Cash is king? or cash is cost?

The former part of the subject of this post is so well known that no elaboration is needed. It is so true when the market has crashed and everything appears to be so cheap yet if someone is still so stuffed with cash in his pocket then he can shop whatever he likes. This is applicable to recession or in any financial market bust. So it seems cash is really almighty in the financial world, or is it?

Naturally cash is good and I like the purchasing power that comes with it. It is always a great relief when you know you have enough cash to meet all the existing or possible bills. On the other hand, knowing that you can hunt for bargains when the market crashes and the feeling of being in the upper hand in a deal negotiation is so brilliant that no one will question about the beauty of having much cash in hand.

However, any one who has a little financial knowledge also understands cash does not come without down side. Inflation erodes cash's purchasing power is just an ABC. On the other hand, cash is non-productive meaning it does not generate yield is also another common sense especially in this still relatively low interest rate environment. 10 years U.S. bonds just pays out some 2% interest only, let alone that of the humble saving account which cash usually sits in.

So apparently albeit the lovely side of cash, holding it, especially excessively, is not without costs. The erosion on the purchasing power against inflation is a very real and cruel cost. The opportunity cost of hold cash but not putting it in profit-producing investments is another one.

The above two drawbacks of sitting on cash are quite obvious, there are also other costs hidden from our sight though. To many people having plenty of cash means being wealthy. Let's imagine how happy one will be if the bank account balance shows a string of zeros following the first few digits. This wealthy feeling could easily breeds the desire of luxury indulgences if one lacks self discipline. Naturally a reward to self for the achievement of hardworking is reasonable but when it becomes a habit then it could be hazardous to wealth accumulation though.

Perhaps to those disciplined people the even bigger harm of holding a lot of cash is FOMO and the subsequent reckless investing decisions. Imagine if one closed all his/her position by last year end in the expectation on bargain hunting resulting from a further market crash but saw the market bounced significantly from the valley then how stressful he/she is now. The regret could even brings quite some sleepless nights as well. This state of mind is not only hazardous to both mental and physical health but could easily lead to improper investing decisions that could bring loss, rather than catching up the missed potential profit.

So while cash is still king but cash is also cost as well. The key is maintaining a proper proportion of cash vs assets. I used to write a post how do you classify your investments regarding the classification of assets which also explains this aspect in another perspective.