Many people have reached out over the past year in the context of what to invest idle cash in, prompted by a headline article describing how their cash is melting in their bank accounts. Case in point:
My personal view is holding cash over a long period of time that is not strategic in any way is not an optimal decision. Cash can be strategic as an asset allocation, a rainy day fund based on personal circumstances, or an earmark for a large purchase in the near / medium term. Here’s the S&P500, high yield bonds, and investment grade bonds over the past 10 years – an effectively zero percent interest rate environment (including this year’s bond rout):
Morningstar had a nice article out this past week (“Cash as an Inflation Hedge – Revisited”) which countered the idea that holding cash today in a rising rate world isn’t the worst decision. As rates rise, everything tends to go down – stocks and bonds. Other asset such as commodities, true “hedge” fund strategies, etc. can provide some uncorrelated return. But here’s cash vs all in this year’s regime change:
Sure, you’re losing money holding cash, but not as much as mindlessly deploying into a market where the cost of capital is rising just to not burn a couple percent of inflation on your cash.
That said, like mentioned above, I do think that eventually a decision point must come where cash gets invested, or it does end up being trash.