Understanding How Cash Fits Into Your Investment Portfolio

Edward G Siddell
July 14, 2026

The baseball player Yogi Berra once said that “a nickel ain’t worth a dime anymore.” With inflation still running high, many investors and everyday consumers may find themselves feeling the same way. Everyday costs remain elevated, and short-term interest rates have come down over the past two years.

For investors who keep a large share of their savings in cash, this combination is a real concern. Rising prices reduce what that cash can actually buy, while falling interest rates mean less income is being earned on those holdings. With assets in money market funds (accounts that invest in short-term, low-risk securities) sitting near record highs at $7.9 trillion, many investors may be holding more cash than their financial plans actually call for.¹ So what should investors understand about the role of cash in a portfolio today?

Managing cash requires careful planning

Cash serves many useful purposes in both everyday life and long-term financial planning. However, holding too much of it comes with real costs that can be easy to miss. Because cash feels safe compared to the ups and downs of the stock market, investors sometimes overlook the fact that it does not grow in value the way stocks, bonds, and other investments can over time.

In financial planning, the word “cash” typically refers to any short-term, easy-to-access holding. Common examples include savings accounts, money market funds, and certificates of deposit (CDs), which are savings products that hold money for a set period of time in exchange for a fixed interest rate. These tools are genuinely useful for covering near-term expenses, building an emergency fund, saving for a home down payment, or setting aside money for tuition. These are all valid and important reasons to hold cash.

The key question is not whether to hold cash, but how much makes sense given a person’s goals, time horizon, and overall financial picture. When investors hold more cash than they actually need, it is sometimes called “cash on the sidelines,” because that money is not growing, earning dividends (payments companies make to shareholders), or collecting interest from bonds.

As the chart above shows, money market fund assets have remained at record levels after rising alongside interest rates a few years ago. Higher short-term rates can seem appealing, particularly when stock markets are volatile. However, because these rates are short-term in nature, they are not locked in for long, which creates what is known as “reinvestment risk.” This means that when cash holdings mature, investors may have to reinvest at lower rates. To keep up with inflation and meet long-term financial goals, cash needs to be put to work in investments with stronger long-term potential.

This is especially relevant today, since short-term interest rates have already declined. Investors who shifted heavily into cash in recent years are not only earning lower yields now, but most likely missed a significant portion of the broader market’s gains over the past few years.

Inflation quietly erodes the value of cash

A common misconception is that cash is completely risk-free. While a bank account balance does not swing up and down the way the stock market does, the true value of cash can still decline. This is because what matters is not the number on a statement, but what that money can actually buy. Inflation, which is the gradual rise in the price of goods and services over time, slowly reduces that purchasing power. The effect may seem small in any given year, but it adds up significantly over many years if interest earnings or investment returns do not keep pace.

As the chart above shows, the inflation-adjusted return on cash, measured using current CD rates from the FDIC, has been negative for most of the past two decades.² In other words, even when cash appeared to be generating some income, inflation was rising faster. With headline inflation currently at 4.2% and the one-month Treasury yield at 3.7%, the return on cash after accounting for inflation remains negative by many measures.³

Money market funds, savings accounts, and short-term CDs also need to be renewed regularly as they expire. This creates reinvestment risk, since the new rates available will depend on market and economic conditions at the time. In this way, many of the same factors that affect stock and bond returns also influence the income that cash holdings generate.

Stocks and bonds support long-term growth

Stocks and bonds have traditionally formed the core of investment portfolios because they can provide both long-term growth and regular income. Dividend-paying stocks, for example, offer income along with the potential for the investment to grow in value over time. While dividends are not guaranteed the way bond interest payments are, several sectors of the S&P 500, including Real Estate, Energy, and Utilities, currently offer yields above 3%, which is comparable to many short-term cash and bond options.

Choosing bonds with longer maturities (meaning money is lent for a longer period of time) can also lead to more attractive interest rates. For example, the 2-year Treasury yield is currently around 4.2%, which is meaningfully higher than short-term cash yields and roughly matches the latest inflation rate. Investment grade corporate bonds (bonds issued by financially stable companies) currently yield 5.3% on average, compared to a historical average of 3.9%. The Bloomberg U.S. Aggregate Bond Index, which tracks a broad range of U.S. bonds, yields 4.8%, more than one and a half times its average since 2009. Unlike cash, bonds can also increase in value, and they can help balance out other parts of a portfolio.

History shows that a portfolio with the right mix of asset types can not only stay ahead of inflation over time, but can grow in a way that supports long-term financial goals. This is not a reason to avoid cash entirely, but rather a reminder that cash is best used to meet specific, short-term needs. For investors who have built up more cash than they need in recent years, putting it to work thoughtfully in a broader investment plan is an important step.

The bottom line? Cash plays an important role in financial planning, but holding too much comes with long-term trade-offs. Staying invested in a diversified portfolio of stocks and bonds remains the best way to work toward long-term financial goals.

References

1. https://www.ici.org/research/stats/mmf

2. https://www.fdic.gov/national-rates-and-rate-caps

3. https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics

Index Descriptions

S&P 500

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Bloomberg US Aggregate Bond Index

The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

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