Interest rates are still high…
They’ve come down from the peak. But the yields on some savings accounts are still above 5%. That means any cash you have in the bank is earning more than it has in decades.
So it makes sense that I’ve gotten the following question from some readers…
“What percentage of my investments should be in cash?“
It’s an important question. But it misses the larger point of investing…
After all, our goal is to make money. We don’t want to just sit on the sidelines in cash.
The current high-rate environment has fooled some investors into thinking that sitting on the sidelines is making money. But as I’ll show you today, that’s a huge mistake…
Before I go on, I need to make one thing clear…
Chaikin Analytics explicitly does not give individualized investment advice. We’re legally not allowed to do that. And the amount of cash you keep on hand is a highly personal number.
We can talk generally, though…
Every investor should have a “sleep well at night” baseline. We should all have a specific amount of cash on hand to pay any expenses if our primary income stream dries up.
You don’t want to be forced to liquidate your holdings in the middle of a personal financial crisis. And in that situation, you certainly don’t want to just hope for the best price.
Now, with that said, we can get to the important question…
Should you have excess cash as an asset in your investment portfolio?
Obviously, cash pays well today. That’s what it seems like on the surface, at least.
But in the larger context of the market environment, it’s not as good as it seems…
The financial world is full of competition for your money.
Sure, interest rates are still high today. But stocks are soaring, too.
The S&P 500 Index is up around 25% over the past year. The tech-heavy Nasdaq 100 Index is up nearly 52% in that span. And of course, many individual stocks are doing even better.
Folks, we’re talking about massive returns. Those types of returns can help us build huge retirement accounts.
If you’re younger than 50 years old, you need to be growing your assets significantly so you can live comfortably in your later years. That’s the point of investing for retirement.
It’s not good enough to sit on the sidelines in cash…
Sitting on cash is effectively choosing not to grow your retirement funds. Even worse, the 5% yield on your savings doesn’t look so big when you account for “real” interest rates…
Real interest rates are simply the returns you make on your money after factoring in inflation. That’s incredibly important because cash in the bank is always losing value.
In the U.S., inflation doesn’t seem too bad at first. Even today, it’s only about 3%.
But over the longer term, the math of our situation becomes unavoidable…
If you have $100,000 in cash and inflation is at 3%, sitting on the sidelines costs you $3,000. So even with a yield of 5%, your “cash asset” only makes $2,000 for the year.
Folks, that’s not an investment.
Meanwhile, just putting your money to work in the broad market would’ve turned your $100,000 into roughly $125,000. And it could’ve been much better with other investments.
I hope it’s obvious by now…
Cash isn’t an investment. Instead, it’s a tool.
It’s the liquid money we keep on hand to buy goods and services. Everyone’s situation is different. But we all need to hold enough cash to handle any personal financial crisis.
The stock market is how we really grow our retirement accounts.
Good investing,
Marc Chaikin
