Its Day 1 of the President’s Investment Challenge, and we are faced with a dilemma — What to do with our recent windfall of fictitious cash? Keeping it in cash may seem like safe proposition, but we know better than that. Liquidity is costing us money and so we actively weighing our options.
the cost of idle cash
Our cash may seemly feel safe while stashed in Stock-Trak, but in reality, it’s value is slowly eroding away in two key ways.
- Opportunity Cost: The money our cash would make if put to work.
- Every day our cash assets sit idle, we miss out on potential returns. Simply investing this 500.000USD in something as safe as U.S treasury Bill (with yields around 5% annually) could be earning interest.
- Lets do a simple back of the envelope calculation for the daily opportunity cost:
- A 5% annual return on $500,000 equates to:
![\[\frac{0.05}{365} \cdot 500,000 \approx 68.48 \]](https://hivoodoo.garden/wp-content/ql-cache/quicklatex.com-9711a5885e9a8786c7dc3dc6413b26d3_l3.png "Rendered by QuickLaTeX.com")
- We are essentially loosing out on earning $64.49 per day by not investing.
- A 5% annual return on $500,000 equates to:
- Inflation: Erosion in the purchasing power of our cash holdings
- If we expect inflation to be 3% annually, at time of realization, our untouched money would effectively have shrunk in real value. We express this effect as daily loss of real value with a simple calculation:
- A 3% percent inflation rate effect on $500,000 means:
![\[ \frac{0.03}{365} \cdot 500,000 \approx 41.09\]](https://hivoodoo.garden/wp-content/ql-cache/quicklatex.com-0d4a0db182c483996a651eb89ebfee68_l3.png "Rendered by QuickLaTeX.com")
- basically another $49.09 lost per day just due to inflation.
- A 3% percent inflation rate effect on $500,000 means:
- If we expect inflation to be 3% annually, at time of realization, our untouched money would effectively have shrunk in real value. We express this effect as daily loss of real value with a simple calculation:
- Calculating the total cost of inaction.
- We add the previous calculated losses:
- $68.49(Opportunity Cost) + $41.09(inflation erosion) = $109.58 per day 🚨
- Or just over $3,287 per month is the cost of sitting on cash.
Proposed Solution
In the time it takes to finalize our strategy, we must minimize this loss by:
- Short-term safe investment- Lets park funds in a money market account or T-bills to earn a guaranteed yield.
- Consider Low-risk ETFs- Allocate a portion of the capital to near liquid and stable investments while we develop a more aggressive strategy.
- Consider index Funds: S&P have a historical average return 8% per year
In investment, everything comes at a cost. Even doing nothing has a tangible and quantifiable cost. Its time to our money to work !
#PresidentsInvestmentChallenge
