Want the Highest Potential Returns? Hold Cash, Yes, Cash

Cash and cash equivalents “Cash” are typically thought of as low return, low risk, and rightly so.  Yet, during periods like today characterized by a disconnect between depressed (and fragile) economic activity and equity market valuations, cash can hold the key to achieving the highest possible returns.  How?   Cash is much more than a direct source of returns; it is the great return enabler.

Cash:  The Return Laggard

Cash and cash equivalents “Cash” such as short-term U.S. Treasury Bills historically have delivered the lowest average annual returns as shown in the chart below. 

Source:  NYU Stern

The disparity between Cash returns and other investments is even greater when looking at more recent history.  As shown in chart below, Cash earned less than 1% on average since 2010 when bonds earned more than 7% and stocks earned 14% on average.

Source:  NYU Stern

Given the paltry return history of Cash and today’s extraordinarily low interest rate environment, how am I concluding that Cash is the key to achieving today’s greatest possible returns? 

Seeing Beyond Cash’s Returns

While Cash itself is expected to generate minimal returns, Cash is much more than a direct source of returns, it is the great return enabler.

Investors often evaluate cash based solely on the returns it is expected to generate.   This leads investors to hold minimal cash in favor of other investments expected to earn greater returns.  It is not uncommon to hear investors say, “I can’t afford to hold cash”.  When investors do hold cash, they do either on a temporary basis until they reallocate the capital or as a small buffer against market volatility.

However, in investment environments like we are in today, Cash can play an invaluable role, that of return enabler.  Cash’s role in achieving the highest potential returns today comes not from the expected returns of cash itself, but from what Cash’s presence in a portfolio allows an investor to do – buy stocks when prices are depressed. 

Buying low and selling high begins with having the capital to buy low.  However, by the time stock prices have fallen, many other asset values have declined as well making it difficult to raise the capital necessary to take advantage of the buying opportunity. 

Investors with limited Cash during periods of stock market declines lose twice:

  • First, they suffer losses from the decline in stock prices.
  • Second, they have limited capacity, if at all, to take advantage of depressed market prices.

 While Cash itself may generate unimpressive returns, investors with Cash are able to buy assets on “sale” when markets decline.  Conversely, other investors are left with losses and limited capacity to take advantage of the buying opportunity.

Investment Implementation

The first step is to decide whether you think equity prices may fall significantly over the next six to twelve months i.e. will there be an opportunity to buy stocks at a discount to today’s prices.  I outlined my views on this question on the Solutionomics.org website in a research piece titled, “Anatomy of the Coming Market Decline:  Frenzy, Fear, Fizzle, and Fall”.  Additionally, the appendix of this piece includes my thoughts on the some of the latest economic developments and equity pricing.

The second step is to decide how much cash to hold.  A good starting point is your long-term target cash allocation.  From there, decide how much more cash you want to hold.  This isn’t an all or nothing exercise.  It is a question of mix.  The key is to consider how much cash you want to have available to buy stocks in the event stock prices fall meaningfully.  Cash isn’t just about reducing exposure to stock market declines it is about having the capacity to profit from the declines.


While some may say they cannot afford to hold Cash given today’s low interest rates, I say that today an investor cannot afford to not hold more Cash than usual give the economic environment and equity market pricing.  Without Cash, investors may miss out on a great stock buying opportunity as well as the opportunity to reduce their portfolio’s exposure to the possibility of significant stock market losses.

Besides, what is the risk in holding cash?  It is that stock prices keep going up and investors miss out. This is known as FOMO.  But beware of FOMO for it may cause you to miss out on a far greater return opportunity simply because you didn’t have the cash.

APPENDIX:  Current Investment Environment


Despite the recent positive reports of economic gains in some areas of the economy, the economy remains significantly depressed.

  • Yes, last weeks’ job report was a surprise and welcome relief.  However, we still have double digit unemployment, millions more without jobs than we did before the pandemic as well as many with reduced hours. 
  • Despite reversing trend, consumer sentiment remains depressed from pre-pandemic highs.
  • Housing has shown promise, but how much of the recent “pop” in housing was simply pent up demand that will fade and plateau well below pre-pandemic levels?
  • Restaurants operating at 50% capacity is better than nothing but certainly not enough to operate profitably and remain open long-term.
  • Retail sales had a healthy bounce, but they too remain well below pre-COVID-19 levels and the list goes on. 

So, despite the recent gains we remain in a severely depress economic environment.  If that is not concerning enough, the nascent gains may be unsustainable.  While most believe the worst of the economic environment is behind us, it may not be. 

Over half the gains in the recent jobs report were concentrated in leisure and hospitality (2,100,00) and retail (740,000).  Besides accounting for more than half the job gains, they are also the most dependent on consumers’ ability and just as importantly, willingness to circulate.  How likely are consumers to continue circulating at even today’s depressed levels?

In only two months the number of weekly infections in the FAACT states (Florida, Alabama, Arizona, California, and Texas) has increased more than 700%, and the rate of increase is accelerating. 

Government officials in these states have responded with varying degrees of restrictions. 

Additionally, how willing will consumers be to keep going to their favorite restaurants, stores, weekend getaways, and other high-traffic businesses as they increasingly know of friends and family impacted by COVID-19?

Source:  USA Facts

Some may counter that these are just limited hotspots and that the rest of the country is improving significantly. 

First, while only five states, the FAACT states represent nearly 1/3 of the U.S. population and GDP. 

Source:  USA Facts

Second, as the chart below shows, after temporarily declining, the non-FAACT states are now also seeing their weekly number of infections increase. 

Source:  USA Facts

Equity Market Pricing

Despite the depressed economic environment and uncertainty regarding maintaining the nascent economic gains, equity markets continue to defy economic gravity having roared back from their March lows with the NASDAQ having even eclipsed its pre-pandemic highs.  FOMO (fear of missing out) seems to have returned replacing fear. 

Source:  MarketWatch data

Given the ongoing state of depressed economic activity and possibility of giving back even the limited economic gains, today’s stock market valuations are built on less than firm ground.