Investors should scale back their cash holdings amid elevated inflation, Citi Wealth Investments warned. Recent price data has come in hot. The consumer price index rose at an annual rate of 4.2% in May, the highest in three years, and the personal consumption expenditures price index for May, the Federal Reserve’s favorite gauge of inflation, reached a seasonally adjusted 4.1% annual rate, its highest since April 2023. Those inflation rates are generally above the annual percentage yield investors have been getting from cash assets, such as money market funds and high-yield savings. For instance, the annualized seven-day yield on the Crane 100 list of the largest taxable money funds stood 3.46%, as of Sunday, making the real, inflation-adjusted return negative. Still, Americans are currently holding cash at levels far above historical averages, said Olaolu Aganga, head of portfolio construction and analytics at Citi Wealth. For instance, some $7.9 trillion is sitting in money market funds, according to the Investment Company Institute . Too much cash can erode a portfolio’s purchasing power over time, Aganga pointed out. “The numbers today really indicate that clients should be decreasing the excess cash outside of what they really, really need,” she said. “On a real yield-adjusted basis — so factoring in inflation — they’re not getting that much.” Putting excess cash to work Holding some cash is important, but it should be treated purposely, Aganga said. It can be a potential source of liquidity to help avoid forced sales of stocks or other assets and it can also be a portfolio stabilizer, she noted. It is also helps to have some cash set aside to fund a large purchase or buy a market dip, she added. The amount of cash to hold depends on the investor’s spending profile, which should be his or her spending in a 12- to 24 month timeline, Aganga said. Then, she said investors should think about four objectives: What type of returns are they targeting, how much liquidity are they willing to give up, how much risk they are willing to take and whether they need to generate income. Dividend stocks are an option for income-focused investors who can handle drawdowns during times of market volatility, she said. For those who aren’t comfortable shifting the money into risk assets, fixed income is the natural next area to put excess cash, Aganga noted. She favors short duration bonds of one to three years, which have historically held up better than long-dated bonds when yields rise. She would also stick with high-quality, including U.S. government debt and investment-grade bonds. “Nominal yields remain high in a historical context, but credit spreads sit near historical lows, which makes active management and security selection important,” she said.
Citi Wealth warns investors to move out of excess cash because of hot inflation
