Weekly Buzz: With soaring interest rates, is cash king now?
Pumped-up interest rates are turning investors off some assets, and by comparison, cash equivalents are looking very attractive. Park your cash in short-term Treasury bills or money market funds and you could safely earn over 5% in USD. So, is cash really king now – or is there another part to this equation?
The cost of investing in cash equivalents
With yields closely tied to the US federal funds rate (which is hitting historic highs), there’s now over $5.52 trillion invested in money market funds. But be wary of leaving your cash untouched in the long term: you could be missing out on lucrative options. Investing in cash equivalents over stocks for more than a year can come with growing opportunity costs (our Jargon Buster below explains further).
The data backs this up. Since 1928, cash (USD) has beaten stocks 31% of the time over one-year periods – but when you broaden your time horizon, cash’s chances drop dramatically. Keep in mind that this study is only based on the US stock market, and US short-term bonds.
While the graph may be eye-opening, it isn’t particularly profound. Historically, the US stock market goes up more often than it goes down, as companies and industries continue to grow. So in the long run, stocks will outperform cash. In fact, there has never been a 25-year period where cash or cash equivalents have outperformed the stock market.
What does this mean for me as an investor?
The opportunity cost of sitting in cash can be substantial. But when investors have short-term cash needs, that money should not be in the market.
So while this data shows that stocks outperform cash in the long term, the takeaway here isn’t to simply pile into the market and wait a few decades. Everyone’s risk appetites, investing styles, and circumstances are different. What’s more important here is to know what your goals are, and what those accompanying time horizons will look like.
Within StashAway, we’ve a number of investment choices for different goals and time horizons. n the short term, our USD Cash Yield Portfolio of cash management portfolios can work well. On the other hand, our General Investing portfolios can help you stay invested for the long run.
📰 In Other News: China’s making moves in manufacturing
Fresh data out last week suggested that China’s economy might be making moves. China's private Caixin manufacturing purchasing managers’ index (PMI) rose to 51.0 in August, beating analysts' forecasts and exceeding the 50.0 threshold, signalling expansion in the country’s all-important manufacturing sector.
The reading came a day after a different, official survey instead showed manufacturing activity shrank for the fifth straight month in August, offering a mixed picture on business conditions. But it didn’t shrink as much as economists expected, and it edged a little closer to flatlining.
China’s economy has struggled this year, and pundits will take what they can get at this point. Mix in a measure of new orders creeping up in the sector for the first time since March, and sentiment is spreading that the worst may be over.
This article was written in collaboration with Finimize.
🎓 Jargon Buster: Opportunity cost
Think of a restaurant menu with limited choices – when you pick one dish, you're passing up the chance to taste others; this is your opportunity cost. In the world of money, it's the value of what you could have gained from your next best option, but didn't, because you chose something else. For instance, choosing to put your money in bonds instead of stocks.
Opportunity costs remind us that every choice we make comes with a trade-off, and sometimes what you didn’t choose can be just as important as what you did choose.
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