Brian Erickson, Fixed Income Strategist – Ameriprise Financial
As of Feb. 20, 2023
Cash serves as the lifeblood of our finances and plays a crucial role in asset allocation. As the funding source for day-to-day bills, vacations and emergencies, it provides a buffer between living our lives and investment funds for long-term financial goals.
But until recently, cash as an asset class has fallen out of favor with many investors. Some have even quipped, “cash is trash,” when discussing how little cash benefits a saver or investor.
2023 may be flipping that sentiment on its head.
Cash has returned as a viable investing opportunity. If you’re holding large balances in a checking account, you may want to consider — in consultation with an Ameriprise financial advisor — how you can make that money work for you.
Why cash fell out of favor
Cash and cash investments have been off investors’ radar for more than a decade.
In the wake of the Great Financial Crisis of 2007-2008, Fed policy sought to disincentivize savings and discourage investors from holding cash by pushing interest rates to near zero.
As a result, investors could no longer expect checking and savings accounts to provide even a modest return — let alone a return that kept pace with inflation. Similarly, many short-term investments, such as money market funds and short-term bond funds, were similarly producing anemic yields.
Why cash is back in vogue
Today, Fed policy rewards savers and allows an attractive return even in cash, incenting investors to shift into cash and short-term fixed income rather than take risks in volatile markets. As interest rates have risen over the past year, so have returns on other cash investments, like money market accounts, CDs or Treasury Bills. It’s no longer uncommon to find cash investments that are currently offering annual percentage yields (APY) of 4% and more.
What qualifies as a cash investment?
At Ameriprise Financial, we apply a narrow definition to cash in our allocations and when we classify cash on Ameriprise Financial statements. Cash is investments or fund holdings maturing in less than 3 months as of the last date data was available. As a result, many investments that could be thought of as cash, such as a 6-month certificate of deposit (CD) or even most of the assets in an ultra-short bond fund, don’t appear as cash. Rather, they are funds invested in short fixed-income and viewed as part of fixed-income allocations.
Options for investing excess cash: Understanding demand deposit accounts vs. cash investments
Elevated bank balances can be put to work in liquid strategies that may help keep up with inflation and contribute to overall investment returns.
When investing excess funds in cash investments, investors should evaluate how quickly they may need access to it:
Demand deposit accounts: For funds needed for transactional purposes, consider demand deposit accounts, such as:
- Checking accounts
- Savings accounts
- Sweep accounts
Cash investments: For funds not needed for transactional purposes, like an emergency fund, consider cash investments, such as:
- Money market funds
- Ultra-short bond fund
- Certificates of deposit
- Treasury Bills (T-bills)
The trade-off between demand deposit accounts and cash investments can be substantial, with 3-month Treasury Bills (T-bills) yielding 4.65% on Feb. 3. Whether investing directly in T-bills or opting for more diversified fund options, APY of over 4% are more common today.
Remember: Cash is a key component of asset allocation
Cash is one of the four legs of asset allocation, along with fixed income (bonds), equities (stock) and alternatives. While it may be tempting to overweight cash, we believe it’s important to remain fully invested to benefit from long-term investment returns and to avoid trying to market time, which often leads investors to make avoidable missteps that can hamper long-term returns.
Let’s evaluate your excess cash holdings
Consider putting excess cash to work. Your Ameriprise financial advisor will help you determine the right level of cash for your portfolio and the right cash investments for your situation.