The Wall Street Journal wrote earlier this week that, "We'​re Keeping Too Much Cash in Our Accounts These Days." They explain, "​Most Americans couldn'​t cover an emergency expense of $​1,​000 without borrowing money. That'​s probably less of an issue for people who read a daily markets newsletter. In fact, many savers have too much cash, which sounds like a high-​class problem. Sure, life throws us curveballs -- illness, divorce, unemployment -- so a little extra cushion can come in handy. But it'​s surprisingly costly to overdo it. About $​5.​6 trillion or 10% of Americans' liquid wealth is in low-​yielding bank deposits. Trillions more sit in money-​market mutual funds." The piece says, "People often keep it there longer than necessary for a variety of reasons. Maybe they receive interest or dividends and let the proceeds pile up. Often they'​re sitting on a lump sum and don'​t want to commit it all at once to riskier investments like stocks or bonds because markets seem frothy or they fear yields might rise." The article speculates, "Cash earns something these days, but not much -- basically zero after taxes and inflation. Over any longer period, the opportunity cost of holding it is likely to exceed that of poor timing in the stock market." It says, "Fidelity Investments ran the numbers for what would have happened to someone who invested $​5,​000 in U.​S. stocks annually between 1980 and 2023 at the best and the worst possible juncture each year. A portfolio with perfect timing would have grown to nearly $​5.​6 million in the S&​P 500 while the one with perfectly awful timing would grow to $​4.​3 million. `​Leaving that money in cash throughout that span would have turned into just $​350,​000. That'​s extreme, but many of us keep too much dry powder for future opportunities." Finally, the WSJ claims, "Money-​market funds tend to see big inflows after a selloff -- usually the time that stocks are poised for some of their strongest performance. Morningstar'​s '​Mind the Gap' study calculated that U.​S. mutual-​fund investors earned a significant 1.​2 percentage points less than mutual funds on average over the past decade. Cash-​like investments certainly have their place in a portfolio, and not just for emergencies. Owning something safe and liquid that doesn'​t rise and fall with stocks or interest rates makes more and more sense as one gets closer to tapping savings because it gives us the ability to ride out bear markets. But young savers with a long time horizon, and some wealthy ones closer to retirement, are costing themselves by holding too much cash for the wrong reasons."

Your Name:
Your Email:
Recipient Email(s):

Use a comma or a semicolon to separate

Please retype symbols from the image:

Optional Message

Daily Link Archive