Cash and interest rates
Cash is not "doing nothing": it earns interest, and that interest is worth the most exactly when stocks are struggling or when interest rates are high.
A real example
In 1980, US inflation ran at about 13.5% a year, and short-term Treasury bills (very safe, very short loans to the government) paid over 10% a year. Cash was not exciting, but it was far from useless.
Why it shifts
What cash pays follows the interest rates central banks set, which rise when they are fighting inflation and fall when they want to support a weak economy. In the 2010s, with rates near zero across much of Europe, cash paid close to nothing; that is a choice by the central bank, not a law of nature.
What cash is for
Over long stretches, broad stock markets have usually beaten cash, but not in every single decade, and never on a guaranteed timetable. Cash's real job is money you will need soon, or a cushion that lets you avoid selling investments at a bad moment.
The trap in the other direction
Treating cash as permanently "safe" ignores that it still loses to inflation when prices rise faster than its rate pays, the same shrinking-in-what-it-buys problem every saver faces.
Key takeaways
- Cash's return follows interest rates set by central banks, not a fixed amount.
- In 1980s conditions cash could pay over 10% a year; near-zero rates make it pay almost nothing.
- Cash's main job is money needed soon or a cushion, not necessarily growth.