The real cost of saving too much cash
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The real cost of saving too much cash

11 Dec
27 Nov

Dangers of saving too much cash

We rarely hear any warnings about playing it safe. We don't see headlines that say: "Hoarding cash forced family to file for bankruptcy", or "Placing deposits wipes out retirement savings."

The only news we read about is how someone lost all his money investing in the FTX, Luckin Coffee or Evergrandes of the world.

But the truth is, there are dangers to playing it safe. They just aren't as obvious or dramatic (unless you're in a negative interest rate environment, where Europe’s ECB experimented in the decade after the Global Financial Crisis). 

But mind you, if the yield on your savings is not generating more than enough to cover inflation, then you're losing purchasing power every year on that cash. Keeping a sizable portion of your portfolio uninvested actually has a hidden cost to you over the long term. We are exposing ourselves to different types of risks — risk of not catching up on inflation, risk of not saving enough for retirement etc.

Investing is a long-term strategy

Warren Buffett in his annual letter to shareholders in 2014, explained how staying uninvested in cash might be a riskier investment than equities for long-term investors.

During the five decades from 1964 to 2014, the S&P returned 11,196% including reinvested dividends. In the same timeframe, the purchasing power of a dollar declined by 87%, which meant that it took US$1 to buy in 2014 what could be bought for US$0.13 in 1965.

As Buffett says, for the majority of investors with multi-decade horizons, short-term market moves are unimportant. The "focus should remain on attaining significant gains in purchasing power over their investing lifetime [with a diversified equity portfolio]."

Investing is a tool to help us reach our goals, and there is a target real rate of return our portfolios need to earn in order to achieve these goals. 

If you start with $100,000 and want to double your money in 10 years, these are the returns you would need to achieve if you decide to keep a portion of the portfolio uninvested:

  • 0% cash / 100% investments: 7.2% annualised returns on investments
  • 20% cash / 80% investments: 9.6% annualised returns on investments
  • 40% cash / 60% investments: 12.8% annualised returns on investments
  • 60% cash / 40% investments: 17.5% annualised returns on investments
  • 80% cash / 20% investments: 25.9% annualised returns on investments

Hence, the higher the percentage of cash you hold in your portfolio, the greater the risk you need to take in your investments to hit that target rate of returns. 

Read more: The power of compounding interest explained

While looking at short-term daily market volatilities may make you want to hide your cash under your mattress, investing is a long-term strategy.

It can be deceiving to think you are not losing money when holding cash, as you are not subject to the daily positive or negative returns showing up on your investment accounts. But what the account balance doesn't show is your cash’s purchasing power declining (invisibly). 

We don't know what will happen with the markets tomorrow, or the next month, or year. Surely, investments come with risks and volatilities, especially in the short-term. 

But in the long-term, with horizons decades out for investment goals such as preparing for retirement, as proven by history, putting your money at work in the markets and letting it reap the rewards of compounding might be a wiser choice. 

To get started on your investment journey with Endowus Hong Kong today, click here.  Or you can schedule a 1-on-1 free consultation with our SFC-licensed client advisors for any questions you might have.

Read more: Why should we invest?


Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. 

This article is not intended to be relied upon as a forecast or research or investment advice, and should not form the basis of any investment or other decisions. The information contained herein is not intended, and should not be construed, as any legal, tax, regulatory, accounting or financial advice. If you would like investment, accounting, tax or legal advice, you should consult with your own professional advisors regarding your individual circumstances and needs.

The information in this article may not be suitable for all investors. You are responsible for any action that you take or decision that you make in reliance on any content in this article, and you agree that Endowus HK Limited (“Endowus”) is not liable under any circumstances.

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Accuracy of Information

Whilst Endowus has made reasonable efforts to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or errors in any such information. Endowus does not warrant or represent that the information in this article is correct, accurate or reliable. 


Any opinion or estimate above is made on a general basis and none of Endowus, nor any of its affiliates, representatives or agents have given any consideration to nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Opinions expressed herein are subject to change without notice.  

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this article are subject to market influences and contingent upon matters outside the control of Endowus and therefore may not be realised in the future. 

In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances.

This article has not been reviewed by the Securities and Futures Commission of Hong Kong.

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