Cash may feel safe, but inflation and taxes are key detractors of wealth
At times, cash may be a highly effective way to preserve capital. However, inflation and taxes tend to erode the value of cash over time. Let's say that, from January 1926 to December 2011, you invested in the 30-day U.S. Treasury Bill—a common proxy for cash because it is very short term and liquid. While initially it might seem as if you have earned a positive 3.62% return (in any 12–month period), in reality you wind up losing 0.63% once inflation and taxes are factored in.
Cash returns after taxes and inflation
30–day T-bill annualized compound return (January 1926 to December 2011)11
Phasing into markets can reduce the effects of volatility, particularly in uncertain markets
The question is, how do you participate in opportunities while mitigating the effects of volatility? Taking a phased-in approach rather than investing cash all at the same time can allow you to seize opportunities, such as taking advantage of price declines in assets that are otherwise fundamentally sound, while still protecting yourself. By investing incrementally and staying in the market, you can also potentially reduce the impact of near-term market declines.
Similar to the approach commonly used by institutions and corporations, there are many ways for you to make the most of your excess cash and sieze timely opportunities as they arise.
Please contact your J.P. Morgan representative to see how we can work with you to capitalize of the themes and ideas that exist today.
"So if you look at today's low short-term rates and then you think about inflation, even inflation running at two to three percent, you're really earning negative real returns compounded on cash right now."
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11 Assumes an effective tax rate of 35% paid monthly for the full period.
Sources: Ibbotson Associates, J.P. Morgan. Data as of December 31, 2011.
Past performance is not indicative of future results. The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument.