The Risk of Having too much Cash

Why too much cash not a good thing

Holding some cash for emergencies or short term opportunities is a sound idea. But having too much cash sitting around instead of putting the money into investments can be financially unwise.

Like most things in life, there is a cost component to cash. Usually cash produces lower returns than other asset classes such as stocks or bonds. One advantage of holding cash is to deflect volatility in a portfolio. But with a longer time horizon investors can manage volatility by using fixed income vehicles instead of cash. Long term corporate bonds from large, stable companies such as Enbridge pay 3.5% or higher annual returns. This easily beats the interest earned in a savings account. πŸ™‚

According to investment management company, BlackRock, people who have allocated their money towards cash or cash equivalent assets actually lost purchasing power in the past. The value of their savings slowly whittled away at 0.8% per year on average between 1926 and 2014. This gives a whole new meaning to cash poor.

Short term vs long term planning

Holding cash for one or two years isn’t a big deal because the loss is very small. But over time it can build up to significant loss of buying power. The longer the investment time horizon, the less cash investors should consider holding. For a multi-decade horizon and high return objectives, having excess cash savings would be a liability because it produces negative real returns. Sometimes the risk is not being aggressive enough with our investment plan and losing out on easy gains.

According to a survey by State Street’s Center for Applied Research, globally retail investors are holding 40% of their assets in cash. Uh oh. If someone has 60% of their portfolio in bonds, and the rest in cash then they could be making zero progress with their portfolio after inflation and tax.

Given that I won’t touch my money until retirement, I should take advantage of long term stock investing. This is why I don’t keep more than 1% of my net worth in cash, unless I’ve earmarked savings for a large, specific purchase. πŸ™‚


Random Useless Fact

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Personal Alpha Investments
Personal Alpha Investments
08/17/2017 12:17 pm

Cant agree more (with both the article and the “useless” fact lol).
I find it hard to maintain a cash level in my investment accounts as I feel I am not employing the power of capital available to the fullest.
With that being said, it is a good practise to have some cash avaiable for both your investment accounts and emergency funds, as you can use it right away as soon as the opportunity arises.
08/17/2017 6:07 pm

I find bonds confusing, even though I buy them based on standard advice. I’ve to 29% of my portfolio in bond ETF.

08/18/2017 9:15 pm

Not having cash on hand while utilizing high leverage is playing with fire, I have 10% in cash for every dollar I borrow to invest, excluding personal RE. I like to make sure that I can keep above water for a while in the worst case scenario that we haven’t seen for generations.

John R
John R
08/19/2017 4:28 am

Different strokes for different folks. Depending on your background, lifestyle living as well as personal investment style.

Do you agree with the follow?

From a CNBC report…

“By age 35: Have twice your annual salary saved.

By age 40: Have three times your annual salary saved.

By age 45: Have four times your annual salary saved.

By age 50: Have five times your annual salary saved.

By age 55: Have six times your annual salary saved.

By age 60: Have seven times your annual salary saved.

By age 65: Have eight times your annual salary saved.

Greene’s timeline is similar to the one recommended by retirement-plan provider Fidelity Investments, which says a good rule of thumb is to have the equivalent of your salary saved by age 30 and to have 10 times your final salary in savings if you want to retire by age 67.”

08/19/2017 5:05 pm

I find it hard to leave too much cash in my investment accounts. I’m trying hard, though… in case opportunities come my way to buy at a significant discount to fair value.

08/19/2017 8:31 pm

What should I do with house down payment cash? Not planning to buy for a year until I have 20% ready.

08/25/2017 11:37 am

Kind of not on the subject but can you talk more about your opinion on the sharing economy and investing in same ? for background and context:

08/28/2017 2:21 pm

My husband is 50% cash lol. I am about 25% cash though in my actual investment portfolio it is just 5.5%. I’m waiting for the next big recession and will deploy the soldiers waiting in the wings.