After the recent subpar performance of bonds, it may be tempting to wait in cash for the right moment to reinvest in bonds. But shifting your long-term portfolio from bonds to cash comes with risks to your long-term retirement goals. Over extended time periods, bonds have provided better returns.
Using the 3-month U.S. Treasury bill as a proxy for cash and the Bloomberg U.S. Aggregate Bond Index as a proxy for bonds, we compared the returns of both asset classes between January 31, 1978, and September 30, 2023, and found that bonds outperformed cash most of the time, as the next figure shows.
“While higher cash rates lead to higher cash returns, bonds are still a better alternative, especially over longer periods of time,” Shtekhman said. “The safety of cash is appropriate for short-term spending needs. But when comparing the performance of bonds and cash over longer periods, bonds outperform cash in the majority of cases, even when cash yields are relatively high.”
Although cash rates are currently at 20-year highs, Shtekhman added, the Federal Reserve may be nearing the end of its rate-hiking cycle and may eventually have to cut rates.
“Investors who have a large allocation to cash may be very disappointed,” he said. ”They need to think strategically, and unreasonably high cash allocations can be detrimental to achieving long-term investment goals.”