We're too obsessed with cash

Welcome to Cautiously Optimistic’s grand opening — er, first post. This is a good example of the type of insights you’ll get from me every Monday morning.

Have a friend who needs an investing pep talk? Send them my way, we’re all about the pep talks here 😊

Let’s chat about cash…the hottest investment on Wall Street right now.

Last year, Americans poured more than $500 billion into money markets—funds holding cash and short-term debt. It was the biggest year for saving money since the 1970s.

I get why many of you are saving like mad. The world doesn’t exactly feel stable with inflation, economic, and humanitarian issues at hand. Cash hasn’t felt as enticing since the Wu-Tang Clan said “cash rules everything around me” (circa 1993).

But this obsession is getting a little ridiculous.

Bank of America’s wealth management arm just released a survey on how wealthy Americans are approaching their finances. This chart made me shriek:

Over the last two years, 55% of investors ages 21 to 43 increased the amount of cash they’re holding (versus 46% of investors 44 and older). This, when the same survey also showed that younger respondents had rosy views about the economy and their finances:

First of all – if you’re saving money, I’m proud of you. Cash can be your strongest asset in both good and bad times.

It's also a prime moment to prioritize cash. Savings rates have risen as the Federal Reserve – the group of academics in DC tasked with keeping the economy in balance – has gradually increased rates since early 2022. Some banks and fintechs are now offering up to 5% APY on savings accounts. It’s a pretty sweet deal to do nothing.

But some of you may be getting too cozy.

I'm talking to you, fellow 30-something investor drooling over that 5%. You feel like a genius right now, but your cash obsession could be distracting you from precious years of investing.

Consider the opportunity costs — or what you’re giving up by choosing the comfort of cash.

Imagine you opened a savings account in July 2023, at the peak of the Fed's rate hikes, snagging a sweet 5% APY on your cash.

How does that compare to stock market returns?

Not great.

By staying in cash, you missed a 20% S&P 500 rally. Not only that – a 27% climb in the tech-heavy Nasdaq 100, and a 10% rise in the mega-company Dow. 

Now, I wouldn’t be an honest analyst if I didn’t tell you that stocks and cash are totally different financial beasts. Cash offers stability in a constantly changing world. It’s the feeling of soft bills crinkling in our hands, the musky smell of money wafting through the air. Ahhhh, cash.

Stocks, by contrast, are often far from stable. Lots of popular stocks have dropped 10 to 20% of their value in a single day, and you could theoretically lose all of your invested money in the stock market.

But as scary as that sounds, it’s the essence of risk-taking. You give up stability for potentially greater return over time. And if you have decades ahead of you as an investor, you’re in a prime spot to take some risks.

Every little bit matters, too. This chart tells the story well. Over long periods, the difference between 5 and 6% returns on a $1,000 investment can be thousands of dollars. For what it’s worth, the S&P 500 – an index of America’s largest companies – has grown about 8% a year over the past two decades. 

Cash may feel like a warm, fuzzy blanket, but you’re not getting anything done just lying there on the couch binging Netflix. 

Even worse – those high rates may be gone soon. The Fed is expected to start cutting rates as soon as September. In other words, the Fed could snatch that 5% rate away from you in a matter of months.

Holding cash as an emergency fund or a house down payment makes sense.

Staking your retirement on cash doesn’t.

Risk is the foundation of wealth-building, so get off the couch.

Thanks for reading!

Callie

Like what you just read? Share it with a friend, pretty please 😊