Pac Man Eats Cash
People love certainty.
People hate FUD (fear, uncertainty, and doubt).
These might be reasons why people love to hold cash.
The Federal Reserve Bank of St. Louis shows there is $6.9 trillion in money market funds and growing.
A money market fund is a mutual fund that invests in low-risk, short-term debt instruments (e.g., Treasury Bills) and acts as a proxy for cash.
The good thing is that cash is making something these days. A one-year Treasury Bill is paying 4.17%.
Although rates have come down over the last year, they are still paying at levels we haven’t seen since 2007.
Holding cash is an excellent tool if you are saving for short-term financial obligations/goals (e.g., saving for a wedding ring or a down payment on a new home).
However, holding cash for decades could be deadly.
“A ship in harbor is safe, but that's not what ships are built for.”
– John Shedd
Did you know that there is a correlation between cigarette sales and lung cancer mortality?
Duh! Everyone knows that!
Below, you can see there is a 25-year lag between cigarettes sold and cancer deaths.
You usually don’t see the adverse effects of smoking in the short term, but they are very apparent in the long term.
Holding cash for decades has this same “slow-risk-effect” characteristic.
In the short term, holding cash is stable and predictable. Here are the returns of cash over the past decades without including inflation (i.e., nominal returns).
These returns are decent.
In the long term, however, holding cash erodes your purchasing power and deprives your wealth from compounding.
Here is the same chart with real returns for cash (i.e., returns that include inflation).
During the 1970s, inflation averaged 7.4% annually, meaning $100 tucked under the mattress in 1970 could barely buy you $45 worth of goods by 1980.
Inflation this decade has seen high rates but also high inflation.
Think of inflation as the Pac-Man of the financial world, gobbling up your purchasing power bite by bite.
Cash is great for emergencies and short-term goals but not so good holding it for long periods of time.
Consider putting it to work before the Inflation Pac Man eats it.
Now here’s what I’ve been reading and watching lately:
Quote:
Men, it has been well said, think in herds. It will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
– Charles Mackay
Carroll Shelby by Rinsey Mills on Founders Podcast
Enzo Ferrari Part 2 on Founders Podcast
Enzo Ferrari Part 1 on Founders Podcast
Quiet: The Power of Introverts in a World That Can't Stop Talking by Susan Cain
My favorite children’s book so far (I have a 5-year old): High Five by Adam Rubin