What are the first words that come to mind when you hear the word “investing”? Perhaps one is “growth” – the idea that over time wealth has the potential to accumulate, compound, and grow. Perhaps another though, is “risk”. You may think about the Dot Com Bubble, or the Great Financial Crisis, or you may be concerned about geopolitics, elections, or the latest headlines. It’s easy to let the latter – risk – get in the way of your achievement of the former – growth.
In our current interest rate environment, where higher-yielding cash and cash-like products (CD’s, High Yield Savings Accounts, etc) have recently yielded in the ballpark of 3%-4.5%, with a lower risk profile, it’s extremely compelling to start to wonder – why not go that route? It’s tempting to abandon market risk for options considered less risky that tend to make mid-single digit returns, and we see this approach often. However, holding too much cash, or cash-like instruments, can present 3 risks that you may not be taking into consideration.
The Risks
1. Timing
Often, investors claim their cash is temporary, and that they will deploy into stocks or bonds at some undefined point down the road, presumably when it feels safe to do so. The challenge is, when it feels most safe to do so is when things have been really good, and the risks of a correction then start to mount more and more. Morningstar Data shows that money market assets tend to peak in times of stress, and bottom out in the middle of a rally, cyclically. Is your allocation to cash out of fear of market risk? Are you trying to time the market? What signs are you looking for when it comes to an entry point? You may be putting the burden of timing the market on your plate if you are holding excess cash and awaiting the “right time”.
2. Inflation
Over the past 20 years, inflation has spiked above 5% twice, and on one of those occasions it remained above 5% for 20 months (May 2021 to Jan 2023). While locking in a modest yield may be appealing, inflation erodes the value of the income received from a bond or CD, and can leave your yield insufficient to meet goals and needs.
3. Real returns
The data is on the investor’s side: historically, over the long run, stocks have outperformed cash, while it is important to remember that past performance does not guarantee future results, and actual investor experiences can vary. Over any 20-year period in the stock market from 1940 to 2023, stocks have outperformed cash every time, with the average total outperformance of stocks being 694% across all 20 year rolling periods.¹ Even if one is working with a shorter time horizon, stocks outperform cash 84% of time over any 3 year rolling period. It’s also important to remember that all investments are subject to risk, including the loss of principal. While cash can play an important role in a portfolio, depending upon an investor’s goals, time horizon, and risk tolerance, holding too much may create opportunity cost over the long term.
While understandable that cash and cash-like income-generating products can feel safer, with decent-enough rates and a reprieve from market volatility, we think it is key to remember these 3 risks that you may not be thinking about. Investors should consider periodically reviewing their cash balances to ensure those balances align with their broader financial objectives
Take away:
Think about your cash balances today. If you would like to discuss how different allocation approaches may fit with your overall financial goals and risk tolerance, our team is available to help.
¹ Source: Lincoln Financial, Total returns of S&P 500 vs. 3 Mo. T Bills, Jan 22, 2026. https://www.lincolnfinancial.com/pbl-static/pdf/FMM-CASHC-PPT001—PDF.pdf
