While cash may seem appealing due to attractive yields and recent market volatility, history has shown that holding cash for the long term may not be a wise strategy. Interest rates have been rising, making cash and cash-like investments more enticing, but investors should consider their time frame and financial goals before deciding. Reinvestment risk is also a concern when holding cash, as declining rates can result in lower returns when reinvesting maturing cash flows.
Comparing cash to other investment options, cash has only outperformed stocks and bonds in 12 out of 95 calendar years since 1928.
Holding cash alone does not offer a strategy for building or preserving wealth over time. In fact, when looking at the growth of $1 million invested in stocks versus cash over ten years, the cash portfolio showed minimal gains. While cash can outperform stocks during periods of market volatility in the short term, history suggests that this relationship will reverse.
Before deciding between holding cash or investing, consider your objectives. Holding cash may be suitable for short-term needs or upcoming expenses, but it is not a means of building long-term wealth. Optimizing cash returns can be beneficial, but attempting to time the market based on short-term market movements can be challenging and requires careful consideration. Ultimately, understanding your goals and the potential risks and returns associated with cash and investments is crucial in making an informed decision.