- Paper money is the original risky asset, pays nothing, and is fully exposed to inflation.
- Wall Street would have you believe that holding cash will destroy your purchasing power over the long-term.
- Cash held as 3-month T-Bills–cash equivalents–has not only kept up with inflation, it has modestly beaten inflation in 53 out of the last 89 years.
Cash is one of the more neglected considerations in financial planning and investing. Everyone knows having a lot of it is a good thing, even as it burns a hole in your pocket begging to be spent on a large flat screen TV or a biturbo something or another.
A recent Michael Kitces post discussed how holding cash instills a sense of well-being and satisfaction. Or at least a sense that you can pick up the check, come what may. In our retirement risk management model this comes under the Spending and Reserves allocation-having the cash available for the next year or so of expected and unexpected spending, without having to sell something at a less than desirable price to pay the bills, whether that something is heirloom sterling or a favorite stock that dropped 20% recently.