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  • Jul 14, 2022

Cash Is Losing to Inflation—Two Opportunities to Invest It

Speaker: Lisa Shalett
Cash Is Losing to Inflation—Two Opportunities to Invest It


Lisa Shalett: Hello and welcome to another edition of Wealth Management Insights. I am Lisa Shalett, Chief Investment Officer for Wealth Management. And today is Wednesday, July 13th, and I’m recording this from my office in Manhattan, New York.

Today let’s talk about cash. A question that’s always been part of investing—but perhaps even more top-of-mind today—is how much cash to keep relative to investments. Maybe not too much, given current levels of inflation. But the ongoing market volatility may be pushing investors to sell and end up with more cash than usual. Or perhaps you want to keep some dry powder in any case, to be able to deploy it when you spot a buying opportunity.

Considering all of that—and, of course, aside from saving for emergencies and paying off debt—how should investors think about their cash allocation in this high-inflation and high-volatility environment?

In our view, investors should be opportunistic and today be underweight cash. First, let’s talk about why.

For years, we’ve had the luxury of not having to worry about inflation, but we’re now contending with stubborn price increases that are fast eroding the purchasing power of your cash. And, as we know, to fight this, the Federal Reserve is tightening its monetary policy by raising interest rates and shrinking its balance sheet. Treasury yields have indeed moved up alongside this effort—with the two-year Treasury now yielding around 3%—but they’re far from keeping pace with inflation which just hit yet another 40-year high. Also, at last check, the average interest paid on savings accounts is just 10 basis points. Cash may be safe, but in “real” terms, meaning “inflation-adjusted,” the opportunity cost is quite high.

So then, how can we invest some of this cash? Well, here are two ideas to deploy it while potentially adding some defensive qualities to your portfolio.

 First, let’s think about investment-grade bonds. These 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. And lately, yields on investment-grade bonds look relatively attractive, having now risen to about 5% in June, their highest level since 2009. Also, for taxable fixed-income investors, the relatively high ratio of the yields on municipal bonds versus comparable Treasuries indicates some attractive value opportunity.

 Now let’s turn to equities. We think dividend-paying stocks are worth a look. A staple of income-focused portfolios, they can provide limited interest-rate sensitivity on a regular, and potentially growing, income stream. Of course, you can also reinvest dividends and seek the benefit of compounding. These days, high-dividend-paying stocks are yielding around 4.2%, a whole percentage point above long-term Treasury yields. Importantly, just because a company pays dividends, it does not mean it’s necessarily a great investment. We need to be selective for companies that have strong free cash flow and track records of maintaining and even increasing their payouts through economic cycles.

There is no question that we are in a tough market environment. We continue to emphasize the need for a very well-diversified portfolio within the scope of your investing goals and your risk tolerance. We advise you pursue both defensive positions like the ones we’ve already  discussed and offensive ones to potentially take advantage of some of the market dislocations that are now occurring. Also consider tax-efficient strategies across asset classes that can help you keep more of what you earn. Morgan Stanley Wealth Management can help investors navigate this environment. If you have any questions or would like to discuss these strategies for your own portfolio, please contact your Morgan Stanley Financial Advisor. And as always, thank you for listening.. 

Cash may be safe, but it’s losing to inflation. How can investors deploy it while seeking some defensive qualities for their portfolios? We highlight two opportunities.


Lisa Shalett is Morgan Stanley Wealth Management’s chief investment officer, a member of the Global Investment Committee and a regular contributor to CNBC, Bloomberg and other financial news outlets, where she helps sift the signal from the noise.

Visit Wealth Management Portfolio Insights for more market commentary and insights from Lisa and her team at Morgan Stanley. Find more audiocasts

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