“If in doubt, don’t”, they say. While this might seem to be sensible advice in general, shunning investments in favour of holding cash in today’s environment is likely to do your wealth some serious harm.
Your Cash Is Losing Value
It’s easy to see why people might feel safer sitting on the side-lines, but staying in cash carries big risks of its own.
With cash losing value at a rate of 1.5% last year alone, many are seeing a silent, yet steady erosion of their wealth over time.
Governments and individuals globally are labouring under a weighty debt burden and the economic recovery remains fragile. Central banks are therefore likely to want to let a dose of inflation erode debt levels before making any big tightening moves that might harm consumer sentiment and derail growth.
The stakes couldn’t be higher for policy-makers and their inevitable caution bodes ill for cash. Several of the institutions on the WEALTH.com panel are warning that even when rates do finally rise, this will be more gradually and by smaller increments than ever before.
As long as governments and central banks are trying to balance their books and sustain economic recovery, returns on cash are likely to remain paltry.
Holding significant amounts of cash might feel comforting in an uncertain environment but a penchant for large cash weightings could cost you dearly.
Just as compounding magnifies gains, inflation can dramatically erode your wealth over time.
If today you had $1,000 and inflation ran at 4% for 25 years; your money would be worth just $368 at the end of the period.
When you see it like that, suddenly a large overweight of cash doesn’t look so safe anymore – does it?
The good news is that there are a wide range of liquid assets investors who can seek better returns from, while holding only a more reasonable amount of cash. No matter how risk-averse you may be feeling, there are proactive, sensible investment strategies you can explore with a wealth manager.