Cash Likely To Reduce Overall Investment Returns

The past ten years have been difficult for investors given the extent of the market's volatility. During this time period it may seem that holding onto cash has been the proper investment decision. The question then becomes cash versus what other alternative. As the below chart notes though, on a calendar year basis, not once during the past ten years did cash outperform both stocks (S&P 500 Index) and bonds (BC Aggregate Index).

From The Blog of HORAN Capital Advisors

As a result there was a better investment alternative than sitting on cash if that cash was targeted for longer term investments. Holding some cash is perfectly logical if the cash is needed for short term needs. Since 1926 cash has outperformed equities and bonds in 12% of the calendar years covered.

From The Blog of HORAN Capital Advisors

Source: Fidelity (PDF)

Holding some cash can serve as a useful purpose in reducing ones overall investment volatility. However, holding too much cash can be a drag on an investor's overall returns.