BlackRock Report: Holding Too Much Cash “Shocking Risk”

“Clutching onto money” is a viewpoint held by many who prioritize stability and prefer to keep cash on hand. Cash is typically seen as the safest asset due to its stability, predictability, and immediate accessibility. However, with interest rates falling and inflation rising, the purchasing power of cash is gradually diminishing.

A report released by the multinational financial services company Fidelity reveals that long-term data shows cash to be the worst-performing asset class, far behind stocks and bonds in terms of returns; holding too much cash poses “alarming risk”.

While the Federal Reserve’s high-interest rate policies in the past have made cash deposits more profitable, allowing many to gain returns without enduring the volatility of stock investments, the decline in cash yields since the Fed began lowering rates in September 2024, coupled with persistently high inflation, may warrant a reconsideration of holding excess cash.

Fidelity’s data shows that even during market fluctuations, the returns on other assets consistently exceed those of cash. From 1980 to 2023, $5,000 invested in cash yielded $349,999, whereas the same amount invested in stocks generated returns ranging from $4,248,889 to $5,574,957. (Note: Past performance is not indicative of future results. Data source: Bloomberg Finance, 12/31/1979 to 12/1/2023. Stocks represented by the S&P 500 index. Analysis based on an annual $5,000 investment).

Taking a longer-term perspective, from 1926 to 2024, the S&P 500’s average annual return stood at 10.4%, while short-term treasury securities only returned 3.3%. This gap highlights that holding excess cash could stagnate wealth growth or even lead to significant erosion when factoring in inflation.

Fidelity’s data underscores that stocks are a preferred choice for long-term appreciation. Research conducted by Fidelity on investing $5,000 annually in stocks under various market conditions found that even investing at the “worst” times (market peaks) still yielded significantly higher returns over the long term than holding cash.

Investing $1 in the S&P 500 at the beginning of 1926 could grow to $18,212 by the end of 2024 (with dividends reinvested), whereas investing in short-term treasury securities would only increase to $24. Despite market fluctuations, stock performance over history far surpasses cash returns.

Bonds serve as a balanced option that combines yield and stability. For investors unwilling to endure stock market volatility, bonds not only provide interest payments but may also appreciate, offering the potential for higher returns. Whether through bond funds, ETFs, or individual bonds, bonds can facilitate capital growth while avoiding sharp fluctuations. Similar to money market funds, bonds offer interest income with greater potential returns, making it an ideal upgraded version of cash for those seeking stability.

Cash, stocks, and bonds form the three pillars of a diversified investment portfolio, each playing a role in achieving investment objectives. Cash is not without its merits—it is essential for emergencies and short-term expenses. While holding a moderate amount of cash is necessary, long-term wealth growth depends on investing in stocks and bonds.

Therefore, ensuring an appropriate allocation of these three asset classes is crucial for preserving and growing one’s wealth. In the current environment of declining interest rates and rising inflation, the risks of holding excess cash should not be underestimated, as it can hinder opportunities for wealth growth.

Fidelity’s analysis serves as a reminder that if wealth does not grow, it diminishes. A sound strategy involves maintaining emergency reserves and then investing the surplus funds in assets like stocks or bonds. Whether pursuing high-growth stocks or preferring stable bonds, the key is to put money in motion rather than simply holding onto it.

(The content of this article is for general informational purposes only and does not constitute any recommendations. Epoch Times does not provide investment, tax, legal, financial planning, real estate planning, or any other personal financial advice. For specific investment matters, please consult with your financial advisor. Epoch Times does not assume any investment responsibility.)