Is Cash King?

Share this Post:


The Federal Reserve raised interest rates 525 bps over the last two years, an abrupt shift from previous zero-interest rate policy

Yields above 5% have attracted investors to money market funds as total assets grew ~20% in 2023 to more than $6 trillion

While higher cash returns can be a short term positive, overweight cash allocations can reduce long-term returns

Interest Rates – A Recent History

For most of the period from the Global Financial Crisis in 2008 through the end of the pandemic in 2022, the Federal Reserve held interest rates near zero. This zero-interest rate policy was beneficial for borrowers, who could service their debt at historically-low costs. However, savers found the environment challenging, and investors learned a new acronym: TINA (There Is No Alternative), which meant that low rates provided no choice but to allocate to riskier assets – stocks, real estate, etc.

As post-pandemic inflation surged in early 2022, the Federal Reserve began a rapid rate-hike cycle that ended in July 2023 with the Federal Funds Rate at 5.25% – 5.50%. The sharp increase in rates was painful for investors in 2022 as both stocks and bonds declined, leading to the worst year for a diversified 60/40 portfolio in history. Low valuations at the end of 2022 provided a much more optimistic return outlook from that point forward, and 2023 saw markets recover the previous year’s losses and approach new all-time highs.

The new interest rate regime has been painful for borrowers as evidenced by surging mortgage rates. On the other hand, many investors have found attractive opportunities in cash and money markets. Investments that very recently yielded less than 1% now offer returns in excess of 5% with relatively low risk.

Cash Drag on Expected Returns

Although cash yields are currently very high compared to recent history, expectations are that over time, they will fall from current levels. ACG’s 2024 Capital Market Assumptions project that cash will generate an average annual return of 2.7% over the next ten years and 3.5% over the next 30 years. A fully invested portfolio of 60% large cap equity and 40% core bonds has an expected annualized return of 7.0% over the next decade. However, a 10%cash balance would reduce that expected return to 6.6%, and a 20% balance would further reduce the annual return to 6.2%, with similar risk-adjusted returns.

Opportunity Cost of Cash

While cash is a great asset to hold when markets are volatile or declining, stocks and bonds have historically outperformed cash by a wide margin over the long term. Cash returned over 5% in 2023 – its best year since 2000 – but still meaningfully underperformed a 60/40 portfolio. Elevated cash balances were particularly painful in Q4 2023, as the S&P 500 surged nearly 12%, bonds rose almost 7%, and cash gained just 1.4%. In just a few short months, risk-averse investors missed much of the market upside as they sat on the sidelines.

Duration – What Happens to Cash When Rates Fall

The Federal Reserve has issued guidance suggesting it expects to cut interest rates by 75 bps in 2024, while market expectations are currently pricing in 125 – 150 bps of rate cuts. Many indications and predictions imply that interest rates (and cash yields) have peaked.

If rates fall as expected, higher duration investments will benefit. Cash has near-zero duration, and its yields will decline as interest rates fall. Conversely, longer-term bonds will receive an additional boost in value from declining rates.

Conclusion for Investors

Given the outlook for cash in both the near-term (2024) and longer-term (10-30 years), investors should reconsider any elevated cash balances and potentially rebalance portfolios to become more fully invested. Over longer time periods, stocks and bonds have significantly outperformed cash, as capital markets reward investors for taking risks not present in cash. It is crucial for investors to weigh the tradeoffs of holding excess cash by asking themselves whether the downside protection sufficiently compensates them for the reduction in expected return. Investors must clearly define what “risk” means to them. While cash may help ease concerns around short-term volatility, holding too much cash may actually increase the probability that a portfolio could fall short of its long-term goals and objectives.


The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or

completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third-party data or the financial information contained herein.

Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements.

The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.

Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put.

The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.

Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees.

This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.

Share this post:

Leave a Reply

Your email address will not be published. Required fields are marked *

This website uses cookies to ensure you get the best experience.  Learn more

Skip to content