How to strike the right balance between stocks, bonds, and cash

With cash and bond yields at their highest levels in over 15 years, many investors wonder if they should favor these higher-yielding options over stocks.

Here are answers to some questions investors might have about how to approach asset allocation in an era of 5% CD yields.

The yields on cash products are compelling today, and cash investors do not have the potential for principal volatility. That’s particularly appealing because we’ve seen losses for some bond investors over the past few years and so far in 2026. Additionally, our annual diversification research has shown that cash is a solid diversifier for equities , on par with bonds.

But cash yields are fleeting: Cash investments are short-term loans to various entities. If interest rates drift down, the high yields may disappear as higher interest rate loans are retired. If you lock in a longer-term CD, you can benefit from that high yield longer. But if you’re in a money market mutual fund or high-yield savings account, your yield will fluctuate based on the prevailing interest rate environment.

Another consideration is inflation risk. Over very long periods, cash yields sometimes beat inflation, but not always. That risk is top of mind for investors as we’ve had above-average inflation recently. Because your long-term yield and return from cash typically will be lower than it is from bonds, inflation will take a bigger bite out of your payout.

Bonds have some key advantages over cash for intermediate time horizons. First, you lock in the interest rate for longer. If you buy an individual bond with a 10-year maturity, that interest rate prevails over your holding period. Second, you have appreciation potential with fixed-income investments, unlike cash. If yields drop in the future from where they are today, bond investors can benefit from appreciation in bond prices. Bonds might also gain value in an equity-market shock, whereas cash investors wouldn’t benefit from any price appreciation.

Bonds are not risk-free. If interest rates continue to rise, that could hurt bond prices, especially 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.

Morningstar’s Role in Portfolio framework is helpful for matching investment types to your time horizon. Cash investments are appropriate for a spending horizon of two years or less, or if you need ongoing liquidity—for example, if you’re retired. Retirees should earmark one to two years of anticipated portfolio spending in cash. If your spending horizon is two to 10 years, holding bonds is appropriate. For 10 years or beyond, equities are a reasonable bet.

Also consider your attitude toward risks and fluctuations in your portfolio. If your portfolio is too risky, is there a chance you might have to sell stocks in a downturn? If you have a tighter plan, that argues for taking a little more risk with your portfolio because you need the growth potential. If you have a plan with more assets than you need, there may be room for allocating a little more to safer investments like cash and bonds.

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. The more equity-heavy portfolio mixes also tend to have higher residual balances. If your goal is to have leftovers at the end of your retirement life cycle, having a little more in equities can make that more likely.

_____

This article was provided to The Associated Press by Morningstar . For more personal finance content, go to https://www.morningstar.com/personal-finance .

Christine Benz is director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast . Subscribe to her free newsletter, Improving Your Finances .

Related Links:

Morningstar: 4 Dangerous Assumptions That Could Hurt Your Retirement Plan

https://www.morningstar.com/personal-finance/4-dangerous-assumptions-that-could-hurt-your-retirement-plan

Morningstar: What High Inflation Means for Stocks, Bonds, and Your Portfolio

https://www.morningstar.com/portfolios/what-high-inflation-means-stocks-bonds-your-portfolio

Morningstar: Why Cash Is Still King for Short-Term Goals

https://www.morningstar.com/bonds/why-cash-is-still-king-short-term-goals