Touchbutton 83 – Cash is rarely king

From time to time pessimistic observers of the stockmarket comment that the return of your capital is more important than the return on your capital.

This is clearly the case if investors can get the timing right and predict with accuracy the optimum moments to be in cash, and then subsequently back into the market. Get this consistently right and the financial services industry will queue round the block with job offers.

“…many investors continue to hold cash that is often well in excess of what may be needed for short term emergencies…”

Be that as it may, many investors continue to hold cash that is often well in excess of what may be needed for short-term emergencies – for which it always makes sense to keep a liquidity buffer.

Holding excess cash is now even more potentially damaging to the real value of wealth than ever before: deposit rates remain very low, and inflation is now a hugely greater threat for the first time in many years.

But it is not just recently that damage has been done – even over much longer time periods, when interest rates were much higher than today, cash has been a spectacularly disappointing investment, as these numbers make clear:

Real cash annualised returns to end 2021

1 year:              -4.9%
5 years:            -2.0%
10 years:          -1.4%
20 years           -0.8%
25 years:          +0.1%

Source: Morningstar Cash (UK Savings NR) as at 31 December 2021.

Simply put, it is only over a 25 year period that the real return, after adjusting for inflation, moves into positive territory – and even then, only by a whisker.

The message is clear:  cash as an asset class for anything other than short periods is unlikely to contribute to wealth preservation, let alone wealth creation.

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