Cash is a terrible long-term investment, even at 5% interest
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- Опубликовано: 8 май 2024
- Meet with PWL Capital: calendly.com/d/3vm-t2j-h3p
With a 5% return on cash, why would anyone want to invest in stocks? I know that cash feels good because its nominal value is stable - it feels safe, but it is counterintuitively extremely risky for long-term investors.
Referenced in this video:
Reaching for Yield: Evidence from Households - papers.ssrn.com/sol3/papers.c...
CRASH BELIEFS FROM INVESTOR SURVEYS - www.nber.org/system/files/wor...
Who Should Buy Long-Term Bonds? - www.aeaweb.org/articles?id=10...
Portfolios for Long-Term Investors - academic.oup.com/rof/article/...
Presidential Address: Discount Rates - onlinelibrary.wiley.com/doi/1...
Long-Horizon Losses in Stocks, Bonds, and Bills - papers.ssrn.com/sol3/papers.c...
“Buy the Dip” - www.pwlcapital.com/resources/...
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I’ve always appreciated the plain Jane format of these videos. No explosions in the thumbnail or meme cuts (I’m takin to you Stephan graham). Just straight researched advice for grown ass adults. Thanks for the continued uploads over the years.
I get it, i love simplicity and hate gimmicky YT video stuff. These videos have substance. But i am a professional Quant working with these things and I still have trouble keeping up because of how "flat" the video is. The video is excellent but, some graphics to help convey the concepts would do wonders. I am a visual learner, and keeping track of all the numbers and examples is really not helping with my following.
as always, this is a great rational reminder for every DIY investor. This is by far the best financial channel I know
I see what you did there 😉
The podcast is even better!!
Because this channel is focused on offering pure value education, not focused in selling you courses, get rich quickly schemes/dreams. There are few like this, Ben Felix, The Plain Bagel, Patrick boyle, we can probably count with our hands vs the majority spammy/poor quality/sales channels
100%
Im jealous that you haven't found out about Patrick then
Very important video. Not simply because it illustrates the drawback of holding long-term assets in cash, but because it wonderfully assuages concerns over short-term moves in borrowing rates for long term holders, i.e., higher expected returns offset present value declines in asset values for long-term investors.
Another great video Ben! Doing your followers a great service.
Thanks big shooter
It's a good time to make sure your emergency fund is big enough, with a nice bonus from the interest rate to encourage you. But that money is going to sit there because it's an investment in your short term daily security, and that is its return. If you have the emergency fund you need, then listen to the man.
Excellent advice, as usual. I'm 70 years of age, though, so in my case cash is not a long-term investment anymore. I'm 45% in stocks.
Congratulations on hitting 70! I hope I make it that far.
Excellent video!!!
Thank you!🎉
From Brazil, I watch all videos. Thanks Ben.
This video is completely aimed at me. Thanks for the insight.
the chuckle at the end made me laugh... good video as always.
Thank you Ben!
What a wonderful video, thank you very much!
Brilliant analysis. Thanks a lot.
Very timely advice, thanks Ben. I just had a family member ask about this, so I’ve been wondering about the data.
Man It is very kind from you to Provide this free on RUclips, will be forever be Grateful, Financially you’re inspiring.
Thank you for spending your time to provide these wonderful knowledges
Excellent video Ben. I would like to know your opinion in cash ETF for emergency funds. Thank you for sharing your knowledge
great content as always
I like the Rational Reminder podcast and I love your solo videos. Great job as always.
Superb as always
Excellent video, as always of course
Just the question I was wondering. Thanks Ben!
Also HYSA has ordinary income tax. Could hold stocks for long term or dividend to save on taxes too.
Great video my friend- Always stay invested 👍
Great video! I was wondering what your opinions are on time diversification, i.e. the idea that stocks become less risky as you increase the holding period. It seems to be a controversial subject among academics.
I've read articles that argue time diversification doesn't make sense and that it might also depend on how you define risk: the probability of losing money vs. how much money can be lost.
Measured by the variance in wealth there is only time diversification if returns are mean reverting. I think they are a little bit mean reverting. Measured by the probability of losing there is time diversification even if there is no mean reversion.
@@BenFelixCSI Thank you!
Ben, thank you for the great videos. Do you happen to have any videos on 100% stocks vs. stocks+bonds vs. possibly all weather (dalio), in the context of a retirement fund? (30+ years runway). Thank you!
I don’t. Not a fan of all weather for any purpose.
This paper finds that 60/40 is optimal for safe withdrawal rates at the 30-year horizon papers.ssrn.com/sol3/papers.cfm?abstract_id=4227132
I view the delta between the expected return on the market and the 5% as a relatively cheap option premium that can be exercised when the expected returns increase.
Great video Ben. However, when you mentioned long term return cash vs other alternatives, is it based on the average market conditions, right? Do you think we are near average now? I would be curious to know, what would the data tell you if you compare the returns starting in market with comparable PE or Schiller PE? Would not holding mostly cash during such times and switching to stocks otherwise, give better results?
Thanks!
CAPE is high for the US market. Much less so elsewhere, and even parts of the US market, like US value, look pretty cheap.
The data I talked about in the video is global and covers all kinds of market conditions from 1890 to 2019.
Thank you for the video Ben! I have been thinking about this exact topic over the last few months wondering if my investing was still the best option.
How does the inverted yield curve play into this, though? Historically, bonds usually pay more than cash due to the interest rate/duration risk premium, but currently this is not the case. We can get 5.5% on cash, but 10 year and 30 year US treasuries only pay about 4.2%. So for bonds to outperform, short term interest rates would need to drop and average below 4.2% over the next 10-30 years.
Also what about it's sibling: the perverted yield curve?
This should be addressed
Good point!
I have 10% sitting in cash @ 5%. I use the interest to rebalance my long term assets. It feels good. Psychology is half the battle for me.
How do you get return on your cash?
@@healthygrowth7760 High yield savings account. Most only will give you at least 4.3 currently.
HYSA or CD/share certificate probably@@healthygrowth7760
Money market fund@@healthygrowth7760
@@healthygrowth7760certificate of deposits or high yield saving account
Just amazing. Thanks.
Ben, I'd love to hear your opinion regarding Equal Weight ETFs. Whether they actually generate long-term alpha compared to traditional market cap index funds.
I'm holding cash because I'll need it within the next 2-3 years, hence a short-term investment. I've got long-term investments in stocks but that's money I don't need to touch for 20-30 years. I think it's important to realize he's not saying cash is a terrible investment, he's saying it's a terrible LONG-TERM investment.
Cash is still preferable to panic selling stocks at the bottom of a bear market.
Only if you need to buy lunch though
i was going to ask if you could link your "buy the dip" paper, but *wosh* there it is. you should be awarded a public service medal. thanks so much!
Would love to have you add in paying off a mortgage to this equation. For example, I have a 5.75% ARM 7-year mortgage, but am building up cash in a 5% saving account that stays liquid for my business. I also have about 60% of my net worth in VT stocks, but thinking I may need to add more.
When a friend asks me anything: hold on, I gotta see if Ben made a video about it before I say nonsense 😅
I love how I quite never understand the middle part of Ben's videos, but it sounds like he knows what he's talking about, so I believe him and act accordingly. 😂
Ha, same here! The middle part is where he gets into the technical details that I lack the background to fully understand.
thanks to you I now realise I also don't understand when it's technical part but still agree to it anyway... i now feel dumber than i already am...
Why did you write this comment? Now, I realized I also don't understand it and have to watch it again....
I think Ben was going to buy us lunch, something like that anyway
Nice. The “oh, they seem informed and they’re nice so dadgummit I believe them”never hurt anyone ever in the history of humans 😂😂
Yeah, completely depends on the purpose of that investment. I have my emergency fund in Tbills. However, that is an emergency fund or money I will use in the next few years for a down payment.
@@Anonymous-ld7je Yeah, you’re right I should have clarified. This is the second tier emergency fund. I do have an emergency fund that is cash it’s just not as large.
Good video as always. I did move my emergency fund to a higher yielding bank account, in EUR earning 2.56% :) does feel good
Hi ben, do you think this applies in all countries?
In Mexico for example interest rate of cash is 11.25% and inflation is around 5%
Seems to me that is very difficult that I would get a better deal in stocks ... at least in the short term
You have to consider political risk and exchange rate risk. Remember third world countries are more volatile and do unexpected things. Loop up the Tequila Effect. My parents lived through that. Something like that would never happen in the US
Finally someone gets it, subscribed
Should address more about whether the role of bond fund in the investment is replaced by cash (@ 2-5% interest rate)
All depends if your still working or retired. Also your age & your current cash needs…. Also depends on how much money you have. If you have many many millions, and a simple lifestyle, hoarding cash is not a big deal if it makes you feel safer.
Totally agree, my friends laughed at me for holding stocks this January. Tbh I am surprised that stock market rallied so much myself, but I know my time horizon is much longer than 1 year so short term volatility doesn't matter so much
I rarely sell anymore I just add to it. it would have to be stupid overvalued for me to reallocate.
what specifically do you add to? index funds? target date?@@mathgasm8484
it depends on how old you are. if you are in the final 15 or 20 years of life you might not be able to afford a big drawn down and the stress of a big draw down. you might prefer to lose a little money holding something relatively safe even if it cannot keep pace with inflation
In my understanding, cash still wouldn’t be the way to go here. Increasing allocation to bonds in your portfolio is key when approaching retirement for reducing volatility and hedging against downturns when not concerned with growth.
What if I need more liquidity and short term cash because say I'm trying to buy a house within a year, do I put it in HYSA, CD?
Been binge watching this channel between my work. You have a similar take on the market as I do as well as just following what the data and research tell you. ETFs are the way to generate reliable alpha while staying diversified. Personally, I've been really interested and invested in strategy-based ETFs as well as certain covered call ETFs. What do you think of ETFs like OMFL, SPGP, DSTL, MOAT, COWZ, etc.? These are alpha-generating ETFs that have beaten the S&P500 and stocks are filtered using cashflows, factors, and some value characteristics. These are US ETFs I don't know if there are Canadian versions of these.
these ETFs do not generate alpha. Generating alpha is getting a return higher than the risk you are taking, which is not possible to do consistently and for long periods of time in an efficient market unless you are jim simmons. These etfs beat the s&p500 but do not generate alpha, and btw they are not reliable etfs for the long run once one of them focus on dividends, that are irrelevant, and the other ones are either too young for us to analyse them or they focus on too much factors at the same time and also focus on nonsense "factors" like large caps and growth
Ben Felix, did you make this video just for me! Very timely, thank you!!! Scotiabank is going to be upset with you if I empty our savings account! 😄
What program or templates do you use for your text and graphics?
OK. Cash < Bonds. What are your thoughts on gold relative to those?
Good video.
This video is terrific and timely as usual. I would never swap out my stock portfolio for cash. Although I am in the process of switching my emergency savings from EQ Bank into Motive Financial for their 4.1% savvy savings rate. I used to ponder about using a short-term treasury bond fund for my emergency savings, but I didn't like the illiquidity. Same thing for GICs(and cashable/redeemable ones have lower rates). I think those 4-5% HISA's are perfect for emergency fund as you said.
I love Motive as an emergency fund HISA. I use it for my tax money as well.
I was given $250 in savings bonds for my 10th birthday. When I cashed them at 30 year maturity, they were worth less than they were initially due to inflation.
Excellent advice, agent 47
Your videos are amazing, Ben. Thanks! I am, however, confused why stocks continue to outperform cash even with high interest rates as hikes are expected to slow down the economic engine. If the economy slows down, how can it continue to grow at the rate you seem to suggest?
Economic growth is not where stock returns come from. Expected stock returns come from the discount rate applied to expected future cash flows. Investors will always demand a premium for owning riskier assets over safer ones. This premium should be (and indeed has been) persistent even when rates are high.
@@BenFelixCSI Makes sense, yet stock prices always reflect a certain emotion amongst the stock market players, no? Emotions which are guided by market signals, and rising interest rates should also result in companies using less leverage for investments, thus reducing growth if they then decide not to use their cashflow for said investments. Or am I missing something?
Investment is negatively related to expected stock returns. All else equal, a company that invests more aggressively has a lower discount rate and therefore lower expected returns. I think you’re still mixing up economic growth and returns.
@@BenFelixCSI Yup, I think you’re right 😇 Thanks for educating me, dear Ben! I’m an IT guy and pretty new to the game as I’ve just recently “woken up” to the fact that throwing away money on liabilities, while perfectly feasible now due to solid and well-paying freelance employment, will not guarantee my pension. I’ve just recently discovered that the stock market is nothing to be afraid of when you educate yourself, and your videos are helping enormously. Many thanks for your time and knowledge, I hope to learn more from you and contribute to the community.
@rocksolid82 There's a one-time repricing of stocks to reflect the higher discount rate, but from that point on expected returns should be higher.
This is the best financial info I've seen on RUclips. Great reminder that when you're getting a big yield on cash, it means long-term returns in other assets are likely higher. Easily overlooked!! Thanks.
Ben,
What really drives me crazy though is say you work for a job for 4 years between 18 and 22. Maybe it's a college job or perhaps you just went right to full time work. If you ended up with $3500 in your 401K, that back in August of 1969 would turn into $130K in August 2009. It would be about $92K in March 2009. But the rules allow the 401K provider to sell it and put it in cash. This is a rule here in the states.
I would like to see something about the correlation between money supply and SPY ...
For sure, the cash you refer is either saving account or fixed deposit. I would like to know whether short-term bond (as little as 3 month or 3 year max), T-bill or Money Market Fund are considered as cash investment as well?
3 month bills are the cash equivalent used in one of the papers I mentioned.
Hey Ben, I’ve been a huge fan of your channel for a long time. I have a question about your BTD chart. I assume the figures do not account for the returns an investor might expect from cash while waiting for the dip. If we take the example of world 20% dip, the spread is 2.2%. But if the investor is earning 5% on cash in the interim, wouldn’t that put the investor ahead by 2.8%?
You also get returns from shares in the form of dividends
They do account for the returns on cash while waiting to buy the dip. That’s the analysis that we did. Sit in bills until a drop of 10% or 20% then invest in stocks. It loses most of the time.
So I know groups of stocks and bonds are much better than cash but what about a single one? If you had to pick putting a significant amount of money into a somewhat volatile tech stock or pure cash what would you pick?
While you talk about an emergency fund, what about funds that are intended for something else, like purchasing a new home? We have had a lot of cash sitting around for a couple years and may for a couple more because we are saving it to purchase our next house, but exactly when that will be is hard to pin down. At the same time, like you mention, the purchasing power of that cash is eroding, but at the same time how can you invest in anything risky something that you intend to eventually use it for without going outside the short term time horizon (hopefully)?
Ben, your explanation about the drawbacks of holding cash for long-term investments is incredibly insightful and well-reasoned. Your ability to break down complex financial concepts into understandable terms is truly commendable.
Now, if you had to give cash a mascot to represent its true nature as a long-term investment, what kind of character or symbol do you think would best capture its unpredictability and lower expected returns compared to stocks and bonds? 😄💰
What a question 😂.
I couldn't agree more with your insightful analysis of the drawbacks of holding cash for long-term investments. Your ability to simplify complex financial concepts is truly commendable and makes it easier for everyone to grasp these important ideas. As for the idea of giving cash a mascot, it's a fun and thought-provoking concept. Great video btw, keep up the good work Ben!
Agree! Your video serves as an educational resource for anyone looking to make informed decisions about their long-term investments, and I'm sure it will be helpful to many viewers. Keep up the great work in spreading financial knowledge!
A mascot to represent cash as a long-term investment could be a "Sleepy Sloth." The sloth embodies the idea of a slow and steady approach, emphasizing the lower expected returns and the relatively stable but slow growth associated with keeping cash over the long term. Just like a sloth, cash investments may not be as dynamic or high-yield as stocks and bonds, but they offer a sense of safety and reliability over time.
Hi Ben, your insights into the world of investing and the role of cash are truly enlightening. It's clear that you have a deep understanding of financial markets and the nuances of long-term investing.
For someone looking to diversify their investments beyond cash, stocks, and bonds, what other options or assets would you recommend exploring? Your expertise would be incredibly valuable for those of us looking to make informed investment decisions. 😊
Ben, please do research about the optimum saving rate for low-income people. Especially in Canada, should it be close to zero?
This is a great topic. I have thought about doing a video on it.
Thank you Ben, great analysis as usual. What do you consider to be long-term? Some of the trends you show are for over a century, I understand how that would be long term. But in terms of a person's investing horizon, how do we apply this advice? Thank you
Thank you. Someone asked me this on Twitter so I looked at the data.
Around the 10 year mark is where the 10th percentile outcome for stocks starts to look better than the 10th percentile outcome for cash in terms of real payoffs.
This is what I needed to hear after I panicked and almost cashed out on my investments.
Sometimes its better to worry about not losing money. After long period of gains.
Just look at the 30 to 45 year returns that end on March 2009, December 2002, and December 1974. All 3 end up beating cash. The only exception is to lock in a long term treasury bond in the late 70s or early 80s.
80's tbills/bonds were/are callable and yes were called in by the treasury
So that just shows you then the safe way to make money is to buy and hold the index over a long period of time even if it lands on March 2009 because the return was over 10% APY with dividends re-invested from March 1979 to March 2009.@@gregh7457
The grand question is: Can the U.S. market continue gaining at the historical average forever (and/or from now until X investor is pulling out their retirement savings)?
What do you think about this specific moment with interest rates hitting home owners in our (Canada’s) housing heavy economy.
I just sold some shares to have some cash 😅
Hey Ben, What do you think of the view that even some shorter term investing /saving should be in equities because all those short horizons in your life add together to be functionally equivalent to a longer period... you'll lose on some, but win on others. It has the added benefit of increasing your equity exposure throughout your life, not just in the 60 to 70 window, reducing some timing risk. I know it's somewhat hetero-orthadox, but it makes sense to me. You'll know better than me where some of these ideas come from, but I think it might be Lifecycle Investing. Thanks
I don’t understand what you’re getting at because adding together short term horizons is a longer horizon. The point is you need to have some money available to draw from if you wind up needing it during a period where you’d lose a ton of your portfolio’s potential growth by selling in a down market. You’re not going to care if in 20 years you have a short term need when the market is up because you’ve lost that time value on the money you took out of the market earlier.
@@greg5892 No, if you're going to have a smallish amount of money, maybe you can invest it in equities. This is going to happen 12 times during your life. Perhaps you'll need to sell twice, but the winds on the other ten instances may more than make up for it. I think the focus on a cash emergency fund is overblown. A line of credit, lower volatility assets (say laddered bond fund) and even equities that you'll liquidate if necessary can all be part of an emergency fund.
As always, awesome video. I'm on the long term side for now, but at some point this has to change.
Is there anything theory on when that shift starts to happen? I mean, if - say - 30 years suggests stocks and - say - 1 year suggests cash, there must be some middle ground. Maybe even some 'sliding' from one group to another.
I've heard about some 'your age minus X' rule, but I would really like to hear your thoughts on it!
Love your videos!
It’s not binary and it depends on more than just your time horizon. Realistically a portfolio will consist of stocks, bonds, and maybe some cash. It also depends how much of the portfolio you need. If you need to spend 1% of the portfolio next year you could probably keep it in stocks.
@@BenFelixCSI
Thanks for the reply! And good points.
I am still a bit unsure on how to do it in practice, when the time comes. Do I withdraw a month's worth of expenses at a time? Do I withdraw a year's worth? Do I, when the time is coming, convert slightly more and more stocks into bonds, etc.
I don't expect you to give me a answer on that, I know it's individual. There's even some tax considerations here in Denmark. I just wanted to share some of my open questions
Again, love your videos. You've already helped my family a lot with making financial and rational decisions with the content, you are producing!
Can you give some examples of these worldwide total ETF things you keep mentioning. I think the naming convention would vary by provider and country and I cant seem to find one or one I am confident is the correct product
In Europe most long term ETF investors invest in total market index ETFs based on the MSCI World or FTSE All-World indices
Yes, can you talk about the higher expected rate of a recession? Shouldn't that be taken into account? Higher yields on cash, higher rate of recession. Seems like a no brainer to me to hold cash temporarily.
I Just Wonder: specifically for Bonds, is Cash Superior in rising interest environments compared to long-term Bonds, or is that effect simple to weak to Change anything? (Yes I know that there would also be this survivorship bias of when tightening Starts and ends, with us only knowing after it's over).
And how about Times when yields on Cash are Higher than longer term Bonds?
Or would It in that Case simply be a better Idea to Invest Into Inflation protected Bonds (TIPS) and get that Higher Long Term Return?
And one Last question: is there a risk Premium for TIPS for the fact that real yields could rise as a consequence of Inflation decreasing? Conversely is the Premium of "normal" Bonds Higher, as there you Take on the risk of Inflation unexpectedly rising?
Cash could be have higher returns in a rising rate environment, if the rate hikes weren't expected and priced in. But he's not talking about attempting to strategically position yourself for whatever you think the best investment is right now. That's just active management. He's approaching this from the perspective of someone trying to figure out what the best investment is for their situation; in particular, a long-term investor.
Cash sometimes has higher yield than long-term bonds but, as he discussed, cash doesn't hedge against falling expected returns. If rates fell, the value of your long-term bonds would jump, but cash would just stop paying as much with no hedge.
TIPS have expected inflation priced in
@@samsonsoturian6013 I know. But there is a risk for the actual Inflation to substantially deviate (i.e. Fall), leaving the Investor better of If they Had fixed rate Bonds.
@@robertwright8844 Yes. But Markets don't Seem to Always be fully aware of what is going to Happen, Sometimes expecting rate hiking cycles to Stop earlier than they actually do.
And otherwise interest Rates may stay in Line for a while, leaving theoretical time to Change the allocation towards Bonds again.
It's also More of a theoretical question, as There's No doubt, that beating the Markets is (nearly) Impossible. I Just wondered If there would Be systemical human Error, of people expecting interest Rate hikes to Stop earlier than they actually do (Just Like now).
@@egal1780 That is indeed a risk: if inflation is lower than expected, you likely would have been better off in similar fixed-rate bonds. But investors seeking the benefits of inflation-protected securities are afraid of inflation being higher than expected. High inflation is such an asymmetric risk that I would expect inflation-protected bonds to have lower expected return. However, I haven't seen an analysis of this and would be interested.
This is an excellent and super timely video! You said it best: "Long term investors care less about volatily and more about how their expected return change with volatility. Stocks are less risky for a long term investor than their short term price fluctuations would otherwise suggest." 🙂 Amzing content as always 🙏👏
I was wondering what these words actualy mean: "how their expected return change with volatility"
If a stock price drops but it’s expected returns increase, a long-term investor would not be affected by the drop since the higher expected return offsets the price drop over time.
@@BenFelixCSI so easy to understand. Thanks Ben. Makes perfect sense now.
@@BenFelixCSI this applies only to _after_ the investor has made his or her investment decision. The moment he or she decides to invest, an invariable expected return is set (typically based on fundamentals). If you buy _exclusively_ into overvalued markets, you have already made your first mistake. Long-term investors should primarily care about fundamentals when taking investment decisions as they determine expected returns in the first place (“in the short run, the market is a voting machine but in the long run, it is a weighing machine.”). This is the reason why market timing becomes less significant in diversified portfolios: In such a portfolio, you can invest at virtually any time, since it is highly unlikely that the whole market / all asset classes are overvalued at the same time and the expected return of the overall portfolio is much more stable over time (otherwise your portfolio would not have been properly diversified in the first place).
Fixed-interest options are an attractive alternative in a high rate environment - 5.5% up to 5 years with no risk versus the garbage bond funds used in most portfolios (that have made maybe 1-2% average over last 10 years) is a no brainer.
The last ten years have been extremely atypical in the history of the market.
Ben, do you have a video on quality as a factor? If not, would you consider making one? Seems like they should do well in the current environment.
Unfortunately a very binary way of looking at this issue. Short term volatility, combined with patiently accepting the "mediocre" 5% yield allows you to then reallocate your portfolio at higher yields on equity. Just a matter of patience.
This is exactly why warren buffet never has any cash positions 👍 excellent video!
If you believe hard enough, you too can be just like Warren Buffett. Good luck, friend.
Also noteworthy:
Interest earned in unregistered savings or GIC funds are taxed in full, while tax earned on investments from the market is taxed at half.
Holding cash for long term investing no matter market conditions is not wise, I agree.
However, CD's and sometimes even savings accounts can be competitive with bonds for retail investors due to deposit insurance.
Bonds carry default risk - so if you're getting over 6% and you're ok with that level of risk for your conservative investments, there you go. If you want a fixed rate close to 6% with zero risk, then you're right, CDs (or Treasuries, or fixed-interest annuities) are infinitely better.
I think savings and money market accounts are considered cash since the deposits are guaranteed.
Right now, only the risky "junk" bonds are yielding more than CDs. I see no reason to buy "investment-grade" bonds.
@@sexygeek8996 junk also has a credit spread into it. If something bad happens to the market, that spread will widen really fast. Junk makes a lot of sense, when that spread is big, which is not the case today.
@@sexygeek8996 That probably won't always be the case though. Bonds will probably have better long-term returns since they can lock higher interest rates for a longer duration.
Could you do a video on managed futures? What they are, and if they offer a diversification benefit? They seemed to have historically good returns.
3:30 "long term inflation indexed bond prices", so TIPS?
So then it really depends what you consider short-term and long-term time horizons.
hello, Ben. At 15 years old, I found your channel and you are among the ones that convinced me to go 100% ETF investing. Today, I am 18 years and still follow your advice and Im willing to do it for the rest of my life. You did not only improve my financial life but also opened my mind so that I could learn to think in a more rational way in lots of areas of my life. Thank you bro.
Wish I did this at 15, good for you!
What is going on in 5:13?
The line with interest has one data point less than the equity and bonds. How is this a legit chart?
Thank you Ben. The only place I hold cash (in the Horizons High interest savings ETF) is in my FHSA where I expect to buy a house around 2030. Does a moderate or conservative asset allocation portfolio etf can be considered as well for this time horizon?
For a 7 year horizon there is likely more volatility than you want in even a conservative AA ETF.
It makes perfect sense. If cash had a higher expected return than equities, the equities market wouldn't exist. Who would want the volatility?
That said, consideration has to be made of age and financial position. If a married couple is 75 and has a $2M nest egg (for example), they may sleep well at night knowing they make $100K in interest, even if the long-term real return is poor. They are likely only concerned about having enough money for the next 10-15 years of life. If their portfolio drops 30-40% because they are in stocks, they may not sleep too well.
Yes the duration of your liabilities will dictate which assets are risky and which are safe in your situation.
In my experience, everyone has a large upcoming purchase: house, car, rental property, etc. All this money, which is often all of someone's money, should be in cash. Given %50 of people are in debt (higher than 5%) and the majority of the rest have a large upcoming purchase, this video is really for a small percentage of people.
If you are holding individual stocks and buying top heavy, overvalued stocks then its different but that's another argument.
I keep a set amount of cash around because sooner or later a really good stock takes a dump and i like the quick profit on the bounce back. Take cvs dropping yesterday. What a great opportunity and get 4.5% dividend while you are waiting.
Hey Ben, thanks for another outstanding video. I'm wondering if you could comment on what defines short-term and long-term. I think we all intuitively know that next week is short-term and three decades is long-term, but, for example, if one wants to buy a house in a year, is that short term? What about 18 months? What about five years? Thank you!
Yeah, I personally rank 0-2 years as "short term", with 3-5 years as "mid-term" - with the mid-term investments being things like "saving for a mortgage downpayment" or "planning on getting a new car in a few years".
In that scenario, my short term investments are all cash+iBonds; ie, my emergency fund. I've got 2 months of expenses in cash (in my checking account), and 6 months of expenses in iBonds.
For the mid-term, I use T-notes (between 2 and 10 years) and TIPS, and dedicate them (in my head) for specific purchases at specific times. If I don't use them, I just roll them over and assign them to a different, longer-term purchase - or else dedicate them to having a mid-term retirement fund to weather market fluctuations.
That being said - the Money Guys recommend anything 5 years or less to be in cash or near-cash equivalent (ie, CD's, cash, or short-term bonds). So for them, the breakoff point between short and long-term seems to be 5 years.
Great question and I'm curious to see Ben's answer. I suspect 18 months would still be considered short-term. 5-10 years is probably where the cutoff from short to long-term is, IMO.
I agree with Fenrir7, while I don't know what Ben would say, I think many people would say this is AT LEAST 5 years+. Emphasis on AT LEAST. This is because stocks generally gravitate towards their intrinsic value, but it takes about 5 years for the correlation to begin to form (between stock price and fair value). The correlation then gets stronger as more time passes. A year or even 18 months would be pretty unpredictable for stocks.
Well it depends on which stocks you buy i bought alot of bad stocks in 2021 which are still only going down in value, Better to play it safe with the safest companies
Hey ben, I rewatched the video and the figure presented at 5:16 caught my attention. You use it to prove that stocks/bonds premium is percistent even in high interest rate environment, but it also seem to prove that the spread between stock and bond returns diminish with increased interest rate. In this context, does it make sense to increase bonds exposure in these environment ( relative to what your investor risk profile would suggest otherwise)?
Thanks in advance for your answer
I don’t do that, but there is an argument to do it.
Not with regular bonds though. A strategy with variable exposure to stocks and intermediate TIPS based on the time varying equity risk premium has theory and evidence supporting it. It was detailed by one of our podcast guests.
rationalreminder.ca/podcast/270?format=amp
Thanks a lot for your answer@@BenFelixCSI ! That was a very interesting conversation that you had on episode 270. I will add ''the missing billionaires'' to my read list!
I don't know if you are compensated in any meaningful ways for providing such valuable content, but I hope that you at least feel the satisfaction of improving others' life in a very significant way. Over the years you provided me (and lot of people around me) with the knowledge that empowered me to become a disciplined and hopefully successful DIY investor.
Loan=2400M interest=5%=120M
Invest=2000M yield=6%=120M
Extra=Yield-Interest
Extra=120M-120M=0
To maintain principle
loan=100%=2400M.
Invest=400M Yield=6% Year=40
Total Investment=1.06^40*400M
Total Investment=4000M++
After 40 Year
Balance=Total Investment-Loan
Balance=4000M-2400M
Balance=1600M(After 40 year)
Cash=2400M from investment
Balance=1600M
Total=4000M(Cash).
Thank you.
Can you please do a video on tail risk hedging a portfolio with put options? You're one of the few youtubers that I can expect to make quality content even on advanced topics. For more info on what I just mentioned you can refer the book "Safe Haven" by Mark Spitznagel
What is considered long term? Anything above 1, 2 or 3 years?