Merryn Talks Money — Jim Reid on Why Cash Is the Riskiest Investment of All
Episode Date: November 17, 2025
Host: Merryn Somerset Webb
Guest: Jim Reid, Head of Macro and Thematic Research, Deutsche Bank
Episode Overview
This episode features Merryn Somerset Webb in conversation with Jim Reid, head of Macro and Thematic Research at Deutsche Bank, discussing the findings of Deutsche Bank’s latest long-term asset return study. The focus is on why holding cash is historically the riskiest long-term "investment," how different asset classes have performed over 200 years, the importance of valuations, and practical implications for individual investors. Jim and Merryn also touch on the outperformance of gold, the realities of portfolio construction, demographic risks, cheap/expensive global markets, and current macro market anxieties around AI and interest rates. The tone is engaging, data-driven, and occasionally self-deprecating, with clear advice rooted in historical research.
Key Discussion Points & Insights
1. Why Holding Cash Is So Risky
[04:49–05:57]
- Long-term results: Over the past 200 years, cash has yielded a negative real return of about -2% per annum.
- Jim Reid: "In the long term, it’s risky to have money in cash ... because it will always be inflated away."
- After the emergence of fiat money in the past 55 years, this pattern has intensified.
- People typically overestimate the riskiness of equities and underestimate the risk of inflation eroding cash.
Notable Quote:
“I kind of almost flip it around—in the long term, it’s risky to have money in cash over the long run because it will always be inflated away.”
— Jim Reid [04:54]
2. The Odds: Cash vs. Equities Over Time
[05:57–08:02]
- Probability that equities underperform cash diminishes over longer periods:
- Over 25 years, equities have only a 0.8% chance of underperforming cash.
- Over 10 years: 6.3%, 5 years: 13.6%.
- Most periods where cash outperformed were during major world disruptions (wars, depressions).
- Having some cash is reasonable for flexibility, especially when equities are expensive, but not as a persistent long-term holding.
Notable Quote:
“... the times that cash have outperformed have often been around just massive events like world wars ... but it’s very difficult to set your portfolio up solely to wait for them.”
— Jim Reid [06:25]
3. Valuations: The Real Key to Long-Term Investing
[08:02–09:49]
- Long-term asset returns are driven primarily by starting valuations.
- Low PE portfolios returned 20.2% annually over 70 years; High PE only 11%.
- High dividend portfolios outperformed low ones across long spans.
- Valuations matter much less for short-term tactical investing.
Notable Quotes:
“Which variables predict long-term performance best? And the answer is starting valuations matter enormously.”
— Merryn Somerset Webb [08:10]
“Valuations are more important for long-term investment than they are obviously for short-term investment ... Long-term investment is a lot easier.”
— Jim Reid [07:11]
4. Lessons from the US/Japan: Valuation, Exceptionalism & Bubbles
[09:49–13:12]
- The US has become a notable exception: maintains high valuations but has also delivered strong returns, especially in recent decades (“Mag 7”, megacap era).
- Historical anomalies like Japan in the late 80s/early 90s remind us extravagant valuations don’t last forever, and global investing offers alternatives.
- A systematic strategy of buying the cheapest 50% of 56 global markets and avoiding the most expensive has yielded strong results.
- Correlation between low valuations and high subsequent 25-year returns is robust and linear.
Notable Quotes:
“The US is the exception, massive exception, rather than the norm. If you look over a wider collection of countries, valuations matter more than anything else.”
— Jim Reid [09:49]
5. How Should a New Investor Approach Market Risk?
[13:12–14:17]
- Five years is likely the minimum time horizon needed for the probabilities to favor equity investing over holding only cash, though “luck plays a part.”
- Many newbies buy cap-weighted global index trackers, which concentrate capital in the world’s most expensive markets—not the best strategy according to the research.
- Suggestion: consider equal-weighted or value-focused allocations.
Notable Quote:
"The easy entry option is typically a global tracker ... it still would be a decent long-term investment, but it probably wouldn’t be getting at the key of this report: that valuations matter." — Jim Reid [15:54]
6. Gold as an Asset: An Unexpected Winner?
[16:08–19:40]
- Over 200 years, gold matched inflation (+0.4% real annualized return), acting primarily as an inflation hedge.
- Its performance since 1971 (end of Bretton Woods/gold standard) has been stronger, and in the 21st century, gold has outperformed equities—but from a low base.
- Concerns about gold: it pays no income, and its recent surge is “a bit worrying” from a value perspective; central banks are again big buyers.
- But gold’s outperformance over equities “should be distressing”, as equities are supposed to reflect real economic growth.
Notable Quotes:
“Gold is a fascinating one ... if you look at that full 200-year period, gold has only given you 0.4% per annum over inflation.”
— Jim Reid [16:33]
“It should be distressing when you see gold outperform equities.”
— Merryn Somerset Webb [18:49]
7. Portfolio Construction: How to Minimize the Risk of Loss
[22:33–25:08]
- 60:40 Portfolios (60% equity, 40% bonds):
- Minimize chance of a nominal loss over 25 years (0.1%).
- Real term loss probability: 8%, only marginally higher for all-equity portfolios (7.5%).
- As time horizon stretches beyond 20–25 years, purely equity portfolios become superior (for returns and loss probability).
- Maximize returns: Stick with cheapest possible equities by PE.
Notable Quote:
“If you’re very loss averse ... a 60:40 portfolio is a reasonably good way of minimizing that risk.”
— Jim Reid [23:02]
8. Which Markets Are Cheap/Expensive? The Value Bias in 2025
[25:24–29:14]
- Current cheapest (by PE): Israel, Turkey, Austria, Colombia, Brazil, Argentina, Hungary; UK is about a third of the way down—cheap, but not the cheapest.
- Most expensive: US, India, New Zealand, Taiwan, Greece.
- High-yielding (dividend) nations: Colombia, Nigeria, Brazil—but many of these are emerging markets. Adjusting for “developed-only” or sectoral preference is necessary.
- Demographics are crucial: Many emerging markets have favorable working-age growth; many developed markets will see workforce declines, though AI’s role may moderate this impact.
Notable Quotes:
“There is an emerging market bias to the cheaper end of the spectrum ... in some ways they’ve got the best demographics.”
— Jim Reid [27:41]
“If you look at history, ever since the Industrial Revolution, we have constantly been worried about new technologies destroying jobs ... what economic history tells us is innovation probably creates jobs.”
— Jim Reid [29:14]
9. The Trauma of Drawdowns: How Bad Can It Get?
[31:00–33:57]
- Maximum historical market falls ("drawdowns") are most often associated with war, chaos, and political instability: Italy, France, Sweden, Kenya.
- Japan’s 70% fall in the 1990s took 33 years to recover in real terms—a warning that sometimes markets are cheap for a reason and recovery is not guaranteed or quick.
- Political stability correlates with stronger long-term market performance (e.g., Denmark, Sweden).
Notable Quotes:
"Trying to identify what causes [major drawdowns] ... something like Italy has probably been the least stable country politically."
— Jim Reid [32:37]
10. Short-Term Market Anxiety: Is AI a Bubble?
[34:17–36:45]
- The current market’s main question: Is AI a bubble?
- AI megacaps dominate not only equities, but bond and rate market narratives.
- If AI is a bubble, and the Fed cuts rates, the bubble could inflate further (“melt up”).
- Historically, US rate-cutting cycles see average equity gains of 50%.
- But: Should data worsen and expected rate cuts evaporate, US risk assets could suffer.
Notable Quotes:
“The biggest topic in the market at the moment is—is AI in a bubble? ... It’s not: is inflation going to be higher or lower ... it’s the AI story.” — Jim Reid [34:17]
11. The UK Market & Sovereign Risks
[37:06–39:18]
- FTSE 100 looks set to break higher despite negative UK-specific news, as most of its businesses are globally focused.
- UK and other developed nations: public debt is “totally unsustainable”; UK is vulnerable due to high foreign holdings of sovereign bonds, making it sensitive to global risk-off moves.
Notable Quote:
“The debt profile of a lot of developed market countries is totally unsustainable ... the UK has a higher proportion of overseas investors than many other developed markets, so it’s more difficult to control.”
— Jim Reid [38:03]
12. Final Key Lessons & Secret Sauce
[40:05–41:28]
- “Buy low, sell high” remains the not-so-hidden secret of markets.
- Nominal global GDP sets the “speed limit” for future equity returns: if growth is structurally subdued, expect weak returns, regardless of starting valuations.
- Policymakers are incentivized to keep nominal GDP elevated due to debt burdens; the risk of “nominal GDP collapse” is low, but these returns won’t beat cash if GDP stagnates.
Notable Quotes:
“The kind of secret thing in financial markets is: buy low, sell high. That is the kind of secret sauce.” — Jim Reid [40:05]
“If you told me for the next 5, 10, 15, 20 years nominal GDP would be 2%, I would tell you that equity returns are going to be very low.” — Jim Reid [40:37]
Notable Quotes (with Timestamps)
- “In the long term, it’s risky to have money in cash over the long run because it will always be inflated away.” — Jim Reid [04:54]
- “The US is the exception, massive exception, rather than the norm. If you look over a wider collection of countries, valuations matter more than anything else.” — Jim Reid [09:49]
- “If you’re very loss averse ... a 60:40 portfolio is a reasonably good way of minimizing that risk.” — Jim Reid [23:02]
- “The kind of secret thing in financial markets is: buy low, sell high. That is the kind of secret sauce.” — Jim Reid [40:05]
- “If you told me for the next 5, 10, 15, 20 years nominal GDP would be 2%, I would tell you that equity returns are going to be very low.” — Jim Reid [40:37]
- “It should be distressing when you see gold outperform equities.” — Merryn Somerset Webb [18:49]
- “There is an emerging market bias to the cheaper end of the spectrum ... in some ways they’ve got the best demographics.” — Jim Reid [27:41]
- “The biggest topic in the market at the moment—is AI in a bubble?” — Jim Reid [34:17]
Timestamps for Important Segments
| Topic | Timestamp | |----------------------------------------|--------------------| | Intro to Jim Reid & DB Study | 02:21–03:41 | | Risks of holding cash | 04:49–05:57 | | Odds: Cash vs. Equities by Timeframe | 05:57–08:02 | | Importance of Valuations | 08:02–09:49 | | US/Japan, Market Exceptionalism | 09:49–13:12 | | How beginners think about investing | 13:12–16:08 | | Gold performance and role | 16:08–19:40 | | Portfolio construction, 60:40, returns | 22:33–25:08 | | Cheap/expensive markets & demographics | 25:24–29:14 | | Market drawdowns, political stability | 31:00–33:57 | | Short-term macro: AI, Fed, bubbles | 34:17–36:45 | | UK market, sovereign risk | 37:06–39:18 | | Big lessons & final advice | 40:05–41:28 |
Memorable Moments
- Both guest and host admit to being “obsessed” with various pages of the report, bringing an entertainingly “nerdy” vibe to the discussion.
- The tongue-in-cheek “secret sauce” is, unhelpfully yet correctly, still just “buy low, sell high.”
- Merryn’s closing attempt to end on an upbeat note ends in self-deprecating laughter.
- Lighthearted end: discussion of favorite crime novels and the relatable frustration of waiting for book series to continue.
Summary Takeaways for Listeners
- Holding cash is historically risky: Inflation reliably chews up its real value over time.
- Investing in equities, especially cheap ones, is the most reliable way to grow wealth over long periods—but mind the time horizon (5+ years).
- Valuations matter: Buy cheap, avoid expensive (especially at extremes). Market cap-weighted global trackers are not always best.
- Diversification and portfolio construction help manage short-term risks—60:40 portfolios minimize loss odds for loss-averse investors.
- Gold is a good inflation hedge but shouldn’t outperform equities in the long-run; if it does, it's a worry.
- Markets recover from crises, but recovery can take decades—especially when starting from bubble conditions.
- Today’s big risks: High valuations in US megacaps/AI bubble possibility, public debt, demographics, and sustainability of nominal GDP growth.
- Authorities are incentivized to keep nominal GDP growing—expect more of the same policy bias unless something breaks.
Further Reading:
Jim encourages listeners to read the Deutsche Bank Long-Term Asset Return Study (see Deutsche Bank Research Institute or podcast show notes).
End of summary