The phrase “cash is king” is credited to the CEO of Volvo, a company that had enough cash reserves to weather the economic storm of 1987.
It is often misinterpreted as a fact by people who, for various reasons, avoid owning the stocks of successful companies, and haven’t experienced their historic wealth-building power.
Cash has an important role to play and taking advantage of higher rates while we can is smart, but as an asset class, nothing has changed.
In any given historical one-year period, the stock market has outperformed cash 70% of the time.*
If you’re feeling deja vu, I did recently write a post about short-term fixed income and why higher interest rates change nothing about how much money we should put into cash while we’re accumulating wealth for retirement, or maintaining a healthy withdrawal rate during retirement.
This has been such a recurring question, a temptation to go off-plan, that I feel it bears repeating:
Don’t get seduced by nominal yields; in a high-inflation environment, a 5% rate of return is closer to 1% than you might think.
If we remember that “safety” means not running out of money during our lifetime, putting too much into cash while the stock markets rebound looks incredibly risky to me.
In financial planning we use real yield- the amount you actually earn after inflation and taxes. Historically, yields on cash have outpaced inflation (by 3%) during only one era: the 80s and most of the 90s.
However, during that same time period, $100,000 invested in the S&P 500 with reinvested dividends would have turned into almost $2 Million.
Sitting in cash obviously has an opportunity cost: try to outsmart the market and you can miss out on some serious wealth-building.
Cash, whether in a money market, high yield savings, or CDs, is always the short-term part of our portfolio. By all means, let’s get cash you’ll need to spend after the next 12-18 months in a 5% CD.
For a long-term investor, it is very probable that when your CD comes due, there will be no comparable interest rates to reinvest into.
The stock indexes are already up double digits leaving the CD in the dust, and as soon as interest rates start coming down, the bond train will probably have already left the station as well.
Rarely has anyone over-saved for retirement. This means we all must have some level of exposure to growth, real yields and a long-term time investing horizon to cover 3-4 decades of retired life.
Cash alone has the illusion of safety, and is hyped right now as an opportunity we can’t pass up.
If you feel your time horizons or risk tolerance has changed- let’s review things and see what other tools we could use to help you be successful.
In a plan to accumulate enough wealth to be financially unbreakable, cash is still just one component. Don’t let it lure you away from long-term success!
Happy August- RK
*Studies of 1-Month Treasury Bills versus the S&P 500 since 1926
Content in this material is for general information only and not intended to provide specific
advice or recommendations for any individual. All performance referenced is historical and is no
guarantee of future results.
Investing involves risk including the loss of principal. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Certificates of Deposit are FDIC insured and offer a fixed rate of return if held to maturity. Brokered CDs sold prior to maturity in the secondary market may result in loss of principal due to fluctuations in the interest rate or lack of liquidity. Brokered CDs are registered with the Depository Trust Corp. (“DTC”). Brokered CDs with step-down and/or call provisions may be less favorable than traditional CDs without these features.
Historical adjusted stock prices found on yahoo.com. Reference to markets is an index which is unmanaged and may not be invested into directly.
Securities and Retirement Plan Consulting Program services offered through LPL Financial, a
Registered Investment Advisor. Member FINRA/SIPC. Investment Advice offered through Western Wealth
Management LLC, a Registered Investment Advisor. LPL Financial, Kennebec Wealth Management LLC and Western Wealth Management LLC are separate entities.