Portfolio construction

Four reasons it may be time to stop stashing cash

September 25, 2024 - 8 min read

Over the past few years, many investors have fallen in love with cash investments – such as money market funds, CDs, or high-interest bank accounts – due to interest rates as high as, or sometimes exceeding, 5%.

Because cash instruments offered extremely low or no interest for many years following the Great Recession, a guaranteed 5% return with certain instruments was more than enticing – it was also anxiety reducing. The general investor feeling went something like this: Why shouldn’t I take advantage of a sure thing when I’m comfortable with cash vs. dealing with the stress of market volatility?

But solely depending on cash investments to achieve your long-term investing goals may not be the best strategy. Avoiding other investment types, such as equities or fixed income, can potentially derail those goals.

Let’s take a look at four reasons why “cash isn’t king” and why stashing cash on the sidelines may not be a solid game plan for financial success.

1. Historically, cash can’t compete with stock returns

Earning 5% in a CD or money market fund may sound great, but it can take 12 months (or more) to earn that full return. Conversely, participation in equity markets can offer the potential for short-term appreciation in certain market environments.

And stocks, as represented by the S&P 500, have historically outpaced returns on cash investments over the long run. In addition market indices cannot be invested in directly, here’s what a hypothetical $100,000 would have returned in the S&P 500^® Index over the past year compared to the same amount invested in a CD earning 5% interest over the same period:

Consider what you give up for 5%

Bar chart showing 1-year return on $100,000 invested in CD vs S&P 500 - 5% vs 26%

Source: Natixis Solutions, Bloomberg (12/31/22–12/31/23).
All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

As you can see, investors who stayed on the market sidelines in 2023 missed out on a return that was multiples higher than what would have been earned in a 5% CD investment during the same time period.

2. Inflation can eat away at investment returns, including cash

Many investors don’t realize that inflation can dramatically impact their returns. While many of us instantly feel the effects of inflation on our purchasing power at the grocery store or gas station, it may not be as transparent how inflation can take a serious bite out of investment returns, including cash.

“Investors who jumped out of the markets and went into money markets or CDs often aren’t aware of inflation’s corrosive effect on those returns,” says Jack Janasiewicz, Portfolio Manager and Lead Portfolio Strategist at Natixis Investment Managers Solutions. “Inflation is like a stealth predator. Although you can’t see or hear it coming, you will feel it when you see how it can diminish your yield.”

In fact, an initial 5% return – minus 3% inflation – erodes the actual yield to just 2%, which may not be enough to achieve certain long-term investment goals.

Inflation can take a big bite out of your return

Bars showing how inflation lowers returns. 5% cash investment with 3% inflation is only a 2% real yield.

Hypothetical example

Conversely, stocks have historically been able to outpace inflation and cash investments. Over the past 15 years, stocks have returned almost $36,000 more than a cash investment on a hypothetical $10,000 investment. And missing even a few trading days can leave a large dent in a portfolio vs. staying invested for the long haul.

Why stocks are important in a portfolio

Line chart showing the value of staying invested in stocks long term. Even missing 5 best days results in $29,721 vs $47,057.

Past performance is no guarantee of, and not necessarily indicative of, future results. Indexes are not investments, do not incur fees and expenses are not professionally managed. It is not possible to invest directly in an index.

3. Cash is subject to interest rate cuts

It’s easy to become complacent in high interest rate environments. Although certain cash investment returns were 5%, the Federal Reserve (Fed) has begun to cut rates, which could extend into 2025 and 2026.

Based on a hypothetical $100,000 investment in May of this year, the series of future 1-month Treasury yield expectation depicted below reveals what could happen over the next two years. A $432 monthly income could fall to close to $400 by year-end. By the second quarter of 2025, that same monthly income would be even less, and so on into 2026. In short, your CD, money market fund or bank account could be delivering less money in the future based on anticipated Fed action.

Monthly cash returns from a $100,000 investment

Bar chart showing monthly cash returns going down over time.

Source: Natixis Solutions, Bloomberg.
Past performance is no guarantee of future results.

4. Investors in cash may face “reinvestment risk”

Many cash investors wait too long to reinvest their money in the markets. Waiting until the Fed cuts rates may have an impact for investors who decide to redeploy cash.

“A lot of people wait for the Fed to make the first cut before they reinvest cash into the markets and, generally speaking, that can be too late,” says Matt Eagan, Portfolio Manager and Head of the Full Discretion Team at Loomis, Sayles & Company.

“If you stay in cash too long, you're going to suffer from what's known as ‘reinvestment rate risk.’ That means you face the possibility of rolling an initial investment with a 5% return into something that's now at a lower interest rate, say 4% or 3%, and you’ll earn less over time. And, if you wait too long, you're going to wish you had captured the total return potential out the curve. The market will price in the Fed's actions ahead of time, so you've got to get ahead of it before you run into that reinvestment risk.”

How to move beyond cash

As you can see, it can take more than cash investments to generate the returns needed to achieve certain long-term investing goals.

Having a well-diversified portfolio and a disciplined investment approach can help reduce risk in a portfolio and aid investors in navigating changing market environments. Talk to your financial advisor today about how to put your cash back to work.

Need a better game plan for cash?

The Natixis Portfolio Playbook helps you discuss the potential risks clients face when they opt for cash investments over the markets and offers solutions for getting them back in the game.

Find out more

This material is provided for informational purposes only and should not be construed as investment advice. It does not take into account the investment objectives, risk tolerance, restrictions, liquidity needs or other characteristics of any particular client.

All investing involves risk, including the risk of loss.

Equity securities are volatile and can decline significantly in response to broad market and economic conditions.

Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise, bond prices usually fall), inflation, and liquidity.

Diversification does not guarantee a profit or protect against a loss.

Past performance is not a guarantee of future results. Index performance is shown for illustrative purposes only and does not represent the performance of specific investment products. Index returns include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment. Performance of indices may be more or less volatile than any investment product.

S&P 500^® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large cap segment of the US equities market.

This document may contain references to third party copyrights, indexes, and trademarks, each of which is the property of its respective owner.

Natixis Distribution, LLC is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers. Natixis Distribution, LLC and Natixis Advisors, LLC are located at 888 Boylston Street, Suite 800, Boston, MA 02199. 800-862-4863. im.natixis.com.

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