Compare Investment in Cash vs. A Diversified Investment

You might be familiar with the term making money from your cash but have you ever heard about losing money to your cash? Yes, you can actually lose money to your idle cash. If you compare different investments "Idle Cash" is probably the worst thing you can do with your savings.

What is Idle Funds?

There is a huge population of people who are not familiar with the term “Idle Funds”. For people, cash means currency or any security which is equivalent to the cash. The Idle Funds basically is the money that is kept as saving and is not invested. These types of funds are not invested in any investment tracing vehicle which means they are not part of the economic markets. The Idle funds are also commonly known as “wasted” funds since they are not bringing any good.

How does it compare with other investments:

People all around the world are so used to of keeping cash that they do not understand the need of investing them. During times when the inflation rate is high, your idle funds will end up decreasing in value. In order to maintain the liquidity of the funds while earning income from the funds, one of the wisest options to go with is investing your money in the money market, be it short term or long term investment. According to a research paper that was published in the Financial Analysts Journal, Vanguard founder John Bogle mentioned that that the idle cash is one of the common reasons most of the investors are not making as much investment as they can.

To break down things for you let’s say that you have $200 in cash with you. You decide to save it by keeping it in your cupboard. In next five years, your $200 will shrink in terms of value. The buying power of the cash will be eaten up by the inflation. Things that you can buy from your $200 today will be more expensive in coming 5 years.

In simple words, unless you decide to put your money to some use in form of investment, it will end up losing its buying power.

Things to know on comparing investments:

  • When it comes to the long term investment portfolio, the cash needs to be minimized so that it is not devalued by the inflation.
  • You should know if you are holding any cash in your portfolio and what negative effects it can bring to your wealth.
  • In order to know how much idle cash you are holding, you need to sync all your investments.

Why cash is not good?

For the long term portfolio, holding on idle cash is not a good option as it can decrease the returns. However, despite being not so good for the long term portfolio, it still ends up being in most of them.

As per the investment Research, an average account holds almost $31,000 cash, which means that almost $200,000 is lost return for over 30 years at the growth rate of 7%.

How cash becomes part of a portfolio?

There are multiple sources through which cash becomes part of the investment portfolio. Some of them are as follow:

  • To fulfill fund redemptions:

    If you have invested in Mutual Funds or ETFs, then you might hold cash since fund’s manager should be ready in order to fulfill the fund redemptions.

  • Dividend payouts:

    Furthermore, if the dividend payouts from the investment are not reinvested, it will lead you to presence of cash in your portfolio.

  • People are afraid to invest:

    It has been widely observed that people all around the world are less excited about the gain and fear the loss more. This is the reason when the individual investors have a very bad reaction to the corrections of stock market. A lot of investors end up selling their stocks as soon as there is a slight decline in the market, fearing that the market will never get back to normal. Furthermore, they take long enough to re-invest which means they hold cash in their portfolio for a long while.

    When it comes to the SAMT AG portfolios, the presence of idle cash is close to none. According to the calculations made by Morningstar Inc. the average weighting cash is 3.2% only, all across the world of the U.S. equity Mutual Funds. The Index-tracking funds that are used in the profile carries low amount of cash as compared to the active funds.

Bear markets:

When it comes to market corrections, Bear markets are the one that takes longest to recover which means the investors need to have a lot of stamina. Despite the long recovery time, they do get back to their normal self. The estimated time for the recovery of the Bear Market was almost 684 days. However, back in 70s, Bear Market took almost 6 years to recover which was longer than the 2008’s meltdown of the financial system. But in recent times it seems that governments do not longer accept the pain of long Bear Markets but prefer to invest huge amount of money (called QE or quantitative easing) to push the stock markets up again.

Peak Trough Recovery No of Days
Date Adj Close Date Adj Close Date % Drop Peak to Trough Trough to Recovery
4/29/11 1363.61 10/3/11 1099.23 2/24/12 -19.39 158 145
10/9/07 1565.15 3/5/09 682.55 3/28/13 -56.39 514 1485
4/7/00 1516.35 10/9/02 776.76 9/18/07 -48.77 916 1806
7/17/98 1186.75 8/31/98 957.28 12/18/98 -19.34 46 110
7/16/90 368.95 10/11/90 295.46 2/11/91 -19.92 88 124
8/25/87 336.77 12/4/87 223.92 7/26/89 -33.51 102 601
11/28/80 140.52 8/12/82 102.42 11/3/82 -27.11 623 84
9/21/76 107.83 3/6/78 86.9 9/12/78 -19.41 532 191
1/11/73 120.24 10/3/74 62.28 7/14/80 -48.20 631 2112
11/29/68 108.37 5/26/70 69.29 3/6/72 -36.06 544 651
2/9/66 94.06 10/7/66 73.2 5/5/67 -22.18 241 211

Table shows S&P 500 Bear Markets (Declines Greater than 20%) 1965-2014

The arithmetic average draw down was app. 32% in a range of -56% to -19%. On average the account was 684 under water or in other words it took 684 days in average to recover from the biggest market crashes in modern age.

It seems that there is currently a trend by central banks not to accept downturns anymore and to bail out anything and anybody no matter how much it cost. This government bailoutmentality supports stock investing as every bailout or stock purchasing program supports the companies and the stock market. If we look into the future we can see that the new elected US president, Donald Trump, plans to start infrastructure investment programs. Infrastructure programs mean that the government invests tax payers' money into private companies to build bridges, roads and military units. Infrastructure programs normally result in increasing stock prices for the companies involved in the programs. From a historical point of view we can say that huge government investments have brought inflation and decreased the value of cash while increasing the prices of stocks.

If we compare the investment in a diversified stock portfolio against the holding of cash in the current macro environment we can summarize that a stock investment had an average under water time from 684 days but always ended with a gain for the investor while in comparison holding cash has resulted in a negative performance from around one percent loss of value due to inflation.

What is the best investment solution?

Holding a small amount of cash can appear to be okay, however, it still can drag your returns down because of compounding.

Smart investors go for the right after-tax returns, once they make sure that the level of the risk is fine for their aimed goals. They control the portion of cash in their portfolio, invest tax-efficiently and makes sure that their portfolio is maintaining the required level of risk to achieve their goals.

However, if you are to hold any cash due to any reason then you need to make sure that you invest it as soon as you can especially when the trading is free and buying a fractional increment of the shares is within your domain.

If the trading cost is $7 per trade and you do not want your returns to reduce by more than 1%, in such case you should have $700 in cash. Cash which exceeds $700 is too much cash to hold and can bring down your returns.

Where to invest for best investment rates?

If you are a smart and empowered investor then you should know where exactly you stand with your investment. However, if you have no idea about presence of idle cash in your portfolio then there isn’t anything that you can do about it. However, if you trust us and let us build your portfolio for you then you do not have to worry about the presence of the idle cash in your portfolio.

SAMT AG never lets idle cash take any place in your portfolio because we make sure that all the cash is invested right away. We understand how idle cash can bring your return down which is why we use available cash and fractional cash to make a new investment as soon as possible.

To grab attention of our investors, we highlight idle cash right away and let them know through simple projection that how much their returns can be dragged due to holding cash for a long period of time.

Being a smart investor, you should sync your investment accounts with us. We will inform you every time there is idle cash sitting in your portfolio. By syncing all your outside investment along with debts accounts which includes taxable accounts, IRAs, mortgages and loans, you will be able to control your wealth. Furthermore, doing so will also help us to give you better advice regarding your current and future investments.

Diversification of your savings:

If you want to earn maximum return from the investment made by your idle cash then you need diversification. We at SAMT AG understand importance of diversification which is why we invest your money in different investment vehicles. However, while focusing on the diversification we always keep the factor of risk in mind. The risk is kept appropriate and is perfect for achieving the desired goals.

Our ProvenExpert Score speaks for itself. You can trust us. Need we say more?

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We have successfully developed many free diversified ETF portfolios for our customers and they are more then happy and rated our service with 5.00 stars based on 9 reviews.

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