Is Cash the Best Investment? - August 14, 2016

Is Cash the Best Investment?

Many believe that the best way to keep our wealth is in cash. Every investment, like stock, holds some risk and real estate isn’t really liquid compared to cash, which holds no risk and obviously liquid. But still, financial professionals don’t advice to keep huge amounts of money in cash for good reasons.

MarketWatch just published the article “7 things you should know about cash” written by the journal’s columnist and former investor. As he states: “We all love cash, and in some ways, you can't ever have too much of it ... except when you can.”

He underlines that keeping money in cash “won't help you grow your wealth. On the contrary (because of inflation), cash is practically guaranteed to leave you with a loss of purchasing power”. He understands that cash leads to a sense of security, but on the long run it will lead to losses anyway: “On the long haul, cash is a lousy investment”. He points out that “Over the past 40 years, since 1976, the purchasing power of $1 million declined to about $236,000, thanks to the compound effects of 3.7% inflation”. He adds: “Treasury bills, which are essentially risk-free, increased their purchasing power by 1.1% a year”.

He also believes that “hoarders of cash are too timid”, as they are not taking the smallest risks while investing but that doesn’t help them grow their wealth.

The editor doesn’t believe that cash is always a bad idea, and we shouldn’t keep our money in it ever. For example, he writes, “When a timing system dictates being out of equities, cash is a very safe and convenient place to be on the sidelines until the system indicates it's time to buy once again”.

In many ways, we agree with the former investor, as keeping our wealth in cash can lead to problems. Just some weeks ago we wrote about how keeping our money in USD cash really only helps the US as basically it’s free cash for the government.

It’s still obvious that the USD is an important currency and has a rather good time lately. In 2015 it was one of the best choices for investing, but that still doesn’t mean cash is the good choice. There are other ways to keep investments in USD but not in cash. What’s more: it’s always better to diversify investments even if we keep some of it in cash.