Warren Buffett has the uncanny ability to make smart investment choices in a timely manner. Most of Buffett’s investment advice for investors simply revolves around the easy ways to get solid returns. One of his main pieces of advice is often overlooked. The one long-term investment option that Mr. Buffett warns against, and should never be in your portfolio is to hold lots of cash.
A Favorite of the Crowd
In a recent bank rate report, the survey of many Americans showed us that cash was the favorite among long-term investment options for funds that have been available for about 10 years. A total of 26% of the respondents have chosen cash investments. The second closest in popularity at 23% was real estate investing, based upon the hypothetical investment choices. Gold and other precious metals, along with stocks, came in fourth place at only 12%.
It’s unfortunate for the majority of people surveyed, as well as the section of the population that they represent, because cash is not the best investment choice. It’s actually a poor choice. And here’s what Mr. Buffett has to say about this subject:
“The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time… Cash is a bad investment over time.”
Is the King Dead?
If you pay attention to the long-term cash returns as opposed to other investment opportunities, you’ll recognize why Buffett looks at it as the worst investment of choice.
Just like Warren Buffett tells us, cash is going to be worth less over time due to inflation. This is even true of developed economies, like the US, where inflation is low, the price of services and goods will far outpace cash investment returns. Some of the biggest and best interest rates for savings accounts come from online-based accounts. But they typically only offer an average interest of 0.85%. There’s no question that inflation is going to cut down an asset’s value over time, but cash will actually lose value.
Timing Is so Important
Buffett’s advice should be heeded by many people, not just those who plan to retire many years from now. Americans are living a lot longer, and plenty of the retirees feel that they will run out of money some day. This particular fear can often lead them to choose what are known as safer investments, by going with an all-cash approach. This can end up being a self-fulfilling prophecy. It’s possible that retirees may even live 10 to 40 years past the date of retirement and a fixed income will be a lot more difficult to stretch when other expenses arise. That’s why Buffett’s advice is relevant to 20-somethings and retirees alike.
Let’s Be Very Clear
Buffett certainly warns us that cash is not the best investment. But he also wants to tell us that it’s important to have cash on hand as well:
“We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future, essentially.”
Having a backup savings account or an emergency fund is not something Buffett would balk at. On the contrary, he would look upon it positively. But he would tell you to not let your cash stash get too big. If it does, the money is not working for you as you look to achieve financial security.