Think Cash Is King? Smart Investors Know Better

Have you heard the saying "cash is king"? With the rise in interest rates in 2022 and 2023, cash and money market positions, they were very attractive. At one point we saw rates well North 5%. When you can earn 5% in a risk-free asset, it's pretty darn easy to make the case to hold excess cash in your investment portfolio. All good things, they usually come to an end.

Hey everyone, I'm Phil Clark. Welcome to another edition of We're Talking Money. Today we're going to dig into why cash positions could be hurting your long-term goals.

Money market rates have decreased over the last 2 years by 21% from their high in 2023. Now, Fidelity's money market, and they're one of the largest out there, is around 4.13 as of this recording. And those rates change daily, so in a week that could be a little more, tomorrow it could be a little less, who knows. But money markets and cash, they are great tools, and I believe they warrant consideration when it comes to investing programs. The goal is making sure that you're not holding too much or too little.

Now, everyone has a different set of circumstances when it comes to investing, so this is not a one-size-fits-all. Of course, making sure there's enough for things like emergencies or, say, short-term purchases make it a no-brainer you need to hold on to cash. But holding too much cash, it could be harming your long-term growth goals.

The S&P 500 over the last 10 years is averaged right around 10%. That return is not adjusted for inflation, but let's talk about it within the context of just simple return. We won't put inflation in it for now. So assuming that the market did around 10% over the last 10 years, let's shoot a little lower than that, and let's assume that you could earn, say, 7% over the next 10 years. And we'll say that the money market stays at a constant 4% for the next 10 years.

We ran the numbers. If you invested $100,000 in a money market today and it stayed at 4%, that 100,000 in 10 years is going to be worth roughly 15, ,000. If, on the other hand, you took that same 100,000 and you invested it in the S&P 500, and we averaged 7% over the next 10 years, your balance would be closer to $200,000. So in this example, the cash, it cost you around $50,000 over just 10 years, and that was only a 3% spread. That spread could easily be more than that. The math makes it easy to see why investing over longer periods makes a lot more sense.

So for those of you who chose cash over the last year or so, you might be finding that it's a little difficult to jump back into the market. A lot of people say, "I want to get back into the market, but I'm not sure when." It's hard to find anyone who has successfully timed the market, entering or exiting.

Here's what our portfolio team says: it's not timing the market, it's time in the market. We know from experience, staying in the market long term, holding good positions, it's going to treat you a lot better than trying to time, unless you have the proverbial crystal ball, and I'm betting that you don't.

So this axiom of time in the market versus timing the market, it can be pretty tough to implement, since human nature is all about making decisions based on emotion. But it's not that simple. So if you find yourself trying to re-enter the market, consider something of a slow drip back into the market, something called dollar cost averaging. You could use options to get back in the market. Whatever the case is, you need to figure out one that makes sense for you. If you're fearful of a declining economy, be careful with going all in. Try one of these other methods.

Now, if you're trying to make this decision, or you think maybe you're holding too much cash, we have a second opinion service that can help you determine the ideal amount of cash and other asset classes for your situation. Why don't you contact one of our associates if you're not sure? They can help you learn more about investing during every stage of life.

I hope this short video has given you some ideas on how to get back into the market without feeling like you have to time it with perfection, and chances are that's a futile effort. Make sure that you share, make sure you like, subscribe, let us know in the comments what you think and what you're doing to get back in the market, and I'll see you next time when We're Talking Money.