Who would want to hold cash? Most seasoned Monevator readers know their way around far more exciting asset classes, after all.
For more than a few readers, I suspect your portfolio is your playground. You trade shares and reinvest your dividends with cheerful self-confidence.
You’re the playful otters of personal finance! Yet cash doesn’t seem to be a favourite toy.
And I get it. Cash is not exactly the most lucrative investment.
At best it’s going to barely keep up with inflation over the long-term.
At worst? Maybe it will continue to lose to inflation – it’s already flunked that low bar in recent decades.
Which I admit is pretty rubbish, considering there’s none of the potential with cash for the big gains that you can get with equities. Nor even the quite nice returns that your bonds might deliver in any given year.
No, compared to other assets cash lags far behind, like the teenage Squirrel on a cross-country run.
Show me the money
I like cash though. Cash is my comfort blanket. So I believe there’s a case for cash.
There may even be… a case for a case of cash!
Here are ten reasons I believe cash can be king for even you investing otters out there.
Reason #1: cash is liquid
Cash is most useful for unplanned expenses.
If your roof blows off, your boiler explodes, you see the sports car you’ve always wanted at a bargain price, or your cousin needs bail money in Torremolinos (what, just us?) then you don’t want to rely on selling your shares, bonds, or other resources to raise money.
Being forced to sell assets at a time that doesn’t suit you is a great way to derail your investment strategy. Instead a cash pile can take the hit so your other holdings don’t.
Cash is also useful as a lifeline in the event of major personal drama.
Emergency funds don’t just cover having to rebuild your garden wall when it gets demolished by a passing coach heading for Flamingoland. (Again, just me?) There are bigger life-blips that have the potential to demolish all your plans.
The usual recommendation is to have six months of expenses in easy access cash accounts, in case something goes wrong in your life.
Unemployment is typically cited as the main money-related major risk. But I reckon illness and disability are underestimated hazards.
A six-month cash cushion gives you time, in theory, to get back on your feet if you lose your job.
Personally I’m happier with a year’s worth of cash – just in case multiple things go wrong at once.
It never rains but it pours.
#2: cash is liquid but also dry
I love the term ‘dry powder’, which is sometimes used by corporations and private equity funds to describe their cash reserves. (Imagine them all sitting in their boardrooms dressed as American Civil War cosplayers, polishing their muskets and trying to get their flags to swish nicely.)
Anyway, ‘dry powder’ – aka holding cash – enables you to respond to opportunities. So you can access your cash and buy quickly if you suddenly encounter that once-in-a-lifetime stock opportunity or must-buy market dip.
#3: cash is stable
Stable, boring, doesn’t do much… I had an ex like that.
But I absolutely love cash for its steadfastness. Unlike equities, with cash I know what returns I’ll be getting and I can plan accordingly. There’s still a little voice in my head that warns me the stock market is gambling (thank you, parents, for programming my subconscious), and cash keeps this little voice at bay.
You do, of course, have to keep an eye on the tax implications of going over the annual personal savings allowance. This currently sits at a measly £1,000 of interest if you’re a basic-rate taxpayer, and £500 if you’re in the higher-rate bracket.
Also, stability cuts both ways. The costs – those low expected returns – are stable, as well as the benefits.
#4: cash is useful for spending
This one is obvious, yes – but no less important for that.
Technically you can use other things to spend, like bitcoin, or even gold if you have one of those fancy gold spending cards.
But people overwhelmingly buy their day-to-day stuff with cash. So if you’re needing to buy food, clothes, petrol, toys, or anything else at all, you should have enough in your cash accounts to cover it.
There are credit cards, of course, but they deal in cash, too – future cash.
If you’re a family person, you’ll be very aware of how much the Bank of Mum and Dad relies on cash.
Increasingly though I’m also finding that the lesser-known Bank for Mum and Dad runs on cash, because my older relatives don’t have anything except for the equity in their houses.
#5: cash is simple
This is one of my favourite reasons to hold cash – the simplicity.
We all have, and use, bank accounts. We all have access to free savings accounts. None of us needs any specialist knowledge to operate our cash accounts.
I know plenty of people who would never touch equities and who are wary of all other asset classes, but they are brilliant at juggling bank accounts.
Cash can be useful to anybody, anytime. It’s not exactly idiot-proof, but it is mostly anxiety-proof.
#6: cash can be useful and interesting!
I accept that if you’re involved in elaborate active antics in the stock market, you’re not going to find anything particularly exciting about your cash accounts.
But some of us live a much more boring life. We’re entertained by things like fixed-term accounts and flexible cash ISAs.
And there’s actually a lot you can do when you hold cash, in terms of adroitly moving it around and deploying it to your best advantage.
Returns from cash are never going to be amazing, but they’re potentially not to be sniffed at.
For example I’m a big fan of paying into multiple regular saver accounts. These can have interest rates of near-double the rates of standard savings accounts.
It all adds up…
#7: cash can be protected
In a world of volatility, when it sometimes seems that everything is falling down around our ears, cash is as about as close as we can get to guaranteed security.
(I work in education, where things are quite literally falling down…)
Even if you’re a mega-saver, it’s not hard to negotiate the £85,000 FSCS protection limit on cash savings by opening an account with another bank if you look like you’re approaching that amount. And that’s all you need to do to keep your money safe.
Well, that and avoid scams of course.
As somebody who worries about pretty much everything, I appreciate this reassurance.
#8: physical cash can be uniquely useful
Yes, I know that we’re moving towards a glorious cashless society. But you can still make a teenager’s face light up by putting a couple of £20 notes in their birthday card.
Don’t try telling me that vouchers are just as good. We both know they’re not!
In fact you can do lots of fun things with physical cash.
And it’s even possible to get some fun out of not having it. An elderly relative of mine died recently, but before she went she whispered to her children that she’d hidden money all over the house.
The kids tore the place apart. Didn’t find a penny!
I like to think of her looking down on them and having a good laugh at their expense.
#9: cash is grabbable
The portability of cash rarely comes up in finance circles. But people have lives, and lives can be messy.
If you’ve ever been trapped in a bad relationship you’ll know how important it is to have a ‘go bag’ packed and ready, with copies of all your legal documents and plenty of cash.
Prepaid debit cards will do the job if you don’t want to keep a stash of banknotes in your bag. But whatever form your cash comes in, have it ready to go.
Relationships aren’t the only reason you might need some portable cash. If you live in a rough neighbourhood then again you might one day have to move fast.
Last year a nice police officer knocked on my door and told me to leave the house immediately, while the bomb squad rumbled down my street in an armoured truck.
I don’t think well on my feet. I grabbed my child, five packets of tissues, some ginger biscuits, and a dog-eared copy of Ovid’s Metamorphoses.
At least I remembered the kid.
Ever since then I’ve had a bag ready to go – just in case. My bag holds everything I might need for an emergency night away.
Disaster ‘preppers’ have what they call ‘bug-out bags’ – although they’re more likely to prefer barter goods and/or gold coins over cash.
But they’ll still tell you to keep a few weeks’ worth of cash on hand, just in case the banks suffer a massive cyber-attack or the zombies get between you and the cashpoint.
Keep coins and small notes (no £50s) in case everyone has to suddenly switch to cash and the shops run out of ready money.
Zombies, I believe, do not carry change.
#10: hold cash as a useful part of your portfolio
All of the above relate to the practical uses of cash. But you can also hold cash to help balance a portfolio.
Holding cash is not the same as holding bonds, but in some respects it has a similar function.
Make sure you create a distinction between ‘portfolio cash’ and ‘emergency cash’ (and also ‘day-to-day cash’). Otherwise you’ll find yourself trying to use one pot to do at least two different things at once.
Cashing up
Maybe I just like to hold cash because I’m a pretty new investor and I haven’t quite found my feet. Or perhaps I like it because I’ve been through some tough times with no safety net, and having plenty of cash to hand now makes me feel more confident.
I guess it’s possible that in 20 years – sitting in my wing chair in the library of my castle – I’ll look back at this list and laugh at how cautious I was.
Who knows? Well, maybe you do.
If you’re further down the FIRE path than I am, has your perspective on cash changed since you started out? Do you still find space to hold cash? Or have you outgrown any dragon-like urge to hoard it?
Let us know in the comments below.
People at work – back in the day- used to snigger when I told them I kept a few hundred in 20’s at home. With their digital wallets and banking apps they thought it must be an old person’s thing. Well no, can’t you imagine a technical outage or cyber attack which stops the atms and card validation at the tills ?
I do think cash is unfairly maligned by FIRE enthusiasts. One reason for that the somewhat tiresome bandwagon of 100% equities, all in S&P 500 etc, where people use mental accounting to completely segment their 12 month cash emergency fund from their overall asset blend. Another, I believe, are those charts that always pop up where cash is compared against other asset classes and a laughably low interest rate is referenced. I just had a look and on cash recently I’ve achieved about 5.5% gross and 4.2% net – it depends a lot on how much effort you’re willing to put in, for sure, but cash doesn’t have to mean leaving it in the basic savings account that your bank offers. It can certainly trade blows in terms of return, and has the unique perk of (FSCS aside) guaranteeing both capital and return. Personally, I don’t hold cash for any reason other than to pay off debts and provide a small buffer for unexpected purchases, but I do think when I get closer to retirement I’m more likely to use cash than gilts to counterbalance equities.
We prioritised cash ever since the period of low interest rates, and the result of a crazy mortgage product that meant our monthly repayments were less than £100. We’ve pretty much always managed to save at a greater rate than our mortgage product too, so now we hold a big cash pile, leveraged against the mortgage, effectively making money at the bank’s expense. Like an offset product on steriods.
It’s only in the last few years we’ve started to really ramp up our pension contributions. Too late, maybe, to be true FIRE hounds, but we do sleep very soundly at night all the same.
Hi Squirrel, and thanks for a good (and amusing) post. I live in the decumulation phase now, and like yourself, but for different reasons, I find that cash has a lot of attractions. Having reached my “target”, I find that my most important objective is keeping hold of what I have, so inflation+ returns are the target for me. I can achieve this (depending on your view of inflation) with a high proportion of holdings in cash, which gives me the comfort of safety and stability.
Thanks again, and good luck in your personal journey.
Thanks Squirrel for an entertaining article! I’ve also been mulling on the role of cash. Bond yields eg vgov seem to be much the same now as cash returns… And cash doesn’t come with the same faff.
For headspace purposes, asset allocation just might become as simple as a good global tracker, and a good few years runway in cash?! (Rather than thinking in traditional % growth v defensive asset splits).
Thanks for the broad view of holding cash.
I think one problem with cash is looking at it in isolation
As a part of a portfolio with equities it is a stabiliser. Currently in a cash isa earning above inflation returns, net tax, guaranteed capital and income return, not all bad.
Not correlated with Trump (yet).
Comparisons of the returns on cash vs equities tend to be biased low by using the returns on Treasury Bills as the proxy for cash whereas Joe Bloggs (and presumably our nut-nibbler) would hunt around for, I imagine, the highest-yielding cash ISA of the day. Be that as it may, and subject to the fact that all “studies” are open to one criticism or another, here’s a relevant link:
http://paullewismoney.blogspot.com/2016/06/cash-beat-shares-from-1995-to-2015.html
Here’s the more academic Mr Bessembinder on a related point:
https://www.sciencedirect.com/science/article/abs/pii/S0304405X18301521
Here’s a stock-sceptic paper
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3594660
I wonder whether cash would often be superior to fixed interest bonds, so that a cautious portfolio might consist of cash, linkers, gold, and as little in equities as you are prepared to risk. Now, if someone could tell me of a low-cost, tax-efficient, remunerative way to diversify some of our cash into foreign cash (e.g. Swiss or Singaporean) I’m all ears.
Declaration: I am by nature a market timer. My record on timing the sale of equities is excellent but I clearly have no ability to time their purchase.
Interesting article; thank you.
I find cash useful in only a number of regards:
1: The Landlord at the pub seems to prefer it and I get better service as a result.
2: You will be surprised just how much people will do for you if you can slip them a hundred quid. Same applies to why having a “named” watch such as as Rolex can prove useful if you find yourself in a sticky situation.
3: You can wire money across to family in a time of need immediately. The stash of VWRL or BRK A doesn’t quite work in the same way.
I entirely identify with Fraser in Dad’s Army. Counting his coins by lamplight
BRK A…., I wish.
#1 I don’t think you mean liquidity, equities and bond are very liquid, you could exchange to cash in a few seconds. Not being able to choose the time of sale isn’t the same as liquidity.
#2 dry powder also has opportunity cost in holding that position in first place. You could be foregoing returns on assets you previously bought instead. So it both gives but also removes opportunities.
#3 cash is not stable, you don’t know what your returns are going to be. Real returns are what matters right, so unless you have a crystal ball for inflation figures then you definitely don’t know what your returns are going to be. Last few years have demonstrated this better than ever.
Would you really choose a stash of 20s over a credit card in your pocket for an emergency? Cash is country specific for a start, also very losable with no recourse. I think probably 95% of the time I’d take the card
#10 I can agree with, I’d happily exchange bonds for cash in a portfolio.
As you can maybe tell. I struggled a bit with this article..
Such a fun article. Thanks Squirrel!
I feel this is an excellent opening to either a joke or a short story competition;
Zombies don’t carry change because…
Great to hear from others who also find reason to hold a stash of cash – and @HAK, I think the Landlord’s involvement here is very important…!
@Rhino, in response to your question – yes, instinctively I would choose the stash of 20s over the credit card. I’m still trying to figure out why! Perhaps because I’ve rarely left the UK, so I tend not to think in terms of it being country-specific. Perhaps because I don’t actually own a credit card myself and was brought up to have a deep distrust of them (more on that another time!). Perhaps because cash for me is immediately usable in an emergency (most of my emergencies are more easily solved with ready cash, which tends to get me a discount). It’s a very strong and possibly irrational preference!
@Rhino #10. You can sell equities in seconds, but how long does it take to a) get the proceeds into your broker account as withdrawable cash, and b) move it from there to your bank account.
Emergency 20s stash: depends on the emergency. Power or internet outages, or Visa/Mastercard or your bank’s processing centre going down turn a credit card into just a piece of plastic, currency notes are still acceptable (unless the tills are down with no way for the shop to just take your money). In my case I’m very unlikely to need currency other than sterling.
@Squirrel: Thanks for a lovely informative article.
@all: I’m 16 years retired, and 10 years past SP age, and supposedly decumulating, so I stopped adding to investments. However I’m spending less than my income, so the cash pile is growing, and I’m having to keep using those techniques for keeping the real return positive.
OTOH, I don’t distinguish between portfolio cash and emergency fund – if an emergency happens it is all going to get spent if needed and available. Hopefully, the emergency won’t be that big.
Hmm – a lot of the benefits you detail can be covered by a good offset mortgage. Then you can be fully invested and still take on opportunities… we have done this for over 2 decades…. And we have another 18 years before our offset closes…
Fully in agreement that ‘cash’ forms a useful component of the portfolio or emergency fund even for those with a long way to go before retirement. For those if us in retirement, it is probably even more useful.
Historical performance. Most studies use 3 month bills as a proxy for cash there being (AFAIK) very little in the way of historical data for actual savings accounts (The Barclay’s equity gilt study has Building Society savings account rates going back to 1946 – I’m not convinced the data pre-1950 are correct though, and The Building Society Association, https://bsa.lansdownepublishing.com, have interest rates going back to 1939). It is useful to note that if you substitute the bank rate (i.e., roughly the SONIA rate) for the bill rate you get a much better historical performance and that STMMF attempt to track the SONIA rate.
6) ‘Interesting and useful’
Challenger banks and the ease of moving savings accounts means that the modern saver can get a much better deal than historical savers. For example, I am currently getting 6% and 5.75% on two regular savers (the first is now at its capacity of £5k, but has no maturity date).
10) cash as part of the portfolio
Our portfolio cash sits in two fixed 1 year accounts with maturity dates six months apart (corresponding to the semi-annual withdrawals we make and has an average maturity of 6 months) – this is a good strategy when rates are steady or falling since it provides extra returns over easy access, but can be frustrating when rates rise rapidly. Of course, this problem is writ large with bond funds where the duration is long.
Our fixed income (including cash) is the only area in which I indulge in some mild activity – our target duration is somewhere between 1 and 2 years so when rates are low or the yield curve is flatish the duration is set towards the low end of this range (i.e., more cash), while when rates are high the duration is set at the higher end (the other components of fixed income are a short global bond fund and a global bond fund – the global diversifies away from being too UK focussed – hyperinflation in 1920s Germany destroyed domestic fixed income of all durations).
Thats weird, just seen/read another squirrel article pop up in feedly ‘The Hemline Index, and other fashionable follies’ but not on the main site..
@Rhino — Yes, I switched the running order as this one seemed more relevant in light of this week’s White House clownery, but I screwed up the date of the Hemline Index (it’ll now come out in a couple of weeks).
I’d have hoped RSS readers would take it off their feeds given it was only up for about five minutes, but I must admit I stopped bothering to monitor how they worked
nearly a decade ago after they (sadly) lost the war against social media etc…
@Squirrel – top article.
I love cash me. Hold far too much (about 25% of portfolio plus another 7% or so in the mortgage offset account.) But I can get over 6% yield on Royal London Short Term Money with very little risk so why go riskier? Even Premium Bonds giving more than inflation (if I have median luck) and they’re tax free.
It won’t last but while it does…
I’m preparing for FIRE, and it’ll run down to an overall 10% or so over the next 8 years. Which is a nice ballast to have.
Take your risk on the equity side!
@Squirrel, @TI: top timing on this article 😉 After the last six or seven weeks difficult to argue against the merits of holding some cash or cash like securities to buy the dips or prepare for winter times. Things are very different now with MMFs and short gilts giving 4+% (albeit not perhaps for long, all depends on inflation I suppose) than holding cash in 2010s at next to nil. The opportunity drag of the liquidity, optionality and safety of cash is much mitigated now compared to then.
@squirrel – so I shared this link a few weeks ago over at Ermine s place:
https://youtu.be/3Ga-M2CpRgY?si=G7QCLuV0KWq9azEC
It seemed to go down well and generate some positive vibes. It’s on the merits of credit cards. TL;DR If you can trust yourself to pay in full monthly then I think they are a good idea.
@TI (#18)
The Hemline article is still showing in my RSS feed so guess the reader software must be using some sort of local cache. That said, I’ve not forced a refresh though a new item from another subscription arrived this morning so it must be updating in some kind of way.
@Curlew — Thanks for the extra information. Curious! I won’t dig too deeply as hopefully it won’t happen again for a while. Think I’ve only made such a blunder 2-3 times in 18 years… 😉
Underclass roots means I have far more of the stuff than I should have, about 18% of the portfolio (and I am well and truly FI). It is spread around various (mostly good) NS&I products and one or two other places.
Cash is better than nearly all other material goods. In a crisis, most of what you physically own (outside of your home itself perhaps) will be worthless or worth far less than you hoped.
Cash will get you discounts, and sometimes great ones. I negotiated close on 18% off the price of our house because I was buying in cash and could move quickly. Plus it was worth it to see the look of horror on the estate agent’s face at my opening offer (80% of asking price).
Cash is uncomplicated. I have zero interest in developing a part-time hobby as a financial investor. Practically all of my non-cash investments are via my pension – and blimey, that’s seen some hefty fluctuations over the last decade. Having up to 8 years or so of running costs in cash means I sleep very soundly through all of those ebbs and flows. When I finally come to retire, sequence of returns risk is unlikely to bite my ass.
@Brod (#19)
While I also hold the Royal London STMMF, according to morningstar the yield to maturity is currently 4.65% (not 6%) while the return over the last year has been 5.1%. Both of these are consistent with the current and recent SONIA rates (4.45% and 5.2% falling to 4.45%, respectively). Of course, future returns will depend entirely on what happens to the base rate.
@Alan S @Brod
A shout out from me for the Royal London money market fund: it always seems to perform a fraction ahead of those from Fidelity, Vanguard and even the swaps-based etf CSH2. I still hold CSH2 for dips-buying as it can be converted to pure cash in a minute rather than nearly a day for the funds. Every day this week seemed longer than the last.
I am retired and have a lot in cash – about 20% of my portfolio, which is about five years expenses. Intially this was because it was five years until was I going to start drawing my defined benefit pension and I wanted complete assurance of where that money was coming from.
Four years in (and one year from that guaranteed montly income!) I still have about five years expenses in cash. This is due to spending dividends and earning interest.
Another reason for having so much cash (well savings accounts, not so much actual crispy notes) is I’m really bad at spending! Having it’s earning power eroding away is supposed to encourage me to spend more of it. This is still a work in progress . . .
23 years retired now -wife and I both 78+(rtd at 57)
Always kept 2+ years of living expenses in cash in our investment portfolio
This portfolio supplies just under half of our retirement income
This cash equates to 5-6% of the portfolio
Cash in one high interest bank account (watching the £1000 tax level) and 2 Instant Access Cash ISAs-no tax problems
These cash accounts feed my current account as required (approximately 2x a month ) ie to pay off Visa ,new washing machine etc and every 5-10 years a new car
These 3 cash accounts are topped up once a year from sales of fund units in Stocks and Shares ISAs(2) and SIPPs(2)
Worked so far but who knows going forward
xxd09
So nice to see an article about the advantages of cash. I decided many years ago to keep about 10% of my portfolio as cash and apart from NS&I, I use AJBell’s savings hub and Monzo to keep an ongoing 2-year fixed term savings ladder. I see the advantage of 20s over 50s, but the new 50s are accepted far more these days and useful for when we eat out. Hard to find a better store of cash in such a small space. I never understood the UK dislike of 50s, especially since our cousins on the continent pay regularly with 50 and 100 euro notes.
However, there is another reason for why I like using cash. The slow but steady chipping away at the last remnants of our privacy. I want to be in charge of what information is stored about my purchases on servers. Paying with a debit card coupled with a store loyalty card, which I gave up many years ago, means that a huge amount of information about your purchases and spending habits is available. Maybe it’s innocuous now, but slowly sets a precedent for future abuses of power. Yeah, okay, my paranoia showing. 🙂 But I will continue to use cash for approx 50% spending and boycott any places that don’t take cash. Very difficult since so far I haven’t found any places like that where I live. So frustrating! 🙂
Steve
BRK.B as an alternative to cash/MMF (CSH2 etc)?
Currently holds ~$350 bn in cash and (short duration, term risk free) cash like instruments, and, arguably, much better able to know when to reduce and increase cash versus investments than us.
For that matter, maybe BRK.B instead of (some or all of allocation to) SPY/SPX?? After all its record since 1965 speaks for itself.
OTOH trading for 1.7x Book value currently. which is the highest for some years….