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

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

Summary

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.

Takeaways

  • 💰 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.

Timeline

  • 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。

Mind Map

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