In a world where money markets yield almost 0% and inflation is moving higher, holding excess cash is likely to destroy wealth and purchasing power. And with the Fed (aka the FOMC ) expected to hold rates down for 2 years or more, this wealth destruction will be compounded. With an accommodative Fed and an improving economic outlook, excess cash maybe a significant drag on returns.
Fixed income offers alternatives that seek to provide lower risk & liquidity, as well as yields that should better keep pace with expected inflation. Short and intermediate taxable funds offer yield potential near 1%, while short-intermediate municipal bond (aka muni) funds can offer even greater tax-equivalent yield potential for investors in high tax brackets. And in an actively managed fund, investors maybe able to generate even stronger total returns. With the stronger total return potential comes more potent market risk.
While the lower volatility of a bond fund is not quite as strong as cash since a negative return is possible, some can get close. Consider a short-term fund consisting of 100% investment-grade bonds and a track record of capital preservation as an alternative to pursue some investment gain.
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