Why Cash is Not a Long-term Investment

This is Brad Barrie, Chief Investment Officer and Portfolio Manager with Dynamic Wealth Group. Welcome to this market and economic update. In this video, we’ll discuss both the importance of cash and the challenge with using it as a long-term investment.

This is timely and relevant right now because some investors have flocked to cash in recent years in response to stock market uncertainty and due to higher interest rates.

It’s important to emphasize that cash plays many important financial planning and investment roles. When it comes to our financial plans, it’s important to have enough cash on hand for expenses and important life events such as buying a home.

However, the problem is when investors hold too much cash compared to what’s necessary. In these cases, they may be giving up growth opportunities in other parts of their portfolio.

Over the next few minutes, we’ll discuss the many considerations investors should be aware of as they think about the role of cash in their portfolios, especially as the market and economic landscape shifts in the coming months.

First, this chart shows that significant amounts of money have flowed into money market funds in recent years. Money market funds hold cash-like, short-term instruments. Their asset levels tend to rise in times of market uncertainty and when interest rates are higher.

Both factors are at play today. You can see that assets increased during the pandemic as investors looked for safety, along with significant government stimulus money being sent out.

However, higher interest rates since 2022 have also led to flows into money market funds. Investors looking to take advantage of higher cash rates have invested in these funds to generate more portfolio income.

At the moment, total assets across money market funds now exceed $6 trillion. This is more than double the average level during the decade after the global financial crisis.

Second, while cash rates may be higher, they do not necessarily offset higher levels of inflation. After all, interest rates are higher exactly because inflation has been high over the past few years.

This chart shows the level of income a hypothetical investor might receive after investing in the average certificate of deposit. While these rates have risen, they are still negative after adjusting for inflation.

In other words, inflation erodes the purchasing power of cash which is only partially offset by current interest rates. As I would caution my clients when I was a Financial Advisor, be careful about being too conservative. As it is highly possible to conservatively loss money, as shown in this chart.

Thus, one challenge with holding too much cash is that inflation can still eat into this income. Another problem is that these yields are not “locked in.” By definition, cash rates are short-term so investors need to re-invest their money periodically and hope they can still find attractive rates.

This is different from investing in long-term bonds or the stock market. Investment grade corporate bonds, for instance, have average yields around 5.5% right now, far above their averages over the past decade.

Finally, this chart shows that while inflation has been a problem over the past century, stocks and bonds have historically outpaced it.

For example, what cost one dollar back in 1926 would cost $17 today due to inflation. However, one dollar invested in the S&P 500 back then would be worth a whopping $13,000 today.

While the past is no guarantee of the future, this historical example emphasizes the importance of investing properly. While cash can play many important roles and is always needed for important expenses, it does not replace a proper allocation of stocks and bonds.

I believe one additional reason many investors have flocked to cash is the poor performance in the bond market. Thus, we would go a step further and suggest added diversification through different approaches, not just asset classes. Namely, having a portion of an overall portfolio, yes follow a buy & hold strategic allocation approach. But also have a tactical portion where portfolio managers have the ability to deviate, possibly using cash to help minimize risks and maximize returns. Lastly, the use of alternative investments can help to add non-correlation and diversification, especially in the fixed income category.

This approach is part of our Multi-Dimensional Asset Allocation models we provide to financial advisors. Think of it this way, if bonds do well, then our strategic buy & hold position will do well, however if bonds perform poorly, as they have for some time now, then having a tactical bond manager that has greater flexibility, gives your portfolio a fighting chance. If that tactical manager is wrong in their changes, that’s when having alterative investments to bonds can help out. This, my friends, is what true diversification actually looks like.

We hope you found these insights valuable. If you are a financial advisor and would like more information on our Multi-Dimensional Approach towards asset management, please visit our website DynamicWG.com, or reach out directly by emailing us at: Info@DynamicWG.com. If you are an individual investor, we are happy to address any questions you may have and put you in touch with a qualified advisor if so desired. Until next time, take care everyone, and make smart, logical & fact-based financial decisions.

Clearnomics and Dynamic Wealth Group, LLC are not affiliated entities. No part of this should be taken as investment advice. Consult your financial advisor for specific investment recommendations tailored to your specific situation.
Dynamic Wealth Group (“Dynamic”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Dynamic by the SEC, nor does it indicate that Dynamic has attained a particular level of skill or ability. This material prepared by Dynamic is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Opinions expressed by Dynamic are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Dynamic, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.
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