I am not sure I fully agree with this BlackRock chart — there are times when cash makes sense. However, I cannot disagree with the takeaway that you cannot sit in cash for very long stretches of time (years) and expect any sort of return above inflation.


Click to enlarge
Source: BlackRock

Category: Asset Allocation, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “The Cost of Cash”

  1. denim says:

    The chart missed the muni tax free bonds. Cash or anything else in a Roth IRA would not ever be taxed again

  2. capitalistic says:

    Good post. Cash alone is not an investment. Having access to cash (via govt bonds) is necessary for making an opportunistic investment play. And this is the conundrum that some investors have: where do you park “cash” at a positive rate of return?

  3. MayorQuimby says:

    Change 2012 to year end 2008 and I bet those numbers look very different.

  4. wisegrowth says:

    This is explained by labor and capital having two different natural rates of interest. Capital’s natural rate is higher, around 6%. Labor’s is low, between 0% and 1%. The Fed funds rate and inflation follow labor’s natural rate. The issue here is that bond yields need to be around 6% for there to be equilibrium in the money market for “capital’s” natural rate. With yields so low, there is excess cash, lots of it. Excess cash pushes down the return on cash even more as an investment compared to bond yields. From a preliminary calculation, the Fed rate should be at least above 1% to balance this effect.

  5. Petey Wheatstraw says:

    We hav abandoned the concept of savings, culturally (and very subtly). Maybe it was never a good idea.

  6. willid3 says:

    what qualifies as cash? treasuries are bonds right? so it is a savings account at a bank/credit union/S&L?
    or whats kept in some one mattress?

  7. VennData says:

    Cash is an asset class that does not correlate with equities.

    Holding cash and/or short term equivalents was a winning strategy during the “I looked into his soul” administration and moved into equities as those plunging asset classes beckoned re-balancing.

  8. rd says:

    Much of the long-term savings are held in tax-deferred accounts these days (except for the top couple of percent). So, it would need to be looked at in light of no taxes except for ordinary income tax at the end of the holding period over the past few decades.

    It also appears that they are using straight returns without taking fees, expenses, and survivorship bias into account. It would have been very difficult to have an all-stock portfolio from 1926 to now without significant expenses (at least 1% a year until the past couple of decades) with brokerage commisions and/or management fees. Even re-invested dividends would have incurred broker commissions before the advent of mutual funds. You would also have had to make sure that you moved out of the stocks in the DJIA and S&P 500 when the indexes moved out of them or a number of them would have gone bankrupt with 100% loss of your money in those units.

    The expenses and survivorship bias would have been much more favorable with bonds and cash would have, by definition, been almost totally liquid and once FDIC came to be, would have had minimal danger of losses as long as you stayed under the limits by diverisfying accounts and institutions.

    Not quite as clear cut as the chart would have you think.

  9. Manofsteel11 says:

    Nothing like a timely chart, as the FED indicates coming change and the market reacts. 2012? 2008? consider 2014.

  10. bonzo says:

    No, you can’t just sit in cash forever. But if you are highly risk-averse, then spending a lot of time in cash makes sense. To compensate, just buy-low sell-high with stocks or other risk assets now and then. Buying at the bottom (actually buying on the way down, since timing the bottom perfectly is impossible) is not that difficult if you’ve been sitting in cash, anxious to buy, for a long time. Nor is holding 100% stocks difficult, if you’ve promised yourself to sell once the price goes up. I’ve sat in cash or bonds for most of my life, most of the time, and still gotten a very good long-term record, by simply taking advantage of occasional fire-sales to buy stocks cheap, then switching back to cash or bonds as soon as it makes sense. The equity risk premium is only about 3% compared to bonds. So all it takes is buying at a 30% off sale every 10 years, then selling once the sale is over, and you gain back all that risk premium and then some without actually spending much time holding stocks. (I’m over simplifying since there are currently tax advantages to dividends vs interest, capital gains taxes is a factor, and so on).

  11. neddyj says:

    Interesting timing on posting this info Barry. Yes, I know it’s showing long term results. But for today, cash was indeed king!

  12. peterkrause says:

    Cash is a drag; as in, if you have an inordinate amount — 20,30, 40% — while being otherwise fully invested, your returns will lag the averages. Yes, we all know this. But for sheer nimbleness it cant be beat. And taken in the context of the excellent post “Time … is on your side,” I argue for an opportunity allocation in cash for just the opportunities bonzo, above, is arguing for. And when comparing results, I like cash for its risk-adjustment contribution.

  13. peterkrause says:

    Not to mention that when I was living in Hoboken in 1987, my cash in MM funds was earning 4% and inflation doesn’t matter until you’re old on fixed drawdown.

  14. Berkeley Maven says:

    In addition to the various reasonable arguments for holding cash above, here’s another case when it works to one’s favor.

    The Fed is distorting high-quality short-term bond rates, so that currently, one needs to buy a fund with a two-year duration to get a yield to maturity of 1%. A half-percent move up in rates negates a year’s income. Alternatively, you can shop for select banks and credit unions paying 1% on insured savings accounts, with no risk to principal. There are also CDs with low penalties for early withdrawal that can work slightly better. Best place to shop: depositaccounts.com.

    The insurance is limited to $250K per institution, but if you play your cards right with multiple or Trust accounts, you can get it up to $500K or $1mm. Most advisors are reticent to do this because the cash cannot be at the same custodian as the other assets, and they don’t like seeing assets leaving the house.

  15. VennData says:

    Cash worked out nice yesterday, with stocks and bonds collapsing.

    Don’t listen to these Wall Street firms, they just want your wealth so they can charge you fat fees.