It’s easy to see why people might feel safer sitting on the side-lines, but staying in cash in fact 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.
The long-awaited US interest rate rise is still yet to materialise. Yet even when the Fed does pull the trigger savers hoping for rapidly improved returns on cash are likely to be disappointed.
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. In fact, according our expert wealth managers, real returns on cash (i.e. above inflation) will remain subdued at best – and negative at worst – for longer-term deposit-holders.
The old adage “cash is king” may not be true again for a long time. Indeed, arguably it never should be to any great degree.
Holding significant amounts of cash might feel comforting in an uncertain environment and inertia – simply not knowing what to do with an inheritance or other large sum – can also play a role. A penchant for large cash weightings could cost you dearly, however.
Just as compounding magnifies gains, inflation can dramatically your wealth over time. If today you had $1,000 and inflation ran at 4% for 25 years at the end of the period your money would be worth just $368.
Seen in those terms, suddenly a large overweight of cash doesn’t look so safe anymore.
The good news is that there are a wide range of liquid assets investors can seek better returns from while holding only a more reasonable level of cash. No matter how risk-averse you may be feeling, there are proactive, sensible investment strategies you can explore with a wealth manager.
If you are exasperated with rock-bottom interest rates and want to make your wealth work harder, help is at hand. To start the process of finding the right wealth manager for your profile and needs, simply complete our short online assessment.