Wisdom for Life

A few weeks ago, my son Rory had earned a few dollars helping around the house.

As parents of young kids know, there is something magical about the way children view money. Rory had accumulated a small stack of bills and was feeling pretty wealthy.

Holding his cash, he looked up at me and said, "Dad, I have a lot of dollars."

I told him he certainly did.

Then he asked a question that caught me off guard.

"Dad, do you have a lot of dollars?"

I laughed and reached into my wallet.

"No," I said. "I think I only have about twenty."

For a brief moment, I think he genuinely felt sorry for me.

The truth is, I have always liked carrying some cash.

Not a lot. Just enough.

Enough to leave a generous tip. Enough to help someone who might need it. Enough to pay for lunch if the credit card machine goes down or technology decides not to cooperate that day.

Cash gives us flexibility. It gives us options. And sometimes it gives us the opportunity to be generous in a moment when generosity is needed.

In that sense, cash serves an important purpose.

The challenge comes when we apply that same mindset to long-term investing.

Recently, I came across an article discussing how much cash Americans are holding today. The author noted that roughly $5.6 trillion sits in low-yielding bank deposits, often earning little after taxes and inflation.

The article included a fascinating chart from Fidelity that compared different investing approaches from 1980 through 2023.

An investor who contributed $5,000 annually to the S&P 500 and somehow managed perfect timing would have accumulated nearly $5.6 million.

An investor with the absolute worst timing imaginable still ended up with approximately $4.3 million.

Meanwhile, the person who simply held cash accumulated only about $350,000.

That result may surprise you.

Because one of the most common questions we hear is, "The market is at an all-time high. Should I really be investing right now?"

The Fidelity data offers an interesting perspective.

Even the investor who managed to buy at the worst possible time year after year dramatically outperformed the person who stayed in cash.

The lesson is not that timing never matters.

The lesson is that staying invested matters far more.

Now, before everyone runs out and empties their savings account, cash absolutely has a role to play.

We regularly help and instruct our clients to maintain emergency reserves because life is unpredictable. The water heater eventually breaks. The transmission eventually fails. A job change, medical expense, or unexpected opportunity eventually appears.

Cash provides stability when life gets messy.

We also generally want money earmarked for short-term goals to remain conservative. If you are planning to buy a home, pay for college tuition, or use funds within the next few years, cash and cash equivalents often make perfect sense.

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The problem is not holding cash.

The problem is using cash for goals that are ten, twenty, or thirty years away.

Because while cash is excellent at providing flexibility today, it has historically not been the most effective tool for building wealth over long periods of time.

As I thought about Rory's question, I realized it was actually a pretty good one.

Do you have a lot of dollars?

The answer depends on what those dollars are doing.

Some dollars should be in your wallet.

Some dollars should be in your emergency fund.

Some dollars should be available for goals you plan to reach in the next few years.

But the dollars intended to support your future may need to be working harder.

So let me leave you with the same question Rory asked me.

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Enjoy your weekend,

Daniel Westergaard

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Source: We're Keeping Too Much Cash In Our Accounts These Da​ys