One of the refrains I heard coming into 2022 was that, given inflation, holding cash was an expensive proposition. It is true that over the past year, inflation has eaten away 8.5% of the real purchasing power of the dollar. But it has only taken the market 75 trading days this year to reduce the value of stocks and bonds by an even larger nominal amount. Surging inflation is prompting an aggressive policy response from the Fed, pushing bond yields higher and weighing stocks and bonds. Passive investors have seen their portfolios stumble to their worst start to a year in the past quarter century. There is a challenge brewing for the passive index-based investment approaches that have soared in popularity in recent years. Holding cash in inflationary environments does come with a cost, but it has the benefit of flexibility in the face of uncertainty. And the way it looks right now, holding stocks and bonds has been even more expensive.
