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Is your cash being eroded by inflation?

Erosion risks from inflation

Inflation matters – and it's eroding your cash and cashlike investments, as they come with no or only little yield in major currencies. Thus, their real value is all but guaranteed to be steadily decreased by inflation. How can you protect your wealth against such a force?




The cost of keeping cash
What is a practical and responsible approach to the issue of inflation? Investors with excess cash may consider building exposure towards investment solutions with a positive performance contribution, whilst taking into consideration their individual investment horizon and overall risk appetite. 

Each year, people around the world spend time – and often money – preparing and filing their taxes. However, there is another ‘tax’, which is sometimes also referred to as the ‘inflation tax’. The economist Milton Friedman once said that “inflation is taxation without legislation”.

As a matter of fact, inflation over time reduces the amount of goods and services one can buy with a given amount of money. Over time, inflation can have a very large impact. For example, in the US goods and services costing one dollar in the year 1975 would cost around five dollars today. In the case of a hypothetical EUR, the depreciation is even more extreme, while the CHF has lost value too, but to a lesser extent.

While inflation is now at the forefront of many investors’ minds – and there are those warning of inflation getting out of hand – our economists believe that after a post-pan­demic spike, it will level off again. Nevertheless, we expect inflation to average 5.7% in the US and 4.9% in the euro­zone this year. 

These figures show the true cost of holding cash that is currently yielding nothing in major currencies as central banks keep their policy rates at rock-bottom levels.

However, this analysis is based on the official reported inflation figures. In reality, each person has their own personal inflation rate, based on where they live, the type of products and services they buy, and even their interests.

For example, inflation in the United States, as measured by the official consumer price index, has risen by 3% p.a. on average since 1982, but it has been close to 5% for the ‘wealthy’ in the United States. Thus, cash yielding next to nothing in the current environment is a challenge.

When is the right time to start investing?
Pondering this phenomenon, cash-rich investors may ask themselves whether now is really a good time to invest, with many markets experiencing strong volatility amid geopolitical and interest-rate/inflation uncertainties. Nev­ertheless, our strategists believe that the secular bull market that started following the great financial crisis is still intact. They do not expect a severe bear market as experienced in the first decade of this century, even as markets have been weak in the first months of this year. The market has cycles, there are good times and adverse times, and a balanced portfolio aims at protecting you against that by definition.

The old adage comes to mind: “It’s not about timing the market, but about time in the market”. Investors often miss a great part of the market’s longer-term ascent because they are waiting for lower price levels to invest – an approach which hardly ever pays off.

Strategise before you invest
This does not mean that all the excess cash should be invested in one go, but rather that investors should have a deliberate strategy to put their excess cash to work commensurately with their return expectations and risk tolerance. This can be seen as part of an overall wealth planning strategy to preserve and grow one’s wealth over time.

How should you position your portfolio in the view of Julius Baer's experts?

> Contact us to find out

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