Can Cash Be Considered An Investment? Or Is Cash One Big Drag?

Cash As An Investment

Can cash be considered an investment? I think cash can, especially if the stock market starts tanking. However, most of the time, cash is seen as a returns drag given cash pays so little.

There's a debate going on between Charles Schwab, who launched its Charles Schwab Intelligent Advisors service (robo-advisor), and existing robo-advisors, Wealthfront and Betterment about whether Charles Schwab's robo-advisor service really is free.

Because Charles Schwab wrote that it will recommend a 8-30% cash weighting for its clients depending on market conditions, Wealthfront and Betterment have gone on the offensive to point out that investing such a huge weighting in cash is not only costly in a hypothetical market return scenario, but irresponsible as well.

Charles Schwab can make money off its client's cash by paying practically no interest, and reinvesting the cash in higher income producing investments. In other words, Charles Schwab can act like a bank, with a much lower funding cost. This may come as a surprise to many, but those who know how the finance industry works know it's a simple spread business. The more money that can be cheaply procured, the more money can be deployed for hopefully higher profits.

It's good that Wealthfront and Betterment have pointed out how Charles Schwab can actually make money from its free robo-advisory product. But here's the thing, when was there ever a free lunch?

Fees And Cash

Furthermore, although Wealthfront and Betterment keep their clients fully invested at all times, Betterment still charges a 0.15% – 0.35% fee and Wealthfront charges 0.25% on money after $10,000. (Betterment is offering a promo now for 6 months fee free) There are also underlying ETF fees, averaging ~0.15%, which the client ultimately pays for their robo-advisors to build their portfolios.

Charles Schwab is charging 0.00% in fees for their robo-advisory service. Yes, if Charles Schwab also charged a 0.15% – 0.35% fee to manage money like Wealthfront and Betterment, while recommending 8%-30% cash, that would be odd. But Charles Schwab isn't.

Let's not debate which business model is better. Instead, let's discuss whether cash can be considered an investment through a logical discussion.

Related: Betterment Review: A Premier Digital Wealth Advisor

CAN CASH BE CONSIDERED AN INVESTMENT?

I'm of the opinion that cash can absolutely be considered an investment. It's a bad investment in a bull market if you never end up deploying your cash given the incredibly low return, but ask anyone who lost money hand over fist between 2008-2010 or 2000-2001 whether they would have loved to have cash. I'm sure the answer would be a resounding YES.

The way to better understand Charles Schwab's 8%-30% cash allocation is to understand how you would use the respective companies for your retirement.

Since Charles Schwab is the relative gorilla with the longest history of operation (1971), it's reasonable to say more people use Charles Schwab as a total solution to manage all their investments and retirement accounts.

Given the roboadvisors have been around for only five years or less, it's reasonable to say their clients tend to allocate only a portion of their investment allocation with robo-advisors.

Example Of How Cash Affects Returns

Let's say a client has a total of $100,000 to invest. If a client decides to allocate $10,000 of their $100,000 investable net worth with a robo-advisor, $80,000 in an S&P 500 index fund on his own, and $10,000 in cash for a rainy day, the robo-advisor better invest 100% of the $10,000.

If the roboadvisor invested only 70% of the $10,000 in equities, then the overall cash allocation for the investor is now 13%. A 13% cash allocation is not ideal for someone who only wants a 10% allocation.

Given Charles Schwab has a much more comprehensive offering, it's easy to see an individual allocate a larger portion of their $100,000 investable net worth with Charles Schwab.

Let's say the individual allocates all $100,000 to Charles Schwab who proceeds to invest 65% in stocks, 25% in bonds, and 10% in cash. The end result is a similar 10% cash allocation!

The conflict seems to stem from the fact that Wealthfront and Betterment think they are managing the client's entire net worth, where in reality, they are probably managing just a slice of the client's net worth. On the flip side, many more of Charles Schwab's clients probably do have a larger allocation of their investable net worth with the firm.

I'd love to get some data from Charles Schwab, Wealthfront, and Betterment on what percentage of their client's investable net worth is being managed by them. Send me an e-mail or leave a comment if you wish.

Can cash be considered an investment?

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Related: Wealthfront Review: The Original Robo Advisor

US DOLLAR INVESTMENT

Besides holding cash as an investment during times of volatility, you can also invest in the US Dollar or any other global currency if you believe it will appreciate (or depreciate).

For example, if you were from a European Union country and decided to invest in the USD in March, 2014, you would have seen a 30% return on your investment if you were to convert the USD back into Euros a year later! That's way better than the S&P 500's performance during the same duration.

In 1992, George Soros put on a $10 billion short position on the British pound and made $1 billion in a single day after the British government let the pound float. Not bad for a cash investment wouldn't you say?

Euro and USD Exchange Rate Chart
USD Appreciation. It now only takes $1.094 to buy 1 Euro compared to almost $1.5 USD for 1 Euro.

MY OWN NET WORTH ALLOCATION EXAMPLE

For the most part, I hate having “excess” cash. But after spending more than a couple hundred thousand dollars on my 2014 house down payment and the subsequent six figure remodeling bill since it was a fixer, I decided that having less than $100,000 in cash at any given point in time was a little too uncomfortable for me. As a result, I've made it a mission to get back to at least a $100,000 steady war chest in 2016 and beyond.

Each person must find their own cash liquidity comfort level.

Take a look at my net worth allocation frame work by age post, which has three different frameworks. I currently hold most of my Risk Free portion of my net worth, which cash is considered a part of, in long duration CDs because they yield 100X more than a checking or savings account. By laddering my CDs, I'm assured I'll always have liquidity every year or two. If I so happen to lose all sources of income between CD liquidity events, that's where my $100,000 cash pile will kick in that earns a pathetic 0.2% at the moment.

If you read the net worth allocation post, my recommended Risk Free portion for someone age 30 is anywhere between 5% – 25%, depending on which of the three net worth allocation frameworks of mine you'd like to follow. Expenses, surprises, and opportunities come up all the time. Don't think that just because we're in a raging bull market where any donkey can make money that we'll never need a cash cushion again.

Once again, for my Risk Free recommendation, I'm talking about your OVERALL net worth here, not a 5 – 25% cash allocation of your investable assets or investments.

net worth allocation framework
One of three Financial Samurai net worth allocation frameworks

CASH IS KING, CASH IS TRASH

We're in the final innings of a bull market, so cash is currently trash. It's very easy to say how everybody shouldn't have cash when everything else is doing so much better.

If the bull market continues, it's also easy to assail Charles Schwab for its proposed 8-30% cash allocation, which will lead to “cash drag” compared to a 100% fully invested portfolio with whatever pie-in-the-sky return assumptions.

But I can assure you that if there is ever a multi-year correction again, cash will become king once more. The beginning of 2016 is showing how unstable the stock market really is. Everybody will prefer earning 0.1% on their cash rather than losing 30% in the stock market.

I remember the difficult times during the Asian Financial Crisis in 1997, the dotcom implosion between 2000-2002, and the disaster of 2008-2009. People weren't just taking a hit on their investments. People were getting fired left and right as well. Having to sell something when you don't have to because of a liquidity crunch is the worst. Don't ever forget the bad times.

You have a right to complain about an investment service or an actively managed fund that charges a fee for investing too much in cash. Investing in cash is not why you're paying them for investing a sliver of your net worth.

Cash Is Wealth Management

But if you're entrusting an institution to handle a large majority of your net worth, then having a certain cash allocation for opportunity or risk management is absolutely a fair position. If that institution is Charles Schwab who is charging zero fees, while your institution charges 0.15 – 0.35% in fees, the uproar does not make sense.

The complaint against Charles Schwab is similar to the occasional complaint I get from a reader who doesn't like what I write and says he's never coming back,. I would refund the angry reader his money, but he hasn't paid for anything in the first place! Readers are free to come and go as they please. In the long-run, the free market will dictate the winners and losers.

Robo-advisors are providing an excellent, low-cost service to the benefit of the retail investor. By lowering management costs, highlighting fiduciary duties, and making it easier for people to invest, more people are less afraid to mobilize their hard-earned savings into something that may grow much faster in value than cash over the course of their lifetimes.

Using Robo-Advisors For Cash Management

For the portion of assets I'd consider farming out, I personally like the do-it-yourself approach by creating my own low cost diversified portfolio while using free financial tools by Personal Capital to optimize my investments.

But for those who have no interest in actively managing a portion of your assets, then using a digital wealth advisor like Betterment is much better than not investing in anything over the long term. They manage over $20 billion in assets and charge at most 0.25% in fees vs. 2% – 3% by traditional wealth advisors. You don't even need to fund your account to check out the various types of ETF portfolios they'll construct for you based off your risk tolerance.

And for those of you who really don't have any time or knowledge about investing, then allocating a major portion of your net worth to a fiduciary with human advisor for a higher fee is fine as well.

Concluding Notes:

* Charles Schwab charges no fees for its robo-advisory service.

* Charles Schwab can act like a bank and earn a spread on cash deposits.

* Betterment invest 100% of your assets, but charge a 0.15% – 0.25% fee after a certain amount of assets are deposited e.g. Wealthfront is free for the first $15,000.

* Given the different fee structure differences, the battle between Charles Schwab and other robo-advisors isn't an apples-to-apples comparison.

* Your viewpoint on cash will depend on your investing history, your investing performance, and how much of your net worth is being allocated to another party to manage. If you entered the workforce, started investing, or launched your robo-advisory business in 2010 or later, it's likely you'll have a much more rosy view of the stock market, and a much more negative outlook on cash.

* Charles Schwab and Vanguard will become the largest robo-advisors by the end of 2015, despite launching years later due to their enormous overall assets under management.

* Fee-minded consumers win because it's a race to the bottom for fees while the service offerings continue to get better and better.

* Low fees will mean very little if there's a downturn e.g. give me a 0.1% return vs. a -30% return.

* Consumers care less about fees with an advisory firm after a certain low level if the products and service are amazing. If consumers did, then a company like Apple with its high pricing wouldn't exist. Companies must focus on interface, products, and value-added services that relate to the entire financial management experience in order to succeed.

Related posts:

Cash Management Is Really About Stress Management

How Much Savings Should I Have Accumulated By Age?

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46 thoughts on “Can Cash Be Considered An Investment? Or Is Cash One Big Drag?”

  1. I have multiple accounts at Schwab including the Intelligent Portfolio. I do not mind the cash allocation for the reason of, as you stated, my overall cash position is where I want it when you take all accounts into consideration.

  2. I completely agree with Wealthfront and Betterment. Any service like the one Schwab offers that allocates a substantial percentage to cash needs to be looked at closely. In my opinion, this is just a way for them to generate more revenue.

    When it comes to investing everyone is perfectly capable of handling the cash portion of their personal balance sheet on their own. I wouldn’t want my money sitting in their hands earning what is essentially a zero return, when I can keep that money at the bank down the road where it is more accessible and probably earns a slightly better (though still negligible in the current economy) interest rate.

    If I were to put my money in a product like this, I would be expecting pretty close to all of it to go into actual investments, for lack of a better term.

  3. I used to hold a ton of cash because I wasn’t proactive at investing it and interest rates used to be decent. Nowadays I always have some cash in case of an emergency or something, and I try to get my money in the markets. I don’t view cash as bad, but I do think it should be a small percentage of one’s overall portfolio.

  4. wallstreet26

    i juss got done with l3 cfa curicculum so maybe i can impart some knowledge. the amount of cash in your portfolio is relative to your liquidity needs (how much money u need to spend in 6 mos to 12 mos). so if its a retirement fund and you are 50 or 60, and do not plan to retire in the next year, ur cash allocation should be 0. so this is a general rule.
    when you implement capital market conditions which have low rates. t bills which represent the risk free rate is essentially 0%, which is equivalent to what cash yields (nada). so due to low rates they are interchangeable. t bills are a crucial investment to have in an optimal portfolio as you typically combine it with best portfolio (has the best sharpre ratio) located in an efficicent frontier to create the best risk adjusted portfolio. the best thing about the risk free rate, is that you can theoretically borrow against it and short it while purchasing an optimal portfolio (added risk for return)
    so to answer the original question. let me emphasize, if say you are 100% cash, since it is equivalent to 100% t bill it is not necessarily inapropriate at current market conditions. But because a person has other constraints such as return requirement needs, being 100% cash or even 33% cash is typically very inappropriate. Also once you include inflation, your real return is essentially negative, and if you have negative returning allocation, you typically need to weight it with risky assets in order to meet return requirements.
    it is all very subjective. but at this point due to low rates, cash isnt all that bad since it is pretty much t bills. having too many bonds may actually hurt due to interest rate risk so t bills or cash is more ideal.
    bottom line cash is a cash drag on returns, but it is the price you pay when you want liqudity. what i do not want people to do is time the market. no one is that smart. and the people who say they are, are charlatans. (im looking at you marc faber)

  5. Thanks Sam. I read that post and it was a bit.of.an.eye.opener. As.for the periods, it’s my.Android doing.what it.wants to.do.

  6. Based.on.what I.have read on.this.blog.so far,.I feel.like I.have.too.little.invested.in.stocks, however, not.having.any training/background in finance, I am apprehensive of stocks. I am not.allowed to engage in interest based investments due.to.religious beliefs so that takes.care of.much else available out there. I.wanted feedback on.my.current.financial setup as described.above.as.I.have no way of gauging.my.mistakes and dont have.much.available in.the way of advice.

  7. Pingback: Investing Insights From Former SEC Chairman Arthur Levitt And Hardeep Walia, Founder And CEO Of Motif Investing | Financial Samurai

  8. Cash is a nonperishable commodity. It can be traded on a market, and it can be used to trade for goods and services. But unlike equities and bonds, it does not produce dividends or yields.

    1. You can think of cash as an investment as you would gold, copper or oil. Meaning, it’s not something I want to hold onto unless I need it as a medium exchange.

  9. Avid reader first time.posting. I m turning 32 and feel like I.have too much.saved in cash. I have 100 k invested in a business that gives me return.of average 17% a month. I have another.70k odd.invested in another.business partnership (carwash/auto repair shop) that hasn’t.made me.anything.yet (8 months) ,however, I am hopefull profits will come in after 1.5 years as I.see improvment. I.have 50k invested in meat.business but.am trying.to pull that money.out.as I.dont.see too much potential. I have another 13k in.stocks ( currently under) planning.to pull out.when I get.even.and.put money long.term.dividend stocks ( any.tips?). I just bought a 1 million dollar house both.for.pleasure.and.as.an.investment.as.its value.will hopefully appreciate significantly.over the next decade (brooklyn ny). I dont have any.background.in.finance and work.in.healthcare making.about.150k.to 190k depending on.how.hard.I.want to work not.including.17/18 k.I.make.from.my aforementioned.100k investment. After down payment on.house I have another 100k.in cash and.hope to.have another 50k when I.pull out.from meat.business investment. How m.i doing ? What.mistakes am I making? Any.advice?

  10. Dane Hinson

    Some great points in this post. Cash is definitely king in a bear market. At the end of the day you have to look at cash as a vehicle for current wealth preservation or future return (once invested). I personally take the approach of a continuous investment philosophy so I never end up accumulating a large cash balance, however there are market timing strategies that can greatly increase overall returns if you’re willing to maintain a healthy cash balance.

  11. What about for the short term? If I plan to buy a house or go back to school in a year, should I keep that money in a money market account?

  12. I’m not sure I would call it an “investment”, exactly, but I certainly agree with your philosophy of funding the war chest. I think the number one lesson I learned from the last recession is that cash is king. There were so many great real estate related deals to be had, and since lenders weren’t lending, only the highly liquid really benefited to the fullest extent. I was living in Arizona at the time, and the people who bought vacant lots and sold them to builders 3 years killed it. Same is true for SFH, commercial real estate, secured notes/mortgages, etc. I don’t know if we’ll have another opportunity like that in our lifetime, but if we do, I hope to have some cash ready to put to work.

  13. I’m a big fan of the “permanent portfolio” investment allocation that includes a 25% cash target. There are many good reasons to hold cash even during a bull market including:
    -having a cushion
    -“dry powder” for re-balancing into other assets
    -volatility reduction
    -hedging against deflation, interest rates

    Even with this “high” 25% target, if I look at my overall networth my total cash is still only around 10% or so due to real estate equity. Cash is definitely underappreciated

    1. I’m slightly under 10% cash for my overall net worth. The amount of cash percentage also depends on your net worth amount.

      If you have a $10 million net worth, holding $1 million in cash sounds a little excessive. But if you have a $500,000 net worth, $50,000 doesn’t sound like too much since that’s one year’s worth of household expenses for the average couple/family.

  14. Cash shouldn’t be considered an investment per se, rather a risk mitigation tool in market cycles. Cash as a means to cover expenses is just that. In emergency cash flow situations, margin is also extremely cheap right now (not at all encouraging this in scale, just saying it’s an option as a short-term small dollar facility for temporary cash flow short falls).

    Regardless, it’s interesting that robo-advisors like Betterment and Wealthfront take issue with Schwab’s ability to leverage a cash position. I don’t know a lot about Schwab’s offering, but it does sound like robo-advisors are fully invested all of the time, regardless of asset class. What about cash as a tool to mitigate downside risks in a bear market? If Schwab is using it for that purpose (not saying they are), why should a robo-advisor or anyone consider that problematic? Robo-advisors don’t appear to do this, nor rotate their categories of investments with leadership changes in market cycles so what is their fee for exactly? One could simply invest their money like the market and do just fine over the long run and not pay their fees.

  15. Cash is definitely an investment. Just because cash pays almost no interest or no interest, doesn’t mean it is not an investment; gold doesn’t pay anything but it is certainly an investment.

    One factor about keeping cash in your portfolio is that the more your stocks increase in your portfolio, the less that cash makes up as a percentage of the total portfolio (assuming your initial cash amount remains fixed). So in essence, in bull markets, the opportunity cost of having cash in your total portfolio becomes less significant.

    By the way, one of the major sources of income for Schwab on uninvested cash is through the lending of funds for margin purposes. They are currently charging between 6% to 8.5% for margin interest loans, depending on the amount borrowed, almost all of it pure profit.

    Assuming a portfolio of $100,000, with $10,000 in cash, if all that cash is loaned out, Schwab would make $850 in interest, which works out to a fee of 0.85% of the total portfolio.

    1. Good analogy with cash and gold not paying anything, but with gold still considered an investment.

      Good point on the OC of cash declining in a bull market as well!

      It’s funny about margin investing. I wouldn’t recommend it for the average person who doesn’t trade for a living, but I’m much more sanguine on investors going on margin (debt) to buy property. It goes back to the unlikelihood of a property just disappearing, and not providing an income.

  16. Sam,

    You are correct – if you plan your cash flow well, either by maturing CD’s, bonds, or dividend payments, then there is less of a concern of keeping piles of cash at the ready. It’s a pity it took me 10 years to figure this out.

    -Mike

  17. I like the perspective of seeing cash as having optionality value, and being able to take advantage of opportunities like a market crash to pick up great value investments that others might not have the means to do. It does depend on your temperament to realise this value though, as it’s not easy for many people to buy during a panic!

    I’ve never held much cash myself though as I’ve always preferred to be fully invested in the stock market, but I’m seeing more and more value in holding cash, and am trying to become a little more patient when deploying that cash!

  18. Since the USD will inflate in the long term, I wouldn’t consider it an investment. It does provide some insurance, but does so at the loss of inflation. I wouldn’t put much of my retirement funds in cash, but it makes sense to keep enough around to self-insure against job loss and sickness.

  19. Currently getting 1.00% with GE Capital Bank in my online savings account which beats any CD under 1 year term by ~.25% on average (according to bankrate.com). Unless you are willing to lock it down for over a year (which is not considered liquidity to me) or have an established series of CDs that expire each month which you renew (as long as you don’t need the $$), as Sam mentioned, then there would be absolutely no reason not to keep all your “cash” in an online savings account. In the current market 1.00% should be everyone’s baseline of 0% risk (FCIC insured), 100% liquid “inevestment” (I’m in the 85% of readers considering cash an investment).

    I do like the idea of the laddered CDs though. Just seems to take some time and a chunk of change to estabilish the process. However, with the term length you would have to bite into to beat the 1.00% baseline by any significant amount, it might be worth it to employ the same strategy with bonds and/or treasuries.

  20. I don’t consider cash an investment.

    Cash is an opportunity.

    An opportunity to not have to sell assets at a loss during a downturn to cover my obligations.

    An opportunity to not have to panic when I lose my job and still have to pay the mortgage.

    An opportunity to buy when the market corrects and all the over-invested are panicky and selling to cover.

    I love my cash, and hate the central banks and financial shenanigans which have brutalized the smart savers and investors by making cash so worthless “financially” that we’re even having this conversation.

    When will we learn not to put the fox in charge of the hen house? Some days I weep for humanity.

  21. I have a similar target of keeping a $100,000 cash cushion. I’ve considered moving into a CD, but with Capital One 360 checking offering 0.9% currently I don’t have a lot of motivation to give the flexibility and risk early withdrawal penalties if the S&P tanks in the next 6 months.

  22. This is a very timely discussion for me, because I have about 100k of cash right now and I have been debating about how to invest it! Stocks seem overvalued to me, and I already have around 90% of my investable assets in stocks. I thought of buying a rental property, but it also seems really expensive right now. The Southern California RE market is pretty hot due to low inventory. Bonds don’t seem like a good option, either. I hate sitting in cash though!

    1. There’s nothing wrong with having a nice $100,000 cushion to feel at ease and enjoy life.

      I’ve got my cash cushion up to about $110,000 now and it feels good. Business is slow during the summer, and I’ll continue to deploy about $10,000 – $20,000 a month into various investments I see fit in order to keep the investing ritual going.

      The key is to not get tempted by all the cash and buy something unnecessary, like a $70,000 car I’m thinking about again!!

    2. I am also gun shy right now and holding way too much cash. I invest in index funds and they are priced high. Waiting for a dip even though every talking head says that is backwards thinking. Earned it all at about a nickel at a time which makes it hard to watch it go poof in the market. UGH. Maybe just put $10,000 a month in and see how it goes.

  23. Will @ Phroogal

    Cash makes me anxious. If my emergency fund gets too large, I invest the surplus.

    Perhaps this is because I’ve known pretty great times for investing. I began investing heavily around 2009-10. Life’s been pretty great since then. I suppose once things resettle (ie: markets go to heck), I won’t have such a negative attitude towards a hoard of cash.

  24. To answer your question, cash is fine, if you are getting a return (invested in a money market fund or the like). I don’t see a problem with it, and I asked 100 questions before I opened a SIP account (schwab intelligent portfolios). I asked how they were getting their fees, and a majority of the funds are schwab funds, so they get paid by charging me .08% on my fund, not the management of it. I have a schwab account (actually several) but have the SIP account. You get asked your risk portfolio and based on your answers, it creates the portfolio balance for you. If you don’t like it, change it. I put mine at 5% cash. I said I want High Risk, I am not Risk Adverse, and don’t need the money for a while.

    I also have 3 other managed accounts w/ schwab, and they have very little cash in them. Overall my accounts have less than 3% in cash values across all my 5 accounts I have w/ schwab (I manage my 5th account). For me, I am not watching the market like I used to when I was in my 20s. It is really hard for me to keep up on it when I have a life now. Letting someone manage it for me works, and I watch them on a monthly basis.

    1. Makes sense. Good to know if you don’t like their recommendations for cash or whatever, you just change it. Although, that may somewhat defeat the purpose of having them “intelligently” make recommendations based off your input variables.

      “Freedom to make my own mistakes is what I’ve always ever wanted,” Mance Rayder, GoT.

      1. StealthWealth

        The problem, in my opinion, occurs if you want to withdraw. If you have a short term need during a downturn you can’t just access the cash allocation. You sell some of everything locking in losses.

  25. Ryan Turner

    The difference is that cash is completely dominated by risk free investments. Anyone who is sitting on cash should be earning the risk-free rate.

    Most of the time this trade-off is so obvious it is done implicitly: The Cash allocation in any mutual fund will be an overnight deposit or even t-bills. Similarly, “Cash and Cash Equivalents” on a balance sheet is generally short term investments or at least a high interest bank account.

    Investors with large cash balances at 0% are literally throwing free money away. I’d have to do the math to see how the cash held by Charles Schwab would compare to paying an additional management fee though.

  26. I go back and forth on whether cash should be considered an investment per se. But it is an asset that I think most people should have and should have a lot more than they do. I question whether most people could continue to DCA through a market downturn at the same rate as they do during a market upturn. Not just because of the psychological aspect, but also because one’s job may be lost or pay cut. So you may not be able to do it even if you want to.

    Finally, in today’s market, I think the risk is better of a 10% correction than a 10% gain. But even if I lose out on the 10% gain, the 10% correction would hurt much more. So I like to have cash available to deploy in a depressed market. Does this make it an investment? Probably not while it is sitting in a bank account, but it is an asset that can readily be turned into an investment.

    1. The fear of a job loss is something that definitely stops many people into buying during a downturn. It’s rational to raise cash for security purposes.

      So many folks just say they’ll just buy more during a downturn. It’s easy to say if you’ve never been through one, or never had much at stake!

  27. Sam,

    That last economic crisis was a liquidity crisis. I think you can make a very good argument that had more people (and companies) kept more cash on hand, it would not have been so severe.

    People should aim to keep at least 6 to 12 months worth of living expenses in cash (my personal opinion). Although, I’m realistic, and realize that is difficult to achieve for many folks. Human nature, at least in the USA, is to spend.

  28. I’m 50 and have the following:

    $800,000 in 401K $700,000 stocks $100,000 in bonds
    $100,000 in Roth IRA – all stock
    $280,000 in home equity
    $170,000 in taxable mutual funds – all stock
    $300,000 in Treasury I bonds – fixed rate of 1% to 3.6% – average about 2% over inflation
    $50,000 in a bank account

    I’m very comfortable with such a large percent of my investments in I bonds cash as the current interest rate is about 3-5.5% and always about 2% over inflation

      1. Those would be Treasury I Bonds that I purchased 15-20 years ago. The I Bonds pay the current inflation rate PLUS whatever the guaranteed rate was at the time of purchase for 30 years. My guaranteed rates are 3.6% on a small amount all the way down to 1%. Many have a guaranteed rate of 3% and 2%.

        I purchased around $200,0000 in I bonds and they are now worth over $300,000.

        As an Added bonus these were purchased with an award credit card at the end of each month and then not paid for until the next month – 2 free months of interest earned. Got a few business class flights to Asia with all the points earned.

  29. Deutsche Bank said they expect dollar appreciation in 2H. From my point of view, cash is a good hedge in an overheated market, but mostly because I work in a threatened industry that is further threatened by any deflationary pressure. I’d rather be heavy cash going into rising probability of job loss than illiquid. But, I understand that’s not where everyone’s head is.

    Long term, the Feds are going to have to try to inflate their way out of this mess.

    1. I’d be surprised if the USD appreciates much more from currently levels. But who knows the future. All I know is that the USD used to buy 2.9 ringgit just last year. The USD can now buy 3.6 ringgit. Crazy how cheap things are in Malaysia, where I just visited.

      Everybody should take advantage and travel internationally now!

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