Could too much cash be bad for your clients' wealth?
The answer depends on whether the goal is liquidity or possible protection.
- Cash has provided liquidity, but since 1950, it hasn’t offered the same protection vs. equity drawdowns1 as bonds.
- Since 1980, bonds have outperformed a proxy for cash2 in the 12 months after the last Fed interest rate hike.
- One theoretical guidepost for forward bond returns suggests the potential for a healthy return in the coming years.
- An increased yield cushion has added protection against an absolute decline for the bond market in the past.
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1. Drawdown refers to a reduction in equity prices.
2. A cash proxy is an asset class with return and liquidity characteristics that are similar to cash.