The Federal Reserve on Wednesday declined to hike interest rates further, but after months of aggressive increases, one thing remains certain among investors: Cash is back.
With interest rates hovering near zero for much of the last decade, savers couldn’t expect to earn much in interest when they stashed their money. But with rates near 22-year highs, there may be reason to get your bills out of the mattress.
Online banks are offering high-yield savings accounts paying interest in the neighborhood of 5%. Rates on one-year certificates of deposit — a popular cash equivalent — pay over 5%. (Check out CNBC Select’s lists of the best high-yield savings accounts here and of the best CDs here.)
All of that may have you wondering: Should my portfolio include some green stuff?
Yes and no, says Amy Arnott, a portfolio strategist at Morningstar Research Services. “I think a lot of people have been tempted to load up on cash, but there’s still a pretty big opportunity cost in terms of long-term growth,” she says.
“Instead of loading up, people should think about using cash appropriately, for emergency funds and short-term spending goals.”
The advantages of holding (some) cash
As an investment, cash has a couple of advantages over things like stocks and bonds.
For one, it’s more liquid than just about anything else you can own. You can use your cash to buy goods and services. If you want to purchase something using anything else, chances are you’re going to have to convert it to cash first.
For another, it doesn’t decrease in value. And although the dollar is no longer pegged to a physical asset, such as gold, it’s backed by the full faith and credit of the U.S. government. That means your $5 bill is going to be worth $5 for as long as you own it.
But there’s a reason you don’t just keep bills in a safe: inflation, which gradually erodes the spending power of your dollar. That’s why it’s generally advisable to park your cash in a vehicle that maintains liquidity and safety,…
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