Is Cash Still King?: Why holding too much cash may be a mistake
For many, cash is seen as a “safe” place to hold your assets. It’s perceived as less risky, it’s available when you need it, and it’s been easier to get better returns on savings accounts and other similar investment vehicles.
In today's economic environment, it's understandable why it might “feel safer” holding onto excess cash. However, this strategy might not be as beneficial as it seems - especially when we may see a drop in interest rates in the coming months. Read on to learn why you might want to rethink this strategy and what other options you have when it comes to making your money work for you.
First, what do we mean when we say “excess cash”?
Loosely, we consider excess cash to be equal to or greater than 6 months of your living expenses. This assumes you don’t have any immediate expenses or outstanding debts that these funds should be allocated to. It also assumes that you want to maximize the potential and power of these funds.
Note: We see individuals and families at every stage holding onto excess cash. However, we’ve seen a significant increase in Millennials who have considerable cash reserves but are unsure what to do with it. Millennials are also less likely to be receiving professional guidance on how to reach their financial goals. If your family member or friend might be in this position, please feel free to forward this email to them. The more individuals we can inform, the better.
Why holding too much cash right now could be detrimental to your financial health
Low Interest Rates on Cash
While interest rates on cash and money market accounts have improved, they are not guaranteed to stay high. Interest rates are expected to fall in the near future - while this is often seen as a good thing from a purchasing power perspective, it’s not good for cash. As interest rates decline, the returns on cash will decrease, making it less profitable for you to keep large sums of money in these accounts.
Inflation Erodes Cash Value
We all know that inflation erodes our purchasing power. But, have you thought about what that means for cash? Having too much cash means you’re likely losing money to inflation each year. Even if you earn interest, it often doesn't keep pace with the rate of inflation, resulting in a net loss of purchasing power over time.
Missed Investment Opportunities
Historically, equities and other investments have outperformed cash in the long term. By holding too much cash, especially if you have a longer time horizon, you may miss out on significant growth opportunities.
What to consider instead
Holding too much cash can be a costly mistake, especially in the coming months as interest rates are expected to drop. That doesn’t mean get rid of your cash, but it does mean taking a more strategic approach to ensure you’re maximizing the potential of your money. Here’s where to start:
Build (or revisit) your wealth plan
It’s likely that if you’re reading this email, that you already have a long-term wealth management plan in place. However, if you don’t, now is the time to create one.
Before deciding what to do with your excess cash, you first need to understand your goals and risk tolerance. Working with an advisor can help you get clarity on these areas and build a well-structured plan that is tailored to your unique needs and preferences. Once this is done, you’ll be able to more confidently determine how to put your excess cash to work.
If you already have a wealth plan in place, now is the time to revisit it. What has changed? How have your goals evolved? And, what does this mean for your current cash holdings?
Lock in attractive interest rates
As noted earlier, interest rates are expected to decline - however, certain long-term vehicles allow you to lock-in current interest rates. Options include laddered municipal bonds or other fixed-income investments.
Diversify your investments
Diversification is key to reducing risk and enhancing returns. In addition to spreading your investments across different asset classes, such as bonds and real estate, it’s a great time to consider equities. Stocks are at an all-time high and historically outperform cash as a long-term vehicle.
Next steps
We know how important (and timely) this topic is. To support you, your family, and your friends, we’ll be holding a live discussion on October 9th 2:00pm EST to answer your questions on excess cash and if and how you should be allocating it differently. Let us know if you’ll plan to join us here. And, feel free to share this invite with your loved ones, too.
In the meantime, if you have any questions or concerns as it relates to your wealth management plan or changes to your personal goals, please don’t hesitate to reach out to our team. We’re constantly monitoring the current landscape and how it could impact your investment, insurance, legal, and financial planning needs and are available to help you navigate any shifts in strategy you might need.
Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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.
