Buffett stashes cash: should investors follow?

Warren Buffett’s swelling cash reserves have not gone unnoticed. The company he runs, Berkshire Hathaway, is currently sitting on a phenomenal $280 billion (£211 billion) in cash, and avid investors want to know why.

Given his much-lauded investing legacy, any strategies deployed by the Sage of Omaha are closely watched and probed, and often mimicked.

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Many have speculated about why Berkshire Hathaway has fattened up its cash holdings. Some argue it suggests Buffett believes a market crash is looming, while others assert it’s a perfectly reasonable figure; the firm has sold stock and chosen to keep the holdings in cash until the right buying opportunities arise.

Either way, it provides a timely nudge for investors to review how much cash to allocate within their own portfolios – particularly given the shifting dynamic between inflation and interest rates.

Cash has a crucial role to play for investors of all ages and wealth levels, but hoarding too much over long periods can damage your future wealth.

Inflation sticks, Bank holds

Two metrics that impact how much you can earn from cash, and whether it retains is value in ‘real terms’, are inflation and interest rates. And we received fresh news and data on these this week.

After the surprise move to kickstart the era of easing interest rates at its August meeting, the Bank of England’s rate setters kept things steady this time around.

The central bank’s Monetary Policy Committee (MPC) voted by a majority of 8–1 to maintain Bank Rate at 5%, with the dissenter preferring a 0.25 percentage points reduction to 4.75%

UK inflation data in August, published Wednesday, tempered hopes that a second successive cut would arrive after year-on-year prices remained at 2.2% last month, matching expectations.

The MPC appears keen to take a more aggressive approach to rate cuts, which will provide some much-needed relief to millions of borrowers. But the news that year-on-year services inflation rose from 5.2% to 5.6% between July and August, shunted up by spiky air fares, remains a barrier.

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The prospect of further rate cuts will have to wait until 7 November when the MPC will announce its next decision. Unless anything drastic happens between now and then, a reduction to 4.75% is possible.

UK inflation is in a much better place than it was this time last year, but there’s still some work to do to keep it in check. The Bank forecasts price rises will speed up to around 2.5% later this year, before falling again in 2025.

Cash in the spotlight

The recent interest-rate hiking cycle has made cash more attractive, but that was far from the case in the previous decade.

Interest rates languished below 1% between March 2009 and May 2022, far outstripped by inflation during this period. This meant that even the top-paying savings accounts would have eroded your money in real terms.

The gap widened further during the height of the cost-of-living crisis, when inflation soared to double-digits, outpacing interest rates more than three-fold in late October 2022.

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Things are now a lot rosier. According to Moneyfacts data, you can still find accounts offering something around the 5% mark, but the bulk of top-paying savings accounts have seen sharp falls since interest rates were cut.

Keep an eye on the interest you get

When interest rates fall, savings rates follow. That means any future cuts will narrow the gap between what you can earn in interest and inflation, especially as the latter is predicted to creep up over the coming months.

Recent research from Bowmore illustrates why it’s so important to monitor your cash holding. The wealth manager found that £232 billion is languishing in UK bank accounts paying absolutely nothing. That’s up an incredible 49% from £156 billion five years ago, despite interest rates rising sharply over this period.

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To be clear, this applies to current accounts, those that your salary, pensions or other income get paid into, and you use for day-to-day spending. Keeping lots of money in such accounts, unless you plan to use the funds to pay for something imminently, should be avoided. Bowmore calculates that those affected could pocket around £10.4 billion more a year if they shifted their savings into accounts paying 4.5% interest.

The case for investing over longer periods

But before you stick any surplus money in a bank or building society account, pause and consider whether this is the right home for it given what you want to achieve. While many savings accounts are higher than inflation right now, this won’t last forever.

In May, the International Monetary Fund (IMF) recommended that UK interest rates should fall to 3.5% by the end of 2025. If this comes to pass, it will squeeze the amount you can earn on your savings.

If you have time on your side, history tells us that other asset classes, such as shares, offer a much better chance of outstripping price rises.

Research by asset manager Schroders found the likelihood of stock market investments beating inflation is 87% where the time frame is 10 years and 100% over 20 years. When it comes to cash, these odds fall to 55% over 10 years and 66% over 20.

I’m not sure I’ve seen a more compelling argument for investing in the stock market.

These findings offer plenty of food for thought when weighing up asset allocations, illustrating the harmful effects of hoarding too much cash over long time frames. It runs the risk of something called ‘cash drag’, which can hamper overall gains if markets are rising.

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There are, of course, situations where holding cash is important. These include a safety net equalling three to six months’ expenditure to cover any emergencies, anything you plan to spend in the near future, roughly two to three years’ income if using drawdown to avoid having to sell shares when markets are performing poorly, and some dry powder to seize any stock buying opportunities.

In all the above, the core aim is to provide security, certainty and access rather than seeking to grow your wealth. Of course, getting the best rate possible - or at least one that matches the speed of price rises - is important, as the Bowmore research underlines. According to reports, Buffett places a chunk of his cash in Treasury bonds with maturity periods of three months or less, ready to deploy into the market once the right opportunity comes along.

But with any excess savings that you don’t need to touch for at least five years, stocks and shares should prove a better horse to back.

There’s nothing wrong with stashing a bit of extra cash right now. Just make sure you have a plan for it. Buffett inevitably does.