Kyle Harpin, CFA®, CFP®

With interest rates the highest they’ve been in a decade and both stocks and bonds down in 2022, investors have turned their attention to cash and cash-like investments. At the end of the year, U.S. investors held $800 billion more in cash, money markets, CDs and Treasuries than they did at the end of 2021.1 Search data from Google indicates that interest in high-yield savings accounts, CDs and Treasury bills has been at all-time highs in 2023.

When markets are volatile, you may be asking, “Should I keep the money in cash (or CDs, T-bills, etc.) or invest it somewhere else?” To answer this question, it’s helpful to think about:

  • Why you’re investing
  • How much risk is right for you
  • The role of cash in your financial strategy

Let your “why” be your guide

    A key element to achieving your financial goals is remembering why you decided to invest in the first place. Whether you’re planning for retirement, saving for a loved one’s education or leaving a legacy, focusing on your goal can help drown out the noise of the markets when times get tough.

    Your goal should also help drive your investment choices. Each investment you own should play a specific role in helping you achieve a financial goal, and your investment mix will vary depending on your goal. Your reason for investing can also help you know where to put any excess cash.

    If you have a long-term goal such as retirement, your portfolio may be more focused on growth-oriented investments. For a short-term goal, you should focus on cash and bonds. The key is to start with your goal and then work with your financial advisor to build your portfolio and strategy around it.

    Actions for investors

    • Stay focused on your goals.
    • Align your mix of investments with your risk tolerance and time horizon.
    • Keep enough cash to align with your overall financial strategy.

    The risk of not investing

    The importance of aligning your investments with your goals can be seen in the result of not doing so. When your goals and your investments don’t align, you could end up taking either too much or too little risk. Ironically, taking too much and too little risk can lead to the same outcome: falling short of your goal.

    If you hold too much in cash, CDs or short-term fixed income, you might be taking too little risk, particularly if you’re investing for longer-term goals. That’s because investments that come with more risk often have the potential for higher returns. This trade-off may not seem like much when interest rates are relatively high, but it can impact whether you achieve your goals over the long term.

    Let’s look at a portfolio set up to supply retirement income. Assuming a 4% withdrawal rate and a 3% inflation rate, a cash portfolio has less than a 1% chance of lasting more than 25 years, while a 50% stock/50% bond portfolio has about an 80% chance.2

    Why the big difference? Because growth is needed to help offset inflation over time.

    [ADA description: Starting with a 4% withdrawal rate and increasing for inflation, a portfolio all in cash has less than a 1% chance of lasting more than 25 years. A portfolio allocated evenly between stocks and bonds has about an 80% chance of lasting 25 years. That chance drops to 55% after 30 years.]

    The flip side of taking too little risk is taking too much. Too much risk can make it difficult to stick with your investment strategy when markets get volatile, potentially resulting in the worst of both worlds: selling after a decline and then missing the market recovery.

    According to DALBAR, over the last 30 years, the average investor’s stock portfolio performed worse than the S&P 500 by 3.5% per year. This underperformance is largely due to moving to cash when markets are down and then reinvesting after markets have rebounded.

    So, how much risk is right for you? The key is finding a balance that allows you to earn a return that helps you achieve your goal and stick with your investments in good times and in bad.

    The role of cash

    With all this talk about too much cash, you may be thinking, “Don’t I still need to hold some money in cash?” Our answer is a resounding “yes.” In fact, today’s relatively higher interest rates provide the potential to earn more on your cash accounts.

    But like all other parts of your strategy, how much cash you hold should be appropriate for your goals. Check out “How much cash should you have?” for more on this topic.

    Where should you put your money?

    Let’s come back to where we started. If you have extra cash or CDs coming due, what should you do? With your financial advisor, look at your progress toward your short- and long-term goals. Together, you can develop a plan for this money that aligns with your overall financial strategy.

    1Source: Federal Reserve data.

    2Source: Edward Jones estimates. Results using a Monte Carlo simulation, where portfolio is rebalanced annually and withdrawals increased by 3% per year for inflation. The diversified portfolio includes cash (1%), U.S. investment-grade bonds (39%), U.S. high-yield bonds (10%), U.S. large-cap stocks (33%) and international large-cap stocks (17%). Expected returns based on long-term capital market expectations for cash of 1.84%, U.S. bonds of 2.34% to 4.47%, U.S. large-cap stocks of 5.44% and international large-cap stocks of 7.04%. This hypothetical example is for illustrative purposes only and does not reflect the performance of a specific investment.

    Kyle Harpin, CFA®, CFP®

    Kyle Harpin is an analyst on the Client Needs Research team, which creates advice and guidance related to preparing for retirement, living in retirement, saving for education, estate planning considerations and protecting financial goals.

    Kyle graduated summa cum laude from the W.P. Carey School of Business at Arizona State University with a bachelor’s degree in finance. He is a CFA® charter-holder and a member of the CFA Institute and the CFA Society of Nevada. Kyle also holds the CFP® designation.

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