KIM: For funds needed soon, zero is often ideal return

Keywords Investing / Opinion
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KimMark Twain famously said, “I am more concerned about the return of my money than the return on my money.” Twain wasn’t an investment professional, but his advice is timeless.

People frequently ask me how they should invest their money. While everybody’s situation is different, I always advise them to not invest any funds likely to be needed in the next three to five years. The reason is, the stock market can experience periods of extreme volatility. Investors never complain about upward volatility, but they have to realize that stocks can rapidly drop 10 percent to 20 percent for any or no reason.

You don’t want to risk having the funds you have earmarked for a specific purpose, like buying a house or paying for your child’s college education, get whacked just before you need them.

Carl Richards is a certified financial planner and author of “The One-Page Financial Plan.” He tells the story of friends who recently sold their house and had a tidy sum of cash after paying off their mortgage. They planned to buy another house in three to five years and were trying to decide what to do with the cash in the meantime.

Richards said this cash wasn’t actually money to his friends; it represented their future shelter. Because it had to be there when they needed it, they could afford to take exactly zero risk with it. The prospect of earning essentially zero percent in a bank CD was not appealing, but Richards argued that if we’ve mentally assigned money to goals three to five years away, knowing the money will be there is more important than finding an extra percentage of return.

Warren Buffett also places a high value on safety. In his most recent letter to shareholders of Berkshire-Hathaway, he said, “We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets to the unprepared.” He went on to note that, in healthy businesses, cash is sometimes viewed as a non-producing asset that serves as a drag on profitability measures, so should be minimized.

However, he said, “Cash is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.” He explained that, during the financial crisis, many prosperous companies found their financial oxygen had vanished. During a three-week period in the fall of 2008, Berkshire supplied $15.6 billion of cash to American businesses, on terms dictated by Buffett.

Buffett described how Berkshire always maintains at least $20 billion in cash equivalents—i.e., U.S. Treasury bills yielding essentially 0 percent. He said, “The reason for our conservatism, which may impress some people as extreme, is that it is entirely predictable that people will occasionally panic, but not at all predictable when this will happen. Though practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension on Dec. 6, 1941, or Sept. 10, 2001.) And if you can’t predict what tomorrow will bring, you must be prepared for whatever it does.”

Finally, “We will never play Russian roulette with the funds you’ve entrusted to us, even if the metaphorical gun has 100 chambers and only one bullet. In our view, it is madness to risk losing what you need in pursuing what you simply desire.”

Sage advice and words to live by.•


Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Indiana. He can be reached at (812) 376-9444 or

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