Shouldn't that be the opposite? The less money you have, the more effort you should put to using it efficiently. Once you have enough money, it's worth keeping a tiny fraction of it as cash for convenience, because investing it won't change anything.
there's a reason why most finance advice lists "3-6 months expenses in cash" as priority one. being forced to sell assets during a market downturn hurts you a lot more than parking a couple extra thousand in an index fund helps you. when you're barely making ends meet, the smart move is minimizing variance. when you can comfortably cover your expenses, you prefer to accept more variance to maximize EV.
It has to do with how long you expect a given dollar to live.
Below a certain point a dollar doesn't persist very long since you're mostly living paycheck to paycheck. If you're spending most of what you earn, then what matters is that you can pay for all the essentials. It doesn't really matter what the price is in absolute terms if your paycheck keeps pace.
(It would be really weird to cash your paycheck, buy some ETFs with it, then sell them all back a week later to pay rent and buy groceries. You'd just get back what you put in.)
Higher up a given dollar lasts a lot longer. Even the dollars in a retirement fund will last for decades - imagine if you were wealthy enough that 95% of your assets were like that. At that point you have two choices:
- Either keep it under a mattress, and lose a few percent of most of your money each year
- Or put it somewhere more active, where you have enough growth to keep pace
