Cash has the lowest return of any possible investment. In some cases — like today — cash carries a negative return when you consider inflation. Berkshire Hathaway’s Annual Meeting had nearly 40,000 people in attendance in 2019. One of the questions asked by the audience was why Warren Buffett and Charlie Munger had such a large amount of cash — yielding almost nothing — when they could be investing it in the stock market for much larger returns. This is a question asked nearly every year at Berkshires Annual Meetings, and few investors, journalists, or Buffett Super-fans are ever satisfied with the answer.

Bill Gates founded Microsoft in 1975 with ambitions of putting personal Computers into every home. Mr. Gates understood investment returns well and had the ability to invest Microsoft’s massive cash flow almost anywhere — back into the company, into the stock market, into corporate bonds, and pay it as a shareholder dividend, among many others. But instead of taking advantage of any number of these high-yield options, he did something else with his cash: he kept it.

I remember the first time I fully understood the concept of investing. It seemed almost magical. I could take the cash I had, invest it in something, and over time that money would grow. Further, I learned that investing in an S&P 500 Index Fund would give me returns that would far outpace any other investment vehicle. It beat Checking Accounts, Savings Accounts, Savings Bonds, Municipal Bonds, and CDs. But most of all, it destroyed the returns of cash, which generally decreases in value after inflation. Of all the possible savings tools, I was convinced that cash was the weakest form of currency.

I have come to realize that I may have been wrong.

Cash Saves You from The Inevitable

Life is unpredictable. Unexpected expenses come up often. Things happen that you cannot predict, and many of these things cost money. I have spent many years planning out how much money I anticipated spending on miscellaneous items each year. I am almost always wrong, and I have never spent less on unexpected things. The real number is always more than what I assumed. Your car will break, houses need repairs, things wear out, medical needs come up, families need help, friends get married, families grow, and on and on.

Treasuries, Bonds, and CDs have maturity dates, and if they need to be sold before expiration, there are fees, and the value of your money can be random depending on what mood the market is in at that time.

Investments in the stock market are typically liquid and can be sold relatively easily, but selling stocks at random times can destroy your compounding gains.

Watching your returns suffer from unexpected life events is not fun, and this type of bouncing in and out of the market can weigh on your health. The one currency that can fund nearly everything unexpected is cash.

Cash Keeps Your Money Invested

When the stock market goes through a downturn, everyone is susceptible to the pressure to sell. Even experienced investors that don’t inevitably sell their stocks feel the pressure.

I am no exception. During times when my investments are down — even if I don’t sell — the uncomfortable feeling of watching my money disappear is intense and very real. But I have noticed one way to make the pressure less severe. When I have some cash saved, it is much easier to watch my investments fall. The yield of holding your investments in down years when you may have otherwise sold is hard to measure, but the benefits are enormous. A large portion of compounded returns come after down years, and cash will help keep you from making the mistake of selling at the worst possible time.

Cash Has Low Risk

One of the most powerful aspects of cash is that there is almost no risk involved in holding it. Now, wise investors will combat this by saying that risk has two sides. The obvious risk is losing something (stock market losses), but the less obvious risk is in the form of lost returns (holding cash and missing out on stock market gains).

There is another investing adage that says yield only came from some form of risk. This is true, in theory, for every opportunity of upside, there is an opposite point of downside when it comes to investing. Bonds have lower yields, but they also come with lower risk. Stocks have large upsides but also come with greater risk and volatility.

But what you may be risking with cash in lost return opportunity, you might be gaining in peace of mind. When you wake up with cash in the bank, there is less wondering if you have enough cash on hand. There are fewer decisions of whether to sell stocks or bonds to raise cash. And you rarely question if your portfolio is balanced.

There may be a risk of lost opportunity in holding cash, but peace of mind might be an immeasurable return.

Cash Gives You Freedom

What would happen if you were to wake up tomorrow and hate your job? Would you be able to quit right away? For many people, the answer is no, and it’s not because they don’t have money invested, equity in their house, or savings in their retirement accounts. This happens because they don’t have enough cash to cover the shortage of income.

Withdrawing money from a retirement account is going to trigger early redemption fees, a tax bill on the gains, and a large hit to annual returns. Further, if the stock market is in a down year when you want to pull your money out, losses can create stress, anxiety, and a feeling of discomfort.

These feelings are not what you are hoping for when leaving the stress, anxiety, and discomfort of your job. Cash can provide the freedom to make that choice, and for some, that choice can change your life.

Cash Can Give You Something Nothing Else Can:

1. Comfort
2. Confidence
3. Options
4. Peace of mind
5. The ability to sleep at night

Cash is incredibly versatile. Other investment alternatives to cash may give you some advantages listed above, but cash is rare because it can give you all of them.

Investors spend a lot of their time thinking about returns and how to maximize them. But the point of maximizing those returns is to have money and hopefully be happy in your life.

Someone with cash has the option to buy something they want or to buy something from someone else who is desperate to sell at a good price. They may have the means to quit their job if they would like to. They can withstand a massive decline in the stock market comfortably while everyone else is panicking. Furthermore, they have the comfort of knowing that what they have is theirs to keep and use how they wish. Likewise, they have the confidence to keep their investments invested or take risks that they may have otherwise avoided.

The risk with cash is not just about limited volatility, it is about spending (or wasting) your time wondering about what you should be doing with your money instead of just enjoying the feeling of knowing your money is yours.

In a Berkshire Hathaway Letter to Shareholders, Warren Buffett told the story of his grandfather, Ernest Buffet.

In 1939 Ernest wrote to Buffett’s uncle,

“I feel that everyone should have a reserve”. The letter came with $1,000 placed inside.”

“You might feel that this should be invested and bring you an income. Forget it — the mental satisfaction of having $1,000 laid away where you can put your hands on it, is worth more than what interest it might bring, especially if you have the investment in something that you could not realize on quickly”.

Buffett has long been ridiculed and questioned for keeping so much cash in Berkshire Hathaway. I doubt skeptics would keep their same positions if they looked at Berkshire’s returns since inception. It’s more than 20% per year, even when you include the paltry returns on cash.

Bill Gates had a reason for keeping his cash on hand in the early years of Microsoft. He made a promise to himself and to his business partners that they would keep enough cash so that the company could survive for an entire year without making a single dollar in cash flow. Many skeptics ridiculed Gates for keeping so much cash on hand.

In 1975, the year Microsoft was founded, the company generated $16,005 in revenue. In 2020, the company produced over $143 billion in revenue. The company has survived for 46 years and is now worth $2.1 trillion. If you invested $1,000 in Microsoft on March 13, 1986 (the day they went public), your investment would now be worth $3,683,965. Not a bad return, even when you do account for the minuscule returns working against Microsoft’s cash on hand.

In the monetary sense, cash still has the lowest returns on the financial scale. It is almost a certainty that it will decrease in monetary value over time due to inflation. But if you look closely enough, you may see that a case full of cash can give you more than financial returns — it can change your life in unimaginable ways.

After all, isn’t that what the money is for in the first place?