Holding onto excessive cash could hinder you from reaching your goals. It may even be more of a cost than a benefit. With higher interest rates and inflation is here to stay, what you choose to do with your cash is more pertinent. Whatever your reason, holding too much cash can significantly impact your long-term financial goals.
Reimagining cash: From inactivity to prosperity
For most people, the concept of deferred gratification might be more challenging to grasp due to the “present bias” – the term behavioural scientists use to describe how people are more concerned with the present than the distant future. At the same time, the principle of loss aversion tells us that potential losses are more painful and motivating than potential gains. So when we are hesitant to “lose” our cash in the present, we owe it to ourselves to make the most rational, balanced decision possible by considering precisely what we might “lose” in the future if we don’t invest.
Lessons from previous hiking cycles
Let’s look at the macro environment. Despite needing to remain data-dependent, we do. These cuts are on the horizon, and global rates will likely fall in 2024. If you hold too much cash, the implications are clear: today’s attractive cash yields may not last. When you reinvest, we believe it will be at lower rates.
No one knows precisely when the Fed and other central banks will end their hiking cycles or what their terminal rates (the rates that prevail at the cycle’s end) will be. But from that point, cash will typically underperform other investments.
Consider: Over the last seven Fed hiking cycles, fixed income has outperformed cash by an average of 14% in the two years following the final interest rate increase. And fixed income has never underperformed cash during that period.
Now could be a time to consider other cash alternatives.
Selecting investment avenues
Money market funds: These funds are regulated tightly and offer the possibility of higher yields with daily access to your money. By distributing risk across diverse interest rates and credit factors, they form a route to amplify returns while maintaining ease of access.
Government bonds: As inflation stays low and real yields remain positive, government bonds are an attractive alternative to cash. They offer the potential for higher returns and carefully managed credit risk.
Short-duration corporate bonds: Marrying income with total return, short-duration investment grade bonds have consistently demonstrated resilience during market downturns. They can potentially earn higher returns than cash.
Long-duration corporate bonds: As the economy slows and interest rates fall, long-duration investment-grade bonds become more appealing. They can provide higher yields and potential capital gains and help diversify your investment portfolio.
Private credit: Unlike other fixed-income strategies, private credit can provide a good vehicle for your opportunistic (versus your surplus) cash. According to the Global Private Capital Association, private credit investments in the Middle East increased by $10.8 billion in 2022, a significant rise of 30% from 2021. Private credit lenders offer agility, speed, and reliability, resulting in attractive yields when combined with careful risk assessment.
Charting the course ahead
There is no ‘one size fits all’ solution. Considering your financial goals and the intent of your wealth is essential, but we believe that holding too much cash can significantly impact long-term financial goals. In the Middle East, where unique market dynamics intertwine with global trends, strategic investing your cash is important for financial resilience and potential prosperity.
