Morgan Stanley
  • Wealth Management
  • Sep 28, 2022

How to Invest Cash as It Loses Value to Inflation

Cash may be safe, but it’s losing value to inflation. How can you invest it while minimizing risk in your portfolio?

Lisa Shalett Chief Investment Officer, Wealth Management
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Investors have always wondered how much cash to keep on hand, relative to their 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.

Still, many investors 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. 

After many years of muted inflation, we’re now contending with stubborn price increases that are fast eroding the purchasing power of cash.
  • Short-term Treasuries may be an overlooked investment opportunity. As the Federal Reserve responds to decades-high inflation by aggressively tightening monetary policy, Treasury yields have risen significantly. At last check, 3-month bills were yielding around 3.12% and 6-month bills 3.78%. Although still far from keeping pace with inflation, which just clocked in at 8.3% for August, these numbers suggest decent value, especially considering that they were near-zero at the start of this year and that Treasuries are backed by the full faith and credit of the U.S. government. Note that interest rates on banks’ savings accounts have not risen as much as Treasuries over the current rate-hike cycle—they averaged about 0.13% as of mid-September.
  • 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 September, high-dividend-paying stocks were yielding around 4.5%, a whole percentage point above long-term Treasury yields. 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.

Morgan Stanley 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. 

Questions to Ask Your Morgan Stanley Financial Advisor:

  • What, if any, amount of cash should I leave out of the market?
  • What strategies for investing cash make the most sense for me in light of my long-term financial goals? 

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Risk Considerations

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Technology stocks may be especially volatile.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

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