Citi Wealth Investments has issued a warning for investors to reconsider their cash holdings in light of recent inflation data, which shows the consumer price index rising at an annual rate of 4.2% in May, the highest in three years.
The personal consumption expenditures price index, favored by the Federal Reserve, also reached a seasonally adjusted 4.1% annual rate, marking its highest level since April 2023. These inflation rates exceed the annualized yield of 3.46% from money market funds, resulting in negative real returns for investors.
Olaolu Aganga, head of portfolio construction and analytics at Citi Wealth, highlighted that Americans currently hold approximately $7.9 trillion in money market funds, significantly above historical averages. She cautioned that excessive cash can diminish a portfolio's purchasing power and recommended that investors should only maintain cash reserves necessary for immediate needs.
Aganga emphasized the importance of strategically using cash for liquidity and potential market opportunities, while also suggesting that investors evaluate their cash holdings based on their spending profiles and investment objectives.
For those looking to generate income, she recommended dividend stocks, while fixed income options, particularly short-duration bonds, are advisable for those hesitant to invest in riskier assets. Aganga noted that while nominal yields are historically high, credit spreads are near historical lows, underscoring the need for active management and careful security selection