Few financial choices feel as comfortable as holding cash. Whether it’s in a savings account, money market fund, or tucked away purely for peace of mind, cash provides a sense of security. Yet comfort can be costly. Too much cash, or cash held for the wrong reasons, can quietly diminish purchasing power and wealth over time.
Imagine selling your business for $500,000 and hesitating to invest because stocks are at all-time highs. Waiting for the “right time” to invest might seem prudent, but market history tells a different story. Data from Vanguard shows over the past century, the S&P 500 has delivered positive returns in roughly three out of every four years. The longer you stay in cash, the more likely you are to underperform the market. The longer you stay in the market, the more likely you are to outperform cash. And emotionally, if deploying capital feels daunting now, it will often feel even harder during a 20% market drawdown, when headlines are dominated by fear.
The True Cost of Cash
Historically, a well-diversified 60/40 portfolio (60% equities, 40% fixed income) has delivered gross returns in the 6-8% range annually over the long term. If your checking account earns 0.5% or less, consider the spread and the opportunity cost you are paying yearly.
Say for illustrative purposes, you keep $500,000 in cash earning no return, versus the same amount invested in a diversified portfolio averaging 7% gross annual return. The opportunity cost is approximately $35,000 per year forfeited. Layering in 2.5% inflation, cash’s purchasing power erodes annually, from $500,000 today to the equivalent of $487,805 next year in real terms. Over a decade, this hypothetical compounding gap leaves cash worth just $390,599 in today’s dollars, while the invested alternative grows to $776,485, reducing your real wealth by more than half versus staying invested.
Wise Reasons to Hold Cash
Not all cash is wasteful. Holding the right amount for the right reasons can provide stability and confidence:
- Emergency Fund: Aim for 3-6 months of expenses in case of a job loss, large medical bills, or major home repairs
- Short-Term Needs: If you expect to make a significant purchase in the next 12-24 months, such as buying a home or a car, or paying for a wedding. Money that you know you’ll need soon should not be subjected to unnecessary market risk
- Psychological Comfort: If having an excess amount of cash helps you weather the market’s volatility without panic-selling, the peace of mind can be worth the tradeoff. Markets do experience downturns, and in those moments, cash can feel like a welcome safety net as opposed to a negative return
There are many ways to get quick access to cash when necessary, such as taxable brokerage accounts, margin loans, or a home equity line of credit which all provide liquidity without compiling low-yield assets.
Bad Reasons to Hold Cash
Beware of traps that lure investors into prolonged periods of sitting on the sidelines:
- Market Timing: Waiting for the “perfect” entry rarely pays off. Historically, markets climb more than they fall, and missing the best days, often clustered after downturns, can deplete returns
- Fear of Recession: Economies recover unpredictably. The market typically bottoms months before recessions end, leaving sidelined investors buying back in at premiums
- High Valuations: While valuations influence long-term returns, markets can stay “expensive” for years. Buying expensive stocks has still historically beaten sitting in cash
Your Path Forward
Ultimately, your cash strategy should align with your goals, risk tolerance, and risk capacity. A conservative approach suits short time horizons, while a growth oriented strategy can help support long-term growth. Your Aldrich Wealth Advisor can help you craft a tailored plan that balances liquidity, risk tolerance, and opportunity in a way that fits your comfort level. Together, you can explore strategies such as phased or lump-sum investing that keep your cash working for you without taking on unnecessary risk.
Don’t let your cash lose value. Deploy it wisely, and watch it compound into lasting security.
Disclosure: This material is for informational purposes only and should not be construed as personalized investment advice or a recommendation to buy or sell any specific security or strategy. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. Hypothetical performance illustrations are for educational purposes only and do not represent actual results. Always consult with a qualified financial professional before making investment decisions. Aldrich Wealth is an SEC-registered investment adviser; registration does not imply a certain level of skill or training.
Q3 2025 Market Commentary + Outlook