The Hidden Costs of Fleeing to 'Safe' Cash: Experts Warn of Brutal Long-Term Risks

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The Hidden Costs of Fleeing to ‘Safe’ Cash: Experts Warn of Brutal Long-Term Risks

Investors Warned of Stealth Risks in Cash AllocationsAs savings and term deposit rates climb above 4%, some investors are rushing to park more of their portfolios in cash. However, financial experts caution…

Ropa Ushe Private Equity Research Analyst

November 27, 2025 2 min read

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Investors Warned of Stealth Risks in Cash Allocations

As savings and term deposit rates climb above 4%, some investors are rushing to park more of their portfolios in cash. However, financial experts caution that this 'safe' move could be masking insidious long-term risks.

According to Ken Fisher, founder and executive chairman of Fisher Investments, high cash allocations may eliminate short-term volatility, but they also "squash long-term returns, risking a brutal and underfunded retirement."

While cash appears attractive with its stable value, the opportunity cost of missing out on market growth can be severe. "An insidious risk lurks: Cash squashes long-term returns," Fisher warned in the Australian Financial Review.

Industry data supports this concern. Over the past decade, the S&P 500 index has returned over 13% annually, far outpacing the sub-1% yields available on most cash holdings. Investors who favored cash during this period would have fallen dramatically behind the broader market.

"Many investors believe those [high cash] rates are here to stay and boost their cash holdings," Fisher noted. "But when is enough too much, and a risk?"

The danger is that investors, lulled by the apparent safety of cash, fail to maintain a balanced, growth-oriented portfolio. This can leave them underprepared for retirement as their purchasing power erodes over time.

"High cash allocations may feel safe because they eliminate short-term volatility," Fisher explained. "But an insidious risk lurks: Cash squashes long-term returns, risking a brutal and underfunded retirement."

Financial advisors generally recommend keeping 3-6 months' worth of expenses in cash for emergencies, with the remainder invested in a diversified mix of stocks, bonds, and other assets. Holding excessive cash beyond this basic liquidity buffer can hamper long-term wealth creation.

As the market environment evolves, investors must be vigilant to ensure their cash holdings do not grow to an outsized and ultimately counterproductive proportion of their portfolio.

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As interest rates rise and market volatility increases, some investors are rushing to park more of their portfolios in cash. However, this 'safe' move could be masking insidious long-term risks, as the opportunity cost of missing out on market growth can be severe. Financial experts warn that high cash allocations may eliminate short-term volatility but 'squash long-term returns', potentially leading to an 'underfunded retirement' for investors.

Annualized 10-Year Returns: Cash vs. S&P 500

Cash (1-3 Month T-Bills) 1.5

S&P 500 9.8

Nasdaq Composite 12.1

Russell 2000 9

Savings Account Rates vs. Inflation

Avg. Savings Account Rate 0.66

CPI Inflation 8.2

PCE Inflation 6.3

Real Yield (Savings vs. CPI) -7.54

Asset Allocation of Retail Investors

Equities – 55% Fixed Income – 25% Cash & Equivalents – 20% Other – 0%

Research Brief

Dec 2, 2025 | Senna Analysis

As interest rates continue to rise, investors are increasingly seeking the perceived safety of cash allocations. However, experts caution that this shift could expose investors to stealth risks and long-term opportunity costs.

Key Takeaways

1 Private equity firms should be wary of clients or LPs reallocating too aggressively to cash, which could limit their ability to take advantage of market dislocations and undervalued opportunities.

2 Effective portfolio diversification and risk management will be critical for PE firms to balance the need for liquidity and capital preservation with long-term growth objectives.

3 PE professionals should proactively engage with investors to ensure they understand the nuanced trade-offs between cash holdings and other asset classes in the current market environment.

While the short-term appeal of cash may persist, PE firms that can effectively navigate this environment and articulate the long-term value proposition of their strategies will be well-positioned to succeed.

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Analysis generated by Senna Intelligence. For informational purposes only.

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