The Changing Landscape of Cash Returns: Time to Reconsider Investment Strategies

With cash returns reaching unprecedented levels, investors must plan for the future

In a surprising turn of events, the year 2023 brought about a peculiar financial phenomenon – the opportunity to earn substantial returns on investments while assuming minimal risk. According to a recent report by TD Economics, the return on cash, as measured by T-bills and short-term corporate borrowing, reached a remarkable 5 percent by the end of 2023. This is a stark contrast to the historical perception of cash as a lackluster asset class. However, as TD predicts a gradual decline in cash yields over the next few years, it becomes imperative for investors to reevaluate their current investment strategies and consider alternative options.

The Changing Landscape of Cash Returns:

The report highlights that the average return on cash following the 2008-09 global financial crisis was a meager 0.8 percent, while the average for the period between 2020 and 2022 stood at 1.8 percent. These figures further emphasize the anomaly of the current situation. Looking ahead, TD anticipates a decrease in cash yields to 4 percent in the coming year and 3 percent by 2025. Although these projected returns still surpass those experienced post-financial crisis, it is evident that the era of high cash returns is gradually fading away.

Considering the Exit Strategy:

Given the transient nature of this favorable cash environment, investors must contemplate their exit strategies. Holding onto cash beyond its peak performance can lead to missed opportunities and potential losses. Firstly, investors must assess the real rate of return on cash. If cash fails to surpass inflation, it essentially erodes the value of one’s investments over time.

Secondly, it is crucial to consider the potential returns from alternative assets. Bonds, for instance, have already shown signs of rebounding from recent setbacks, while certain sectors in the stock market have demonstrated robust returns. Broad stock market indexes in both Canada and the United States are on track for a strong performance in 2023. As cash returns gradually decline to 4 percent and 3 percent, the allure of cash diminishes in comparison to the potential gains in other asset classes.

Planning for the Future:

While there is no immediate rush to reallocate cash holdings or deplete them entirely, now is an opportune moment to contemplate the redeployment of these funds. One potential strategy is to consider a balanced portfolio consisting of 60 percent stocks and 40 percent bonds. Although bonds faced challenges in 2021 and 2022, it appears that this anomaly has run its course. Stocks may experience setbacks if the economy significantly slows down, but the presence of bonds should provide a cushion against potential downturns.

Conclusion:

The unprecedented rise in cash returns during 2023 has presented investors with a unique opportunity to earn substantial profits with minimal risk. However, as TD Economics predicts a gradual decline in cash yields in the coming years, investors must reevaluate their investment strategies and plan for the future. By considering the real rate of return on cash and exploring the potential gains from alternative assets, investors can make informed decisions about reallocating their cash holdings. While there is no need for immediate action, now is the time to contemplate and prepare for the changing landscape of cash returns.