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In this Morningstar market brief, it is revealed that the average self-directed Vanguard investor (7 million accounts!) held an asset allocation of 65% stocks, 24% cash, and 10% bonds. That’s a lot more cash than I expected as well.

Then this WSJ article comes up, Wealth Management Has a $3 Trillion Problem: Investors Are Keeping Too Much Cash (gift article). A self-directed investor and former pilot is profiled that keeps 85% in stocks and 15% in a “a money-market fund yielding 3.62%”, which suggests a Vanguard money market fund or another very-low cost money market.

He is keeping 85% of his portfolio in stocks and the rest in a money-market fund yielding 3.62%. Ross looked at historical bear markets and determined they typically don’t last longer than three years. He keeps enough of his portfolio in cash to comfortably get himself through that period, and he sells stocks when he needs to replenish his cash pile.

The rest of the article is about financial advisors thinking this is wrong and suggesting all sorts of alternatives, from muni bonds to private credit to buffer ETFs.

Now wealth and asset managers, eager to prove their worth and in many cases earn more fees, are trying to persuade investors to put it to work. Search for the phrase “too much cash” and you will find numerous articles penned by the likes of JPMorgan Chase and Charles Schwab, warning about the risk of being underinvested.

I found myself siding with the pilot. Maybe an alternative bond fund would give you a slightly higher yield, but the yield curve right now is still not very steep. As long as you are smart with your cash holdings (“cash sort”) and avoid crappy default sweep options with low yield from brokerages (like *cough*, JPMorgan Chase at 0.01% and Charles Schwab at 0.01%!) and instead buying SGOV, VBIL, or a Vanguard money market fund, you won’t be losing that much to a riskier bond alternative. Perhaps that is also partially why the cash allocation of Vanguard investors is so high. Their money market funds are quite good.

Switching to other bonds types can be fine, but be aware of the additional risk you are accepting for that higher yield. You may be taking on principal risk (buffer ETFs can lose money), duration risk (longer-term bonds can lose money), credit risk, or liquidity risk (private credit may limit withdrawals).

Finally, cash is simply a very safe, very short-term bond. Bonds are broken down by maturity, and Treasury bills with under 30 days of maturity are considered cash (“cash equivalents”). I see nothing wrong with taking your risk with stocks and keeping your “bonds” the safest flavor of bonds possible.

Keeping track of TIPS yields is useful because it provides a baseline of the return you can get by taking minimal risk. Beyond just the reliability of US Treasury bonds paying out their interest and return of principal at maturity, TIPS are US government-backed bonds that also address the risk of unexpectedly high inflation.

The real yield on 30-year TIPS has been at ~3% for weeks now as of August 2026, which is the first time since 2008, nearly 20 years ago. At the same time, the 30-year regular Treasury is at 5.3%, making the break-even annual inflation rate roughly 2.3%. This situation has motivated a new article by Edward F. McQuarrie and William J. Bernstein, Long TIPS Yield 3%. Time to Buy?. Only 2.3% inflation for the next 30 years? As the authors state, “Good luck with that.”

I would recommend reading it in full for their blunt and snarky writing style, but here are my major takeaways:

• Long-term TIPS real yields at 3% or above are not common, and they usually don’t last long when they do show up.
• “Regular” nominal bonds are more likely than not to have a 30-year rolling average real return below 3%. One long-term average provided is only 1.5% real (above inflation). They do sometimes, but it’s not guaranteed and it can be a lot lower than 3%.
• Stocks historically do provide 30-year rolling average real returns above 3% (see chart below). But your time horizon must be that long, as the short-term returns can be very different.
• As a result, this may be a good opportunity for a near-retiree or retiree to lock in some guaranteed, inflation-protected income via a ladder of individual, long-term TIPS. Near-retirees might sell other bonds and buy TIPS. Younger folks should still own mostly stocks.
• Per TIPSLadder.com, you can currently get a 4.9% real withdrawal rate by building such a ladder. That means with $1,000,000 invested, you can get $49,000 every year in today’s dollars every year for the next 30 years, adjusted upwards each year exactly to match CPI inflation.

What if you live past 30 more years? Remember, you don’t need to put every penny you have into a TIPS ladder. For example, if you carve out just 10% and put it into stocks instead, after 30 years those stocks will have grown quite a lot, most likely enough to fund another 7-10 years of annual income. Or you could split your portfolio up between stocks and TIPS however you like, knowing that the TIPS will provide a stable sleeve of income.