The comfort and simplicity of cash can be enticing; it’s tangible, easily accessible, and feels safe. While cash can be useful for short-term needs like daily spending or emergency savings, it can come with a significant – and often hidden – cost for long-term investors. It remains impervious to hackers and doesn’t require specialized hardware or software. Cash enjoys widespread acceptance and provides anonymity. Let’s challenge the notion that “cash is king,” uncovering the pitfalls of holding too much cash and how it can negatively impact your long-term investment returns.
When it comes to cash in your long-term portfolio, less is often more. As markets rise, cash can struggle to keep up with other asset classes like stocks or bonds. Holding too much cash can limit how much your entire portfolio can grow in value over time. Think of it like carrying a heavy backpack while running a marathon – it’ll slow you down.
t’s a common misconception that cash is risk-free. While cash can provide stability as its value doesn’t fluctuate as much as other asset classes (called market risk), its value also often doesn’t go up much over time either, subjecting you to inflation risk.
If you’ve felt the pinch of higher costs for goods and services at the cash register, you’re familiar with the concept of inflation. Inflation risk grows over time as costs keep rising, meaning it can have an even bigger impact on your savings over longer periods of time. If your cash doesn’t keep up with rising prices, you’ll lose purchasing power. That means cash can have a negative real rate of return after being adjusted for inflation.
Market risk refers to risk factors that affect financial markets as a whole, including the potential for an investment to decline in value during periods of market volatility. In the moment, this may feel uncomfortable, but over time, the ups and downs can often feel like small bumps in the road as you progress towards your investment goal.
Is your money working as hard as you do?
You work hard for your money, and your investments should work hard too. Here are some questions you can ask to determine if your cash is working for you:
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- Is your allocation to cash intentional? Was this cash set aside for a specific purpose, or did you mean to invest it? If the latter, take action today to put your money to work for you.
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- Does your cash allocation match your investor profile and risk tolerance? Are you willing to accept lower returns for perceived safety? Review your investor profile with your advisor to determine if there’s an investment strategy that can serve you better.
- Could your excess cash be put to better use? If you have a surplus of cash, when will you need access to it? Consider investing it according to your time horizon and risk tolerance.
When it comes to investing for the long-term, it’s hard to reach your destination when your hard-earned savings are sitting idly as cash. With inflation falling and central banks poised to cut interest rates in 2024, the changing investment landscape is sending a clear message: it’s time to consider shifting your cash into high gear. At SDV, we can review your financial plan and guide you in investing strategy to help you stay on track with reaching your financial goals.
