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While we do believe cash is queen in many scenarios, it’s important to understand its limitations as a long-term strategy. In this post, we dig into the changing risks and rewards:
KEY TAKEAWAYS:
• Keeping your assets in cash may seem like the safe route, but it does pose risks.
• Cash can work as a short-term option, but because tomorrow’s money market yields won’t necessarily be the same as today’s, it can become a dicey long-term strategy.
• Inflation, even when it moderates, can cause your purchasing power to slip over time if your money is only in cash.
For the last few years, cash has had its moment. Money market funds and savings accounts have offered yields we haven’t seen in quite some time, and for many investors, it has felt like a safe place to park assets while earning a decent return. So, it’s no surprise that one of the most common questions advisors are getting today is: “Why shouldn’t I just stay in cash?”
CASH ABSOLUTELY HAS A ROLE
The issue with cash is when a short-term solution becomes a long-term strategy. One of the biggest risks of staying in cash is something called reinvestment risk. Today’s money market yields won’t last forever. If the Federal Reserve eventually begins cutting interest rates, the income generated by cash balances will likely decline as well. The 4 or 5 percent yield investors have become accustomed to could look very different.
INFLATION ALSO POSES A RISK
Even when inflation moderates, the cost of living tends to rise over time. If your money is sitting in cash earning less than the rate at which prices increase, your purchasing power can gradually erode. That’s why it’s important to think beyond today’s headline yield.
For investors with longer-term goals, this may be an opportunity to consider locking in attractive yields through high-quality fixed income investments.
Whether it’s Treasury securities, investment-grade bonds, municipal bonds, or a laddered approach, extending out modestly on the maturity spectrum may allow investors to preserve income even if short term rates move lower. The goal isn’t to eliminate cash entirely. Emergency reserves and short-term needs should absolutely remain liquid. But if excess cash has quietly become a permanent allocation, it may be worth asking whether that money is truly working as hard as it could be.
THE BOTTOM LINE
Cash can feel safe because the value doesn’t fluctuate day to day. But there are risks to staying in cash, too—particularly reinvestment and inflation risk. And in today’s market, investors have an opportunity to lock in yields that may not be available forever.
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