Ask a Fool: Now That Interest Rates Are Rising, Should I Keep More Money in Cash?

Q: You’ve written that cash, or cash-based investments like money market funds and CDs, are a bad place to keep your assets because they pay next to nothing. With recent interest rate increases, is this still the case?

Generally speaking, I’m still an advocate of a well-allocated portfolio of stock- and bond-based investments.

That said, some cash investments have certainly become more attractive recently. As of this writing, there are one-year CDs with APY of 2.25% and five-year CDs with APY of as much as 2.85% available. You can even find savings accounts that pay 1.7% if you don’t want your money tied up. All of these rates are significantly higher than could be found a year ago.

Here’s a key point. Stock investments historically return 9%-10% annually over long periods of time, while bond investments tend to return 4%-5% over the long run. However, both of these investment types have significant risk — even bonds.

So, if you’re willing to accept slightly less return in exchange for the safety and easy accessibility of cash, it can be a smart idea to allocate some of your investable assets to cash-based investments in the current environment.

In other words, if you have a portfolio that consists of 70% stocks and 30% bonds, it will impact your returns less to shift to say, 70% stocks, 20% bonds, and 10% cash, than it would have previously. The bottom line is that as interest rates rise, cash-based investments like savings accounts and CDs aren’t necessarily as “bad” for your investment strategy as they are when interest rates are next to nothing.

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