How to Strike the Right Balance Between Stocks, Bonds, and Cash

Cash and bond yields are at their highest levels in more than 15 years, and many investors are wondering whether they should favor these higher-yielding options over stocks.

Here are my answers to some common questions that investors might have right now, as well as how to approach asset allocation in an era of 5% CD yields.

Cash Allocation Considerations

Question: With the combination of higher yields and stability of principal, cash looks tough to beat today, but I’ve often heard you and others caution against overallocating to it. What’s the problem with holding some extra cash, especially at today’s higher yields?

Answer: I’ll confess that I’ve tended to be a bit cash-heavy in my household’s portfolio over the past few decades. Not only are the yields on various types of cash products compelling today, but cash also offers safety and liquidity. If you’re a cash investor, you do not have the potential for principal volatility. That’s particularly appealing because we’ve seen principal-related losses for some bond investors over the past couple of years, including in 2022 and so far in 2026. Additionally, our annual diversification research has shown that cash is quite a solid diversifier for equities, on par with the diversification benefit that investors receive from bonds.

So why should investors avoid overallocating to cash? One of the key reasons is that cash yields are fleeting: Cash investments are short-term loans to various entities. That means that if interest rates drift down in the future, the high yields on offer today may no longer be available as higher interest rate loans are retired. Certainly, if you lock in a longer-term CD, you’ll be able to benefit from that high yield longer. But if you’re in some sort of a money market mutual fund or high-yield savings account, which are more convenient products than CDs if you need ongoing access to your money, your yield is going to fluctuate based on whatever the prevailing interest rate environment is. Another consideration is inflation risk: When we look at cash yields over very long periods of time, they sometimes beat inflation but not always. That risk is top of mind for all of us as we’ve had higher-than-average inflation recently, and it has been difficult to tamp down. Because your long-term yield and return from cash is typically going to be lower than it is from bonds, inflation will take a bigger bite out of your payout.

Why Bother With Bonds?

Q: I keep hearing it’s a good time to buy bonds. But if I can get a 5% yield on a cash account, and I’m not risking any principal, why would I bother with them?

A: Cash is a good parking place for funds you expect to need to spend soon. But bonds have a couple of key advantages over cash instruments for intermediate time horizons. One is that you are able to lock in a higher yield for longer. If you buy an individual bond with a 10-year maturity, that means that interest rate will prevail over your holding period. Another potential advantage is that you have some appreciation potential with fixed-income investments, which is something you do not have with cash instruments. You won’t have losses with cash, but you won’t have gains, either. If yields go lower in the future from where they are today, bond investors stand to benefit from some appreciation in bond prices. Bonds might also gain value in an equity-market shock, whereas cash investors wouldn’t benefit from any price appreciation.

But bonds are by no means risk-free. If interest rates continue to go up, that has the potential to hurt bond prices, and that’s especially true of long-term bonds. And as with cash, bond investors are vulnerable to inflation: Higher prices mean that any interest you earn won’t go as far as it would have when prices were lower.

How Should Investors Divide Their Assets?

Q: How would you suggest that investors determine how to divide their assets over the three main asset classes—cash, bonds, and stocks?

A: I would put my proximity to needing my money front and center in the decision-making process. Morningstar’s Role in Portfolio framework is helpful for matching various investment types to your time horizon. Cash investments are appropriate if you have a very short-term spending horizon of two years or less, or if you need the money for ongoing liquidity—for example, if you’re retired. I like the idea of retirees earmarking one to two years’ worth of anticipated portfolio spending in cash. If your spending horizon is longer than two years but fewer than 10, that’s where holding bonds is appropriate. And if you have a spending horizon of 10 years or beyond, equities are a reasonable bet.

Secondarily, it’s important to think about your personal attitude toward risks and fluctuations in your portfolio. If your portfolio is too risky, is there a chance that you could sell yourself out in a stock downturn? Also, think about how well-situated your plan is. If you have a tighter plan, that argues for taking a little bit more risk with your portfolio because you need the growth potential. If you have a more flush plan, where you have more assets, there’s more margin for error, and more room for allocating a little bit more to safer assets like cash and bonds for peace of mind.

Withdrawal Rates in Retirement

Q: I noticed in your retirement research about safe withdrawal rates that the highest spending rate corresponded with a low stock weighting. Why is that, given that stocks typically have the highest long-term return of any asset class?

A: In the retirement spending research you mentioned, we employ a “base case” where we assume that someone wants a fixed real paycheck for 30 years of retirement. A consistent finding with that base case has been that thanks to higher yields that are available for cash and fixed-income investments today, the Monte Carlo simulations that we run heavily favor a portfolio with a fairly significant stake in fixed income. In the 2025 research, for example, the highest starting safe withdrawal rate, 3.9%, corresponded with a portfolio with less than half in equities and the remainder in bonds and cash.

At the same time, it’s worth pointing out that we make conservative assumptions about the spending plan. We assume that the retiree is going to withdraw the same amount year after year; the only adjustments to the withdrawals are to increase the paychecks to address inflation. Those assumptions about spending tend to bias our model toward a fairly conservative asset allocation. Meanwhile, in the real world, most retirees are willing to tolerate some fluctuations in their spending from year to year based on how their portfolio behaves. Nonetheless, the finding is food for thought. If you’re a retiree with a 90% equity weighting, the higher yields on offer today should cause you to step back and think about whether you can potentially achieve your goals with a less risky portfolio.

Stock-Focused Retirees

Q: What type of retiree might want to stick with, say, a heavier allocation to stocks in retirement?

A: There are a couple of profiles who might reasonably have higher equity allocations. One would be the retiree who is willing to make course corrections in their spending. In that case, a more equity-heavy portfolio mix might be appropriate. Retirees with sizable portfolios and modest spending can also reasonably maintain more in equities than those with smaller portfolios that they’re spending more from. Finally, there’s a relationship with ending portfolio balances and equity allocations. The more equity-heavy portfolio mixes do tend to have higher residual balances. So, if your goal is to have leftovers at the end of your retirement lifecycle, having a little more in equities will tend to make that more likely.