Ray Dalio, the billionaire co-founder of Bridgewater Associates, the world’s largest hedge fund, is a legend among investors.
He has been quoted many times in recent years as saying that “money is trash”. It refers to what investors call cash, which is short-term fixed-income securities like one-, two-, or three-month Treasury bills.
Dalio has changed his mind. In a tweet from early last week, he wrote: “As John Maynard Keynes is credited with saying, ‘When the facts change, I change my mind. What do you do sir?’ In that sense, the facts have changed and I’ve changed my mind about money as an asset: I don’t think cash is trash anymore.”
Dalio’s earlier dismissal largely reflects the belief among financiers that investors lose money by playing it safe by collateralizing cash. Its recent appreciation seems to reflect the attractiveness of cash as an asset in the current environment. The treasury has fared much better than its modest investment reputation suggests.
The Bloomberg US T-Bill Index (one to three month Treasury bills) has outperformed the Bloomberg Aggregate Government Treasury Long Index over the past 12 months, three years and five years. Cash is also a reasonable hedge against inflation, as it (mostly) retains its value as higher inflation drives up interest rates.
Cash deserves more appreciation and attention than financials. Cash is fundamental to personal finance, not as an investment, but as a cornerstone of household savings.
Cash is a simple and inexpensive way to protect a wallet or a household against financial crises. Cash is where people put their emergency savings and, at the same time, cash allows households to take advantage of investment opportunities – from buying a home to paying for education. through starting a business.
I would add I-Bonds, US inflation-protected savings bonds, to the definition of cash. I-Bonds cover inflation measured by the Consumer Price Index (CPI). You cannot mine your I-Bonds for the first 12 months of ownership and if you sell them before the investment is five years old, you will lose the last three months of interest.
But, over time, the I-Bonds will be there when needed. The composite rate of I-Bonds issued from May 2022 to October 2022 is 9.62%. This yield will decline as the Federal Reserve succeeds in reducing inflationary pressures. Still, I-Bonds will remain a solvent option for savers, even at lower yields.
For most low- and middle-income households, “cash is king” in all market environments.
Farrell is a business contributor to the Star Tribune, Minnesota Public Radio and the US Public Media Marketplace.