Is Cash Back?
No, I’m not talking about your credit card rewards. When used in the context of investing, cash isn’t too exciting. It does provide some level of comfort in volatile markets, but over the long term, it is not your friend when you consider inflation. Therefore, its role in a portfolio for the long-term investor should be relatively small, all things considered.
The chart above shows the last ten years comparing the CPI (Consumer Price Index) and US Short-Term T-Bills (Cash Proxy). As you can see, cash lags far behind – not surprisingly, given the near-zero rate environment during this timeframe.
However, that dynamic changed this year as the fed aggressively started to raise rates to combat higher inflation. Although that has negatively impacted the equity markets thus far, investments such as cash and bonds are looking much more attractive.
When looking at your statements each month, you’ll notice there is a cash ‘sweep’ fund. This holds all cash generated from your investments, such as dividends, interest, sales, and new deposits that have yet to be invested. This cash sweep is comforting because it is FDIC insured, but it still earns close to nothing, even in this rising rate environment. There is good news, other cash options in the form of position traded money markets can be used. We can utilize these vehicles to take advantage of the increased cash yield while maintaining very high quality (US Government Debt). By purchasing these vs. leaving excess cash in the ‘sweep’ account, we increase our yield from 0.25% to 1.92%. This is subject to change, but you get the idea given where markets and rates are.
We will start doing this automatically on your behalf with the position traded money market SNVXX. You will see more trading activity in relation to these as cash flows in and out of accounts. However, there are no trading costs or tax consequences other than the extra interest you will now start accumulating. As you know, with investing, every penny counts!
What can be even more exciting than cash (drumroll, please) …. bonds! As we have discussed previously, the bond market is off to its worst start ever in history. When interest rates rise, this causes bond prices to fall. Why? Since new issuances of bonds will now have higher interest rates, to stay competitive in the marketplace, older bonds must sell at a lower price (which in turn increases their yield). As a longer-term investor, more yield provides a higher and more predictable forward-looking return. We have seen yields on bonds more than double since the start of the year.
The chart above shows the return of the US Aggregate Bond Index vs. the CPI (Consumer Price Index) over a long-term period (dating back to Feb. of 1996). High-quality bonds could be a great solution for you if you have large excess cash balances on the sidelines and are looking to increase yield. We highly recommend reaching out to your wealth management team to see if this would be a good fit, given your financial situation and goals.
Brendan enjoys providing financial guidance and support so clients can focus on what is important to them in their everyday lives. He graduated from the University of Missouri where he earned a Bachelor of Science in Business Administration with a major in Finance and Banking. Brendan is a CERTIFIED FINANCIAL PLANNER™ professional and holds the series 7 and 63 licenses.