Chris Galeski: As it relates to the opportunity cost of holding on to too much cash. I think about it a number of different reasons why people might have a bunch of cash. They're either trying to time the market, which nobody's ever very good at.
Or they have a large payout, from selling a business or selling a property and, or they maybe inherited a large amount of cash, and they want to wait to kind of figure out what to do with it. Or the third one is, is that cash just helps them sleep at night. And they've built it up over time.
I think that you've had conversations with clients about all of these different factors for a long time, so I'm excited to kind of engage in this conversation with you about the opportunity cost of having too much money in cash, right.
Eric Selter: And think about opportunity cost as something. Well, think of it this way. You're a golfer. Yeah. You lose a golf ball. So you've lost something. But if you'd lost an opportunity to maybe make money on something that's a little bit harder to wrap your head around. So you're right that there are a lot of different scenarios. The typical scenario as an advisor is that somewhere in November/December, I will say I sold an asset or I'm going to put this much money in taxes in April.
What should we do with the money in the interim? In the interim? And the answer is always put it in the money market. I don't care even... I mean, we're at 4% now. I don't care if it's zero. You need that money there. Otherwise the IRS will be knocking at your door, you know. But now, if it's something different from that, this can be a lot of questions.
What's it for? What's the time period? How do you feel about taking risk on that money? You know, is it going to be more important to you. Which will be more important. You making some money on that money or making sure you don't lose it? What what where do you come from on that?
Chris Galeski: And those are really good questions. And I love the way that you phrased it. It's what's your time frame. What's the money for? How much risk are you willing to take? How are you going to feel if you need $100 and you only have 90 available? Those sorts of conversations are important in terms of gauging someone's comfort level with risk and the importance of it.
Right? Obviously, if you're doing a construction project and it's 4 to 6 weeks away and you need to pay those contractors, you're going to need the money. If it's for a house that might be 2 to 3 years down the road and you're continuing to save with it, you could benefit from maybe having some money outside of just a money market to help you invest or accelerate.
Rate that. I've look back at my career or my life, I should say not career, and the investment decisions that didn't go the way that I wanted were often because I didn't have enough cash on the sidelines to get me through something unexpected in life, and I had to sell an investment that I liked to come come up with money for that need.
Right. And so that's a little bit of the opposite of what we're talking about today.
Eric Selter: But it's all part of that scheme. Another one of the questions is do you have an emergency fund. If you do then we're not going necessarily need other cash. If this cash if something happens to this money, you were trying to not lose an opportunity on. Yeah. Do you have liquidity enough that you can make it up somewhere else?
And then, of course, there's that whole psychological factor. And again, I know I say this almost every financial company I'm in, which isn't that many, is that what's your psychological feeling about it? I mean, are you someone that really needs a lot of cash? I've got some clients that are wealthy and they sit on huge amounts of cash.
And the bottom line is, it just makes them feel better, you know, knowing that it's there now, they've lived through 1998. They've lived through 2000. They've lived through the 2008, 2020, 2022. And they go like, I just feel better knowing it's there and they look at themselves and say, I'm willing to give up that opportunity to know it's there.
Even if I know inflation's going to, you know, eat at it, etc. I want to do it just to make sure that money ends up being there. When... if I want it.
Chris Galeski: And so that's the feel good approach. You and I have talked a number of times that depending on the life stage that you're in and what the money's for, you might have cash for certain reasons. Right? I go back to what makes me feel like a really good equation for security and comfort is I've got an emergency fund, so I know any expenses that I have within the next 12 months.
And, you know, my general lifestyle, what that costs, if that's in bucket one and I need to get new tires or change, you know, my AC in my house, I've got money available for that. Right. The second bucket is where your income comes from. So that way you can live and enjoy the life that you want to live.
I'm going to make sure that I've got enough money in that second bucket to provide me with the consistent income, to be able to live that type of life. Whatever else is left over, I can invest for growth. And that sort of equation at least makes me feel good at night.
Eric Selter: Okay. And but it's again, that's a very personal thing. I mean, you've got some people have said I'm willing to take on the risk, so I don't lose that opportunity cost, because we all know the time in the market is a fool's errand. Yeah. I think you've got the statistics about that. If you, you know, if you miss, was the 20 best trading days, you've got that stuff.
Chris Galeski: I've got a few of them. Yeah.
Eric Selter: But people need to know that it's investing in the stock market over a very long period of time. Is probably the odds are in your favor that you can do well. Yeah, but when you need this money for an emergency, or you need to pay your taxes or whatever, then you've got to be prepared to say, I'll give up that opportunity because I got to make sure the money's there.
Chris Galeski: Yeah, I completely agree with you. So here's some interesting stats. Missing the best days in the stock market can significantly reduce your longer term performance. So, for example, if you missed just the ten best trading days in the S&P 500 between 1993 and 2023, your annualized return would have gone from 8.1% a year to 5.6.
Eric Selter: Big difference.
Chris Galeski: I mean, that's 3%, 2.5% a year compounded over 20, 30 years. That's a long time. Similarly, missing the 30 best days between 2003 and 2003, it reduced your annualized return from 9.7% to 3.8. Wow. Here's here's a really good one. Another study showed that missing the best 30 days over the past 30 years, so from 1995 to 2025 would have reduced your average annual return from 8.4% to 2.1, which was less than the average inflation rate during that period.
Wow. So if you're holding a lot of cash because you're trying to time the market right, you're you are really losing out to inflation. Your purchasing power and your money is not working for you.
Eric Selter: Right. And you don't want to get caught up in the whole performance idea. When I first came into the business, the I read this great article about a financial advisor was down at a retirement home and this is back in 1998. I hate to admit that. And he's going around saying, well, how much we you've got last year, how much were you up that last year?
So he comes to one person says, I don't know. And he goes, what do you mean you don't know? He goes, I don't know what, I don't care at him. Why don't you care? Because because we met our financial goals. What that is as a percentage doesn't mean anything. So all the things you just said lead you into that count of.
You need to do good financial planning. Good cash flow planning. With Martin, wealth is important so that you can keep on track. And that way, you're not trying to time the market. You're not trying to you're not going to miss out on opportunities that might happen along the way. And every year you kind of reevaluate and make sure I'm there.
I'm meeting my goals.
Chris Galeski: I have friends that, you know, we talk about investments in different things, and you hear often about the winners. So you don't often hear about the losers. But at the end of the day, I don't I don't care like your client what they got versus what I got as long as I'm on track for my goals. So let's say you've got a client with an extreme amount of cash.
In your opinion, what do you think the opportunity cost is for them? I know today is different because at least our money market can earn close to 4%, in some cases a little over. Whereas a few years ago it was earning zero. So we were having different conversations around large amounts of cash because the opportunity cost there was this big yes it was.
What are your thoughts around that?
Eric Selter: Well, I'm going again. I need to ask a lot of questions like, what's the purpose for the cash that are. But if this is a client that has is has a reasonable amount of wealth and they don't need this money, then you're probably going to suggest, say, I think you should invest now, maybe you don't want to take on undue amount of risk.
Everybody's got that concept. Maybe it's not just the stock market. Maybe it's going to be the fixed income markets where we can still probably earn more than 4%. But I usually end up telling them that if it makes you feel better, then basically what you're doing is you're giving your kids more money down the road. And I believe you have an expression with regard to that was.
Chris Galeski: That if you don't fly first class, your kids will, right?
Eric Selter: So it's like, go ahead. And if take that opportunity or take that risk if you're willing to do it because it's going to benefit for your children. But like just the other day, I had a client call me up and he said, you know, I'm kind of in an advanced age now. I'm pretty good health. I'd like to start taking more money out because a lot of clients are where have been savers all the time.
Under spenders. And he said, we're realizing we ought to just spend some of this money and enjoy it. And it was like, yes, that's what I've been telling you. Let's spend some.
Chris Galeski: I had a fun conversation with the client a couple of weeks ago. Long story short, there was about $32,000 that, that they had that they said, should we just give it to you to invest? And I said, you definitely can give it to us. And if we do a great job the next 20 years, let's say we turn that $32,000 into 150.
And we did a great job over the next 20 years. You fast forward 20 years from now, your two sons inherit an extra $150,000. Would you rather them have that? Or would you rather take that amazing family vacation with your boys and have a great time and they're gone on the vacation?
Eric Selter: Absolutely. And it's interesting that if you look at all the articles I've been reading or saying that the younger generation is saying they'd rather have the experience rather than have the cash, which I find interesting because I came from a generation that you had to save. Yeah. So it's it's going to be a dichotomy again, a unique to each individual.
But you might as well just go ahead and enjoy your life, especially if you can afford to enjoy your life. Yeah. So I'm sorry, and I do tell clients, okay. Don't run out and go buy a Lamborghini tomorrow. You don't need you tell I couldn't get in out of the car anyway I could.
Chris Galeski: You should buy one for me.
Eric Selter: I would consider that. Except I didn't get to sit in that seat, so. But you can do things for yourself and for your family. And had another client that said we're going on a family vacation. Do exactly what you just said because we'd rather spend it now and see our family enjoy it.
Chris Galeski: I don't disagree with you. I love the way that you phrased that. I guess just to summarize today, the opportunity cost of holding on, a large amount of cash. You value that differently depending on where that money would have likely gone instead of the cash. Obviously, as we talked, investing in the stock market, real estate, other growth-oriented investments, sitting and sitting on the sidelines versus having that invested can really impact your longer term returns.
And over the last 30 years, just missing out on the 30 best days in the market over that 30 year period, your money lost to inflation. If you've got a large amount of expenses or liabilities or fluctuations going on in your life and uncertainty, it's probably okay holding on to more cash. At least it's earning 4% today, right?
The recent inflation numbers, they were a little bit less than that, about 2% inflation. So you're hopefully not losing to inflation in that scenario. But timing the market is probably where the opportunity opportunity cost is, is the one that you can value the most, that where people are really missing.
Eric Selter: Right. And it was a little bit like when people say, should we sell out because be coming up on a recession or what's going on? And the answers, you got to stay invested. It's a marathon. It's not a sprint. And if you really want to sell out, you have to tell me that you want to do it. But more importantly, you have to tell me when you want to buy back in.
Because let's face it, no one has a crystal ball and very few people are good market timers.
Chris Galeski: We've had a few episodes recently. I'm glad that you brought that up. We've talked about preparing for a recession, whether you're a person or your business owner. And then we're obviously we're talking about high cash balances today, and the opportunity cost is a little bit better for people that own cash today, because, again, money markets are paying a good yield.
But at the end of the day, we're not predicting a recession. We're not saying we're going into one. We just know that since World War Two, the US has experienced a recession about every six years. And we just wanted to have these conversations kind of inform people that if you're going through a different change in your life retirement, bigger expenses, larger, you know, large tax bill or you're maybe getting older and wanting to be more conservative, there are plenty of things that we can do to help you invest, stay diversified, generate that income, protect the value of your assets.
And so holding cash can be a benefit.
Eric Selter: And don't forget, economists have called 12 out of the last 12 recessions.
Chris Galeski: 12. I've had the last ten.
Eric Selter: 12 or last ten. Yeah, I think about that. But they do. I mean, your stop clock is what is right twice a day. But you know, but when you talk about that as our as our fearless leaders, our CEO Jeff Sarti always says we're building resilient portfolios. If you've done that, if you're diversified, you've got that kind of thing in there.
You're not out there just throwing risk to the wind. Then you're going to be able to withstand the recession.
Chris Galeski: I often, I often see people with larger cash balances because they've taking on so much more risk in other areas, and so they just don't have the right mixture of investments. Right. And it's something that we should have conversations with them about. It's fascinating to see, you know, extreme risk on one end, extreme conservative, extremely conservative on the other.
There's a lot of things in the middle that we can take advantage of.
Eric Selter: Let's find a happy medium.
