Why shouldn’t I hold cash?

If you’re looking to lower your risk — in a difficult market or when you’re nearing retirement, for example — you may be tempted to take assets out of the market and put them in cash. Over the long term however, cash may not be as safe as you think. Let’s look at some of the implications of moving your investments to cash and keeping them there for long periods.


Rethink the Cost of Cash

While cash and cash equivalents might offer modestly positive nominal returns, their real returns are much lower.

The chart below shows compound annual returns for stocks, bonds and cash over the period from 1926 to 2013 and compares nominal returns with returns accounting for inflation and taxes.

Front of Chart

Cash has averaged a negative real, after-tax return

As the chart shows:

Historically the return of cash has been negative on average, after accounting for inflation and taxes.

Likewise, the real return of bonds has been barely positive.

Only stocks have historically yielded a substantial return after factoring in both inflation and taxes. Stocks can be a vital part of a portfolio not only for growth but also for capital preservation.


A False Sense of Security

As you get closer to retirement, the lower short-term risk of cash and bonds may seem appealing. But these investments carry a different risk: their lower returns could cause you to outlive your assets.

The chart below compares the longevity of several hypothetical $500,000 retirement portfolios with different asset allocations.

Back of Chart

Over-Allocating to cash may cause you to outlive your assets

As the chart shows:

Assuming 5% inflation-adjusted withdrawals, a 100% cash retirement portfolio would run out of money in 21 years. The fixed income portfolio would last only two years longer.

A portfolio comprising 100% stocks would experience more volatility, but it would last at least 30 years, with assets remaining.

While you may not be comfortable with an all-stock portfolio, a diversified portfolio that includes stocks is an important option to consider. Such a portfolio performed second best in this illustration and may help protect you from outliving your savings.

 

Investing involves risk, including possible loss of principal.

Diversification and asset allocation may not protect against market risk or loss principal.

©2014 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, iTHINKING, iSHARES CONNECT, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, CoRI and the CoRI logo are registered and unregistered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

USR-3606