For quite some time now, investors have used tools such as money market funds and CDs to put their sideline cash to work. Cash instruments can be used as a risk-averse means to gradually build up yield. However, by choosing to use these instruments, investors may miss out on bigger returns.
Recently, the Natixis Investment Managers team put out an article breaking down why cash instruments may begin losing their luster. In the article, Natixis portfolio managers explain how inflation can tear into the returns from cash investments.
“Investors who jumped out of the markets and went into money markets or CDs often aren’t aware of inflation’s corrosive effect on those returns,” noted Jack Janasiewicz, portfolio manager and lead portfolio strategist at Natixis. “Inflation is like a stealth predator. Although you can’t see or hear it coming, you will feel it when you see how it can diminish your yield.”
The Natixis article breaks this point down with a good example. For investors who get 5% in returns from a cash investment, the inflation rate will trim those earnings down to closer to 2%- 3%.
Meanwhile, equity investment has allowed the market to roundly outdo climbing inflation for some time now. As such, investors may wish to move their sideline cash to an income-generating equity strategy.
