Stocks, bonds, and cash: How to strike the right balance with your assets

In an era of soaring cash and bond yields, investors are increasingly considering how to optimally allocate their assets across these options. While cash offers compelling yields and minimal principal risk, there are drawbacks. Cash yields are temporary, as rates are likely to drop, and inflation can erode returns. Additionally, bonds provide advantages over cash for intermediate horizons.

Bond interest rates are locked in, and they have the potential for price appreciation if rates fall. Bonds may also fare better during equity market downturns compared to cash. However, bonds are not completely risk-free and can suffer if interest rates rise, and they are also vulnerable to inflation.

Morningstar's framework suggests that cash is suitable for spending horizons of two years or less or for investors needing ongoing liquidity. For a two-to-10-year horizon, bonds are appropriate, while equities are suitable for 10 years or beyond. Investors should also consider their risk tolerance and the potential necessity to sell stocks during market downturns.

Retirees willing to make course corrections in their spending might benefit from a more equity-heavy portfolio, particularly if they have sizable portfolios and modest spending needs. Allocating a larger portion of assets to equities can leave a higher residual balance for retirement, which can be advantageous for those aiming to have funds left at the end of their retirement life cycle.