By Ben Dolan, CFP®
My high-yield money market account is yielding 4.0%. This is where I keep my emergency fund. If the current heat wave knocks out my AC, I’ve got the cash ready to go and Morris Jenkins in my favorites.
I have a little bit of cash in my portfolio as well (roughly 1%). This morning rates on 1-yr CDs ranged from 5.0% to 5.2%. Short-term treasuries, which are not subject to state income tax, ranged from 4.9% to 5.2%. These returns on cash are fantastic, especially compared to rates just a couple of years ago. According to macrotrends.net, short-term treasury yields closed 2021 at 0.39%.
Cash rates look even more favorable given recent news on inflation. Last week the Wall Street Journal reported that the consumer-price index (CPI) climbed 3% in June from a year earlier. This is welcome news, and I’m cheering for the CPI to normalize to its 2% target as soon as possible.
While I’m enjoying these rates and the improved inflation numbers, I can’t help but wonder…what is my “real” return on cash? Real return is defined as the annual percentage of profit earned on an investment, adjusted for inflation. In other words, return minus inflation.
Despite the decrease in June, through the first 6 months of 2023 inflation has averaged 4.8%. Assuming I made 5% on cash, my real return is 0.2%. Not so great. Especially considering that investing cash is not my only option.
I wonder how my real return on cash compares to the real return on my portfolio? Keep in mind, I’m relatively young (my kids would laugh at this!) at 43, and I have a high-risk tolerance (my portfolio is 100% to stock). Year-to-date, my portfolio has returned almost 13%, providing a real return of 8.2%. That’s an 8% difference versus cash!
This is not a fair comparison given that markets have done better than their respective long-term averages so far in 2023 (not far off though, given the 20-year return of 9.8% for the S&P 500), but the point still holds: if you’re looking for good real returns that increase your purchasing power then you should consider an appropriate allocation to a diversified stock portfolio held for the long-term.
The uber-wealthy can afford to earn cash rates given the size of their nest egg. But many investors with average portfolio balances have exited the stock market to invest in cash. If they calculate their real return, they may not like what they see.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data are historical and are no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.Nothing in this material should be construed as investment advice offered by Dolan Capital Advisors, Inc. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction, or investment strategy. No chart, graph, or other figure provided should be used to determine which securities to buy, sell or hold. No representation is made concerning the appropriateness of any particular investment, security, portfolio of securities, transaction, or investment strategy. You should speak with your own financial professional before making any investment decisions. Past performance is not indicative of future results. Dolan Capital Advisors, Inc. does not guarantee any specific outcome or profit. These disclosures cannot and do not list every conceivable factor that may affect the results of any investment or investment strategy. Risks will arise, and an investor must be willing and able to accept those risks, including the loss of principal. Certain statements contained herein are statements of future expectations and other forward-looking statements that are based on opinions and assumptions that involve known and unknown risks and uncertainties that would cause actual results, performance, or events to differ materially from those expressed or implied in such statements. Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors a North Carolina state-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.