Warren Buffett has had a remarkable track record of making timely and smart investment choices. And while most of his advice to investors revolves around the super-simple ways you can get solid returns, one very important piece of advice from Buffett is often overlooked. There is one long-term investment option that the Oracle warns should never be in your portfolio: a hoard of cash.
In a recent report from Bankrate, a survey of Americans found that cash was the favorite long-term investment option for funds that were available for 10 years, with 26% of the respondents choosing cash investments. Only real estate came close to matching the popularity of cash, with 23% of people choosing that option for their hypothetical investment. Stocks came in fourth (after gold and other precious metals), at 12%.
Unfortunately for the majority of those surveyed, and the portion of the nation's population that they represent, cash is a very poor investment choice. Here's Mr. Buffett on the subject:
"The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time... Cash is a bad investment over time."
The King is dead
If you look at the long-term returns of cash versus other investment options, you'll see why Buffett thinks it's the worst investment you could choose:
Just as Buffett says, cash will be worth less over time because of inflation. And even in developed economies, like the United States, where inflation is low, the cost of goods and services still outpaces the returns of cash investments. Some of the best savings account interest rates are centered in online-based accounts, but they still only provide an average of 0.85% in interest. While it's true that inflation will cut down the value of any asset over time, cash is the only one that has actually lost value -- as you can see in the chart above.
Timing is everything
This advice from Buffett should be heeded by more than just those years away from retirement. With Americans living longer, most retirees fear the same thing: running out of money. And while that fear can lead them into various "safer" investments, choosing an all-cash approach could be self-fulfilling prophecy. Retirees can live anywhere from 10-40 years beyond their retirement date, and unlike those still working, a fixed income can be very difficult to stretch across all sorts of expenses. So Buffett's advice is just as relevant to retirees as it is to 20-somethings.
Let's be clear
Though Buffett warns against the use of cash as an investment, he does state that it's important to have some on hand.
"We always keep enough cash around so I feel very comfortable and don't worry about sleeping at night. But it's not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future, essentially."
Having an emergency fund or back-up savings account is not something Buffett would shake a finger at -- quite the opposite, in fact. But he would warn against letting your stash get too big. Otherwise, your money isn't working for you as you try to achieve your financial goals.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.