Cash can be such a drag
Endowus Insights

Cash can be such a drag

March 30, 2022
February 23, 2018
"Cash is going to become worth less over time. But good businesses are going to become worth more over time."
  • Warren Buffett
image of speed skaters
Source: CBS News

Picture groups of spandex-clad, quad-bulging athletes wearing razor sharp blades, ice-skating around a track at high speeds in a space that is entirely too small for them to fit.

This is a short-track speed-skating relay. It's truly a team sport, where handing off between laps involves perfectly timed shoving of teammates. One uncoordinated shove, one slowpoke, one slip, will drag down the whole team's performance.

The performance of your investment portfolio will similarly be dragged down by one element that people don't generally think about - cash.

You've probably heard the saying: "cash is king." For a long-term investment portfolio, cash is more like a court jester that just keeps dancing the same dance and drags on your returns. Vanguard conducted a study of cash in US retirement accounts, and found that the cash levels were too high and created a drag on performance. At the end of 2016, more than 60% held cash continuously for at least five years rather than using it in cash investments. Vanguard concluded that even in a worst-case return environment, the cash would likely provide little additional short-term protection against downturns.

We have all heard this cowgirl (and boy) talk before:

"I made 40% on my Tesla stock in 3 months!"

"Oh yeah? I made 100% on my Tencent last year!"

A wise question to to ask:

"How much of your total net worth did you allocate to those positions?"

For most people, it will be small amounts: maybe 1-2% of their total portfolio. This means that a 100% gain on Tencent (which was a stroke of awesome luck) would translate into a 1-2% gain on their entire portfolio. How about their non-star performing investments? How much cash are they holding? We did a quick survey among friends and discovered that a >50% cash position was common, which means 50% of their portfolios is returning close to nothing. Even if they did great, let's say 12% on their invested money in a year, they really did closer to 6% as a whole, because they didn't invest their cash.

What you should really say is:

"Oh yeah? The annualized performance of my entire portfolio was 8% for the last 30 years, which means I have grown my money by 10x. I have maintained and rebalanced a global portfolio of 80% stock and 20% bonds."

Boring... yes. But you will do better in the long-run. Put your cash to work with cash investments and make money responsibly on your entire portfolio so you can save your adrenaline for something else - like speedskating.

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