Cash isn’t trash, at least not over certain short periods when equities stink.
Yes, stocks beat cash over the long term, but there are still periods, even as long as a decade, when cash is a better investment than stocks, according to a LendingTree.com study. In fact, in a recent 51-year period, cash was the best-performing asset 30 percent of the time, the study found.
Hard times for equities often mean all that glitters is not financial assets but actually garden variety cash—in certificates of deposit.
“Unsurprisingly, CDs outperform stocks more often during economic recessions and underperform during economic expansion, although there are pockets of exceptions,” according to the study.
The author of the study said it reminds investors that over-relying on any one asset class is dangerous.
“We did this study as a wake-up call to make people understand that one needs more than just stocks and bonds as a diversifier—that stocks and bonds can sometimes go down together as in 2008,” said Brian Karimzad, vice president of research for MagnifyMoney, a LendingTree subsidiary.
He added that, for the average investor, cash can be important for a number of reasons. A cash reserve can be critical in hard times, when someone has lost a job for instance. Cash can also be an effective investment when equities are pricey, Karimzad said.
Six-month certificates of deposit, for example, did very well at the beginning of the period known as the “lost decade,” the study said. That’s when CDs had the longest time of beating stocks, a 33-month period from 2000 to 2003.
“The one-year return of six-month CDs beat the one-year return of stocks for 33 consecutive months,” according to the study.
And the 1970s and 2000s were the two decades when annualized CD performance beat stocks, the study said.