Investors are being advised to reconsider their cash holdings in light of rising inflation, according to recent insights from Citi Wealth Investments. The firm highlighted the pressing need to address elevated inflation rates, which have seen a notable increase in recent months. The consumer price index, for instance, escalated to an annual rate of 4.2% in May—marking its highest rate in three years. Similarly, the personal consumption expenditures (PCE) price index, which is closely monitored by the Federal Reserve, also reported a rise, reaching a seasonally adjusted annual rate of 4.1% for the month of May.
These inflation figures exceed the annual percentage yields typically associated with cash assets, such as money market funds and high-yield savings accounts. Data reveals that the annualized seven-day yield on the Crane 100, a list of the largest taxable money market funds, was just 3.46% as of Sunday, translating into a negative real return after accounting for inflation.
Despite these troubling metrics, many American investors are maintaining cash levels significantly above historical norms. Currently, around $7.9 trillion is parked in money market funds, according to the Investment Company Institute. Olaolu Aganga, head of portfolio construction and analytics at Citi Wealth, warned that this excessive cash could diminish a portfolio’s purchasing power over time. She advocated for clients to reduce their surplus cash to only what is absolutely necessary. “Clients should be decreasing the excess cash outside of what they really, really need. On a real yield-adjusted basis – factoring in inflation – they’re not getting much,” Aganga stated.
While holding cash serves an essential purpose in providing liquidity and stability to avoid forced asset sales, Aganga stressed the importance of being strategic about cash reserves. It can act as a cushion for unexpected expenses or allow investors to capitalize on market dips. To determine the appropriate amount of cash to hold, investors should evaluate their spending plans over the next 12 to 24 months, alongside four key objectives: targeted returns, liquidity preferences, risk tolerance, and income generation needs.
For income-focused investors who can endure potential drawdowns during market fluctuations, dividend stocks present a viable investment opportunity. For those reluctant to take on riskier positions, Aganga suggested reallocating excess cash towards fixed income options. She expressed a preference for short-duration bonds with maturities of one to three years, noting that they tend to perform better than longer-dated bonds in rising yield environments. Additionally, she recommended investing in high-quality assets, including U.S. government debt and investment-grade bonds. “Nominal yields are historically high, but credit spreads are near historical lows, underscoring the importance of active management and careful security selection,” Aganga concluded.
