benefit of compounding. While they are unlikely to move the needle materially over the short term, dividends can make a significant contribution to total returns over the medium to long term. In August, high-dividend-paying stocks were yielding around 4.5%. Importantly, however, just because a company pays dividends, it does not mean it’s necessarily a great investment. Investors should consider companies that have strong free cash flow and track records of maintaining, or even increasing, their payouts through economic cycles.
It’s important to emphasize the need for a very well-diversified portfolio within the scope of your investing goals and your risk tolerance. Consider pursuing both defensive positions, like the ones discussed above, and offensive ones to potentially take advantage of market dislocations like the ones we saw earlier this year. You may also want to consider tax-efficient strategies across asset classes that can help you keep more of what you earn.
Your financial advisor can help you navigate this environment. If you have any questions or would like to discuss these strategies for your own portfolio, please do not hesitate to contact us.
Keith Norris
Matt Kuerzi
About the Authors
Keith Norris, First Vice President and Financial Advisor, and Matt Kuerzi, Vice President and Financial Advisor, are co-founders of The Derby City Group at Morgan Stanley in Louisville, Kentucky. They have combined over 40 years of experience helping families with their financial planning (1). In 2019, Matt was recognized by Forbes in their first ever list of “Best-In-State Next-Gen Advisors” in 2019 and more recently as a “Best-In-State Wealth Advisor” in 2023. He can be reached directly at (502) 394-4094 or [email protected].
Forbes Top Next-Gen Wealth Advisors
Source: Forbes.com (Awarded June 2019) Data compiled by SHOOK Research LLC based on time period from 3/31/18 – 3/31/19.
Forbes Best-In-State Wealth Advisors
Source: Forbes.com (Awarded April 2023) Data compiled by SHOOK Research LLC based on data as of 6/30/2022.
Branch address: 4969 U.S. Highway 42, Suite 1200, Louisville, KY 40222
(1) Keith Norris, First Vice President, Financial Advisor, experienced in the financial services industry since 1997. Matt Kuerzi, Vice President, Financial Advisor, experienced in the financial services industry since 2002.
(2) Source: https://www.cnbc.com/2023/07/25/most-middle-income-americans-havent-switched-to-higher-yield-savings.html
(3) Source: https://ycharts.com/indicators/us_core_inflation_rate
(4) Source: https://www.cnbc.com/bonds
(5) For more information, please see Investing Surplus Cash During Inflation | Morgan Stanley CRC # 4964549 (09/2022)
This material has been prepared for informational purposes only. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC (“Morgan Stanley”) recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Morgan Stanley Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.
Investors should consider many factors before deciding which 529 plan is appropriate. Some of these factors include: the Plan’s investment options and the historical investment performance of these options, the Plan’s flexibility and features, the reputation and expertise of the Plan’s investment manager, Plan contribution limits and the federal and state tax benefits associated with an investment in the Plan. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own Qualified Tuition Program. Investors should determine their home state’s tax treatment of 529 plans when considering whether to choose an in-state or out-of-state plan. Investors should consult with their tax or legal advisor before investing in any 529 Plan or contact their state tax division for more information. Morgan Stanley Smith Barney LLC does not provide tax and/or legal advice. Investors should review a Program Disclosure Statement, which contains more information on investment options, risk factors, fees and expenses and possible tax consequences.
Morgan Stanley Smith Barney LLC. Member SIPC.
CRC # 5940724 9/2023
For more information about the AFCA, visit www.AFCA.com. For more interesting articles, check out The Insider and subscribe to our weekly email.
If you are interested in more in-depth articles and videos, please become an AFCA member. You can find out more information about membership and specific member benefits on the AFCA Membership Overview page. If you are ready to join, please fill out the AFCA Membership Application.
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We hope this article finds you having a great start to the season and that all of the hard work in the offseason by your team and your staff is paying dividends.
Dividends? Did someone say dividends? In this article, we will discuss a few ways- including dividend-paying stocks- how investors can battle inflation while interest rates on traditional banks’ savings accounts have not risen much and still only averaged about 0.42% as of July (2). With inflation registering at 4.65% in July (3) after topping out at around 9.0% last year, some data shows that there is still over $3.5 trillion in U.S. money market funds (4).
Investors have always wondered how much cash to keep on hand, relative to their longer-term and perhaps riskier investments. It’s an especially timely question now. After many years of muted inflation, investors are contending with stubborn price increases that are fast eroding the purchasing power of cash.
Many savers and investors still may find themselves with more cash than usual. Amid recent market volatility, some may have felt a need to sell riskier assets and hide out in cash, while others may prefer to keep some cash on hand as “dry powder” to deploy when they spot an attractive buying opportunity.
Aside from saving for emergencies and paying off debt, are there ways to put excess cash to work? Here are a few ideas to deploy cash while potentially adding some defensive qualities to your portfolio.
- Short-term Treasuries may be an overlooked investment opportunity. As the Federal Reserve has responded to decades-high inflation by aggressively tightening monetary policy over the last two years, Treasury yields have risen significantly. At last check, 3-month and 12-month bills were yielding around 5.4% (5). These numbers suggest decent value, especially considering that they were near-zero at the start of 2022 and that Treasuries are backed by the full faith and credit of the U.S. government.
- Investment-grade bonds are high-quality bonds that can provide some resilience against growth concerns, while generating income. Bond prices fluctuate with interest-rate moves, but the income component can help offset that volatility. Lately, yields on investment-grade bonds have been looking relatively attractive, at a multi-year high above 5%. In addition, for taxable fixed-income investors, the relatively high ratio of the yields on municipal bonds versus comparable Treasuries indicates some attractive value opportunity.
- Dividend-paying stocks are a staple of portfolios built to generate income. They can provide limited sensitivity to interest rates on a regular, and potentially growing, income stream. You can also reinvest dividends and seek the benefit of compounding. While they are unlikely to move the needle materially over the short term, dividends can make a significant contribution to total returns over the medium to long term. In August, high-dividend-paying stocks were yielding around 4.5%. Importantly, however, just because a company pays dividends, it does not mean it’s necessarily a great investment. Investors should consider companies that have strong free cash flow and track records of maintaining, or even increasing, their payouts through economic cycles.
It’s important to emphasize the need for a very well-diversified portfolio within the scope of your investing goals and your risk tolerance. Consider pursuing both defensive positions, like the ones discussed above, and offensive ones to potentially take advantage of market dislocations like the ones we saw earlier this year. You may also want to consider tax-efficient strategies across asset classes that can help you keep more of what you earn.
Your financial advisor can help you navigate this environment. If you have any questions or would like to discuss these strategies for your own portfolio, please do not hesitate to contact us.
|
Keith Norris |
Matt Kuerzi |
About the Authors
Keith Norris, First Vice President and Financial Advisor, and Matt Kuerzi, Vice President and Financial Advisor, are co-founders of The Derby City Group at Morgan Stanley in Louisville, Kentucky. They have combined over 40 years of experience helping families with their financial planning (1). In 2019, Matt was recognized by Forbes in their first ever list of “Best-In-State Next-Gen Advisors” in 2019 and more recently as a “Best-In-State Wealth Advisor” in 2023. He can be reached directly at (502) 394-4094 or [email protected].
Forbes Top Next-Gen Wealth Advisors
Source: Forbes.com (Awarded June 2019) Data compiled by SHOOK Research LLC based on time period from 3/31/18 – 3/31/19.
Forbes Best-In-State Wealth Advisors
Source: Forbes.com (Awarded April 2023) Data compiled by SHOOK Research LLC based on data as of 6/30/2022.
Branch address: 4969 U.S. Highway 42, Suite 1200, Louisville, KY 40222
(1) Keith Norris, First Vice President, Financial Advisor, experienced in the financial services industry since 1997. Matt Kuerzi, Vice President, Financial Advisor, experienced in the financial services industry since 2002.
(2) Source: https://www.cnbc.com/2023/07/25/most-middle-income-americans-havent-switched-to-higher-yield-savings.html
(3) Source: https://ycharts.com/indicators/us_core_inflation_rate
(4) Source: https://www.cnbc.com/bonds
(5) For more information, please see Investing Surplus Cash During Inflation | Morgan Stanley CRC # 4964549 (09/2022)
This material has been prepared for informational purposes only. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC (“Morgan Stanley”) recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Morgan Stanley Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.
Investors should consider many factors before deciding which 529 plan is appropriate. Some of these factors include: the Plan’s investment options and the historical investment performance of these options, the Plan’s flexibility and features, the reputation and expertise of the Plan’s investment manager, Plan contribution limits and the federal and state tax benefits associated with an investment in the Plan. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own Qualified Tuition Program. Investors should determine their home state’s tax treatment of 529 plans when considering whether to choose an in-state or out-of-state plan. Investors should consult with their tax or legal advisor before investing in any 529 Plan or contact their state tax division for more information. Morgan Stanley Smith Barney LLC does not provide tax and/or legal advice. Investors should review a Program Disclosure Statement, which contains more information on investment options, risk factors, fees and expenses and possible tax consequences.
Morgan Stanley Smith Barney LLC. Member SIPC.
CRC # 5940724 9/2023
For more information about the AFCA, visit www.AFCA.com. For more interesting articles, check out The Insider and subscribe to our weekly email.
If you are interested in more in-depth articles and videos, please become an AFCA member. You can find out more information about membership and specific member benefits on the AFCA Membership Overview page. If you are ready to join, please fill out the AFCA Membership Application.
