Key takeaways

• Cash is a risk-free place to keep your savings. It can provide security and stability.
• If you hold onto too much cash for too long, you may miss opportunities to earn greater gains from other investments.
• Dollar-cost averaging is a way to move your cash into the market in small amounts at a regular pace.

They say cash is king. It’s a safe place to park your savings that can earn you a guaranteed income when placed in a savings account or traditional short-term GIC – clean, easy and risk-free. But for long-term investors, the charm of cash might be better likened an enchanting siren’s call, luring them off course.

What’s the problem with cash?

Short-term cash investments are often the best options for your near-term spending needs. However, challenges can arise when an excessive amount of cash finds its way into your long-term savings.

How so? Well, let’s first consider that stocks and bonds would be the common alternatives to cash for a long-term investor. Stocks and bonds carry more short-term risk than cash. But, over time, they are likely to outperform cash. In fact, if we compare a representative balanced portfolio – made up of stocks and bonds – to 1-year GICs, we find that even the worst 20-year return for the balanced portfolio (4.9%) was still better than the best 20-year return for GICs (4.7%).

Best, worst and average 20-year return

Annualized

Note: January 1, 1988 to December 31, 2021. Source: RBC GAM, Morningstar. Returns calculated monthly. Balanced portfolio based on GAM's strategic asset mix for balanced global investors, rebalanced monthly as follows: 38% Fixed income: FTSE Canada Universe, 2% Cash: FTSE Canada 30-day T-bill, 15% Cdn Equity: S&P/TSX Composite TR, 25% US Equity: S&P 500 TR CAD, 15% Int'l Equity: MSCI EAFE GR CAD, 5% EM Equity: MSCI EM GR CAD. 1-year GICs represent an average of the 1-year GIC rates offered by banks and trust companies in Canada and should be treated as an approximation. An investment cannot be made directly into an index. The graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results.

How much might cash cost you as a long-term investor?

To illustrate the potential cost of cash, let’s imagine your goal is to save $500,000 over the next 20 years. We will compare two options to invest your savings:

1. Invest in a balanced portfolio. We’ll assume that your money will grow 4.5% each year. This return is lower than what a balanced investor has historically earned.
2. Hold your money in cash. We’ll assume that your money will grow 1.4% each year. This is lower than the long-term average, but is actually better than what cash investors have earned over the most recent 20 years.

The hidden cost of cash over 20-year period

Additional contributions required to reach savings goal when investing in a low return asset

*The stated return is hypothetical.
Source: RBC GAM. Scenario depicts the sum of equal annual contributions required over 20 years to achieve a total savings goal of $500,000, based on a constant return from a given investment. Dollar amounts are rounded to the nearest thousandth. The above example is for illustrative purposes only and not indicative of any investment.

Based on our data, to reach your savings goals of $500,000:

• If you invest in a balanced portfolio, you would need to contribute $305,000 over 20 years ($15,250 per year).
• If you keep your money in cash, you would need to save $431,000 over 20 years ($21,550 per year).
• The hidden cost of cash is $126,000 ($6,300 per year). This is because your cash investments don’t offer nearly as much growth potential as the balanced portfolio. So if you want to save $500,000 over the same time period, you would have to make larger contributions.

How can you put your cash to work?

If you’re ready to start investing, but are waiting for the “perfect time” to do so, you may be doing more harm than good. In reality, there is no perfect time to invest. And trying to time the market can cost you in the long run. 

Dollar cost averaging (DCA) can be a better way to move from cash to the markets. This is where you invest a smaller amount at a regular pace, rather than making a larger lump-sum investment. DCA can help you gradually ease into the market, provides a smoother investment experience and puts your hard-earned cash to work.