Take a look at this chart and the meaning of the headline is instantly clear. Investing in a 90 day Government of Canada bond now pays over 5% per year. In contrast, for the previous 10 years, the best you could do was less than 2%, and that only lasted for about a year.

The onset of inflation in early 2022 caused central banks around the world, including the Bank of Canada, to boost interest rates by about 5% in a nine-month period. In spite of expectations expressed by many economists and market forecasters, rates have not come down. Strength in the U.S. economy has resulted in continued record low unemployment, and higher than projected GDP growth. Inflation has remained persistent in the 3% to 3.3% range. Now, economists expect rates to stay “higher for longer”.

During the ten years of very low rates, cash was trash. Trying to time the market by staying in cash or short-term bonds produced almost no income, but came with a high opportunity cost. During seven of those ten years, stock markets had gains in the double digits.

We are never fans of market timing, but there are occasions when it is sensible to keep cash on hand. If you know you have a big tax payment coming up, if you are planning to pay off a mortgage or help a child buy a home, or have some other big expenditure than you know about, it might make sense to take some money out of the stock market and put it into a short term High Interest Savings Account or 90 day treasury bills. Removing the fear of volatility and possible loss always comes at a cost, but today, that cost is much lower than it has been any time in the past decade.

For this reason, we are supportive of clients who wish to use cash and cash equivalents to lock in amounts to be used for upcoming liquidity needs. We do not view cash as a good long-term portfolio asset, however, and usually keep cash balances in clients’ portfolios very low. Over time, high quality stocks have outperformed cash and cash equivalents by large margins, and we expect that will continue to be the case even with today’s high interest rates.