This article was first published on NerdWallet.com.

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode starts with a discussion about cannabis ETFs. While they may seem like an appealing investment, the industry’s volatility should give you pause.

Then we pivot to this week’s question from Pete in Boston. He asks:

“Is it possible to save too much cash? I am 53 years old. I am one of the fortunate ones that have not been financially impacted by the pandemic, and have actually been making a little more money due to a lot of overtime. I signed up for Personal Capital, and it is telling me that I have too much cash and that I should put that money to work for me. I’ve managed to max out my 401(k) this year and have been regularly contributing to a Roth. I have a savings account with my emergency fund, but also have a CD I got last year at a somewhat low interest rate. What should I be doing with the money that I have beyond my emergency fund?

“I would really like to have this money working harder for me. I don’t foresee any large expenses or purchases in the next few years. So should I put this money in some kind of brokerage account? I’ve tried one of the robo-advisors before and was not impressed with it at all. I had money in it for almost three years and didn’t earn anything, so that makes me a little skeptical of these companies/services. Any thoughts or advice would be greatly appreciated.”

Check out this episode on any of these platforms:

• Apple Podcasts
• Spotify
• SoundCloud

Our take

It is possible to have too much cash. If you’re keeping most of your cash in a traditional checking account or in physical cash, you’re missing out on potential earnings from investing that money or putting it in a high-yield savings account. And if your money is languishing in your checking account, it might actually lose value over time as inflation decreases its purchasing power.

You have a number of options to make your money work harder for you. Which might be best depends on when you might need this money and your risk tolerance. A high-yield savings account, for example, is pretty low risk and your cash remains easily accessible. On the other hand, you could put your money in an online brokerage account. This way of investing could produce higher returns, but there is always a risk of loss when investing. And in general, you may not want to invest money that you’ll need within five years.

And if you already have money in an emergency fund and investment accounts but still don’t know what to do with your cash, think about making a charitable contribution to organizations in your local community.

Our tips

• Don’t keep too much cash. If you’re keeping all your savings in cash and not investing, you’re losing out on earnings.
• Think about your time frame. It may be better to put short-term savings goals into a high-yield savings account. Any goals that are further than five years out should be invested.
• Know your options – and your priorities. Robo-advisors are a good choice if you want your investments managed for you, while online brokerage accounts are better if you want to create and manage your own portfolio.

Have a money question? Text or call us at 901-730-6373. Or you can email us at podcast@nerdwallet.com. To hear previous episodes, go to the podcast homepage.

Episode transcript

Liz Weston: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I’m Liz Weston.

Sean Pyles: And I’m Sean Pyles. To contact the Nerds, call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. Or email us at podcast@nerdwallet.com.

Liz: To get new episodes delivered to your devices every Monday, hit that subscribe button. If you like what you hear, please leave us a review.

This episode, Sean and I answer a listener’s question about whether you can have too much cash in your bank accounts. But first, we’re talking with investing Nerd Chris Davis about a different kind of green – cannabis. Specifically, we’re going to chat about cannabis ETFs.

So hey, Chris. Welcome back to the podcast.

Chris Davis: Hey, Liz. Happy to be here.

Liz: Good to have you on, Chris. So with the standard caveat that we are not investment advisors, and do not and will not offer suggestions about how folks can invest their money, can you give us a rundown of what cannabis ETFs are?

Chris: First, just a quick breakdown of what are ETFs compared to stocks. So ETFs, they’re going to invest your money across lots of different companies. It could be bonds or commodities. But in the case of stocks, when you buy an ETF, you’re buying one share of it, or many, but that one share is going to spread your investment across dozens or hundreds of companies. And so, in the case of the cannabis industry, this means you’re spreading your investment across several cannabis companies operating in various areas of the industry. So that could be research and development, growth, distribution and supply chain.

Sean: So it’s essentially a curated list of publicly traded companies in the cannabis industry that you will then be investing in overall, correct?

Chris: Yeah. Yeah, exactly. That’s a good way to put it.

Liz: If people are familiar with mutual funds, they’re kind of the same thing. Except it’s something that you can trade every day, right?

Chris: Exactly. Yep.

Sean: And there are also different tax implications of ETFs compared to mutual funds, but that is a whole different rabbit hole that we don’t need to go down today. All right. So let’s go into why cannabis ETFs are really appealing to some investors. What’s going on there?

Chris: When you buy into a cannabis ETF, you’re really avoiding over-concentrating on an individual cannabis stock. So if you’re buying individual stocks, you’re buying one stock, one company, in one corner of the industry. This is a very young industry, and there’s lots of room for shakeout. So we don’t know who’s going to last in the long term, who’s going to go out of business. Consolidation is going to take place. So when you’re investing in an industry that’s this young, more diversification is extremely important.

Sean: Right. So you’re not putting all your eggs in one basket. You’re putting a few eggs over here, some over there, and you’re hoping that some of them will hatch.

Chris: Exactly.

Liz: So what does the cannabis ETF landscape look like right now?

Chris: Since it is still relatively young, there actually aren’t that many, comparatively. That can be a good thing because it’s going to be easier for you to do your research on those ETFs. A good place to start is you can compare the different holdings of the different ETFs. So if you go to the ETF’s website, you can look at the top 10, or even in some cases, every holding within the ETF, and you can see how much of the fund is invested in these companies. Maybe it’s 8%. Maybe it’s 6%. Maybe it’s 1%. But you can really see where your investment is going within the ETF. And from there, you can start to look around at which one is most appealing to you.

Sean: And at this point, there’s actually an entire index dedicated to marijuana stocks and ETFs, is that correct?

Chris: Yeah. So if you look up the U.S. Marijuana Index, you can use this index to look at how the sector overall is performing over time. And if you look back far enough, you’ll see that it’s been a pretty volatile ride for marijuana stocks.

Liz: Let’s talk about that volatility a little bit. What are the specific risks of investing in cannabis ETFs?

Chris: So again, because it’s such a young industry, there’s lots of those risks. And one of them is going to be regulations. We don’t know what regulations are going to come down. It’s possible that there could be favorable regulation. Also, it’s possible that there could be regulations that make it very difficult for some of these companies to operate. And that’s something that you can speculate on, but we just don’t know which direction that’s going to go.

Liz: I understand that right now, a lot of states have either decriminalized, or basically made it legal, but the feds don’t look at it the same way.

Chris: So there’s this really gray area between state and federal regulations, but many states have recreational marijuana laws in place. Others, it’s still, you know, there are legal penalties for it. So it’s very different. Each state, it’s kind of a patchwork approach right now. And until there’s level federal guidance on what to do, a lot of people are going to be hesitant to get into this.

Sean: Well, let’s talk about the volatility of the markets themselves, because if you look at the performance over a year of a number of these cannabis ETFs, the results are pretty staggering. They’re doing really, really well. But that doesn’t mean that they’re going to be doing really, really well over the next years.

Chris: Again, we just … there’s no way to know. They’re going to get a lot of attention because of the staggering growth that you’re talking about. And you’re going to have a lot of people who come in and want to buy in, and anticipate that it can only go up. But again, there’s just no way to know which direction this is going to go. And if you look back at that, the U.S. Marijuana Index, you’ll see that we’ve had enormous rises before, and then sometimes it’s followed by large declines.

Sean: As we like to say, past performance does not guarantee future results.

Chris: Very important to remember that. Yep.

Sean: Another thing I wanted to ask you about is how cannabis ETFs compare to buying individual cannabis stocks? And then we kind of touched on a little bit before, but can you go deeper into the cannabis stocks part of it?

Chris: Yeah. There are hundreds of marijuana stocks to choose from right now, but it’s important to know that the large majority of these are risky penny stocks. So these are companies that maybe have no proven revenue. They don’t have a business model. We can’t look back at what they’ve done in the last five years. So they’re extremely risky. And so the chances of you finding that one that’s going to break out and have that long-term success? It’s a risky industry already, but if you’re trying to pick and choose individual stocks in the cannabis industry, that just adds another level of risk.

Sean: It reminds me a little bit of all the activity around WallStreetBets on Reddit and GameStop and cryptocurrencies, all of these things that are very speculative.

Chris: In the case of everything you mentioned, a lot of this is driven by hype. It’s what’s making the rounds on the Reddit boards, what’s going on in social media. And it’s people who are buying in strictly because of that hype. It’s possible that there’s an element of that going on with the cannabis stocks right now, too. Perhaps they’re soaring just because it’s hype, rather than people really looking into the fundamentals or an understanding of the industry.

Sean: And that’s why it seems like the more conservative investors who are willing to take a chance on a volatile market like cannabis would be more likely to go toward ETFs.

Chris: Because of that diversification that you’re getting, that volatility, it could be less because in that fund, maybe there’s one far underperformer, but there’s also an outperformer that can help offset those losses.

Liz: I find all this absolutely fascinating, but I’m really not going to change the way I approach investing my real money, which is my money for retirement, because I follow what Warren Buffet said, that most of us are better off in low-cost index funds, not trying to find the next big hit, because most of us will fail.

Sean: All right. Well, Chris, do you have any final thoughts around investing in cannabis and ETFs?

Chris: Maybe just echo what Liz said. It’s very difficult to choose and pick individual stocks. It’s going to be extremely difficult to find something in as new an industry as this.

Sean: Thanks so much for talking with us, Chris.

Chris: Yeah, absolutely. Thanks for having me.

Liz: All right. Let’s move on to this week’s money question, which comes from Pete in Boston. Sean, can you read what he wrote us?

Sean: “Is it possible to save too much cash? I am 53 years old. I am one of the fortunate ones that have not been financially impacted by the pandemic, and have actually been making a little more money due to a lot of overtime. I signed up for Personal Capital, and it is telling me that I have too much cash and that I should put that money to work for me. I’ve managed to max out my 401(k) this year and have been regularly contributing to a Roth. I have a savings account with my emergency fund, but also have a CD I got last year at a somewhat low interest rate. What should I be doing with the money that I have beyond my emergency fund?

“I would really like to have this money working harder for me. I don’t foresee any large expenses or purchases in the next few years. So should I put this money in some kind of brokerage account? I’ve tried one of the robo-advisors before and was not impressed with it at all. I had money in it for almost three years and didn’t earn anything, so that makes me a little skeptical of these companies/services. Any thoughts or advice would be greatly appreciated.”

Liz: All right. To help us answer Pete’s question, on this episode of the podcast we’re joined by investing Nerd Alana Benson.

Sean: Hey, Alana. Welcome on to the podcast.

Alana Benson: Hey. Thanks for having me.

Sean: So our listener, Pete, has a lot of good questions about how to make his money work harder for him. But first I think it might be helpful to zoom out a little bit and look at the bigger financial picture. So Liz, I’m going to lob this first question at you. What do you think someone in Pete’s situation should be thinking about?

Liz: Well, it sounds like he’s got his bases covered with retirement investing, although I would go back and just make sure that he is saving enough for that end. Then I’d look at how big is that emergency fund. Is it three to six months? Maybe if his job isn’t stable or he’s extremely nervous, it could be larger. Is he adequately insured? Does he have long-term care and disability insurance? Does he have kids? Is he saving for college? And finally, is he on track to pay off his mortgage by retirement? Those are just the highlights of things that I would think about before I would go ahead and invest more money.

Sean: Right? And the housing aspect is one question that I have as well, because he didn’t mention that he has a mortgage. He might be renting. So if he doesn’t have a house, maybe that would be a goal. Something like saving for a down payment on a house.

Liz: Yeah. Not everybody needs to be a homeowner, but really it’s something that long term, most people want to be.

Sean: Well with that, I think we can now get to Pete’s first question – one of his many questions – which is, is it possible to save quote-unquote “too much cash?” So Alana, what do you think about that?

Alana: I think that, yes, it definitely is possible to save too much cash. And then this really hinges on the word cash. So when you’re taking all the money that you’re able to save and either keeping it in physical cash or in a regular savings account, you’re actually losing out on the potential earnings that you could be making by investing that money. Like, for example, if you hid $1,000 under your mattress for 30 years, you’d still have $1,000 when you pulled it out. But if you invested that money instead, you could have so much more than that. And the other thing to think about, too, is that over time, inflation can actually erode your cash’s purchasing power, which means that the same dollar amount will just buy less as time goes on.

Sean: I think a lot of folks are wary of investing, though, because they think that they might lose all of their money. And what do you think people in that situation should keep in mind?

Alana: And it is possible, right? Like you technically could potentially lose all of your money. But I think it’s really important to keep in mind that all forms of investing carry some kind of risk, and that some are just much more risky than others. For example, if you invested in a single stock and then that company actually went out of business, you’d lose your whole investment. Versus if you had a fund and that company stock was just one of many stocks within that fund, then it really wouldn’t be that big of a deal. So it is possible, but losing all of your money is something that can happen when you’re invested in these more risky forms of investments.

Sean: But as you pointed out with your example about stashing cash under your mattress, there’s a risk and an opportunity cost to not doing anything with your money, because even though it would be that same $1,000, as you pointed out, it could have a lot less purchasing power over time.

Alana: And I know that people may deal with some anxieties when it comes to getting started with investing. I think it’s important to know that you don’t need to know a lot about investing to start. In fact, the folks that try to predict the stock market and day trade, they actually underperform more often than the folks that just buy a simple index fund and forget about it until they retire.

Liz: It sounds like Pete wants to make his money work harder for him. And this basically comes down to finding the right financial product for what he needs. What options do you think he should look into?

Alana: There are a couple of different ways that you can do this. First thing that you’ll need to think about is when you’re going to need the money that you’re saving. So if you are going to need that money within five years, it’s actually better to put it into a high-yield savings account rather than invest it. So that way you can get to your money whenever you need it, but you’ll still earn a modest return.

I love the high-yield savings account. I’ve been saving for a down payment on a home and I have it in a high-yield savings account. And so I’ve been getting monthly interest payments. Right now, the rate’s about 0.5% APY. But before the pandemic, it was much higher. It was closer to 1.5%. So I’m earning that return, but I also have access to that money whenever the perfect house comes along.

Sean: You pointed out that your APY is 0.5%, and mine is actually right about there too. And it is a little bit sad to see how it’s come down from around 1.5, like yours, before the pandemic. And that’s why I think a lot of people are in the same boat as Pete. They want their money to be working harder for them because having it just sitting in your high-yield account isn’t as great an option as it was a year ago.

Alana: So unfortunately, those rates aren’t as high as they were a year ago. But if you need that money soon, it’s better to have access to it, right? But if you’re saving for a goal that’s further out, typically further than five years away, you can start thinking about investing. The reason for that’s because your investments will be able to ride out the highs and the lows of the stock market over time. And since the market has historically trended upward, the longer you stay invested, the longer your money has to grow. And that’s another thing I’d say to the folks that are worried about losing all of their money. When you’re looking at a day-to-day basis, those look really dramatic. But when you zoom out over 30 years, you really don’t see those huge dips, like the peaks and the valleys. You see the upward trajectory much more clearly.

Sean: People lose sight of that because they get so focused on the day-to-day actions, especially in the past few months as we’ve seen things like GameStop go up and down, and it seemed really erratic. But what matters is the long term, what’s happening beyond a three-week period. A 30-year period is a lot more significant.

Liz: And I’ll just put in that Pete may be 53, which means that retirement is probably in his future in the next 20 years. But he may live 20, 30 years in retirement. So his time horizon could be a lot longer than you think.

Sean: All right. So two popular options that people like to think about are online brokerage accounts, where you take a more hands-on approach to managing your investments, and then robo-advisor accounts that do the work for you. What do you think are the pros and cons of these options, Alana?

Alana: So it really depends on what you’re looking for. Online brokerage accounts are for DIY investors. You’ll need to fund your account and then start choosing different investments, like stocks or mutual funds. Robo-advisors will actually do all of that choosing for you. They usually have a quiz that asks you about your risk tolerance and your timeline, and then they’ll create a portfolio and just manage it for you. Robo-advisors do that for a fee that’s based on your assets under management, but that can be as low as 0.25%. So it depends on what you want. If you’re really passionate about picking your own investments – maybe you’re a socially responsible investor and you want to make sure that the companies line up with your morals – that’s one way you can do it. But if you’d rather hand that off and never think about investing, you can just have a robo-advisor do it.

Sean: For my friends who are just getting into the investing game, their first question to me is often, how do I do it? And do I need a lot of money to do this? And the answer is robo-advisor accounts are pretty simple and straightforward to set up. And then no, you don’t need a lot of money. Even $50 a month deposited into one of these accounts makes it pretty simple to get started.

Alana: Especially the earlier you get started. Fifty dollars a month might not seem like very much, but because of the way compound interest works, over time that will grow to be so much more. So even if you can just be setting a little bit aside every month, you shouldn’t be discouraged. Any amount is better than nothing.

Sean: One thing I had questions about is Pete said that he had his money in a robo-advisor for three years and it didn’t earn anything. So what do you think happened there?

Alana: I think a couple of things could have happened, right? Pete, like you said, mentioned that he’s 53 years old. So it’s possible that in the robo-advisor’s algorithm, it suggested a less aggressive portfolio for him. So people who are getting closer to retirement kind of start shifting their portfolio to a more conservative allocation so that they’re not risking all of their savings. If you work with a robo-advisor, you can change how aggressive your portfolio is to suit your needs kind of regardless of how old you are. And the other issue that could have happened could have just been his time frame. So three years isn’t a very long time to have your money invested. He had, say, $1,000 invested for three years, and he had a return of 6%. He’d probably only make $200.

Liz: Well, that’s a good point. Yeah.

Sean: OK. So one question I have, going back to the idea of brokerage accounts and robo-advisors, is for the purposes of making your money work for you, is one better than another?

Alana: Neither one of these is guaranteed to net you better returns than the other. That has a lot more to do with the risk level of your investments and larger market factors.

Sean: I think people fall into that trap where they try to go for an account that they think will make them the most money, or they try to time the market. And those are really risky things to do, and they often don’t pan out for people.

Alana: Even if you’re just comparing robo-advisor to robo-advisor, a robo-advisor that had a really high rate of return for this year, next year could absolutely have a much lower rate of return. That isn’t necessarily the best benchmark. I would encourage people to look at some of the other features that are offered, whether they have a savings account with a high interest rate, or if they offer access to a financial advisor.

Liz: OK. So what about target date funds as a way for Pete to invest? Can you explain what those are?

Alana: So target date funds are set to have specific portions of the portfolio dedicated to certain investments, depending on how close you are to retirement. So if you’ve got 40 years to go until your target date, meaning when you retire, then your portfolio will likely be heavier in stocks and other more risky investments that can bring in a higher reward. But as you get closer to retirement, the fund will transition you from riskier investments to those more conservative investments. If you have a 401(k), you might already have a target date fund. They’re pretty popular with those employer retirement programs. But if you’d like to invest in one outside of a 401(k), you’ll need a brokerage account to do so. Unlike other investments within your investment portfolio, target date funds are pretty hands-off. So you don’t actually have to rebalance them yourself. It’s kind of similar to a robo-advisor in that way.

Liz: And the alternative then would be to do it yourself, to actually pick the investments and the asset allocation and rebalance and do all the heavy lifting. Right?

Alana: Exactly. That can take some time. Some people aren’t interested in that. And for those folks, I would say that a robo-advisor or a target date fund might be a better option.

Sean: And also we have so many resources at NerdWallet for folks who are beginning investors that can walk you through the very first steps of how to get started in investing. And it helped me when I was first doing this.

Alana: Me too.

Sean: All right. Well, I think that it also would be good to talk about ways that Pete can make his money go further beyond things like investments. And here I’m talking about charitable donations in ways to help people in his local community. Like, Pete’s in Boston, for example. So maybe he can look at local charities or mutual aid funds that can help people who really need it in his community.

Liz: Yeah, it wouldn’t be Smart Money if we passed up an opportunity to tell people who still have some money and have a little bit extra to maybe share the wealth.

Well, that was great information, Alana. Thanks for joining us today.

Alana: Yeah. Thank you for having me.

Liz: All right. And with that, let’s get to our takeaway tips. First, don’t keep too much cash. If you’re keeping all your savings in cash and not investing, you’re losing out on earnings.

Sean: Next, think about your time frame. It may be better to put short-term savings goals into a high-yield savings account. Any goals that are further than five years out should be invested.

Liz: Finally, know your options and your priorities. Robo-advisors are a good choice if you want your investments managed for you, while online brokerage accounts are better if you want to create and manage your own portfolio. And that’s all we have for this episode.

Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That’s 901-730-NERD. You can also email us at podcast@nerdwallet.com. Also, visit nerdwallet.com/podcast for more info on this episode. And remember to subscribe, rate and review us wherever you’re getting this podcast.

Sean: And here is our brief disclaimer, thoughtfully crafted by NerdWallet’s legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.

Liz: And with that said, until next time, turn to the Nerds.

The article Smart Money Podcast: Cannabis Investing and Too Much Cash originally appeared on NerdWallet.