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Investment Outlook

Why not cash?

Cash on the sidelines

Many wary investors are sitting on high levels of cash and cash equivalents, preferring to earn what looks like a decent yield in today’s higher interest rate environment rather than take on additional credit risk. But when does an abundance of caution turn into missed opportunity? How long is too long to wait for a return to “normal”?

Fixed income can offer attractive starting yields

Bond yields are much more compelling with the substantial increase in interest rates over the U.S. Federal Reserve’s current hiking cycle. The Bloomberg U.S. Aggregate Bond Index ended 2023 at a yield of 4.5%, the highest level since before the 2008 financial crisis.

Since 100% of bond market returns are currently driven by income rather than price appreciation, these higher yields make fixed income investments an important part of a portfolio.1 And bonds continue to anchor portfolios through their naturally low-to-negative correlation to equities,2 helping to stabilize portfolio returns and lower volatility.

Figure 1: Higher yields are a bright spot

Inflation shrinks the value of savings

When overall prices increase due to inflation, the purchasing power of cash erodes over time. $1,000 today doesn’t buy what it did 10 years ago.

Investments like stocks and bonds can better keep pace with inflation over time. In fact, from 1928 to 2022, a portfolio of 60% stocks and 40% bonds held for 20 years or longer has produced a positive real return (adjusted for inflation) during all rolling time periods.

Figure 2: Cash risks losing value after inflation over time

Investments like stocks and bonds can better keep pace with inflation over time.

Broad diversification can offer even more stability3

Whenever there is market uncertainty, investors may feel compelled to hold cash until the conditions appear more favorable. However, this market timing strategy has not been conducive to successful investing. While asset class leadership changes from year to year, a diversified portfolio provided competitive returns in most of the last 10 years and cash typically underperformed.

Figure 3: No asset class consistently outperforms (or underperforms) the diversified portfolio

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1 Bloomberg, L.P., 31 Jan 1976 – 31 Dec 2023, 100% of the annualized total return of the Bloomberg U.S. Aggregate Bond Index was derived from coupon return as opposed to price appreciation. Index inception is 01 Jan 1976.

2 Morningstar Direct, 10-year period ending 31 Dec 2023. Correlation between the Bloomberg U.S. Aggregate Index and S&P 500 Index was 0.31.

3  Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Diversification does not assure a profit or protect against loss.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on Please note, it is not possible to invest directly in an index.

Important information on risk

Past performance is no guarantee of future results. All investments carry a certain degree of risk, including the possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Certain products and services may not be available to all entities or persons. There is no guarantee that investment objectives will be achieved.

Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.

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