If you are reading this post, I guarantee I got you by the title. But stick with me, there are some important mistakes we all make that I need to address. I see many of my friends, clients, loved ones making some serious mistakes and rationalizing them away like it is nothing. But it costs them in the long run, more than they know.
I am talking about the cash trap!
Throughout my years as an advisor, I cannot tell you how many clients, prospective clients, friends, and acquaintances at a cocktail party have told me, “I am just sitting on too much cash”. While this may seem like a good problem to have (I still have yet to have anyone tell me, “I have way too much money”), it is actually damaging to their finances.
Most people I meet with this problem have a fear of “the market”. What if I put it in at the wrong time? What if World War III breaks out the day after I invest it? These thoughts lead to the “monkey mind” that is usually accompanied by cold sweats and ultimately an indecision about whether or not to invest their extra cash they are sitting on. This mental gymnastics comes up every time someone tells me they are sitting on too much cash.
Higher yields on money market accounts and CDs in the last few years have exacerbated the problem. Many find it easy to just sit in cash “because I am earning 4% and the market is too volatile”. The ironic thing is this “safe 4%” has actually guaranteed them a loss!
Let’s look at the data through a different lens. Below is a “heat map” that visualizes historical returns for an asset.
Instead of a simple line graph, these charts allow us to see how an investment performed over every possible timeframe. Here is how to read them:
- The Grid: Each row and column represents a specific year.
- The Diagonals (Time Horizons): Each diagonal line represents a specific holding period.
- The first diagonal shows 1-year returns (e.g., 2007–2008, 2008–2009).
- The second diagonal illustrates 2-year annualized returns, and so on.
By looking at the "heat" (the colors) across these diagonals, we can quickly identify patterns—like how often the asset stayed "green" during 5-year stretches versus 1-year spikes. It effectively turns a mountain of data into a single snapshot of Steiner-period performance.
Let’s put two side by side and then I want you to guess which heatmap is for cash and which heatmap is for the S&P 500. Remember, red is when the asset was down, green is when the asset was up.
If you are like me, you would logically guess the first heatmap is the stock market (because it has more red) and the second heatmap is cash because it doesn’t have as much red (i.e. it seems to be safer). It’s the opposite.
These two heat maps represent the returns for cash and the S&P 500 adjusted for inflation. I’ll ask it again, which is more risky? Probably the cash.
Another question I want to ask, “is the boogey man really there like you think it is?”. Take a look at the second heatmap that represents the S&P 500. Notice where all the red is and where all the green is. There seems to be more red in the top few diagonals but no red toward the bottom left-hand side of the heatmap.
Therefore, what’s actually important with your cash? Time.
I’m not trying to argue cash isn’t important to hold. It is. But you need the proper amount. Holding too much cash leaves you overexposed to all that red in the first heatmap. To invest properly, you need to structure your balance sheet and investment portfolio to be able to let time work for you (i.e. end up in the lower left hand corner of the second heat map). Catch my drift?
Said another way, if you are going to need money next year to buy a home, don’t put it in the stock market. If you are going to need money in 10 years to buy a home – put it in the stock market.
Since I usually am the life of the party, the next time someone tells me they are “holding too much cash” at a cocktail party, I’ll pull out a heatmap. Yes, I’m just that cool.
Disclosure: Heatmaps and data provided by Dimensional Fund Advisors via their 2025 Matrix Book