Beyond money markets: Maximizing your cash

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, U.S. Treasuries outperformed cash during 98% of the rolling monthly 10-year periods during the past 30 years.¹

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).

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.