Cash Burn...
Though cash should be a part of every household’s wealth, cash might not be considered an investment. Investments usually involve appreciation in value, or provide some sort of percentage-based return on your invested principal. However, depending on the circumstances, cash might not provide either of these qualities. If cash sits idle in a non-interest paying account, the cash will lose purchasing power over time as inflation erodes its value. In the current times of restrictive monetary policy from the Fed along with the accompanying increase in short-term interest rates, cash in savings accounts or money market accounts may provide a return that outpaces inflation. However, once interest rate policy normalizes, prevailing interest rates on savings and money market accounts may fall back below the rate of inflation.

Fixed Income
Usually, longer dated bonds pay a higher interest rate. For example, a 10-year bond would typically pay a higher interest payment than a two year bond. In an era of restrictive policy from the Fed, shorter-term bonds are paying more than longer-term bonds, a situation that is often referred to as an inversion. Currently, the highest yielding bonds are short-term treasury bills with durations of less than a year, which are currently yielding an annualized rate of around 5%. As the yield on a bond will remain the same as long as it is held, bonds are often referred to as fixed income investments. Annuities can be another type of fixed income investment, with a guaranteed return over a predetermined period of time. Pensions are a type of annuity, as they pay a set amount. The guaranteed pay out of fixed income investments can be an attractive feature, though depending on the rate of return, the gains may or may not match or outpace inflation. Also, for some investors, the returns may not provide much assistance in covering costs of living during retirement.

Growth
Though investing in companies through owning shares of stock can involve an element of income investing, as some companies pay cash dividends to shareholders, stock market investing is probably most often associated with a growth strategy. A growth strategy seeks to build wealth through appreciation in value. As companies grow and increase their value over time, their share prices may reflect the increase in worth. Instead of receiving regular interest or dividend payments as income, growth investors wait for their holdings to appreciate in value, often over periods of multiple years.

Which One…
For those who have a larger net worth, the returns received from fixed income may provide enough to cover costs of living during retirement. For example, a household with $1 million invested in fixed income investments that earn 3% per year would make $30,000 annually.
Though, with only around 10% of households having at least a million to invest, many may need returns that exceed those found in fixed income investments to help fill gaps left by SSI or pensions. Though the stock market involves a much higher level of price volatility than fixed income investments, stocks may provide an opportunity for long term retirement investors to grow their wealth enough to make a financial difference once they stop working. For the last 75 years, the overall stock market has averaged a return of 8% per year.

January 3, 2024