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

FILE - A tip jar contains one dollar and five dollar bills, Sept. 6, 2017 in New York. (AP Photo/Mark Lennihan, File)

TOKYO (AP) — Honda’s net profit rose 66% in the first half of its fiscal year, the Japanese automaker reported Tuesday, driven by strong motorcycle sales.

Tokyo-based Honda Motor Co. reported a profit of 516.76 billion yen ($3.3 billion) for the six months through September, up from 311.83 billion yen a year earlier. First half sales rose 13% to 12 trillion yen from 10.6 trillion yen.

The robust results came despite costs in its electric vehicle program, where it dropped some models. Honda said EV-related losses erased 484.8 billion yen from its operating profits.

But officials stressed that Honda expects battery EVs might eventually become more popular and it will remain flexible enough to switch to EV production in the future.

Honda raised its full-year operating profit forecast to 780 billion yen from 650 billion yen.

Honda attributed the more optimistic forecast to favorable exchange rates and efforts to reduce the impact of U.S. tariffs, including shifting production to the United States.

The maker of the Super Cub motorcycle and Accord sedan also announced major production investments in North America and Brazil.

Honda plans to build a new auto production plant in Ohio, increasing production capacity in North America to 1.91 million vehicles by 2029 from 1.67 million. The company expects U.S. demand to grow, especially for its hybrid models.

Honda also plans to expand production of its motorcycle business at its Manaus factory in Brazil, increasing capacity to 2.3 million motorcycles by 2029 from the current 1.6 million.

Honda marked a record for fiscal first half sales in its motorcycle division, as its models proved popular in Brazil and India. It sold 11.9 million motorcycles during the six months, up from nearly 10.8 million the previous year.

However, Honda sold 1.57 million automobiles globally in the first half of the year, down from 1.68 million.

Honda shares, which have risen over the past year, had slipped 1.6% in Tokyo trading on Tuesday before the financial results were released.

Yuri Kageyama is on Threads: https://www.threads.com/@yurikageyama

FILE - This is the Honda logo on a Honda Civic Sport Touring automobile on display at the Pittsburgh International Auto Show in Pittsburgh, Feb. 14, 2025. (AP Photo/Gene J. Puskar, File)