How to invest cash as it loses value to inflation

Morgan Stanley Wealth Management


Summary: Learn how to keep price increases from eroding the purchasing power of your cash. Explore investing as a way to help manage inflation while minimizing risk and volatility.

Image of erosion

Having extra cash on hand may seem liberating, especially if you already have the money you need to cover day-to-day expenses, pay off any debts, and keep your emergency savings well-funded. But after many years of muted inflation, the economy has been seeing stubborn price increases that are quickly eroding the purchasing power of your cash.

Fortunately, there are a few ways to invest it that may help keep your money growing while potentially adding some defensive qualities to your portfolio.

Short-term Treasuries

Treasuries, backed by the full faith and credit of the US government, are regarded as one of the safest investments. As the Federal Reserve responds to decades-high inflation by aggressively raising interest rates, Treasury yields have risen significantly. As of October 7, 2022, 3-month bills were yielding around 3.33% and 6-month bills 4.07%—up from near-zero at the start of the year. While these levels are still far from keeping pace with inflation, they are higher than interest rates on banks’ savings accounts, which averaged about 0.16% in early October.1

Investment-grade bonds

Investment-grade bonds are high-quality bonds that may provide some resilience against concerns about economic growth, while generating income. Typically, the higher a bond’s risk, the higher its yield. Non-investment-grade bonds usually have a relatively high yield but offer less stability. In contrast, investment-grade bonds tend to have lower yields, but exhibit less price volatility and, thus, could be a possible choice for risk-averse investors. Lately, yields on investment-grade bonds have remained above 5%, their highest level in years.2

Dividend-paying stocks

These securities are a staple of income-focused portfolios and may be worth considering for investors looking for potential cash flow. Many big, established companies pay dividends to shareholders, who use the payments as an additional income stream or reinvest them to seek the benefits 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. As of October 10, 2022, dividend-paying stocks were yielding around 5%, more than a percentage point above long-term Treasury yields.3

Importantly, 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.

Keep in mind: There’s more than one way to incorporate these investments as part of your portfolio. In additional to individual bonds and stocks, mutual funds and exchange-traded funds that invest in baskets of these securities offer a way to diversify exposure. Diversification, within the scope of your investing goals and risk tolerance, is the foundation of a portfolio equipped to ride out tough economic conditions.

The source of this article, How to Invest Cash as It Loses Value to Inflation, was originally published on September 28, 2022.

  1. The national average interest rate for savings accounts is 0.16 percent, according to Bankrate’s October 5, 2022 weekly survey of institutions.
  2. As measured by the US Bloomberg Corporate Total Return Index, yield to worst (October 7, 2022).
  3. As measured by the S&P 500 High Dividend Index, next twelve months dividend yield (October 10, 2022).

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