Your options when putting excess cash to work

24 August 2023

Excess cash in a time of high inflation is both a blessing and a curse. While it’s essential to have money in the bank for ongoing spending and emergencies, cash that is sitting in your account might be quickly losing value. Below, we discuss how much cash to keep on reserve and how to get the rest of it working for you. 

Excess cash in your account is only losing value

The exact amount of money you need in the bank, depends on your financial situation and preferences. After the pandemic, many people have more cash in their accounts then they currently need for security purposes. Given the market backdrop today, it is worth exploring what options may be available to you to get a positive return. Investing your money can help to fight against inflation and the subsequent erosion of your overall net wealth. 

Identify true excess cash

Before you decide on an amount for investing, it is important to ask yourself significant questions:

1. What are your current and future cash requirements? 

Look at your current household bills and any future maintenance costs you may have. 

2. Are your liquidity needs matched to your investment? 

Make sure there are no deposits needed for large purchases or life events in the near future. 

3. What is your ultimate financial goal?

Once you identify cash that is truly excess, think about what you want to use it for and discuss with your financial adviser a suitable investment plan to make the most of its future value. 

The Options Available 

Let’s say you have excess cash and need the amount to stay liquid with a low level of risk, what are the options available to you? The following are just some examples of strategies but always seek advice to understand what might be best for your specific circumstances.

Bonds are Back 

As an asset class, fixed income is a lot more attractive today relative to recent history. A year ago, investors looking to invest in short term government bonds were faced with negative yields, meaning a guaranteed negative return if the bond was held to maturity. Today there are significantly positive yields on offer, presenting an attractive opportunity for investors. 

Government Bonds - A Safe Haven

Core European government bonds (issued by highest-rated euro area sovereigns) are considered among the lowest risk investments. They are non-complex instruments, typically highly liquid and available to all investors. In addition to this, government bonds can demonstrate safe-haven characteristics. In March 2023, banking sector concerns had a negative price performance impact for some markets. During the same period, government bonds posted positive price performance and outperformed corporate bonds due to safe-haven investor demand. Gross yields of nearly 3.5% are currently available on AAA-rated short-dated euro government bonds.

Safety in Short Duration 

Investing in short duration assets limits the risk sensitivity to unexpected interest rate moves relative to longer duration (longer maturity) assets. In addition to this, given the unique backdrop of interest rate markets today, shorter duration bonds, offer higher yields relative to longer duration bonds of the same issuer. Today the German Government two-year bond yield is roughly 0.45% higher than the 10-year bond yield. This combination of lower interest rate sensitivity and higher yield of shorter maturity bonds relative to longer maturity bonds introduces a unique opportunity for investors today. 

Income Portfolios

For investors with a larger amount of excess cash and willing to accept a little more risk on capital value, another option is positive-yielding, high grade, short-maturity fixed income portfolios. These portfolios can be constructed using core government bonds, high quality corporate securities or a blend of both. This low-risk conservative blend can generate a gross yield up to 4.5%. 

Blended Investment Portfolios

The longer you spend invested in the market, the higher the potential rewards. A blended investment portfolio of equities and bonds is the higher-risk alternative for excess cash. Remember that equities (stocks) alone are higher risk, with exposure to market vulnerability, a company’s loss/profit margin and many unforeseen events. However, based on the historical data available to us, a well-balanced investment portfolio has a high probability of keeping its value and adding significant growth over a period of more than five years. 

Take control of your excess cash

The most important thing is to not underestimate the options available for excess cash. Talk to a financial advisor and consider your objectives. Take time to establish how money you need, along with your ideal risk tolerance. Small steps today to diversify your wealth will help to avoid capital erosion, grow your money, and preserve your purchasing power.

To avail of a no commitment, complimentary consultation on options that might work for you and your circumstances, please contact Owen Redmond at [email protected]

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Warning: Nothing presented on this website constitutes investment advice as it does not take into account the investment objectives, knowledge and experience or financial situation of any person. You should not act on it in any way and are advised to obtain professional advice suitable to your own individual circumstances. The value of your investment may go down as well as up. You may lose some or all of the money you invest. Past performance should not be taken as an indication or guarantee of future performance; neither should simulated performance. The value of securities may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities.