Yields on Cash Have Fallen: What Is Your Plan?
Next steps for reallocating cash to pursue your investment goals

If you're like many investors, you've allocated more of your investment portfolio to cash instruments over the past few years. And why not? Yields on money market funds and CDs had hovered around 5%, creating a rare opportunity to get a relatively high return while assuming a very low level of risk. The Federal Reserve lowered the Fed Funds rate three times later last year, and cash yields dropped from over 5% to closer to 4%. What are the next steps for your portfolio?
The role of cash in a diversified portfolio
A diversified portfolio generally includes allocations to each of the 3 main asset classes: cash, bonds, and stocks. Over the long-term, each offers a different risk/return profile. In general, the higher the risk, the higher the asset class’s long-term return potential.
Cash serves two roles in a portfolio. The first is to reduce overall portfolio risk. The second is to meet liquidity needs, whether for current spending or future investments. If you have a low risk tolerance and expect to need funds from your portfolio soon, you might consider an allocation that is more heavily weighted towards low-risk investments, like cash. Due to their low volatility, cash instruments can be a great choice to fund nearer term expenditures, like buying a car or paying for a big vacation.
If your investment time horizon is longer, you can likely tolerate some market ups and downs. If this is the case, you may find it appropriate to allocate more of your portfolio to higher risk asset classes, like bonds and stocks. Compared to cash, these asset classes have historically generated higher average returns over the long-term, albeit with greater risk and fluctuations. The potential for higher returns can be key for growing investments for retirement or funding college for children.
Factors impacting your optimal asset allocation:
- Investment goals
- Time horizon
- Risk tolerance
Has your asset allocation drifted away from plan?
It's important to re-assess your portfolio's allocation to cash, bonds, and stocks on a regular basis to make sure it continues to reflect your goals, time horizon, and risk tolerance. Sometimes, your asset allocation may drift due to investment performance or deliberate investment decisions. High yields offered by cash instruments in the last few years have enticed many investors to invest more in cash instruments than is reflective of their long-term asset goals. If your portfolio's allocation has drifted, you may want to consider rebalancing your portfolio.
Money market yields have dropped from their 5% peak
If your cash allocation has increased beyond your near-term needs, it may be a good time to consider your reallocation choices. Holding onto too much cash may rob your portfolio of the higher long-term return potential offered by bonds and stocks.
Where to invest now - bonds or stocks?
Forecasting the future is hard, so it may seem challenging to figure out how to reallocate cash. Moving money into stocks alone may seem questionable given a potential economic slowdown. Investing in bonds amidst potentially lower rates also has potential drawbacks. At Schwab, we caution against trying to time the market. Instead, we encourage a longer-term view of investing, which involves periodically rebalancing a portfolio back to its long-term asset allocation targets. If you're uncertain how to reallocate your cash, a 60/40 blended portfolio solution is a great starting point to consider, especially if you have a time horizon of 5-7 years or longer.
The potential benefits of a 60/40 strategy
The 60/40 portfolio includes a 60% allocation to stocks and a 40% allocation to bonds and cash. Historically, the 60/40 portfolio has performed better than stocks or bonds alone during periods of market turbulence. During the last three Fed rate reduction cycles, a portfolio of 60% stocks in a dividend equity strategy combined with 40% of aggregate bond market exposure produced positive returns in each time frame.
Tip: Using dividend-oriented strategies for the 60% stock allocation can increase the income component and also raise the quality factor of the stocks, which may be beneficial in today's market environment.
The performance of the 60/40 portfolio is less volatile because stocks and bonds often behave differently. If the economy slows, falling bond yields produce positive bond returns that can offset equity market negative returns. Conversely, a strong economic outcome could contribute to rising equity markets and offset negative returns from bonds. The measure of different assets performing differently is called Correlation. Over longer time periods stocks and bonds tend to have low correlation. The chart shows that a 60/40 portfolio delivered positive average returns while reducing the range of gain/loss outcomes.
The importance of diversification

Source: Schwab Center for Financial Research, with data provided by Morningstar, Inc. Stocks are represented by total annual returns of the S&P 500 Index, and bonds are represented by total annual returns of the Ibbotson U.S. Intermediate Government Bond Index. Return figures are the average, maximum, and minimum annual total returns for the hypothetical portfolios represented in the chart and are rebalanced annually. Returns include reinvestment of dividends, interest, and capital gains. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product. Investing involves risk, including loss of principal. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Past performance is no guarantee of future results. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Summary of next steps
1. Check your portfolio's cash allocation. Is it in line with your goals, risk tolerance, and time horizon?
2. If your cash allocation has grown beyond your portfolio's target allocation, consider rebalancing.
3. If you're not sure how you want to rebalance your excess cash, consider a blended strategy of 60% stocks and 40% bonds as a starting point.
4. Explore your options for rebalancing and execute your plan.
How to implement a blended strategy
Implementing a blended strategy, such as 60% stocks and 40% bonds, can be easy and straightforward. Options include ETFs, mutual funds, and separately managed accounts. Take action with these investment ideas.
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Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can view and download a prospectus by visiting www.schwabassetmanagement.com/prospectus. Please read it carefully before investing.
Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.
Dividend focused funds may underperform funds that do not limit their investment to dividend paying stocks. Stocks held by the fund may reduce or stop paying dividends, affecting the fund's ability to generate income
Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.
Index performance data discussed in this presentation is based, in part, on backtesting. Backtested performance is hypothetical and created with the benefit of hindsight. Past performance of a backtested index is no guarantee of future performance and is not indicative of any specific investment. Index data does not account for fees or expenses and if it had, performance would have been substantially lower.
Schwab Asset Management® is the dba name for Charles Schwab Investment Management, Inc., the investment adviser for Schwab Funds, Schwab ETFs, and separately managed account strategies. Schwab Funds are distributed by Charles Schwab & Co., Inc. (Schwab) Member SIPC. Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). Schwab Asset Management and Schwab are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation, and are not affiliated with SIDCO.