The classic view of cash in the world of investing is that it’s something to avoid, or at least minimize. To the extent cash is truly needed for immediate or near-term liquidity, holding some may be a necessity. But the investment goal is always to hold as little cash as possible, and put the rest to work on your long-term behalf.
Except a recent research study by Ruberton, Gladstone, and Lyubomirsky finds that maintaining a healthy level of cash-on-hand (or at least in a checking or savings account) appears to improve our feelings of financial well-being and life satisfaction. And the relationship holds up even after controlling for income, spending, and other investments, as well as age and employment status. In other words, no matter how much total wealth and income we have, we’re just not as happy unless it’s also accompanied by a healthy pile of cash (or at least, a sizable and readily available bank account).
From the investment perspective, it’s purely irrational for anyone to need to hold a substantial cash balance above and beyond what’s needed to cover actual near-term spending needs. But the research results are more understandable given the research on mental accounting, that we tend to bucket our holdings into groups of current income, current assets, and future income (or at least, assets to fund future income). Which means even if we have ample income, and ample assets for future income, we’re just not content until we also have a healthy allocation to current assets. Which in practice, means cash (or at least cash equivalents).
As a result, rather than always encouraging clients to fully deploy their available cash, perhaps instead it would be better for advisors to start by asking clients “how much cash do you need to hold to feel comfortable and sleep well at night”, and then invest what’s left around that constraint. Because in the end, what’s the point of trying to invest a little more cash for a little more return, if in the long run greater wealth buys little additional happiness anyway, but having more-than-enough cash today may have a more positive impact on financial well-being? Or viewed another way, perhaps holding some comfort cash is not “under-investing”, but simply giving up on extra yield as a way to “buy” a little more financial contentment?
source https://www.kitces.com/blog/buying-happiness-life-satisfaction-wellbeing-with-cash-on-hand-reserves-ruberton-gladstone-lyubomirsky/?utm_source=rss&utm_medium=rss&utm_campaign=buying-happiness-life-satisfaction-wellbeing-with-cash-on-hand-reserves-ruberton-gladstone-lyubomirsky
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