Cash is trash and cash is king

I explain how cash is both trash and king.

Cash is king. It helps you not lose your shirt or lose your mind, it helps you pay down your debts, it helps you prepare for the unexpected (emergency savings), it helps you buy stocks at a discount when the stock market is crashing (see Warren Buffett), and it protects you from risks (e.g. buying a house with all cash, if you can). So what’s the conclusion? The conclusion is that cash provides safety in the short term and provides opportunities in the short term as well.

But also, cash is trash. Or at least it can be trash, specifically if you have too much cash or cash not used correctly. Cash loses value every year due to inflation, so it doesn’t grow: It shrinks. Also, if you don’t utilize your cash to buy assets — like stocks — when they’re ‘cheap,’ then you “ain’t doing it right.” The conclusion: if you’re using cash for anything beyond the short term or maybe even immediate term, your cash is trash.

So is cash trash or is cash king? Well, it’s both. And that’s not a contradiction because I’m not saying cash is trash and king in the same respects.

You might also wonder whether when we say “cash is king” or “cash is trash” we are committing ourselves to saying cash is the worst asset or the best asset.

First, let’s grant that cash is the worst asset and best asset in some senses — cash is the worst asset in the long-term and the best asset in the short-term. But secondly, I don’t think this is the best way to view assets. Different assets do different things, so different assets have different places/purposes in your portfolio. However, this wouldn’t mean that there shouldn’t be constraints. It wouldn’t make sense, for example, to have 100% of your portfolio allocated to cash because you’re leaving no room for the future/long-term.

Photo by Giorgio Trovato on Unsplash