How Much Cash Is Too Much Cash?

June 14, 2024

Today's relatively high yields from savings accounts and other cash investments are tempting, but don't overdo it.

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Despite inflation's spike in 2022, the attendant rise in interest rates has been a welcome development for savers, who piled more than $1 trillion into money market funds¹ between the third quarter of 2022 and the third quarter of 2023.

Unfortunately, the downside of higher rates is that some investors may now have cash allocations out of step with their goals. "It makes sense that investors have been taking advantage of these relatively high rates," says Rob Williams, managing director of financial planning and wealth management at the Schwab Center for Financial Research. "But with the Federal Reserve expected to lower rates in 2024, the current yields on cash may not last much longer. And if your current cash allocation is larger than your target allocation in a long-term portfolio, even today's relatively high yield² isn't likely to exceed the returns you could get from stocks and bonds over time."

For example, in 2023—which by most accounts was expected to be a rough year for the stock market—the S&P 500^® Index's total return was a stunning 26.3%.³ "Cash still belongs in your portfolio, but it is first and foremost a way to help buffer against losses or fund a near-term goal—not a way to achieve meaningful returns," Rob says.

That said, deciding whether you have "too much" cash depends on your personal situation. "If you have a shorter-term goal on the horizon—say, college tuition or the down payment on a second home—having more investment cash on hand, as well as historically less volatile investments such as high-quality short-term bonds, may make sense," Rob says. "Plus, some people simply aren't comfortable with increased market volatility, and these higher rates are a way of getting a bit more return without much risk, at least for the time being."

The important thing is to let your needs, risk tolerance, and time horizon—rather than the novelty of higher rates—dictate your allocation.

¹Federal Reserve Bank of St. Louis.
²Bankrate, up to 5.4% annual yield on CD, high-yield savings, and money market accounts as of 04/03/2024.
³S&P Dow Jones Indices, as of 12/29/2023.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

Past performance is no guarantee of future results.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in the fund.

Cash equivalent investments are cash management strategies that seek to prevent the loss of an investment's total value. Although a cash management product may seek to maintain a stable or constant net asset value, there can be no assurance it will do so.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

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