When it comes to managing your money, a common question is whether you should keep your funds in cash or invest them in the stock market. The lure of attractive yields on savings, CDs, and bonds can make holding cash seem like an appealing option, especially in the face of recent market uncertainty. Before making the decision to go all-in on cash, let’s explore the factors that should influence your choice.
Disclaimer: Using high yield savings, CDs, and short term debt instruments as a proxy for cash.
The Potential for Growth
People invest primarily to increase their wealth over time. Whether it’s stocks, bonds, CDs, real estate, or even cryptocurrencies, the main appeal is the potential for growth. Stocks, in particular, have become a popular long-term choice due to their remarkable growth potential.
Consider this historical comparison: In the early 1990s, stocks were relatively stagnant for three years, and they were still trading below their 1987 peak. Fast forward to 2023, and we find ourselves in a somewhat comparable position, with stock prices yet to recover to their 2021 highs. Both eras were marked by inflation rates exceeding 6% and left investors increasingly frustrated over an extended period of time.
However, over the following decade, stocks performed significantly better than cash. If you had invested $1 million in stocks in 1990, it would have grown to $5.3 million by 2000. This happened during a period where you could earn 5% on your cash.
Reflecting on history, we can learn a valuable lesson: stocks can thrive even in the face of soaring interest rates and market uncertainty. If your goal is long term growth, stocks still represent a better opportunity than cash.
The Risk of Loss
While stocks offer growth potential, there is always the risk of loss. The stock market is volatile, and prices can go up and down sharply. In the short term, it’s possible to lose money on stocks. However, over the long term, stocks have historically outperformed other investments, such as cash and bonds.
Other Factors to Consider
When deciding whether to hold cash or invest, you should also consider your individual circumstances. For example, if you have a short-term goal, such as saving for a down payment on a house, you may want to keep your money in cash. This will ensure that you have the money you need when you need it.
On the other hand, if you have a long-term goal, such as retirement, you may want to invest your money in stocks. This will give your money the opportunity to grow over time.
Ultimately, the decision of whether to hold cash or invest is a personal one. Always consider your financial goals before making any decisions about your investments. Keeping large sums of money in cash may not be the best option for you.
If you’re trying to time the market out of concern for near term market moves, proceed with caution. Successfully doing so requires you to be right twice: when you get out and back in. Historical data shows that some of the market’s best returns follow periods of less than stellar performance. So before moving to cash, carefully consider your goals.
Disclaimers / Sources:
US stocks total return growth of $1M data from YCharts. Total return data of the S&P 500 from 12/31/1989 – 12/31/1999.
5% on cash represented by short term bonds. From 12/31/1989 – 12/31/1999 the average yield for a 3 month T-Bill was 4.85% and a 1 year treasury was 5.36%. Data from YCharts.
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.