Why You Shouldn’t Overlook Your Cash and Low-Risk Assets

Nov 7, 2022

Low-risk assets including cash are often overlooked versus short-term needs. Changing your mindset towards long-term goals can be a difficult one to navigate but can help you more in the long run. Some questions that might come to mind are: What is cash for? How much cash is too much? When is the last time I looked at what is in my savings or money market account versus my actual short-term needs?

One thing to look at is your opportunity costs. Opportunity cost is the lost of a potential gain from long-term investing versus keeping too much cash in a savings account. According to Business Insider, the average rate of return of the S&P 500 has been 10.7% since its inception in 1957 and the current savings rate is around 1%. [1] This means that in this scenario, if the S&P averaged around 10% long-term and you kept too much cash outside of emergency fund needs and other short-term needs, you may have missed out on 9% compounded growth on average with that money.

Another thing you should look at are inflation rates. Inflation is a huge impact on the true value of the US dollar. Last time we saw inflation this high was in the 1980s: CDs were around 18% while inflation was around 14%. [2][3] Today, national CD rates have fallen below 1% while inflation in the June CPI report rose to 9.1% over the past year. [2][3][4] This means that if inflation was 9% and your bank or CD rate this past year as 1%, you could have lost real return on your savings by 8%.

Many people don’t realize the mistakes you can make when moving money out of your 401(k). One of the most common ones is you can’t touch that money until your 59.5 or you will have penalty fees to pay. Some other common mistakes are people reduce contributions and trying to sell or try and time the market. Your 401(k) is a long-term retirement vehicle and you don’t want to cut corners because that can do more harm than good in the long run.

No one can predict what the market will do on any given day. A good reference point for this is Fidelity’s ‘Missing the Best 5 Days Chart’ listed below. [5] By missing 5 good days in the market alone, the hypothetical shows a decrease in 38% total revenue that could have been used for retirement. Another example of this is Schwab’s ‘Five Investing Styles’ listed below as well. [6] This chart explains that even buying into the peak of the market ever year, you still were rewarded than if you kept money in cash.