Stocks Versus Cash: Improve Your Chances Of Long-Term Rewards

Stocks Versus Cash: Improve Your Chances Of Long-Term Rewards
Theodora Lee Joseph, CFA

4 months ago1 min

Pumped-up interest rates are turning investors off a lot of assets – and by comparison, cash is looking tidy. Shove some notes in the right savings account, and you can earn over 6% by doing nothing. Short-term treasury bills and money market funds could do the job too. Cash is simply offering the path of least resistance right now, letting investors lock in close to two-thirds of the S&P 500’s average return between 2002 and 2021 “risk-free”.

Thing is, holding cash over stocks for more than a year comes with serious “opportunity costs” – the amount that you could’ve made by going another route. The data backs that up. Since 1928, cash has beaten stocks 31% of the time over one-year periods. And in 2022, cash returned 2%, way better than stocks’ 18% loss. But when you broaden your time horizon, cash’s chances drop dramatically. In fact, there has never been a 25-year period where cash has outperformed the stock market. Plus, while cash’s returns can be more reliable, stocks’ returns tend to be more likely to beat inflation – remember, though, that comes with more risk.

Everyone’s risk appetites and investing styles are different, of course, and the takeaway here isn’t to simply pile into stocks and wait a couple of decades. After all, even Warren Buffett is a fan of a tall cash pile. Today’s volatile environment means investors need to be extra savvy, and holding cash could help you reduce losses and free you up to seize more opportunities. Just be wary of leaving your cash untouched in the long term: you could miss out on more lucrative options elsewhere.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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