Is cash trash or is cash king? This is a question that is quite controversial. Ray Dalio tells us that cash is trash, Warren Buffett $BRK.B has $128 billion in cash.
Let's look at the argument that cash is king. Right now, I have about 20% of my portfolio in cash and cash equivalents and 10% in an arbitrage position which I'm closing. Overall, we can say that I have 30% of my portfolio in cash, ready to be deployed. One great use of cash in a bear market is that it gives us the opportunity to buy stocks at a discount. Another reason to have cash right now, is that it can protect your portfolio against volatilities. The markets $SPX500 fell by 32% but my portfolio fell only by 18%.
Ray Dalio said that cash is trash because of low interest rates and all the money printing that has been going on. The Fed and other central banks cannot lower interest rates further and they are forced to do quantitative easing, that is, print money. Since 1913, when the Fed was created the US Dollar lost more than 95% of its value. Most of the lost came after 1971 when it was no longer backed by gold $GOLD . In the future, inflation is expected to be higher and cash will further lose its value. Inflation at 5% for 10 years means that the US Dollar loses 40% of its value.
Right now, we have deflation. Cash is king. People are not spending that much money. Oil $OIL prices are cheap, so are airline tickets. But when things get back to normal and all these people get back to work, they will start spending again and inflation rate will rise. Short-term, cash is king. Long-term, cash is trash.
What about our personal finance? If you need cash soon, let's say you're getting married or buying a car. You shouldn't take the risk to invest in stocks right now. In 2018, during the market correction, I invested my emergency fund in stocks and then last year, I had to take money out of my portfolio to buy a new laptop since I didn't have an emergency fund. This is not good. I have cash in my portfolio to invest but as far as my personal finances are concerned, I still need to build an emergency fund. We can say that for me, right now, cash is king. Whether cash is king or cash is trash, it depends on you.
Ray Dalio is a global macro investor, he doesn't need cash in his portfolio. He invests in multiple asset classes and doesn't even take new clients anymore. Warren Buffett, on the other hand, cannot make new investments because his portfolio is too big. This $128 billion is only 15% of his $817 billion total assets in his portfolio. Both of them are great investors but they are in different situations. Same for you and me. I cannot tell you whether cash is trash or king. It depends on you. You know your financial situation better than I do. You know your risk tolerance better than I do.
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