Investing in stocks is generally considered to be superior to holding cash because history has shown that equities have the potential to provide higher returns over the long term. For example, investing in mainstream indexes through their tracking ETFs like the S&P 500 (SP500)(SPY)(VOO), Dow Jones Industrial Average (DIA)(DJI) and the Nasdaq (QQQ)(NDX) has yielded significant outperformance over the long-term relative to cash proxies like money market funds:
This is because, buying stocks is in effect taking an ownership stake in a company, and as the company grows and becomes more profitable, the value of your investment can increase. Cash, on the other hand, is a low-risk asset with little to no potential for growth and merely pays out interest to investors. As a result, the growth potential of stocks, combined with dividends that some companies pay to shareholders, can provide a higher rate of return than the interest earned on cash.
This is particularly true over the past several decades when interest rates have been historically low:
However, at times when interest rates soar, there are moments where the interest rate offered by cash generates superior cash flow to that offered by dividends. As a result, the impetus is then on the companies to generate robust growth to drive capital appreciation which - combined with the dividends - can outpace the interest paid by the cash. In addition, the growth rate should also exceed the interest payments on the cash by a healthy margin to compensate investors for the risk they are taking on to invest in the company, since cash is a relatively risk-free investment whereas businesses encounter all sorts of risk.
As a result, if stocks become too pricey and the economy falls on difficult or simply uncertain times simultaneous with rising interest rates, cash can actually be a superior investment. This was definitely the case over the past year, where bloated stock market valuations combined with geopolitical and macroeconomic uncertainty and rapidly rising interest rates to deliver underwhelming stock market returns and outperformance for cash relative to the stock market:
Meanwhile, today, cash looks to be more promising than ever. While stock prices have retreated significantly from their all-time highs right at the beginning of 2022...
...interest rates have risen even faster:
As a result, today the Federal Funds Rate is roughly three times the yield on SPY, about 160 basis points more than what is offered by the Utilities sector (XLU), and nearly 100 basis points higher than what is offered by the U.S. REIT sector (VNQ). On top of that, Federal Reserve Chairman Jerome Powell just recently stated that interest rates are likely to go higher than previously anticipated, so further upside is likely in store for interest rates, which will further erode the relative value of stocks.
Furthermore, rising interest rates serve as a double-whammy to stocks, especially given how addicted to debt the corporate world has become. This is because rising interest rates generally reduce earnings growth for most companies due to an increased cost of capital (thereby reducing investment in growth opportunities), increasing the cost of consumer spending (thereby reducing demand for companies' goods and services), and increasing the cost of servicing debt on the companies' balance sheets. After a decade of debt-fueled buyback frenzies across the corporate world, the effect of rising interest rates is more impactful than ever:
When combining stubbornly high inflation with rising interest rates and already stagnant economic growth, it appears that a recession is all but inevitable at this point. This means that in the near term, stocks are actually likely to experience negative growth. Furthermore, simmering geopolitical tensions between China, North Korea, Iran, and Russia on one side and the West and regional rivals of its aforementioned adversaries (i.e., Taiwan, South Korea, Israel, and Ukraine among others), mean that a major war could very plausibly break out in the coming years. In such a scenario - especially one involving China - the stock market would almost inevitably crash, making cash a big winner.
As a result, the case for buying stocks over holding cash in an interest bearing account like a money market fund or even a 1-3 month treasury ETF like the iShares 0-3 Month Treasury Bond ETF (SGOV), is getting harder and harder to make.
Current money flows reflect this as well. Total assets under management in the big index funds as well as in once-red hot technology funds like Ark Invest's Innovation ETF (ARKK) are plunging:
Meanwhile, recently tens of billions of dollars have been flowing into money market funds on a weekly basis. In fact, in recent weeks, money market funds have reportedly been the only group of funds to log net inflows consistently as even bond funds are taking a beating alongside equity funds. This reflects the clear reality that interest rates on short-term cash funds are compelling relative to the total return profile offered by bonds, as long-term interest rates are no longer attractive relative to short-term interest rates:
Moreover, with the stock market still considered overvalued by many leading valuation models along with the aforementioned near-term growth headwinds for the economy, there is little to excite investors about the indexes either, especially relative to the interest rates currently being offered on cash.
Investor Takeaway
While the total return generated by stocks has crushed that generated by cash equivalent investments such as money markets and short-term bonds over the long-term, these are unique times. Since the beginning of 2022, cash equivalents have materially outperformed stocks and bonds and - with short-term interest rates all but certainly headed higher before they head lower and a recession increasingly likely to hit soon - cash continues to look like it is king in 2023 and potentially beyond.
That said, it is important for investors to keep in mind that macroeconomic factors can change quickly and unexpectedly and that it is extremely difficult to predict market behavior over a short period of time. Furthermore, given that stocks have a remarkable track record of thoroughly dominating the total return performance of cash-related investments over the long-term, in our view it is likely imprudent to completely dump stocks and flee to cash. In fact, for long-term oriented investors who do not need to touch their principal for at least three years, it makes sense to remain nearly or even entirely invested in stocks.
On the other hand, for risk-averse investors due to personal financial circ*mstances and/or personal psychological make up, it may make sense to adopt a larger cash allocation than normal in these times. Given that I am in my 30s and am earning a steady income that easily exceeds my living expenses, and the fact that I am finding numerous attractively priced high yielding opportunities that are likely to weather a recession just fine, I am still nearly fully invested in stocks and only have a small position in SGOV.
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"Cash is king" is a slang term reflecting the belief that money (cash) is more valuable than any other form of investment tools, such as stocks or bonds. This phrase is often used when prices in the securities market are high, and investors decide to save their cash for when prices are cheaper.
The key reason to invest in equities (or shares) over cash for long-term growth is due to something known as the 'equity-risk premium'. This is the idea that, because stock returns are more volatile than cash saving rates, investors should be rewarded for bearing this additional risk.
Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured.
Cash: Cash is another safe investment because it doesn't fluctuate in value like stocks and bonds. If the stock market crashes, you can be sure your cash will still be worth the same.
However, the use of cash is still strong, and in many cases, usage is rising. In this blog, we'll discuss the top 5 reasons why cash is still king in 2023, particularly for mature demographics and those disproportionately affected by the rising cost of living.
In 2023, cash is far from trash. That's the verdict of 404 professional and retail investors who took part in the latest MLIV Pulse survey. Two-thirds of respondents said the cash in their portfolios would bolster rather than drag down their performance in the year ahead.
For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.
Federal bonds are considered very safe but have very low returns. Real estate can produce income but can be risky. Precious metals, especially gold, offer an alternative to stocks and bonds. Luxury assets are tangible, but lag stock market returns.
It's a good idea to keep a small sum of cash at home in case of an emergency. However, the bulk of your savings is better off in a savings account because of the deposit protections and interest-earning opportunities that financial institutions offer.
Liquidity. Your biggest risk in a recession is the loss of your job, if you're still employed or semi-employed. If you need to tap your savings for living expenses, a cash account is your best bet. Stocks tend to suffer in a recession, and you don't want to have to sell stocks in a falling market.
When the prices for goods and services are rapidly rising, holding cash in your portfolio becomes less attractive. The prospect of prolonged inflation “argues against having too much in cash,” Christine Benz, director of personal finance and retirement planning at Morningstar, recently told The New York Times.
In the current economic climate, with unprecedented levels of market uncertainty, the importance of cash cannot be overstated. For businesses, cash is king because it allows them to hold on to valuable assets, sell some that may be strategic but smaller in scale, and make strategic acquisitions when the time is right.
Without cash, purchases can't be made, debts cannot be settled, and dividends cannot be paid to shareholders. In this respect, cash is indeed king, and it always will be.
How much is too much? The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.) saved up for emergencies, such as unexpected medical bills or immediate home or car repairs. The guidelines fluctuate depending on each individual's circ*mstance.
A long-standing rule of thumb for emergency funds is to set aside three to six months' worth of expenses. So, if your monthly expenses are $3,000, you'd need an emergency fund of $9,000 to $18,000 following this rule. But it's important to keep in mind that everyone's needs are different.
Millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios.
Do no withdraw cash. Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.
High net worth investors typically keep millions of dollars or even tens of millions in cash in their bank accounts to cover bills and unexpected expenses. Their balances are often way above the $250,000 FDIC insured limit.
We have been issuing banknotes for over 300 years and make sure the banknotes we all use are of high quality. While the future demand for cash is uncertain, it is unlikely that cash will die out any time soon.
Key Takeaways. Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the FDIC for bank accounts or the NCUA for credit union accounts. Certificates of deposit (CDs) issued by banks and credit unions also carry deposit insurance.
As people move toward more electronic or digital forms of payment, it might seem like paper money is on its way toward obsolescence. But experts say that cash will always be around.
A checking account can help cover daily spending needs, check-writing, and ATM usage. Bank checking accounts are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the US government, against the loss of up to $250,000 per depositor, per insured bank, based on account ownership type.
In 2023, economic activity is projected to stagnate, with rising unemployment and falling inflation. Interest rates are projected to remain high initially and then gradually decrease in the next few years as inflation continues to slow.
You should invest when you have income, a cash emergency fund, and no high-interest debt. Cash emergency fund. This cash helps you manage the risks of investing. Any asset you buy can lose value or fail to produce the income you expected.
Cash is less secure than a credit card. Unlike credit cards, if you lose physical money or have it stolen, there's no way to recover your losses. Less Convenient. You can't always use cash as a payment method.
A general rule of thumb for how much of your investment portfolio should be cash or cash equivalents range from 2% to 10%, although this very much depends on your individual circ*mstances.
Cash makes it easier to budget and stick to it. When you pay with the cash you've budgeted for purchases, it's easier to track exactly how you're spending your money. It's also an eye opener and keeps you in reality as to how much cash is going out vs. coming in from week to week or month to month.
Introduction: My name is Melvina Ondricka, I am a helpful, fancy, friendly, innocent, outstanding, courageous, thoughtful person who loves writing and wants to share my knowledge and understanding with you.
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