The Long-Term Cost of Holding Cash: What $10,000 Could Lose in 10 Years

Key Points

• Treasury bills currently offer risk-free, 3% to 4% yields.

• Stocks have historically returned around 10% per year.

• If you have a 10+ year time horizon, you’re probably better off in stocks despite the added volatility.

Over the past three years, cash has actually been a reasonable place to keep your money. The iShares 0-3 Month Treasury Bond ETF offers a 3.6% yield with minimal share price volatility and no credit risk.

For your near-term spending and portfolio cash needs, it’s an effective way to generate income while maintaining liquidity.

The hidden cost of keeping $10,000 in cash

Suppose you have $10,000 to invest and can earn 4% annually in a Treasury bill ETF for the next decade. After 10 years, you’d have around $14,800.

Now let’s contrast this with an alternative.

The S&P 500 (SNPINDEX: ^GSPC) has historically produced an average annual total return of roughly 10% over the very long term. Assuming a 10% annual return, $10,000 would grow to roughly $25,900.

That’s a difference of more than $11,000.

While the 10% annual return of stocks isn’t guaranteed, neither is the 4% return of T-bills. If the Fed cuts rates, that 4% yield could shrink, widening the performance gap.

Cash isn’t the problem

This doesn’t mean investors should move all cash into an S&P 500 ETF. Cash can serve as a place to hold money not yet invested or as dry powder for market opportunities.

But long-term investment funds are different.

The opportunity cost of underinvesting in stocks for years can outweigh the downside of a market downturn. In this example, the drag is $11,000 over 10 years. Larger investments held longer could amplify this loss significantly.

This illustrates how the comfort of low risk can become riskier over time.

Where I’d allocate $10,000 today

If I need the money within the next year or two, cash or short-term Treasuries would be appropriate.

If I don’t expect to use it for at least 10 years, I’d prefer investing in a low-cost S&P 500 ETF to pursue higher returns. Some years will be worse, but over time, stocks should offer better growth potential.

Should you buy S&P 500 Index stock now?

Before deciding, consider this:

The Motley Fool Stock Advisor team recently identified 10 stocks they believe are best buys now—S&P 500 Index wasn’t among them. These stocks could deliver strong returns in the coming years.

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