'Cash is Trash' vs. 'Cash is King': The Pros and Cons of Holding Cash

Last Updated: October 2023

Can you ever have too much cash? It's hard to believe this could ever be a problem, but for investors, cash can create much debate.

Like equities, bonds, real estate and your uncle's stamp collection, cash is a specific asset class with its own unique characteristics. Whereas equities and bonds are considered to have an inverse relationship (when one goes up, the other typically goes down), cash marches to its own beat.

When equity markets go up (or down), cash is still cash; its value doesn't change just because markets are moving. This can be both its strength and its weakness. During bull markets, holding too much cash can depress returns (what a (cash) drag!), while during market busts, cash can provide a cushion of protection.

There are two common sayings: "Cash is trash" and "Cash is king." As with many things, the truth largely lies somewhere in the middle for investors.

While past performance doesn't guarantee future results, cash has been shown to underperform both equities and bonds over the long-term. Over the last 120 years, global equities have produced an annualized real return of 5.2 per cent, bonds returned 2 per cent and Treasury bills (cash) returned 0.8 per cent, according to the 2020 edition of the Credit Suisse Global Investment Returns Yearbook.

Here's a breakdown of some of the pros and cons of cash for investors.

Pros:

Liquidity: Cash, whether in the form of savings or chequing accounts, money market funds, or short-term deposits gives ready access to your cash when you need it. 

Zero Risk: Cash comes with no capital risk. If you deposit $100 today, tomorrow you'll still have $100. That's what makes it ideal for an emergency fund or a down payment. It can be your safe haven.

Opportunity: Having cash allows you to take advantage of investment opportunities when you choose. For example, following the big market crashes in 1987, 2000 and 2008, investors who had cash could purchase assets at greatly reduced prices.

Asset Allocation: Having a cash position in your portfolio can add diversity, and diversification can be key to lowering risk levels.

Cons:

Lower Returns: Since cash is largely a risk-free asset, investors don't get the "risk premium" that other investments come with. 

Inflation Risk: While cash has no capital risk, its lower returns do not keep up with inflation, thus reducing your buying power.

Cash Drag: During rising markets, cash struggles to keep up with other investments. 

Behaviour Gap: Investors are often reluctant to put a large sum of cash into the market at once. Instead, we tend to make systematic investments over time to avoid feelings of regret should the market drop soon after investing. However, there are studies showing that lump sum investments tend to outperform systematic ones over the long-term. Still, the key is what works best for you.