Daily Capital

The Dangers of Too Much Cash

With the dotcom bubble and the subprime crisis still fresh in our minds, it is understandable why so many investors continue to hold sizable cash positions in bank accounts or money markets. Unfortunately, this habit can be very hazardous to your long term financial goals.

Since 1926, one dollar invested in a 70% stock and 30% bond mix, rebalanced annually, would be worth $1,721. A dollar invested in 60% stock, 20% bonds and 20% cash would be worth $938. Due to compounding, the 20% cash position eliminated almost 50% of the growth.

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A more meaningful example for individuals takes the same portfolios over the last 30 years. This time, a dollar in the 70/30 portfolio grew to $18.36, while a dollar in the 60/20/20 portfolio grew to $14.11.

If this doesn’t sound like much, consider how a 33% spending cut in retirement would feel.

There are times to hold cash, particularly if there are short to mid-term liquidity needs. But for most people, maintaining a large allocation of cash is more dangerous than safe.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk, CFP®
Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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