The Federal Reserve’s decision Wednesday to hold interest rates steady means investors still get to enjoy attractive yields on their cash. Cold, hard cash has also proven to be a good diversifier for portfolios in recent years — even better than Treasurys, according to a recent Morningstar analysis . The financial services firm looked at the trailing three-year period through the end of December 2024 and put cash’s performance alongside bonds. “While both stock and bond prices stabilized in 2023 and 2024 after the painful drawdown in 2022, three-year correlations between stocks and high-quality bonds remain elevated. Treasury bonds, historically among the best diversifiers for U.S. equities, are now positively correlated with U.S. stocks,” Morningstar’s report said. “Cash had the lowest correlation with stocks, in part because it was a rare asset type to exhibit positive returns in 2022. Cash investors’ yields rose at the very time that stock and bond prices were falling,” the Morningstar researchers said. While down from those highs, cash yields remain around 4%, depending on the particular asset. For instance, the annualized seven-day yield on the Crane 100 list of the 100 largest taxable money funds is 4.14%, as of Tuesday. Among certificates of deposit, American Express currently offers a 3.85% annual percentage yield and Marcus by Goldman Sachs has a 4.25% APY. BlackRock also recently highlighted cash, such as shorter term bills and notes, as an alternative asset to consider in high volatile environments because it has typically been less sensitive to interest-rate changes and stock market uncertainty. “Cash-like strategies diversify portfolios away from near term ups and downs by seeking to preserve capital,” the team wrote in its spring 2025 outlook . “By parking cash in a lower risk asset, investors can later deploy it in places that may be attractive when market conditions support.” How to deploy cash Just because cash has proven to be a good way to diversify your portfolio in recent years doesn’t mean you should overdo it, warned Chrsitine Benz, Morningstar’s director of personal finance and retirement planning and on e of the authors of the report. “It’s a good stabilizer. You should hold some in your portfolio, but it’s quite vulnerable to declining yield. So when yields go down, as a cash investor, you’re just a loser,” she said. “Inflation is another big risk factor for any fixed-rate investments, cash and bonds.” How much cash to hold depends on your life stage. It becomes more important as you get older. “Retirees who are in drawdown mode should consider employing cash and short-term bonds alongside their intermediate- and longer-duration core bond holdings,” Morningstar’s report said. That means having one or two years worth of spending in cash, so that if there is another stock and bond rout, as happened in 2022, you don’t have to withdraw from your depreciating assets, Benz explained. For younger investors, three- to six months of liquid reserves to cover living expenses is the general rule of thumb, Benz said. Sole earners, those with more specialized career paths and those over around 60 — who may have a more difficult time finding a job if laid off — should aim for a year’s worth of liquid reserves, she said. An exception to these guidelines would be someone who is a disciplined, opportunistic investor, who likes to put money to work when the market falls, she added. When choosing your cash-equivalent assets, shop around, Benz advised. “There’s a broad gradation of yields on offer and the diversity of yields reflects the implicit costs that are embedded in some of these products,” she said. Benz tends to like Treasury money market mutual funds because there is the implicit guarantee of U.S. Treasury backing. Therefore, investors can exceed the Federal Deposit Insurance Corporation’s insurance limit of $250,000 per depositor, she said. Those who have excess cash should consider deploying it according to their predetermined portfolio allocation. “[For] people under age 50, for example, the name of the game is to get that money invested as soon as possible, because we know that over time, over long periods of time, the market goes up,” Benz said. Gradual deployment Older investors can put excess cash to work more gradually to avoid the risk of sharp losses, she said. UBS has also been suggesting that investors phase cash into more “diverse and durable income sources” to protect their portfolios. “Putting excess cash to work and seeking durable income should remain a strategic priority for investors, in our view,” strategist Vincent Heaney wrote in an April 28 note. “Government and investment grade bonds look particularly appealing in tariff-induced volatility and with recession risks elevated.” At the end of the day, people should remember that the recent performance of cash is partly an outgrowth of a very specific environment, Benz said. “Yields were so low for so long that when bonds fell, they just didn’t have any yield cushion whatsoever,” she said. “So it may be a little bit of an artifact of history, not necessarily repeatable, especially now that bonds do have … yields [that] are more attractive and provide a cushion in periods like this.”
