“Cash is king,” or so the saying goes, but holding too much cash in your portfolio has been an expensive mistake for the last five years.
That’s not to say that you shouldn’t hold cash at all. In fact, there are plenty of good reasons to keep a decent chunk of change uninvested on the sidelines, but being overweight cash at the expense of being invested has been particularly costly over the last five years.
As you can see in the following purchasing power graph from the St. Louis Fed, the U.S. dollar has lost 20% of its purchasing power in just the last five years alone.
U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Purchasing Power of the Consumer Dollar in U.S. City Average [CUUR0000SA0R], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CUUR0000SA0R, January 5, 2026.
More specifically, the chart shows that purchasing power fell from 38.4 coming into 2021 to 30.8 as of the latest figure (September 2025), a decline of 19.8%.
That shouldn’t come as a surprise to consumers, as that chart reflects the aggregate impact of inflation, which we’ve all been feeling acutely, especially since the post-pandemic period.
The reason it’s of particular relevance now is that investors are increasingly caught between a rock and a hard place.
Invest now, with indexes at all-time highs and the stock market, in the aggregate, overvalued by most conventional measures (CAPE ratio, PE, Buffett Indicator), or keep your assets parked in cash and risk inflation continuing to chip away at your buying power.
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Why Too Much Cash Is an Outsized Risk
In my estimation, the balance of risks favors staying (or getting) invested instead of being too heavily allocated to cash.
To see why, let’s look at the relative purchasing power of three portfolios with a starting balance of $200,000 on January 1, 2021, with one split evenly between cash and stocks, a second with an 80% allocation to stocks and 20% to cash, and the last portfolio with 100% cash.
The following calculations make two assumptions: Cash yields 2% (that’s just above the peak one-year CD rate of 1.88% per the St. Louis Fed’s National 12-Month CD Rate but is below what you could have achieved rate shopping in the last few years), and stocks are represented by an investment in the S&P 500 via the SPY with dividends reinvested.
The Impact of Holding Too Much Cash in Your Portfolio
| Portfolios | Starting Date | Ending Date |
| 50/50 Portfolio | 1/1/2021 | 1/5/2026 |
| Cash | $100,000.00 | $110,400.00 |
| Stocks | $100,000.00 | $194,165.00 |
| Total Portfolio Value: | $200,000.00 | $304,565.00 |
| 80/20 Portfolio | ||
| Cash | $40,000.00 | $44,160.00 |
| Stocks | $160,000.00 | $310,665.00 |
| Total Portfolio Value: | $200,000.00 | $354,825.00 |
| 100% Cash | ||
| Cash | $200,000.00 | $220,816.00 |
| Total Portfolio Value: | $200,000.00 | $220,816.00 |
On first impression, the returns are solid, with a 50% five-year gain for the 50/50 portfolio, a 77% five-year gain for the 80/20 portfolio, and even a 10% five-year gain for the cash portfolio.
But if we control for the loss of purchasing power, the 50/50 portfolio is worth $244,286 in 2021 dollars, while the 80/20 portfolio is worth $284,599 in 2021 dollars and the all-cash portfolio has lost real value as it’s worth only $177,113 in 2021 dollars.
That translates to real returns of 4.08% for the 50/50 portfolio, 7.3% for the 80/20 portfolio, and -2.4% for the all-cash portfolio.
If you’re in retirement and following the “4% rule” (where your retirement withdrawals start at 4% of invested assets and then are adjusted higher to account for inflation each year), a 50% allocation to stocks was enough to offset your drawdowns, keeping your portfolio’s head above water.
The 80/20 allocation not only covered your drawdowns but also allowed you to build more wealth over the last five years.
But if you were entirely allocated to cash, you’ve lost actual wealth due to the purchasing power decline alone, and that’s before we even factor in portfolio withdrawals.
The hypothetical portfolios also omit any exposure to bonds for the sake of simplicity, but bond investors were in even worse shape than cash investors over the last five years, as the Vanguard Total Bond Fund (BND) lost 0.5% a year with dividends reinvested (not accounting for the lost purchasing power).
Brass tacks: without at least a 50% exposure to equities, investors did not generate enough returns to follow the conservative “4% rule” in retirement without losing real wealth.
And with the Fed once again adding to its balance sheet and precious metals continuing to head higher, some corners of the market are pricing in expectations that inflation will continue to be a problem.
Even if we don’t see a second wave of inflation, a la the 1970s, higher-than-expected inflation will continue to hammer cash-heavy portfolios while benefitting investors who own real property, hard assets and equities.
You should have some cash, even in the face of inflation. Enough cash to cover emergencies (like a job loss), or if you have large, impending expenses like college costs, a wedding, or a down payment for a home.
But if you’ve been overweight in cash waiting for a buyable dip in stocks, you may need to start getting some of that money off the sidelines and into equities.
The best risk management for overpriced stocks isn’t avoiding stocks altogether; it’s finding pockets of the market where valuations aren’t at extremes.
Cabot Small-Cap Confidential is a good place to start, due to the more favorable small-cap valuations and the expert analysis of Chief Analyst Tyler Laundon, as are Cabot Value Investor and Cabot Turnaround Letter, where Chief Analysts Chris Preston and Clif Droke (respectively) have an emphasis on stocks that are undervalued by the markets and trading at a discount.
To learn more about those advisory services, simply click on the links above.
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