Cash is a terrible long-term investment

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gammalaser
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Cash is a terrible long-term investment

Post by gammalaser »

A great video by Ben Felix on why cash is a terrible investment for the long term
https://www.youtube.com/watch?v=KdzOlRRHOU8

Key points: Cash has low expected returns in the long run due to not carrying any risk premium. And even in a high interest rate environment, stocks/bonds have superior long term expected returns.

My conclusion: Stick to your stock/bond allocation. Don't try to tactically change to cash even in the short term unless you actually need to spend that cash soon or as an emergency fund!
Last edited by gammalaser on Fri Sep 01, 2023 7:17 am, edited 1 time in total.
Tib
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Re: Cash is a terrible long-term investment

Post by Tib »

Felix's argument is clear and interesting. But one of its premises, defended in the video, is that when bonds or stocks fall because of increased or increasing interest rates, their expected return (from their lower prices) tends to rise to compensate for the fall. Is that premise generally accepted even with regard to stocks?
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blimp
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Re: Cash is a terrible long-term investment

Post by blimp »

I agree with the video. A 0% cash allocation is appropriate.

I'm not sure why people think 5% interest on a high-yield savings account when inflation is 7% is a good return. A negative real return is horrible as you are losing purchasing power.

If you are a long-term investor, temporary drops in the value of bond funds due to rising interest rates aren't very significant.
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Re: Cash is a terrible long-term investment

Post by ivgrivchuck »

Tib wrote: Fri Sep 01, 2023 1:52 am Felix's argument is clear and interesting. But one of its premises, defended in the video, is that when bonds or stocks fall because of increased or increasing interest rates, their expected return (from their lower prices) tends to rise to compensate for the fall. Is that premise generally accepted even with regard to stocks?
Generally yes. Bonds pay coupons, stocks pay dividends. When the price of security goes down, the expected return goes up.

The caveat is that rising interest rates may cause the economy to contract which obviously may impact future dividends.
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Re: Cash is a terrible long-term investment

Post by Northern Flicker »

Tib wrote: Fri Sep 01, 2023 1:52 am Felix's argument is clear and interesting. But one of its premises, defended in the video, is that when bonds or stocks fall because of increased or increasing interest rates, their expected return (from their lower prices) tends to rise to compensate for the fall. Is that premise generally accepted even with regard to stocks?
As long as the words I colored in red are used, then I think it is correct.

Rising rates increases the discount rate used to discount projected future cash flows back to a present value, leading to a lower present value. From the lower present value, the projected future cash flows require a higher yield to materialize. If the cash flows materialize, we would project a higher return relative to the lower present value, all else equal.

But there is no guarantee that the same future projected cash flows will materialize after rates rise. Rising rates may slow the economy, and may increase a company's debt service cost.
DayOfChange
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Re: Cash is a terrible long-term investment

Post by DayOfChange »

blimp wrote: Fri Sep 01, 2023 2:07 am I agree with the video. A 0% cash allocation is appropriate.

I'm not sure why people think 5% interest on a high-yield savings account when inflation is 7% is a good return. A negative real return is horrible as you are losing purchasing power.
The same exact thing can be said about bonds
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Re: Cash is a terrible long-term investment

Post by Tom_T »

blimp wrote: Fri Sep 01, 2023 2:07 am I agree with the video. A 0% cash allocation is appropriate.

I'm not sure why people think 5% interest on a high-yield savings account when inflation is 7% is a good return. A negative real return is horrible as you are losing purchasing power.

If you are a long-term investor, temporary drops in the value of bond funds due to rising interest rates aren't very significant.
Inflation rate is 3.2% as of July, so 5% provides a real return, not a loss.
Claudia Whitten
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Re: Cash is a terrible long-term investment

Post by Claudia Whitten »

Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
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Re: Cash is a terrible long-term investment

Post by tonyclifton »

Cash as part of a long term investment strategy (aka dry powder) is very different than cash for spending. I was burned twice investing cash that I needed for major expenses. Lesson learned, I have no problem keeping and building cash to pay for major expenses likely to occur (like buying a car). And yes, I do count this cash as part of our portfolio and asset allocation.
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Re: Cash is a terrible long-term investment

Post by Mopar440 »

+1 for Claudia Whitten
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Re: Cash is a terrible long-term investment

Post by SquawkIdent »

blimp wrote: Fri Sep 01, 2023 2:07 am I agree with the video. A 0% cash allocation is appropriate.

I'm not sure why people think 5% interest on a high-yield savings account when inflation is 7% is a good return. A negative real return is horrible as you are losing purchasing power.

If you are a long-term investor, temporary drops in the value of bond funds due to rising interest rates aren't very significant.
YMMV but some return is better than nothing or a loss. How did you feel last year when the market lost 20%, bonds lost 13% and inflation was about 7%? What happened to your buying power?

Diversification is a good thing. Yes I agree, being a long term investor is a good thing. But losses can’t pay my bills. And selling low is something I try to avoid. Having some cash on hand allows me to not do that.
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Re: Cash is a terrible long-term investment

Post by SquawkIdent »

Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
+1

Nicely said.
CloseEnough
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Re: Cash is a terrible long-term investment

Post by CloseEnough »

Tom_T wrote: Fri Sep 01, 2023 4:56 am
blimp wrote: Fri Sep 01, 2023 2:07 am I agree with the video. A 0% cash allocation is appropriate.

I'm not sure why people think 5% interest on a high-yield savings account when inflation is 7% is a good return. A negative real return is horrible as you are losing purchasing power.

If you are a long-term investor, temporary drops in the value of bond funds due to rising interest rates aren't very significant.
Inflation rate is 3.2% as of July, so 5% provides a real return, not a loss.
Exactly what I was thinking. Citing inflation "is 7%" is inflated.
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Re: Cash is a terrible long-term investment

Post by UpperNwGuy »

SquawkIdent wrote: Fri Sep 01, 2023 5:57 am How did you feel last year when the market lost 20%, bonds lost 13% and inflation was about 7%? What happened to your buying power?

... losses can’t pay my bills. And selling low is something I try to avoid. Having some cash on hand allows me to not do that.
Buying power? Are you paying your monthly bills out of your investment portfolio?

I don't care if my stock or bond holdings lose value over the course of a year, or two years, or even a longer period. They will regain their lost value over the long-term, and I'm a long-term investor.
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Re: Cash is a terrible long-term investment

Post by Stinky »

Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
Excellent post.
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Re: Cash is a terrible long-term investment

Post by student »

Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
Great post.
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Re: Cash is a terrible long-term investment

Post by tennisplyr »

Sometimes investing is not about making money, it's about sleeping well at night.
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Re: Cash is a terrible long-term investment

Post by Call_Me_Op »

gammalaser wrote: Thu Aug 31, 2023 10:53 pm A great video by Ben Felix on why cash is a terrible investment for the long term
https://www.youtube.com/watch?v=KdzOlRRHOU8

Key points: Cash has low expected returns in the long run due to not carrying any risk premium. And even in a high interest rate environment, stocks/bonds have superior returns.
You mean that even in a high interest rate environment, stocks/bonds have superior long-term expected returns. It is certainly not true that over the next year, a 10 year bond has a higher expected return than a 1 year TBill.
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Re: Cash is a terrible long-term investment

Post by Call_Me_Op »

SquawkIdent wrote: Fri Sep 01, 2023 5:59 am
Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
+1

Nicely said.
Agreed!
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gammalaser
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Re: Cash is a terrible long-term investment

Post by gammalaser »

Call_Me_Op wrote: Fri Sep 01, 2023 7:05 am
gammalaser wrote: Thu Aug 31, 2023 10:53 pm A great video by Ben Felix on why cash is a terrible investment for the long term
https://www.youtube.com/watch?v=KdzOlRRHOU8

Key points: Cash has low expected returns in the long run due to not carrying any risk premium. And even in a high interest rate environment, stocks/bonds have superior returns.
You mean that even in a high interest rate environment, stocks/bonds have superior long-term expected returns. It is certainly not true that over the next year, a 10 year bond has a higher expected return than a 1 year TBill.
Yes! Edited OP for clarity.
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Re: Cash is a terrible long-term investment

Post by Call_Me_Op »

I think we also have to remember that we are currently experiencing an inverted yield curve - which is not a very common situation. One normally expects to be rewarded for taking duration risk with bonds. I don't think it is unreasonable to take advantage of the higher rates for short durations and adjust as the yield curve adjusts.
Last edited by Call_Me_Op on Fri Sep 01, 2023 7:20 am, edited 1 time in total.
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Re: Cash is a terrible long-term investment

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UpperNwGuy wrote: Fri Sep 01, 2023 6:06 am
SquawkIdent wrote: Fri Sep 01, 2023 5:57 am How did you feel last year when the market lost 20%, bonds lost 13% and inflation was about 7%? What happened to your buying power?

... losses can’t pay my bills. And selling low is something I try to avoid. Having some cash on hand allows me to not do that.
Buying power? Are you paying your monthly bills out of your investment portfolio?

I don't care if my stock or bond holdings lose value over the course of a year, or two years, or even a longer period. They will regain their lost value over the long-term, and I'm a long-term investor.
Yes, buying power. What your money actually buys. I will be paying bills out of my investment accounts. What’s the point of having them if you aren’t actually using them. Not sure where you’re going with that. This is not legacy money.

What do you consider long term? If your withdrawal percentage is low enough then no problem. However, I’m sure many folks around here would be thinking about this differently if we had a long term (10-15 years for example) bear or sideways market.
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Re: Cash is a terrible long-term investment

Post by SquawkIdent »

Call_Me_Op wrote: Fri Sep 01, 2023 7:18 am I think we also have to remember that we are currently experiencing an inverted yield curve - which is not a very common situation. One normally expects to be rewarded for taking duration risk with bonds. I don't think it is unreasonable to take advantage of the higher rates for short durations and adjust as the yield curve adjusts.
+1 That’s called taking advantage of an opportunity. Sometimes known as market timing around here.
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Re: Cash is a terrible long-term investment

Post by Wanderingwheelz »

I doubt you’re going to come across many investors who view cash as a long-term investment in their financial plan. An investor who has a cash position over say 30 years has it to meet short-term obligations, not for long-term needs.
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Re: Cash is a terrible long-term investment

Post by Call_Me_Op »

SquawkIdent wrote: Fri Sep 01, 2023 7:21 am
Call_Me_Op wrote: Fri Sep 01, 2023 7:18 am I think we also have to remember that we are currently experiencing an inverted yield curve - which is not a very common situation. One normally expects to be rewarded for taking duration risk with bonds. I don't think it is unreasonable to take advantage of the higher rates for short durations and adjust as the yield curve adjusts.
+1 That’s called taking advantage of an opportunity. Sometimes known as market timing around here.
That's not what I call market timing. That is a bond strategy that accounts for value and risk. Market timing is actually avoiding the short-term maturities because you think you know what rates will do in the near future. I use the Larry Swedroe rule of thumb, which states that investors are usually rewarded when the duration premium is greater than 20 bps per year of maturity.
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Re: Cash is a terrible long-term investment

Post by beardsicles »

My goal has been to maintain the purchasing power of my cash. I’ve mostly accomplished this by laddering I Bonds to the point that I float almost nothing in checking, keep some cash in a floating rate ETF, and the rest in I Bonds. It’s as close to cash-like I can get while not losing purchasing power. While not strictly cash under a pillow, I mentally bucket it as cash.
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Re: Cash is a terrible long-term investment

Post by MrMars »

I would argue that calling cash an "investment" is intentionally misleading. Cash is not an investment. An "investment" is literally something from which an individual is expending a resource in hopes of what is perceived to be a likely positive future return.

IMO, cash is a tool that has a very real place in an financial plan.
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Re: Cash is a terrible long-term investment

Post by SquawkIdent »

Call_Me_Op wrote: Fri Sep 01, 2023 7:31 am
SquawkIdent wrote: Fri Sep 01, 2023 7:21 am
Call_Me_Op wrote: Fri Sep 01, 2023 7:18 am I think we also have to remember that we are currently experiencing an inverted yield curve - which is not a very common situation. One normally expects to be rewarded for taking duration risk with bonds. I don't think it is unreasonable to take advantage of the higher rates for short durations and adjust as the yield curve adjusts.
+1 That’s called taking advantage of an opportunity. Sometimes known as market timing around here.
That's not what I call market timing. That is a bond strategy that accounts for value and risk. Market timing is actually avoiding the short-term maturities because you think you know what rates will do in the near future. I use the Larry Swedroe rule of thumb, which states that investors are usually rewarded when the duration premium is greater than 20 bps per year of maturity.
I don’t think of it as market timing either but I know some who would. Also, I think the Larry Swedroe rule of thumb is a good one.

I look at it as I have the opportunity to buy an asset that pays 5.28% right now (VFMXX for example). I also have an opportunity to buy an asset paying about 5.5% now and longer term (CDs and T Bills).

Does that fit my risk profile for those funds? If yes, then buy/invest. If not, keep looking.
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Re: Cash is a terrible long-term investment

Post by rkhusky »

tennisplyr wrote: Fri Sep 01, 2023 6:37 am Sometimes investing is not about making money, it's about sleeping well at night.
Sleeping well at night doesn’t compensate for making uninformed, incorrect or irrational choices. Cash is the best choice for many situations, but there are also many situations where bonds (or CD’s) would be more appropriate.
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Re: Cash is a terrible long-term investment

Post by cmr79 »

I keep cash not as an investment but for utility. It is a small and fixed part of my assets based on expected expenditures over the next several months. Honestly, the fact that I get any significant interest return on it is a perk not unlike the cash back credit card rewards we get, not a necessary feature. The return on cash will never be enough to move the financial needle for us.
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Re: Cash is a terrible long-term investment

Post by 6bquick »

Call_Me_Op wrote: Fri Sep 01, 2023 7:08 am
SquawkIdent wrote: Fri Sep 01, 2023 5:59 am
Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
+1

Nicely said.
Agreed!
Another voice in the chorus praising this. Well put.
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Re: Cash is a terrible long-term investment

Post by N.Y.Cab »

The sweet spot in fixed income now is around 6 months. Cash is just another form of fixed income with the lowest duration that’s good enough in the inverted yield curve environment.
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Re: Cash is a terrible long-term investment

Post by JackoC »

gammalaser wrote: Thu Aug 31, 2023 10:53 pm
1. Key points: Cash has low expected returns in the long run due to not carrying any risk premium. And even in a high interest rate environment, stocks/bonds have superior long term expected returns.

2. My conclusion: Stick to your stock/bond allocation. Don't try to tactically change to cash even in the short term unless you actually need to spend that cash soon or as an emergency fund!
1. Cash v stock and cash v 'bond' are two different discussions. Stocks need to be priced to give a significantly higher expected return than the (govt default risk) cash/bond continuum or else the market is mispriced. Because they have much risk for fundamental reasons. And the BH assumption is that market mispricing is too unusual and/or hard to identify in advance to be worth considering in one's investment plan.

Govt risk 'cash' and 'bond' are in contrast really just variations on the same theme as to risk. There is a risk to lenders (ie bond buyers) to lock in a fixed rate for long term (long term fixed rate nominal bonds) v not ('cash' or floating rate bonds) lest it turn out lower than they could achieved rolling over 'cash' or buying a floating rate bond. But there's a risk to borrowers to lock in a term rate, lest it turn it out higher than they could achieved with short term rollover or floating. There's a risk premium there, but it doesn't even have to be in one direction let alone anything like constant. It's called the 'term premium'. Term premium does *not* mean the shape of the observable yield curve. It means the difference in expected return between rolling over short term investments out to term T v the rate you can lock in now out to T. It's generally been positive, meaning lenders are rewarded extra return for taking term risk. But models which seek to quantify it have tended to show it declining over time, calling into question saying 'bonds return more than cash' just looking at history. The NY Fed's 'ACM' model has been putting out a generally negative expected term premium in 10 yrs for the last few years, in a model fitted to the past data. See link, and look up some recent threads on this for more info. Other variations on the discussion might consider term premium along the TIPS curve, since TIPS are arguably more suitable investments for some individual investors than nominal treasures.
https://www.newyorkfed.org/research/dat ... nteractive

It's not clear the expected return of term nominal treasuries now is higher than 'cash', though the average past realized return was higher.

2. Depends what you're changing to/from and what's 'tactical'. I agree changing from risky (stock) to/from low risk (govt risk cash bond) because 'you have a feeling' (and/or based on some media or prognosticator) is going to tend to work out less well than random for typical retail investors. That's the core insight of BH'sm and basically correct IMO. But again cash/bond are the two like things and stock the basically different thing rather than 'stock/bond' being the like things and 'cash' the different thing. So by the same token that we'd at least consider different variations on the stock side (US only, global cap weight or in between?, 'factors' like small, value etc) likewise we would consider variations on the cash/bond side. And those could be due to market price changes. An obvious example would be when best 5 yr CD's yield 1.5%+ more than treasuries v when that spread is much smaller (like now). But also whether TIPS or nominals suit best, or what term is appropriate ('cash' v 'bond' is part of that larger question).
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Re: Cash is a terrible long-term investment

Post by Call_Me_Op »

Perhaps we can agree to append the title: "Cash is a terrible long-term investment....but an excellent short-term one."
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Cash is a terrible long-term investment

Post by gammalaser »

JackoC wrote: Fri Sep 01, 2023 8:40 am
gammalaser wrote: Thu Aug 31, 2023 10:53 pm
1. Key points: Cash has low expected returns in the long run due to not carrying any risk premium. And even in a high interest rate environment, stocks/bonds have superior long term expected returns.

2. My conclusion: Stick to your stock/bond allocation. Don't try to tactically change to cash even in the short term unless you actually need to spend that cash soon or as an emergency fund!
1. Cash v stock and cash v 'bond' are two different discussions. Stocks need to be priced to give a significantly higher expected return than the (govt default risk) cash/bond continuum or else the market is mispriced. Because they have much risk for fundamental reasons. And the BH assumption is that market mispricing is too unusual and/or hard to identify in advance to be worth considering in one's investment plan.

Govt risk 'cash' and 'bond' are in contrast really just variations on the same theme as to risk. There is a risk to lenders (ie bond buyers) to lock in a fixed rate for long term (long term fixed rate nominal bonds) v not ('cash' or floating rate bonds) lest it turn out lower than they could achieved rolling over 'cash' or buying a floating rate bond. But there's a risk to borrowers to lock in a term rate, lest it turn it out higher than they could achieved with short term rollover or floating. There's a risk premium there, but it doesn't even have to be in one direction let alone anything like constant. It's called the 'term premium'. Term premium does *not* mean the shape of the observable yield curve. It means the difference in expected return between rolling over short term investments out to term T v the rate you can lock in now out to T. It's generally been positive, meaning lenders are rewarded extra return for taking term risk. But models which seek to quantify it have tended to show it declining over time, calling into question saying 'bonds return more than cash' just looking at history. The NY Fed's 'ACM' model has been putting out a generally negative expected term premium in 10 yrs for the last few years, in a model fitted to the past data. See link, and look up some recent threads on this for more info. Other variations on the discussion might consider term premium along the TIPS curve, since TIPS are arguably more suitable investments for some individual investors than nominal treasures.
https://www.newyorkfed.org/research/dat ... nteractive

It's not clear the expected return of term nominal treasuries now is higher than 'cash', though the average past realized return was higher.
I assume that by bonds Ben is referring to a bond portfolio that may consist of corporates, MBS, munis, etc. In that sense we could lump both equities and bonds together as carrying additional risk premia over cash and Treasuries.
Last edited by gammalaser on Fri Sep 01, 2023 9:51 am, edited 1 time in total.
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Re: Cash is a terrible long-term investment

Post by AlwaysLearningMore »

Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am Cash's "return on investment" comes in the form of being there if you need it when selling your other investments is impractical (think real estate) or would result in losses (think bear market).

My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.

I always suspect that threads such as this are created by people who want to justify having all their money tied up in risk assets in the hopes of, well, getting rich. Good luck with that. A 2008-style bear market, job loss, and loss of housing will quickly teach you the value of cash.

In my view, one wants a well-diversified portfolio at all times, and cash is one component of that.
Thank you for articulating this so clearly.

(Not everyone wants to place a mutual fund sell order when the credit card bills arrive each month.)
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
the_wiki
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Re: Cash is a terrible long-term investment

Post by the_wiki »

So far I have not seen any arguments refuting the video's main point: Cash is a terrible LONG TERM investment.

He specifically mentions in the video that the cash is ideal for short term and emergency needs.
Bill Bernstein
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Re: Cash is a terrible long-term investment

Post by Bill Bernstein »

It's remarkable how many all-stock enthusiasts there are after a long bull market.

As that great financial economist Mike Tyson said, "Everyone's got a plan until they get punched in the mouth." Cash is what prevents you from suffering the inevitable consequence of being overconfident about your risk tolerance outside the confines of a spreadsheet.

I.e., there's a reason why Warren Buffett/Berkshire holds 20% T-bills/cash equivalents.
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bd7
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Re: Cash is a terrible long-term investment

Post by bd7 »

MrMars wrote: Fri Sep 01, 2023 7:45 am I would argue that calling cash an "investment" is intentionally misleading. Cash is not an investment. An "investment" is literally something from which an individual is expending a resource in hopes of what is perceived to be a likely positive future return.
Perhaps physical Benjamins aren't an investment, but a 3-month T-bill or even a MMF that holds overnight repos certainly is, IMO. So when people talk about 'cash', presumably what they really mean is very short duration ultra-low-risk high liquidity instruments which I certainly think qualify as investments.
dbr
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Re: Cash is a terrible long-term investment

Post by dbr »

bd7 wrote: Fri Sep 01, 2023 10:25 am
MrMars wrote: Fri Sep 01, 2023 7:45 am I would argue that calling cash an "investment" is intentionally misleading. Cash is not an investment. An "investment" is literally something from which an individual is expending a resource in hopes of what is perceived to be a likely positive future return.
Perhaps physical Benjamins aren't an investment, but a 3-month T-bill or even a MMF that holds overnight repos certainly is, IMO. So when people talk about 'cash', presumably what they really mean is very short duration ultra-low-risk high liquidity instruments which I certainly think qualify as investments.
During deflation cash can be a very good investment.
the_wiki
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Re: Cash is a terrible long-term investment

Post by the_wiki »

Bill Bernstein wrote: Fri Sep 01, 2023 10:21 am It's remarkable how many all-stock enthusiasts there are after a long bull market.

As that great financial economist Mike Tyson said, "Everyone's got a plan until they get punched in the mouth." Cash is what prevents you from suffering the inevitable consequence of being overconfident about your risk tolerance outside the confines of a spreadsheet.

I.e., there's a reason why Warren Buffett/Berkshire holds 20% T-bills/cash equivalents.
Does warren buffet call his cash a "long-term investment?"

nothing but straw man arguments in this thread so far.
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Re: Cash is a terrible long-term investment

Post by Broken Man 1999 »

My cash has a lifespan of two-three weeks. That lifespan represents the interval from me taking a distribution from my TIRA, sending the funds to my CU checking account, and the cash being removed from the checking account via bill-paying activities.

The cash distributions from my TIRA are from selling enough investments to realize enough cash to pay my bills. If I am selling Short-term Treasury Bond Index MF, the cash goes straight to my CU checking account, bypassing my settlement fund. Otherwise the proceeds from the sell of an investment will make a brief stop in my settlement fund. Repeated each month.

Actual cash holdings give some posters the ability to SWAN, much like emergency fund do for others. There are no rules concerning cash, one should hold whatever makes them comfortable.


Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
100factorial
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Re: Cash is a terrible long-term investment

Post by 100factorial »

According to the following, equities would have significantly outperformed T-bills even if one had the worst possible timing (investing a fixed amount in the S&P500 at its highest closing value every year).

https://www.firstcitizens.com/wealth/ma ... st-webinar
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bd7
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Re: Cash is a terrible long-term investment

Post by bd7 »

the_wiki wrote: Fri Sep 01, 2023 10:10 am So far I have not seen any arguments refuting the video's main point: Cash is a terrible LONG TERM investment.
Read again. Holding a portion of your portfolio in cash all the time over a very long term is an investment that pays off in ways that are different from an actual numerical return on the asset itself. That simply means that the cash pays off by being there when you need (or want) it, whether that is to handle an unexpected expense or to take advantage of an investment opportunity. We held a big chunk of cash in a MMF all throughout 2022 and then invested it in other stuff at the beginning of 2023. What was the return on that?

Holding a portion in cash long-term may indeed have a lower typical overall numerical return on the cash itself than an index fund, but lower returns does not make it a TERRIBLE investment if it gives you peace of mind and actual financial security as well as the ability to both take advantage of opportunities and shield you from adversity (not needing to sell during bear markets).

So no, some cash is not a terrible long-term position. Cash is not trash. And IMO, right now is not a good time to be cash-light.
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Re: Cash is a terrible long-term investment

Post by AerialWombat »

Claudia Whitten wrote: Fri Sep 01, 2023 5:09 am My cash therefore brings peace of mind, and for that I'm willing to pay. Just so happens that currently my cash is getting a nice return. Even if it weren't, I'd still have it unless we experienced hyperinflation and there was a vehicle that could offset such a calamity.
+1

Even if my cash was earning 0.01%, I would still hold 1/3 of my net worth in savings accounts, money market funds, and T-bills. I held lots of cash before retirement, and hold even more now.

Some people say cash is trash. I say cash buys food, electricity, and shelter. I was poor most of my life, homeless for a number of years even. Cash position provides significant protection against that ever happening again.

The other 2/3 of my net worth, in stocks and rental properties, gets to do the heavy lifting against inflation.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
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Re: Cash is a terrible long-term investment

Post by seajay »

Simba spreadsheet, data since 1871, 60/40 TSM/TBM, 66.7/33.3 TSM/T-Bills, 85/15 TSM/hard cash ... insignificant differences. Some like to shift bond risk over to the stock side. Arguments to suggest cash is 'unworthy' is paramount to suggesting you shouldn't hold any bonds either, just stock alone.

If you're asset allocation is 80/20 and another holds 100/0, and you both end up with a unexpected expense of 20% of their portfolio values at a time when stock prices had collapsed, then the 80/20'er sells their bonds and spends the proceeds and then rebalances the remainder 100% stock to 80/20 by selling 20% of the stock value to buy bonds. Ah but the 80/20'ers portfolio value had declined less in having included some bonds as part of the asset allocation, however the 100/0'er had seen their portfolio value rise more in the lead up to stocks being hit.

Broadly doesn't matter if you do or don't include bonds/cash, can be just a simple roll of the dice. Generally however its better to not have all of your eggs in one basket as high concentration risk is a major risk factor. If you're OK with that concentration risk then why not hold just one, or maybe a handful of individual stocks. For similar reasons why people prefer to diversify stocks across 100's rather than just holding a few individual stocks, people often prefer to hold some cash/bonds.

In many cases the likes of 30 year SWR outcomes will be similar whether you held 60/40 or 100/0. In a smaller number of cases 100/0 does much better, where typically those start dates align with times after stocks had declined a lot, which is the time when potential 100/0'ers are less inclined to have started with 100/0.
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Re: Cash is a terrible long-term investment

Post by the_wiki »

bd7 wrote: Fri Sep 01, 2023 10:43 am
the_wiki wrote: Fri Sep 01, 2023 10:10 am So far I have not seen any arguments refuting the video's main point: Cash is a terrible LONG TERM investment.
Read again. Holding a portion of your portfolio in cash all the time over a very long term is an investment that pays off in ways that are different from an actual numerical return on the asset itself. That simply means that the cash pays off by being there when you need (or want) it, whether that is to handle an unexpected expense or to take advantage of an investment opportunity. We held a big chunk of cash in a MMF all throughout 2022 and then invested it in other stuff at the beginning of 2023. What was the return on that?

Holding a portion in cash long-term may indeed have a lower typical overall numerical return on the cash itself than an index fund, but lower returns does not make it a TERRIBLE investment if it gives you peace of mind and actual financial security as well as the ability to both take advantage of opportunities and shield you from adversity (not needing to sell during bear markets).

So no, some cash is not a terrible long-term position. Cash is not trash. And IMO, right now is not a good time to be cash-light.
Holding cash for reasons other than return on capital is not "investment" and that is not what the video is about. If that is your strategy, you would do it regardless of the interest rate.
Last edited by the_wiki on Fri Sep 01, 2023 11:01 am, edited 1 time in total.
Marseille07
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Re: Cash is a terrible long-term investment

Post by Marseille07 »

AerialWombat wrote: Fri Sep 01, 2023 10:49 am +1

Even if my cash was earning 0.01%, I would still hold 1/3 of my net worth in savings accounts, money market funds, and T-bills. I held lots of cash before retirement, and hold even more now.

Some people say cash is trash. I say cash buys food, electricity, and shelter. I was poor most of my life, homeless for a number of years even. Cash position provides significant protection against that ever happening again.

The other 2/3 of my net worth, in stocks and rental properties, gets to do the heavy lifting against inflation.
Well, Felix said in the video he wasn't talking about an emergency fund - there is no question some amount of cash to buy shelter, food, clothing is beneficial.

He was mostly talking about allocating cash as part of your portfolio.
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Re: Cash is a terrible long-term investment

Post by seajay »

AerialWombat wrote: Fri Sep 01, 2023 10:49 amSome people say cash is trash.
Cash bought 27% more stocks at the end of 2022 than at the start of 2022.
In 2008 cash bought 61% more stocks at year end than at the year start.
Bought 29% more in 2002.
... Average of near 40% more across those three. In 3 of 21 years.
Not totally trash, worthy of perhaps a 3/21 = 14% allocation for those +40% type potential periodic benefits.
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bd7
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Re: Cash is a terrible long-term investment

Post by bd7 »

the_wiki wrote: Fri Sep 01, 2023 10:59 am Holding cash for reasons other than return on capital is not "investment" and that is not what the video is about. If that is your strategy, you would do it regardless of the interest rate.
Peace of mind and paying the bills may not qualify it as an investment, but being prepared to take advantage of opportunities certainly is, IMO. We're all aware of the fact that if you put equivalent amounts of money in a MMF and and a low-cost index fund and then wait 20 years, you'll have lot more in the index fund, except perhaps from 1929 to 1949. That's not news. And yes, I'd do it regardless of the interest rate--the rates at the end of 2021 were 0.01% IIRC and I had a large cash position and it was an excellent investment even though it didn't return anything numerically. But one winning example doesn't prove anything and getting lucky isn't the reason to hold cash--not getting unlucky is. Whether you call that an investment or not doesn't matter much to me nor do I have any desire to 'disprove' the thesis of the video because proponents of such ideas will always manage to restate them in ways that make them true.
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