Still Sitting in Cash? Here’s How Much $10,000 Could Cost You Over the Next 10 Years.

Over the past three years, cash has actually been a reasonable place to keep your money. The iShares 0-3 Month Treasury Bond ETF, for example, offers a 3.6% yield with minimal share price volatility and no credit risk.

For your near-term spending and portfolio cash needs, it’s a great way to earn a solid income while sitting on the sidelines.

The problem comes when that money sits in cash for too long. What can be a nice risk/reward trade-off in the near term can be damaging to returns in the long term.

The hidden cost of keeping $10,000 in cash

Suppose you have $10,000 to invest and can earn 4% annually in a Treasury bill exchange-traded fund (ETF) for the next decade. After 10 years, you’d have around $14,800.

Not a bad outcome. But now let’s consider the alternative.

The S&P 500 (^GSPC +0.43%) has historically produced an average annual total return of roughly 10% over the very long term. Obviously, there’s no guarantee those returns will be achieved in the future, and returns can vary widely from year to year. But for this example, let’s assume a 10% annual return.

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At that rate, $10,000 would grow to roughly $25,900 after 10 years.

That’s a difference of more than $11,000.

And don’t forget that while the 10% annual return of stocks isn’t guaranteed, neither is the 4% return of T-bills. If the Fed begins cutting rates again over the next several years, that 4% yield could shrink quickly, widening the performance gap.

Cash isn’t the problem

This doesn’t mean investors should move all of their cash into an S&P 500 ETF. Cash can have a place in a portfolio as a place to keep money not yet invested or as dry powder to take advantage of market pullbacks.

But long-term investment money is different.

The opportunity cost of being underinvested in stocks for years can be greater than the downside impact of a 20% bear market. In this example, the drag is $11,000 over 10 years. A larger investment held for longer can multiply that amount many times.

It’s an example of how the comfort of less risk can actually be riskier over the long term.

Where I’d put $10,000 today

If I needed the money within the next year or two, I’d be perfectly comfortable keeping it in cash or short-term Treasuries.

If I didn’t expect to touch it for at least 10 years, I’d much rather take the risk of investing in a low-cost S&P 500 ETF and pursue higher returns. Some years will be worse. Some will be better.

In total, over that period, stocks should provide a much better opportunity for long-term growth.