Cash is a terrible long-term investment, even at 5% interest

00:07:52
https://www.youtube.com/watch?v=KdzOlRRHOU8

概要

TLDRBen Felix discusses the disadvantages of holding cash as a long-term investment, even with a current yield of 5%. He explains that cash may seem safe, but it often leads to a decline in purchasing power over time. For long-term goals, it's more beneficial to invest in stocks and bonds, which provide higher expected returns. Felix emphasizes that cash returns are unpredictable and vulnerable to market fluctuations, making it a poor hedge against falling returns. He suggests that long-term investors should focus on inflation-indexed bonds and stocks to protect their investments and achieve better financial outcomes.

収穫

  • 💰 Cash is perceived as safe but can be risky for long-term investing.
  • 📉 Expected returns on cash are unpredictable and often lower than stocks and bonds.
  • 🏛️ Long-term inflation-indexed bonds can be a better hedge for investors.
  • 📊 Stocks and bonds historically provide higher real returns than cash.
  • 📈 Higher interest rates can lead to greater expected returns for stocks and bonds.
  • 📉 Holding cash can lead to loss of purchasing power over time.
  • 📊 Buying stocks during a market dip may not yield better returns than investing now.
  • 🛡️ Cash doesn't protect against falling expected returns.
  • 🏦 Cash provides stability for short-term needs, not long-term growth.
  • 🎯 Long-term investors should focus on higher expected returns.

タイムライン

  • 00:00:00 - 00:07:52

    现金的稳定性和流动性虽然让人感觉安全，但从长远来看，现金实际上是一种极端高风险的投资选择。作为长期投资者，现金的实际回报相比于股票和债券往往较低，且更可能贬值。基于历史数据，即便在高利率环境下，现金的收益也难以匹配长期资产的表现。因此，尽管现在现金的收益率为5%，但长期投资者应更关注股票和债券，以确保资产的持续增值与购买力的保持。

マインドマップ

ビデオQ&A

  • Why is cash considered risky for long-term investors?

    Cash is considered risky for long-term investors because it has lower expected returns than stocks and bonds, and is more likely to lose purchasing power over time.

  • What is the role of cash in a portfolio?

    Cash can be useful for short-term needs and as an emergency fund, but it is a poor long-term investment.

  • How do expected returns on cash compare to stocks and bonds?

    Historically, expected returns on stocks and bonds are higher than those on cash, even when cash yields are high.

  • What is a better alternative to cash for long-term investments?

    Long-term inflation-indexed bonds and stocks are generally better alternatives for long-term investments.

  • What happens when interest rates rise?

    When interest rates rise, expected returns on stocks and bonds also tend to increase, making them more attractive.

  • Is it better to wait for a market drop before investing?

    Research shows that waiting to buy stocks until after a market drop often results in lower returns compared to investing a lump sum immediately.

  • How have cash and bonds performed over the long term?

    Over long periods, cash has been more likely to lead to purchasing power loss compared to stocks and intermediate bonds.

  • What should investors prioritize for long-term financial goals?

    Investors should prioritize investments with higher expected returns to meet long-term financial goals.

  • What attitude should long-term investors have towards volatility?

    Long-term investors should focus on how volatility affects expected returns, as opposed to short-term price changes.

  • What is the implication of cash having a lower risk premium?

    The lower risk premium of cash suggests investors miss out on higher expected returns associated with riskier assets like stocks and bonds.

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  • 00:00:00
    with a 5% yield on cash why would anyone
  • 00:00:03
    want to invest in stocks and bonds I
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    know that cash feels good because it's
  • 00:00:07
    nominal value is stable it feels safe
  • 00:00:10
    but it's counterintuitively extremely
  • 00:00:11
    risky for long-term investors cash is a
  • 00:00:14
    poor hedge against falling expected
  • 00:00:16
    returns it is historically much more
  • 00:00:19
    likely to lose purchasing power than
  • 00:00:20
    stocks and bonds in the long run and
  • 00:00:22
    real Returns on stocks and bonds have
  • 00:00:24
    historically been higher at higher
  • 00:00:25
    levels of real interest rates making
  • 00:00:28
    cash a relatively poor long-term invest
  • 00:00:30
    M even when interest rates are high I'm
  • 00:00:32
    Ben Felix portfolio manager at pwl
  • 00:00:35
    Capital and I'm going to tell you why
  • 00:00:37
    cash is a terrible long-term investment
  • 00:00:39
    I want to be clear to start that this
  • 00:00:41
    video is about money that you can direct
  • 00:00:42
    toward long-term Investments keeping
  • 00:00:45
    cash set aside in an emergency fund is
  • 00:00:47
    often a good idea and that cash should
  • 00:00:49
    not be kept in anything volatile since
  • 00:00:51
    it's set aside to cover short-term needs
  • 00:00:54
    highin savings accounts currently
  • 00:00:56
    available to retail investors through
  • 00:00:57
    highin savings account ETFs are paying
  • 00:01:00
    more than 5% in annual interest at this
  • 00:01:02
    moment when you can get a 5% yield on
  • 00:01:04
    your cash stocks and bonds might seem to
  • 00:01:06
    lose some of their luster as long-term
  • 00:01:08
    Investments It is Well documented that
  • 00:01:11
    investors exposure to risky assets is
  • 00:01:13
    sensitive to interest rates when
  • 00:01:14
    interest rates are lower investors reach
  • 00:01:16
    for yield in riskier assets and when
  • 00:01:18
    interest rates are higher they reduce
  • 00:01:20
    their exposure cash is safe dayto day
  • 00:01:23
    when markets are volatile cash
  • 00:01:24
    especially in a country like Canada is
  • 00:01:26
    going to be there when you need it while
  • 00:01:29
    stocks and bonds change in value often
  • 00:01:31
    materially every day investors are
  • 00:01:33
    always worried about the next market
  • 00:01:35
    crash probably more worried than they
  • 00:01:36
    should be and this results in reduced
  • 00:01:39
    exposure to risky assets like stocks
  • 00:01:41
    risky assets sound risky and they are
  • 00:01:44
    but risk is not always a bad thing in
  • 00:01:45
    investing most investors think about
  • 00:01:47
    cash or short-term government bills as
  • 00:01:49
    the risk-free asset in managing their
  • 00:01:51
    portfolios but this is only applicable
  • 00:01:53
    to a short-term investor the first thing
  • 00:01:55
    to understand about cash returns is that
  • 00:01:57
    while the value of cash is stable the
  • 00:01:59
    expected return on cash is unpredictable
  • 00:02:01
    the current 5% yield on cash is
  • 00:02:03
    definitely attractive but the
  • 00:02:05
    relationship between the current
  • 00:02:06
    short-term return on cash and the
  • 00:02:08
    long-term return on cash is at best very
  • 00:02:11
    noisy based on regression analysis of
  • 00:02:13
    historical data we attribute only a
  • 00:02:15
    small portion of the expected return on
  • 00:02:17
    cash to its current yield when we run
  • 00:02:19
    financial planning projections at pwl
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    Capital a 5% cash yield today does not
  • 00:02:24
    mean a 5% cash yield tomorrow and this
  • 00:02:27
    is a problem for long-term investors
  • 00:02:29
    short-term volatility matters a lot to
  • 00:02:31
    short-term investors if you wake up
  • 00:02:33
    tomorrow and you have 20% less money in
  • 00:02:35
    the bank account that you're going to
  • 00:02:37
    use to buy lunch you will not be happy
  • 00:02:39
    on the other hand if you wake up and
  • 00:02:41
    your cash is earning 3% interest instead
  • 00:02:43
    of 5% you can still afford your lunch
  • 00:02:46
    long-term investors care less about
  • 00:02:48
    volatility and more about how their
  • 00:02:50
    expected returns change with volatility
  • 00:02:52
    for example a drop in the value of a
  • 00:02:54
    long-term portfolio that is offset by an
  • 00:02:56
    increase in the portfolio's expected
  • 00:02:58
    return is actually irrelevant to a
  • 00:03:00
    long-term investor based on this the
  • 00:03:03
    risk-free asset for a long-term investor
  • 00:03:05
    is not cash it's a long-term inflation
  • 00:03:08
    index bond in simple terms when you lock
  • 00:03:11
    in your inflation index future coupon
  • 00:03:13
    payments from your bond you don't really
  • 00:03:15
    care about the price of your bond in the
  • 00:03:16
    interm since a drop in prices is offset
  • 00:03:19
    by an increase in expected return you
  • 00:03:21
    can use the coupon payments to buy your
  • 00:03:23
    lunch even if the bond price Falls by
  • 00:03:25
    20% now what's interesting is that
  • 00:03:27
    long-term inflation index bond prices
  • 00:03:29
    can be extremely volatile as we saw in
  • 00:03:32
    2022 so a short-term investor would
  • 00:03:34
    probably call them risky cash does not
  • 00:03:36
    change in price in response to changes
  • 00:03:38
    in interest rates its nominal value is
  • 00:03:41
    very stable day to-day this is great for
  • 00:03:43
    a short-term investor since they want to
  • 00:03:45
    be able to spend their cash today and
  • 00:03:46
    tomorrow but it leaves long-term
  • 00:03:48
    investors exposed to the risk of falling
  • 00:03:51
    expected returns expected returns matter
  • 00:03:53
    a lot for long-term investors since
  • 00:03:55
    they're relying on their assets to
  • 00:03:57
    generate returns far into the future if
  • 00:03:59
    you need $50,000 per year for the next
  • 00:04:02
    30 Years and you buy a 30-year Bond
  • 00:04:04
    you're set even if interest rates fall
  • 00:04:07
    but if you buy a one-year Bond at 5% and
  • 00:04:09
    then interest rates fall to say 3% you
  • 00:04:11
    have a massive shortfall to fund for the
  • 00:04:13
    next 29 years if expected returns fall
  • 00:04:17
    long-term bonds hedge your ability to
  • 00:04:19
    afford your lifestyle in the future
  • 00:04:20
    while cash offers no such protection in
  • 00:04:23
    this way stocks are sort of like bonds
  • 00:04:25
    when their prices fall their expected
  • 00:04:27
    returns rise this also means that like
  • 00:04:30
    bonds stocks are less risky for a
  • 00:04:32
    long-term investor than their short-term
  • 00:04:34
    price fluctuations would otherwise
  • 00:04:35
    suggest when expected returns fall
  • 00:04:38
    long-term asset prices like those of
  • 00:04:40
    stocks and long-term bonds will tend to
  • 00:04:42
    rise offsetting the effects of lower
  • 00:04:44
    expected returns for long-term investors
  • 00:04:47
    cash also has lower expected returns
  • 00:04:49
    than stocks and bonds in most
  • 00:04:51
    environments since cash does not command
  • 00:04:53
    a risk premium stocks and bonds are
  • 00:04:55
    expected to earn a premium above and
  • 00:04:57
    beyond the return on cash to compensate
  • 00:04:59
    investors for taking risk based on this
  • 00:05:01
    we should expect that when interest
  • 00:05:03
    rates increase expected Returns on
  • 00:05:05
    stocks and bonds also increase and this
  • 00:05:08
    is exactly what we see in the data in a
  • 00:05:10
    global sample of countries with
  • 00:05:12
    continuous histories back to 1900 5-year
  • 00:05:15
    Returns on stocks and bonds sorted on
  • 00:05:17
    their starting real interest rates
  • 00:05:19
    increase with higher starting interest
  • 00:05:20
    rates this suggests that as Theory would
  • 00:05:23
    predict the risk premiums for stocks and
  • 00:05:25
    bonds above cash are persistent even at
  • 00:05:27
    higher interest rates this is important
  • 00:05:30
    even if interest rates are high expected
  • 00:05:32
    returns are being left on the table when
  • 00:05:34
    you hold cash this consistently lower
  • 00:05:37
    expected return on cash means it will be
  • 00:05:39
    much more challenging to meet your
  • 00:05:41
    long-term financial goals you'll need to
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    expect to save more or spend less in the
  • 00:05:45
    future to compensate but the lower
  • 00:05:48
    expected returns also increase the risk
  • 00:05:50
    of losing purchasing power in the long
  • 00:05:52
    run investors have historically been
  • 00:05:54
    significantly more likely to lose
  • 00:05:56
    purchasing power holding cash measured
  • 00:05:58
    by short-term government bills than
  • 00:06:00
    holding stocks or Bonds in the long run
  • 00:06:02
    in a broad sample of 38 developed
  • 00:06:04
    markets from 1890 to 2019 the bootstrap
  • 00:06:07
    estimate of 30-year real loss
  • 00:06:09
    probabilities for government bills is
  • 00:06:11
    37% compared to 27% for intermediate
  • 00:06:14
    bonds 133% for domestic stocks and 4%
  • 00:06:18
    for international stocks not only has
  • 00:06:20
    the probability of loss been greater but
  • 00:06:22
    the magnitude has as well importantly
  • 00:06:25
    this is only true at longer Horizons at
  • 00:06:27
    Short Horizons as you would hope cash
  • 00:06:29
    has been safer than stocks and bonds if
  • 00:06:32
    you hear this and think that you'll hang
  • 00:06:33
    tight sitting on cash until the market
  • 00:06:35
    drops and then invest in stocks I have a
  • 00:06:37
    word of caution when we've looked at the
  • 00:06:40
    idea of buying the dip sitting on cash
  • 00:06:42
    until a market drop of 10 or 20% and
  • 00:06:44
    then investing in stocks we found that
  • 00:06:47
    buying the dip Trails investing a lump
  • 00:06:49
    sum most of the time and by a wide
  • 00:06:51
    margin on average this finding is
  • 00:06:53
    consistent with stocks and bonds having
  • 00:06:55
    higher expected returns than Cash Cash
  • 00:06:58
    yields are currently High potentially
  • 00:07:00
    enticing long-term investors to hold
  • 00:07:02
    cash rather than investing in stocks and
  • 00:07:04
    bonds the problem is that the expected
  • 00:07:06
    return on cash is unpredictable and cash
  • 00:07:09
    does not offer a hedge against falling
  • 00:07:11
    expected returns which can be materially
  • 00:07:13
    detrimental to long-term investors cash
  • 00:07:16
    also has lower expected returns than
  • 00:07:18
    stocks and bonds in all interest rate
  • 00:07:19
    environments and is much more likely to
  • 00:07:22
    lose purchasing power in the long run
  • 00:07:24
    holding cash can feel really good and
  • 00:07:27
    even better at 5% but long longterm
  • 00:07:29
    investors are likely better off in
  • 00:07:31
    stocks and bonds in the long run thanks
  • 00:07:34
    for watching I'm Ben Felix portfolio
  • 00:07:35
    manager at pwl Capital if you enjoyed
  • 00:07:38
    this video please share it with someone
  • 00:07:39
    who has their long-term Investments
  • 00:07:41
    sitting in cash
  • 00:07:43
    [Music]
タグ
  • cash
  • long-term investment
  • stocks
  • bonds
  • interest rates
  • expected returns
  • inflation
  • financial goals
  • risk
  • portfolio management