Cash has gotten comfortable.
For years, investors earned next to nothing on savings and money market accounts. Higher interest rates changed that. Today, nearly $8 trillion sits in money market funds, including about $3.1 trillion in retail funds. With cash once again generating meaningful income, it is easy to understand the appeal.
If your money is earning interest without the ups and downs of the stock market, why take more risk?
There is nothing inherently wrong with holding cash. Emergency reserves, upcoming purchases, tax bills, and other short-term needs generally require liquidity and stability. The problem begins when long-term money starts behaving like short-term money.
And that can carry a real cost.
Consider $100,000 that an investor does not expect to need for at least ten years. If that money earns an illustrative 3% annually, it would grow to approximately $134,000 after a decade.
If, instead, it earned an illustrative 6% annual return in a diversified investment portfolio, it would grow to approximately $179,000.
That is a difference of nearly $45,000 on the same $100,000.
Extend the comparison to 20 years and the potential gap grows to roughly $140,000.
That opportunity cost is only one potential price of holding excess cash.
Inflation is another. An account balance can rise while the purchasing power of that money falls. If cash earns 2% while the cost of living rises 3%, an investor may be making money in nominal terms while losing ground in real terms. “Not losing money” and preserving purchasing power are not necessarily the same thing.
Then there are taxes. Interest from bank accounts, CDs, and taxable money market funds is generally taxable as ordinary income. Consider $250,000 earning 4%. That produces $10,000 of annual interest. For an investor paying a 24% federal marginal tax rate, roughly $2,400 could go to federal income taxes, reducing the effective return before considering inflation.
None of this means cash should be avoided. It means cash should have a job.
The important question is not simply, “How much cash do I have?” It is, “How much of this money do I actually expect to need in the next few years?”
Cash earmarked for emergencies or near-term spending may be exactly where it belongs. But money with no foreseeable use for five, ten, or twenty years deserves a different conversation.
Because waiting can feel safe, particularly when cash is paying a respectable yield. But at some point, “waiting” can quietly become an investment strategy of its own.
And over enough time, that strategy may be more expensive than it appears.
At Hanover Advisors, we help clients determine what each part of their portfolio is meant to accomplish—including how much should remain in cash and how much may be better positioned for longer-term goals.
If you are holding a significant amount of cash and are unsure whether it is still serving the right purpose, we can help you take a closer look. Contact Hanover Advisors to schedule a portfolio review and make sure your money is positioned with intention.