An article on CNBC caught our attention. Nearly 1 in 5 Americans are stashing cash at home in fear of a recession according to the folks at CNBC. Perhaps they are trying to emulate Warren Buffett whose silent warning for investors is that his company is holding more than $100 billion in cash assets because he cannot find investments that he believes will be profitable over the long term at current prices. Or maybe they are thinking about the 1933 bank holiday when President Roosevelt suspended all banking transactions within 36 hours of taking office. At that time banks closed their doors in 37 states. To a degree, these concerns may be valid. But, there are investment risks of holding cash. CNBC makes the point that when you are stashing cash, you are missing out on investment opportunities and the compounding of interest with bank deposits and bonds when reinvested. Here are our thoughts about the investment risks of holding cash.
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Investment Risks of Holding Cash Include Loss of Interest Payments
When we pointed out that the Oracle of Omaha is sitting on a pile of cash, we do not mean that he is stuffing bills into a really huge mattress. From bank deposits, CDs, and money market accounts to short term bonds, there are many ways to hold cash, make a little money (even at today’s low interest rates) and have ready access to your money. When we wrote about how to invest without losing any money, we talked about how Federal Deposit Insurance now protects bank deposits. And, with bank CDs or Treasuries, you can set up “ladders” where money is always turning over and available for short-term needs. The rate of inflation is low today but it still eats away at the purchasing power of you hidden home cash. When investing in stocks, holding cash until you find the right investment is not a bad idea. And, when you will need your money for things like buying a house or sending a child to college, don’t stay in a risky market. But, over the long term, you are missing out on interest payments when you stash cash.
Investment Risks of Holding Cash Include Missing Out on the Next Market Rally
The reason that many investors are staying in the ever-older bull market is fear of missing out on the next big surge in prices. The rationales are that Trump will fix the trade war, earnings will continue to soar, and high employment will continue. Add a possible cut in interest rates to the picture and you can see why many folks are hesitant to get out of an ever-higher market.
The problem with this line of reasoning is just why long term successful investors like Buffett are holding so much money out of the stock market when they (Buffett especially) have described the US stock market as the best place for your long term investments.
The counter-argument is that folks like Buffett pick companies that will in all likelihood make strong and steady profits into the far distant future. With this idea in mind, they are willing to wait out a market downturn in the belief that that stock prices will recover and continue to climb. This approach was borne out when investors stayed with strong companies through the Financial Collapse and Great Recession.
The Investment Benefits of Holding Cash
When the markets melt down, cash is king. Time and time again, stocks and real estate have taken hits and folks with cash in hand have moved in and used the concept of intrinsic stock value to pick investments that are very cheap only to see their investments grow and prosper over the years.
We see no problem with holding cash so long as you have a plan for how to use it. But, don’t find yourself with hidden cash at home that loses its value slowly but surely as inflation eats away at it.