Heading into 2022, the stock market and bond market were both trading at high valuations. It’s hard to put your hard-earned money on the line when investments are so expensive, and many investors may wonder if storing the money somewhere might be a good alternative.
The first week of 2022 was not very kind to investors, and perhaps some of them were afraid to build up more cash reserves. But cash may not be the best place to put your money in 2022.
It’s hard not to talk about the value of money these days without talking about inflation. The Consumer Price Index – a measure of the average change in prices paid by consumers – rose 6.8% in November. It also shows strong growth month over month, up 0.8% from October. So investors should not expect inflation to return to pre-pandemic levels anytime soon.
Meanwhile, keeping cash in a savings account is unlikely to result in Which nominal yield. An average savings account offers 0.06% interest. That’s because the Fed’s overnight interest rate is still low. While the Fed may raise the rate in 2022, investors should not expect a big jump in savings account interest rates because they have remained low during the Fed’s recent series of rate increases at the end of the last decade.
In other words, you are practically guaranteed a loss of value if you hold the money in 2022. The question is whether this guaranteed loss is better than other investment options.
Is it worth the risk?
The market valuations are certainly very high. The cyclically adjusted price-to-earnings (CAPE) ratio – a historical measure of market assessment based on the price-earnings ratio – hasn’t been that high since the dot-com bubble. It wasn’t this high before.
But you can’t look at stock valuations in a vacuum. Treasuries are also yielding near historical lows. This means that the risk-free rate of return is very low and, therefore, investors must be prepared to accept lower returns from stocks and therefore higher stock prices.
At the very least, investors should have lower expected returns for stocks and bonds over the long term. This can come from slow and steady growth or an impending crash and a return to historical growth rates after that. It is impossible to say with any certainty.
If you plan to invest for the long term, you are more likely to end up with a more valuable portfolio by investing in stocks in 2022 rather than holding cash over the next decade. However, you may feel uncomfortable investing your money knowing that there is a possibility of a stock market crash.
What are the alternatives?
There are some alternatives that you can look at in order to increase the value of your money.
One option is to invest in a series of savings bonds. Class 1 bond rates are adjusted every six months based on prevailing interest rates. The real interest rate is around 0%, but your money is protected from inflation.
The disadvantage of I Bonds is that each person can only invest $10,000 in I Bonds annually when investing electronically. You may be able to invest up to an additional $5,000 by paying extra taxes and using the refund to purchase paper bonds. In addition, it requires you to hold your funds for at least a year, and there is a penalty of three months of interest if you withdraw the funds within five years.
Dive into the complex world of Decentralized Finance (DeFi) and do things like use stablecoins to produce a farm (where you lend your crypto holdings and earn interest on them) paired with your existing crypto investments. Going this route can find you attractive returns that outweigh inflation. Alternatively, you can simply deposit a stable currency on one of the popular exchanges or DeFi apps to earn high interest rates on your savings. While these interest rates are backed by excessive collateral loans, there are still significant risks involved in this type of investment.
There are a lot of better options than holding cash in 2022. Inflation will degrade the value of your savings if you decide to store your money in a bank account. In the long run, it will be better for you to invest now, even if the expected returns are lower than in the past. Alternatively, you can invest in more stable savings options like the ones mentioned above and still beat inflation.