The impact of holding cash in your portfolio

Key Takeaways

• Investors are hoarding more cash than ever, the Federal Reserve reports.
• Attempting to time the market is fraught with pitfalls; missing just a few of the best days can significantly dent your return.
• If your asset allocation is too cash heavy, talk to your TIAA wealth advisor about reinvestment strategies.

The doctor had timed the market perfectly. Or so it seemed.

It was December 2021, and he decided to move a big chunk of his stock portfolio into cash. The Standard & Poor’s 500 had just shrugged off the pandemic, inflation and supply-chain disruptions to end the year with a whopping 28% total return. Equities had become much too expensive, the doctor told his wealth advisor.

His advisor warned him that trying to time the market was risky, but the doctor was adamant. And for a while, his gambit looked prescient. The S&P 500 fell 18% in 2022, and the bond market suffered double-digit losses too. Unfortunately, his prescience proved short-lived. “He’s still sitting on that cash,” Jeffrey Mellone, a TIAA executive wealth management advisor, says of his client. “He was in cash all of 2023. We’re now four months into 2024, and he’s still reluctant to get back in.”

To be fair, the doctor has plenty of company, as the lingering effects of 2022 still have many investors spooked. According to the Federal Reserve Bank of St. Louis, money market fund assets now sit at historic highs, increasing from $5.2 trillion in 2022 to $6.4 trillion in 2023.¹ Bank certificate of deposits (CDs) have surged too.²

Stories like the doctor’s frustrate TIAA Chief Portfolio Strategist John Canally to no end. The doctor may have avoided a 18% loss in 2022 by getting out of stocks at the right time, but he missed out on a 26% gain in 2023 and another 5% so far in 2024 (through April 18). 

Yes, it’s important to for investors to have cash on hand to meet spending needs and to provide a safety net for emergencies. And yes, an 85-year-old retiree should have a bigger cash allocation than a 25-year-old opening their first retirement account. (Talk to your TIAA wealth advisor about how much cash is right for your own life stage and situation.) But if investors are simply using cash to time the stock market—sitting on the sidelines while they wait for prices to fall—history shows that strategy is likely to fail.

Three of Canally’s favorite charts demonstrate why.

Stocks go up 75% of the time

The first chart illustrates the performance of the S&P 500 over the long run, from the beginning of 1926 through year-end 2023.

Over those 98 years, the S&P 500 finished with positive returns in 72 of them. The size of the gains in positive years was nearly double the size of losses in the negative ones.

What a difference a few days makes

Some of you may be thinking, “But I have no intention of being in cash for a whole year! I’m just waiting a few more weeks for prices to come down.” Canally’s second chart shows the perils of such a plan.

As the chart shows, the average annual return for the stock market over the past 20 years was 10%. But miss the 10 best days, and the return falls to 5%. Miss the 20 best, and it’s 3%.

High yields, same story

Back when CDs and money market funds were yielding only 1%, Canally had an easier time steering clients away from cash and towards investments best suited for their long-term goals. Now that cash is yielding 5%, his job is harder. But as the third chart shows, cash can have huge opportunity costs even when interest rates are high for investors whose goals align better with stocks and other higher-risk asset classes.

Says Canally, “From June 1984 to June 1985—while your cash was earning 10%—stocks earned you 30%.”

If you’re worried you may have too much cash in your portfolio, talk to your TIAA wealth management advisor about reinvestment strategies. Don’t yet have an advisor? Schedule an appointmentOpens in a new window.