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Cash is appealing when stocks and bonds continue to be buffeted by inflation, weaker corporate profits, U.S. regional-bank failures, debt-ceiling standoffs and a whole lot more.

But stay parked in cash for too long and there may be a risk of losing out on bigger gains elsewhere.

This risk may be hard to see right now, admittedly. Rising interest rates have raised the returns on cash-like investments, where your money might be locked in for short periods, at a time when economic clouds continue to hang over the stock market and bond prices remain in the dumps.

Money market funds – which hold short-term government securities and can be bought and sold daily – can offer annualized yields above 4.5 per cent, with no fear of losing money. Some one-year guaranteed investment certificates will deliver even more.

Sure, these yields lose some of their appeal when you adjust for inflation, which in Canada clocked in at 4.4 per cent in April, from a year earlier. But the attraction may be hard to resist for investors still wary of stocks and bonds after last year’s tumult.

The S&P 500 fell about 18 per cent in 2022, including dividends. Government bonds, which normally offer a buffer against a downturn in the stock market, also fell sharply as central banks raised interest rates.

That made cash one of the best ways to sit out last year’s headaches, and its appeal grew stronger as yields on money market funds and GICs steadily increased.

Some observers expect stocks will continue to be volatile this year, even if the Federal Reserve ends its rate-hiking campaign next month. That’s because there is a historical tendency for stocks to fall to new lows in the monetary cycle after the first rate cut.

“The bullish scenario of equity market gains based solely on the end of rate hikes does not seem plausible,” Lisa Shalett, chief investment officer at Morgan Stanley’s wealth-management division, said in a note this week.

Add continuing fears of a recession to the mix and it’s little wonder investors are hoarding cash. In the United States, total assets in money market funds have increased by 12.5 per cent since the end of 2022, according to data from the Investment Company Institute.

But this might not be a healthy trend for investors with longer-term time horizons.

“I think people are always reacting to the last event that has scarred them,” Gargi Chaudhuri, BlackRock’s head of iShares investment strategy for the Americas, said in an interview.

She’s referring to last year’s disappointments, which affected just about everyone, from sophisticated institutional investors to retail investors with portfolios of stocks and bonds.

But cash has slipped in the ranks this year. According to BlackRock’s figures to the end of April, it has trailed just about everything in 2023.

European, Japanese and U.S. stocks have rebounded. Even investment-grade bonds, high-yield bonds and real estate investment trusts have outperformed after their distributions are included.

More specifically, the S&P 500 index is up 9 per cent, as of Friday afternoon. U.S. tech stocks are up 27 per cent. And Canada’s S&P/TSX Composite Index is up 5 per cent – more if dividends are included – or about double the return of any cash investment over the first five months of the year.

“I understand the urge to gravitate to cash,” particularly in the case of short-term investors who might be saving up to buy a home, Ms. Chaudhuri said.

But investors with time horizons that extend beyond a couple of years might want to check the impulse to hold on to what worked last year and explore other opportunities.

High-quality stocks – companies with strong balance sheets and resilient profit margins – look right over the next six to 12 months, given that signs of an economic slowdown are emerging, Ms. Chaudhuri said.

Short-term government bonds and investment-grade corporate bonds, with durations of two to three years, are also appealing.

If interest rates don’t move higher – which is a reasonable outlook – these bonds can deliver mid-single-digit returns on the coupons alone, Ms. Chaudhuri said. And if central banks cut rates, perhaps next year if the economy slows, bond prices will move higher, rewarding investors even more.

Regardless of what works well this year, though, long-term historical returns stand as a clear warning to investors still clinging to cash: Over the past 10 years, the S&P 500 has delivered a total return of about 12 per cent a year, on average.

That’s hard to beat, especially with cash.