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class="callout-container__wrapper "> <div class="callout-container__content"> <div class="callout-container__aligment callout-container__aligment--left "> <h1 class="callout-container__headline"> How much is too much cash in your portfolio?</h1> <div class="callout-container__text"> <p>You may be tempted to increase your cash holdings when interest rates rise or markets become volatile. These insights can help you understand the risks as well as the benefits.</p> </div> </div> </div> </div> </div> </div> </div> </div> </section> </div> </div> </div> <div class="article-container__content" data-anchor="#rightrail_328111097"> </div> <div class="article-container__content" data-anchor="#more-for-you"> <div class="aem-wrap--text section"> <div class="text js-rte-tagging" data-cmp="enhancedText"> <p> </p> <p>STUBBORNLY HIGH INTEREST RATES have given renewed luster to cash as an investment. Yet while cash may feel as familiar and safe as memories of your childhood piggy bank or first savings passbook, investors often misunderstand the role it should play in their portfolios, says Matthew Diczok, head of fixed income strategy in the Chief Investment Office for Merrill and Bank of America Private Bank.</p> <p> </p> </div></div> <div class="aem-wrap--pullquote section"> <blockquote class="pullquote pullquote--rightAligned " style=" "> <div class="pullquote__box pullquote__box--"> <q class="pullquote__quote"><p><img src="/content/dam/ML/Articles/images/headshots/matthew-diczok-headshot.jpg" alt="Matthew Diczok headshot" width="140"/><br/> “It’s important to be as strategic about cash as you are about any other investment.”</p> </q> <cite> <span class="pullquote__author ">— Matthew Diczok, head of fixed income strategy, Chief Investment Office, Merrill and Bank of America Private Bank</span> </cite> </div> </blockquote></div> <div class="aem-wrap--text section"> <div class="text js-rte-tagging" data-cmp="enhancedText"> <p>“Some perceive cash as a risk-free haven when equities and other markets become too volatile, while others may see it as more or less interchangeable with bonds,” he notes. “The fact is cash is a distinct asset class with its own properties, advantages and risks. So, it’s important to be as strategic about cash as you are about any other investment.”</p> <p> </p> <h3><b class="text-color-blue">The benefits and risks of cash</b></h3> <p>Cash and cash equivalents such as certificates of deposit (CDs) or money market funds are among the safest and most liquid of investments. Cash is available when you need it and, unlike stocks, there’s little risk to principal, especially since most savings and checking accounts, CDs and money market deposit accounts are FDIC-insured for up to $250,000 per depositor.<a href="#footnote-1" title="footnote 1" aria-label="footnote 1"><sup>1</sup></a></p> <p> </p> <p>Small wonder, then, that when volatility rises, nervous investors may feel inclined to sell other assets and put the money in cash and cash equivalents. “We saw a lot of that in 2022, when both stocks and bonds underperformed,” Diczok recalls. 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You may revoke your consent at any time by notifying the Merrill representative.</span></p> </div> <div class="cta"> <div class="form-group js-form-group form-group--submit-no-relations " data-cmp="formGroup"> <div class="form-group-container"> <button class="cta__anchor cta__anchor--button button red-cta t_track_registrationform_submit" data-bactmln="advisorcontact-_-submit-_-submit" type="submit"> Submit</button> </div> </div> </div> </form> </div> <div id="form-4-successId" class="unity-form-success" tabindex="-1" aria-hidden="true"> <div class="header "> <span class="icon-c" aria-hidden="true"> <style type="text/css"> #icon_901902006 { color:#279F00; } </style> <span id="icon_901902006" class="icon unity-icon unity-icon-action-success custom-font-color icon--size10 "> </span> </span> </div> <p>Thank you.</p> <p>You’ll receive an automated email confirming receipt of your request shortly.<br/> A Merrill financial advisor will be in contact with you in the coming days.</p> </div> </unity-form> </section> </div> </div></div> </div> </div> </div> </section> </div> </div> </div> </section> </div> <div class="aem-wrap--text section"> <div class="text js-rte-tagging" data-cmp="enhancedText"> <h3><b class="text-color-blue">Not a replacement for stocks or bonds</b></h3> <p>Another downside to cash: “reinvestment risk” — the financial cost of having to invest cash flows at potentially lower yields in the future. Short-term interest rates can change dramatically and quickly, and if you haven’t “locked in” rates for a longer period of time, you are subject to those market moves. Say you’ve purchased a one-year CD at 3% interest, and rates drop. When your original CD matures, you’d likely have to accept a lower yield if you wanted to purchase another short-term CD. </p> <p> </p> <p>Diczok also points to the 2008-2009 financial crisis, when nervous investors persistently increased their cash allocations for many years. “Many investors missed out on years of historic market growth, which really hurt their long-term performance.” Numerous studies highlight the dramatic impact that missing even a handful of the equity market’s best days can have on a portfolio.</p> </div></div> <div class="aem-wrap--positioning-container section"> <style type="text/css"> @media (min-width: 0px) { #positioning_container_919909333 { margin-top: -45px; margin-bottom: -35px; margin-left: 0px; margin-right: 0px; } } </style> <div id="positioning_container_919909333" class="positioning-container positioning-container--full "> <div class="positioning-container__wrapper"> <div class="aem-wrap--background-container section"> <section class="background-container background-container--full-bleed "> <div class="background-container__section " style=" "> <div class="background-container__wrapper " style="max-width:770px;"> <div class="aem-wrap--image section"> <div class="image " style="max-width: inherit" data-cmp="image"> <div class="header header--align-center "> <h3 class="header__heading headline--lg dark-blue-color">The risk of relying on cash</h3> <div class="header__subheading"><p><span class="copy--body">Over the long term, cash has barely kept up with rising prices, while stocks and bonds have delivered average annual returns that have exceeded the rate of inflation.</span></p> </div> </div> <div> <picture class="image__picture"> <source media="(min-width: 1200px)"/> <source media="(min-width: 1024px)"/> <source srcset="/content/dam/ML/Articles/images/Merrill_4251W_RoleOfCash_Inset_042924_F360_640x440.png" media="(min-width: 640px)"/> <img src="/content/dam/ML/Articles/images/Merrill_4251W_RoleOfCash_Inset_042924_F360_375x258.png" alt="Graphic depicting returns of stocks, bonds and cash after inflation over time. See link below for a full description." title="Graphic depicting returns of stocks, bonds and cash after inflation over time. See link below for a full description." class="image__img "/> </picture> <div class="image__caption"><p>Source: © Morningstar 2024 and Precision Information, dba Financial Fitness Group 2024. Stocks are represented by the Ibbotson® Large Company Stock Index, which tracks the monthly return of S&P 500. Bonds are represented by the 20-year U.S. government bond, cash by the U.S. 30-day Treasury bill minus inflation as shown by the Consumer Price Index. Assumes reinvestment of income and no transaction costs or taxes. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment.</p> </div> </div> <div class="image__text-version"> <a role="button" href="#" class="image__text-expand t-track-footer-ctasection-link" aria-expanded="false" aria-controls="image_819184454__text-collapsible" data-bactmln="ctasection_hyperlink_show-text-version_"> Show text version </a> <div id="image_819184454__text-collapsible" class="image__text-collapsible hidden" role="region" tabindex="-1" collapsed> <div class="image__text-content image__text-content--grey"> <a role="button" href="#" class="t-track-close-button image__text-close unity-icon unity-icon-action-close" aria-expanded="false" aria-controls="image_819184454__text-collapsible" data-bactmln="Close_Button_"></a> <p>Returns after inflation 1926 – 2023</p> <p>Stocks: 10.3%</p> <p>Bonds: 5.1%</p> <p>Cash: 0.4%</p> </div> </div> </div> </div> </div> </div> </div> </section> </div> </div> </div></div> <div class="aem-wrap--text section"> <div class="text js-rte-tagging" data-cmp="enhancedText"> <p>Nor is cash a substitute for bonds, which remain an important tool for offsetting the risks of stock volatility in a portfolio. While high-quality bonds and cash offer both stable principal amounts and generally higher yields, longer-date bonds (for example, long-term bonds such as Treasurys with a duration of 10 years or more) offer reliable income with lower reinvestment risk and, generally, higher returns than cash or short-term bonds over longer time periods, Diczok says.</p> <p> </p> </div></div> <div class="aem-wrap--pullquote section"> <blockquote class="pullquote pullquote--leftAligned " style=" "> <div class="pullquote__box pullquote__box--"> <q class="pullquote__quote"><p>“If you’re not generating returns above the inflation rate, you’re essentially on an investment treadmill, not really getting anywhere.”</p> </q> <cite> <span class="pullquote__author ">— Matthew Diczok, head of fixed income strategy, Chief Investment Office, Merrill and Bank of America Private Bank</span> </cite> </div> </blockquote></div> <div class="aem-wrap--text section"> <div class="text js-rte-tagging" data-cmp="enhancedText"> <p>Recent conditions have temporarily muddied that important distinction, with rapid interest rate hikes, intended to counter inflation, driving short-term rates (including those you might get from a money market or other cash vehicle) above the rates for long-term bonds. Yet if inflation drops and the economy enters a recession, that rare situation — known as an “inverted yield curve” — could easily reverse. As interest rates decline, investors who chose cash over, say, a 10-year Treasury bond, may wish they had locked in that steady return, Diczok says.</p> <p> </p> <p><b>So, when and how should you invest in cash?</b></p> <p>While the precise percentages depend on one’s personal situation and needs, cash should occupy only a small place in most investment portfolios, relative to stocks and bonds, Diczok believes. Yet cash does serve two important strategic purposes:</p> <p><b> </b></p> <p><i>Money for emergencies:</i> “You need some reserves in case you lose a job, have an accident or face unexpected medical bills,” he says. Otherwise, you might have to sell stocks or other assets at inopportune times. Because it must be available without notice, this cash should be in highly liquid forms, such as bank savings or checking accounts, Diczok advises. While the amount will vary depending on your needs, savings to last at least three months is advisable, he says.</p> <p><b> </b></p> <p><i>Money to be invested:</i> The second pool involves money you plan to invest soon but are awaiting the right time or opportunity. This money should be kept separate from your emergency fund, in accounts that you can tap relatively quickly. The cash investment vehicles you use should be guided by the time you have before you plan to deploy it.</p> <p> </p> <p>Bank accounts or a traditional money market mutual fund will provide immediate daily access to your cash. If you can afford a little more time, a “prime” money market fund may offer higher rates, but you might have to wait several days for your money when market conditions are stressed. If your timeframe is even longer, a managed solution such as a separately managed account could offer higher yield with incrementally higher risk.</p> <p> </p> </div></div> <div class="aem-wrap--background-container section"> <section class="background-container background-container--contained " style="max-width:850px;"> <div class="background-container__section transparent-bg" style=" "> <div class="background-container__wrapper "> <div class="aem-wrap--vendor-snippet section" data-cmp="vendor-snippet"> <uc-vendor-snippet version="functional_3.10.2-WEALTHV7" class="uc uc-vendor-snippet"> <div class="knotch_placeholder"></div> </uc-vendor-snippet> </div> </div> </div> </section> </div> <div class="aem-wrap--pullquote section"> <blockquote class="pullquote pullquote--rightAligned " style=" "> <div class="pullquote__box pullquote__box--"> <q class="pullquote__quote"><p>Cash may sometimes feel like the safest way to go, but having too much could slow progress toward your goals.</p> </q> <cite> </cite> </div> </blockquote></div> <div class="aem-wrap--text section"> <div class="text js-rte-tagging" data-cmp="enhancedText"> <p><b>Focus on your goals</b></p> <p>While it’s important to stay aware of market conditions as they evolve, “successful investing has far less to do with predicting which way interest rates will go next than it does with investing in a disciplined way toward your personal goals,” Diczok says.</p> <p> </p> <p>Keep in mind that while cash may sometimes feel like the safest way to go, having too much cash may rob your portfolio of the potential higher returns associated with stocks and bonds, and it could slow progress toward your goals, especially when the economy and markets return to steadier growth. If you have an advisor, Diczok advises, ask them how best to manage the cash portion of your portfolio while sticking to a diversified, long-term strategy.</p> <p> </p> <p>For a more detailed look at the risks of various assets, read the CIO report “<a></a><a href="https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/Risky_Assets_Merrill.pdf" target="_blank">What Is a ‘Risky’ Asset, and Is Anything Really ‘Risk-Free?</a>’”</p> <p> </p> </div></div> <div class="aem-wrap--background-container section"> <section class="background-container background-container--full-bleed "> <div class="background-container__section " style=" "> <div class="background-container__wrapper " style="max-width:864px;"> <div class="find-advisor section"> <div class="find-advisor js-find-advisor " data-cmp="findAdvisor"> <div class="find-advisor__header white-bg"> <div class="find-advisor__header-content"> <h2 class="find-advisor__header-title black-color">Choose your advisor in a more personalized way</h2> <div class="find-advisor__header-description"><p>All our advisors are committed to putting your needs and priorities first. 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