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Asset allocation


BEYOND MONEY MARKETS: MAXIMIZING YOUR CASH

June 24, 2024
Brian Levitt
Global Market Strategist

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KEY TAKEAWAYS

LOWER LONG-TERM PERFORMANCE

1

Longer-term government bonds, corporate bonds, and stocks have historically
returned more than cash.

REINVESTMENT RISK

2

One of the risks of short-term investing is not being able to reinvest the money
at the same rate.

While it may seem like a no-brainer to stash cash in money markets right now
because of their relatively high interest rates and low risk, it may be time to
lock in yields or go for long-term growth. Yes, there can be such a thing as too
much cash. Choosing money markets over investments with more growth potential
can impact long-term portfolio performance. Corporate bonds, core bonds, and
stocks — and the funds that invest in them — may be better long-term options for
some of this money, in my opinion. Here's why.

(For a deeper dive, see my chartbook Beyond money markets: Maximizing cash.)


1. LOWER RETURN OVER TIME

Short-term cash-like investments have historically generated significantly lower
return than longer-term government bonds, corporate bonds, and stocks, as the
example below shows. Yes, cash-like investments may outperform Treasuries over
short time periods, but using the same 30-year time period as the example below,
Treasuries outperformed cash during 93% of the rolling monthly 10-year periods
during the past 30 years.1

Cash has a significantly lower return over the long term (1994-2024)

 

Bar chart with 1 bar.
Growth of $100,000
View as data table,  
The chart has 1 X axis displaying categories.
The chart has 1 Y axis displaying Values. Data ranges from 0 to 0.


Created with Highcharts 11.4.6Values0

 
Growth of $100,000




End of interactive chart.

Sources: Bloomberg L.P., 3/31/24. Large-cap stocks are represented by the S&P
500 Index, including dividends. High yield bonds are represented by Bloomberg US
Corporate High Yield Bond Index. Corporate bonds are represented by Bloomberg US
Corporate Bond Index. Government bonds are represented by the Bloomberg US
Treasury Index. Cash-like instruments are represented by the S&P US Treasury
Index 0-1 Year Index. Inflation is represented by the Consumer Price Index. The
chart features hypothetical examples, which are shown for illustrative purposes
only, and do not predict or depict the performance of any investment. An
investment cannot be made directly into an index. Past performance does not
guarantee future results.


2. LOCKING IN LONG-TERM RATES MAY BE BETTER 

Reinvestment risk is among the biggest challenges of investing in short-term
securities, such as money markets, because that money generally has to be
reinvested every few months. At some point, interest rates will fall from
today’s elevated levels, and the money market will have to reinvest in
lower-yielding securities. Investors who like today’s yields may be better off
locking them in for the longer term with bonds.


HOW MIGHT INVESTORS MOVE OUT OF CASH?

Let’s look at three instances when cash balances were high — following the 1991
and 2002 recessions, the 2008 Global Financial Crisis, and the 2009 European
debt crisis — and calculate what $12,000 invested yearly in the stock market for
10 years would have been worth. Since there are many ways to put cash back to
work, I considered four investing scenarios:

 1. Perfect timing assumes that an investor maximized their return in the S&P
    500® Index each year.
 2. Worst timing assumes that an investor minimized their return in the S&P 500
    Index each year.
 3. First of the year imagines an investor moving the entire $12,000 into stocks
    as a lump sum at the start of each year.
 4. Dollar cost averaging assumes an investor made a $1,000 per month investment
    in the index yearly.

I compared each of these strategies with the returns an investor would have if
they simply continued to hold cash (calculated using the Bloomberg 1- 3 Month US
Treasury Index).

Investors have been better off investing their money versus holding cash

Chart

Bar chart with 5 data series.
View as data table, Chart
The chart has 1 X axis displaying categories.
The chart has 1 Y axis displaying Values. Data ranges from 0 to 0.


Created with Highcharts 11.4.6ValuesPerfect timingFirst of the yearDollar cost
averagingWorst timingHolding cash0
 * 
 * 
 * 
 * 
 * 


End of interactive chart.

Sources: Bloomberg L.P., Invesco, 12/31/23. Assumes $12,000 invested yearly into
a hypothetical S&P 500 Index portfolio. Cash return is based on return of
$12,000 invested yearly in a hypothetical portfolio of 3-month Treasury bonds
represented by the Bloomberg 1-3 Month US Treasury Index. Perfect timing (worst
timing) assumes that you maximize (minimize) your return in the S&P 500 Index
each year. Dollar cost averaging assumes a $1,000 per month investment in the
S&P 500 Index yearly. For illustrative purposes only and not meant to depict or
predict the performance of any strategies. Indexes cannot be purchased directly
by investors. Past performance does not guarantee future results.

In each instance, investors would have been better off investing their money in
stocks versus holding cash — regardless of how they did it. Investing a lump sum
at the first of the year and dollar cost averaging were both sound strategies.
While all investors would like perfect timing, even having the worst timing each
year still outperformed cash.


FOOTNOTES

 * 1
   
   Source: Bloomberg, L.P., 1994 through 2024. Cash-like instruments are
   represented by the S&P US Treasury Index 0-1 Year Index, which is designed to
   measure the performance of US Treasury bonds maturing in 0 to 1 years.
   Treasuries are represented by the Bloomberg US Treasury Index. Past
   performance does not guarantee future results.


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Important information

NA3646344

Photo credit: d3sign / Getty

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

In general, stock values fluctuate, sometimes widely, in response to activities
specific to the company as well as general market, economic and political
conditions.

Fixed-income investments are subject to credit risk of the issuer and the
effects of changing interest rates. Interest rate risk refers to the risk that
bond prices generally fall as interest rates rise and vice versa. An issuer may
be unable to meet interest and/or principal payments, thereby causing its
instruments to decrease in value and lowering the issuer’s credit rating.

Treasury securities are backed by the full faith and credit of the US government
as to the timely payment of principal and interest.

The Bloomberg US Corporate High Yield Bond Index covers the universe of
fixed-rate, non-investment grade debt.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate,
and taxable corporate bond market. It includes USD-denominated securities
publicly issued by US and non-US industrial, utility, and financial issuers.

The Bloomberg US Treasury Index is an unmanaged index of public obligations of
the US Treasury with remaining maturities of one year or more.

The Bloomberg 1-3 Month US Treasury Index is an unmanaged index of public US
Treasury obligations with remaining maturities of one to three months.

The Consumer Price Index (CPI) measures change in consumer prices as determined
by the US Bureau of Labor Statistics.

The opinions referenced above are those of the author as of June 3, 2024. These
comments should not be construed as recommendations, but as an illustration of
broader themes.

Forward-looking statements are not guarantees of future results. They involve
risks, uncertainties and assumptions; there can be no assurance that actual
results will not differ materially from expectations.




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