Investors Are Sitting on Cash. Wealth Managers Want it Moving.

This story will be featured in the upcoming Financial Poise Weekly newsletter.

Individual investors are sitting on more than $3 trillion in retail money-market funds– nearly a record high, according to the Investment Company Institute. Many aren’t convinced that moving out of cash is the better choice.

Why has cash been hard to give up? As Miriam Gottfried from The Wall Street Journal explains:

• Money-market funds became much more attractive when the Federal Reserve began raising interest rates in 2022, pushing yields above 5%. And while yields have since fallen, investors have grown accustomed to earning relatively attractive returns with little risk.
• Wealth managers want that money back in the markets. They argue that sitting on too much cash can mean missing out on greater long-term returns, pitching everything from corporate and municipal bonds to buffer ETFs and private credit as alternatives.
• But investors are staying put. Cash offers liquidity and a buffer against market downturns. Memories of 2022 (when stocks and bonds fell together) have made some investors more skeptical of traditional portfolio diversification.

Our take? Even leaving aside our healthy skepticism about the fact that wealth managers earn less when their clients are less active, there’s nothing inherently wrong with holding cash. It provides liquidity, stability, and a cushion when markets get rocky. Plus, there’s cash (as in actual greenbacks), and then there’s cash equivalents, like money market funds and CDs (stacked CDs, often referred to as a CD ladder, are a strategy worth considering) that carry virtually no risk yet are paying a decent interest rate these days.  Of course, there’s a cost to playing it too safe since money sitting on the sidelines may miss out on greater long-term growth. And don’t forget about inflation: if your cash isn’t earning enough interest to keep pace with rising prices, its purchasing power is shrinking over time.

The real question is how much risk makes sense for you, and whether the return you’re getting justifies the risk you’re taking. We dig into that relationship in ‘Risk-Adjusted Return’ in a Nutshell, which explains why risk needs to be considered in the context of your broader portfolio.