Schwab: How Much Cash Is Too Much?
Charles Schwab recently published a brief titled, "How Much Cash Is Too Much Cash?" Subtitled, "Today's relatively high yields from savings accounts and other cash investments are tempting, but don't overdo it," it tells us, "Despite inflation's spike in 2022, the attendant rise in interest rates has been a welcome development for savers, who piled more than $1 trillion into money market funds between the third quarter of 2022 and the third quarter of 2023. Unfortunately, the downside of higher rates is that some investors may now have cash allocations out of step with their goals. 'It makes sense that investors have been taking advantage of these relatively high rates,' says Rob Williams, managing director of financial planning and wealth management at the Schwab Center for Financial Research. 'But with the Federal Reserve expected to lower rates in 2024, the current yields on cash may not last much longer. And if your current cash allocation is larger than your target allocation in a long-term portfolio, even today's relatively high yield isn't likely to exceed the returns you could get from stocks and bonds over time.'" The piece continues, "For example, in 2023 -- which by most accounts was expected to be a rough year for the stock market -- the S&P 500 Index's total return was a stunning 26.3%. 'Cash still belongs in your portfolio, but it is first and foremost a way to help buffer against losses or fund a near-term goal -- not a way to achieve meaningful returns,' Rob says. That said, deciding whether you have 'too much' cash depends on your personal situation. 'If you have a shorter-term goal on the horizon -- say, college tuition or the down payment on a second home -- having more investment cash on hand, as well as historically less volatile investments such as high-quality short-term bonds, may make sense,' Rob says. 'Plus, some people simply aren't comfortable with increased market volatility, and these higher rates are a way of getting a bit more return without much risk, at least for the time being.'" Schwab's piece adds, "The important thing is to let your needs, risk tolerance, and time horizon -- rather than the novelty of higher rates—dictate your allocation."
